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https://www.courtlistener.com/api/rest/v3/opinions/4620595/	ROANOKE MILLS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ROANOKE MILLS CO. v. COMMISSIONERDocket No. 23221.United States Board of Tax Appeals18 B.T.A. 474; 1929 BTA LEXIS 2036; December 11, 1929, Promulgated 2036 1. Claim for paid-in surplus based on the alleged value of certain water-power rights acquired from nonstockholder corporations denied. 2. Respondent reduced invested capital as of August 31, 1916, by the amount of alleged depreciation accruing from 1899 to 1916. Held, upon the evidence, that the reduction was in error. 3. March 1, 1913, value of certain water-power rights determined for depreciation purposes. 4. Reasonable allowance for depreciation of physical assets determined for the purpose of computing the net income in the taxable years 1917, 1918, 1920, and 1921. E. S. Parker, Jr., Esq., and J. L. Elliott, C.P.A., for the petitioner. E. C. Lake, Esq., for the respondent. SMITH 474 In this proceeding the petitioner seeks a redetermination of its tax liability for the fiscal years ended August 31, 1917, to August 31, 1921, inclusive. The respondent has determined deficiencies for the years 1917, 1918, 1920, and 1921 in the respective amounts of $8,683.17, $29,515.01, $37,979.68, and $2,186.47, and an overassessment for the year 1919 in the amount of $4,245.64. Since no deficiency has been determined for the taxable2037 year ended August 31, 1919, and a consideration of the tax liability for that year is not necessary to determine any issues involved for other years, an order will be entered dismissing the proceeding with respect to such year. The petitioner alleges error on the part of the respondent in his computation of its invested capital and in his failure to make proper allowances in computing its taxable income for exhaustion, wear and tear of property used in its business. FINDINGS OF FACT. The petitioner is a corporation organized and existing under the laws of the State of North Carolina, with its principal place of business 475 at Roanoke Rapids. It is engaged in the business of manufacturing and selling cotton products. Its chief product is outing flannels. Under date of February 18, 1897, the petitioner acquired by deed from the Carolina Construction Co., a North Carolina corporation, a mill site on the Roanoke River at Roanoke Rapids and certain water-power rights as hereinafter more fully described. The identical water-power rights and other property acquired by said deed had been conveyed to the Carolina Construction Co. by the Roanoke Rapids Power Co., a North2038 Carolina corporation, formerly the Great Falls Water Power Manufacturing & Improvement Co., hereinafter referred to as the Power Co., by deed dated July 23, 1895. The deed of 1897 by express terms purported to "transfer" and "assign" to the petitioner all of the property, rights and privileges acquired by the Carolina Construction Co. under the said conveyance of 1895, subject to the terms and conditions thereof. The Power Co. and the Carolina Construction Co. were organized by a group of North Carolina and Virginia business men composed of T. L. Emry, of Weldon, N.C., a land owner of large holdings in the vicinity of Roanoke Rapids; W. S. Parker, a merchant of Henderson, N.C.; W. M. Habliston, a merchant and banker of Petersburg and Richmond, Va., and Charles Cohen, a merchant of Petersburg, Va. Under the plan of its organization the Power Co. took over the lands, including the Roanoke Rapids power site, formerly owned by Emry. Later on the above named parties, together with certain northern investors represented by John Armstrong Chaloner and Winthrop Chaloner, caused to be organized two corporations, the Roanoke Mills Co., the petitioner herein, and the United Industrial2039 Co. The petitioner was organized to build and operate a cotton mill and was owned by the southern interests. The United Industrial Co. was organized to build and operate a paper-fiber mill and was owned by the northern interests. Neither the Power Co. nor the Carolina Construction Co. owned any of petitioner's stock. W. S. Parker, president of the petitioner company, was a stockholder of the Power Co. T. L. Emry was a stockholder and director in the petitioner company and a stockholder in the Power Co. W. M. Habliston was president of the Power Co. and a director and stockholder in both companies. Charles Cohen was a stockholder and director in both companies. Under date February 18, 1897, there was conveyed to the petitioner by the Carolina Construction Co. the mill site and water rights hereinabove referred to, consisting, roughly, of a certain tract 476 of land situated between the Roanoke River and the canal of the Power Co., designated as mill site No. 2, and the right to take in perpetuity from the canal sufficient water to produce at all times 500 horsepower. The above named W. M. Habliston, Charles Cohen, and T. L. Emry appear as parties to the said deed2040 of 1897 by virtue of an option which they held under a prior contract to purchase and acquire said property and rights from the Carolina Construction Co. On July 23, 1895, the Power Co. had conveyed to the United Industrial Co. an adjacent tract of land between the canal and the river, designated as mill site No. 1, and the right to take in perpetuity from the canal sufficient water to produce at all times 500 horsepower. This right of the United Industrial Co. to take water from the canal was prior to the petitioner's right. The mill site and the water-power rights were conveyed to the petitioner as an inducement and upon condition that it erect a cotton mill upon the site designated. There was no other consideration for the conveyance. The petitioner thereafter erected its mill in accordance with the terms of the agreement and began operating. The Power Co. had previously erected wing dams at the opening of the canal capable of directing into the canal about one-fourth of the flow of the Roanoke River at that point. This was estimated to be sufficient water to produce at all times approximately 2,400 horsepower. The petitioner used its own equipment in converting the2041 water into usable power. Several years after, about the year 1903, there arose a dispute between the petitioner and the Power Co. in which the Power Co. claimed that the petitioner had been using a greater amount of water from the canal than the 500 horsepower which it was entitled to under the contract of 1897. A settlement of this dispute was reached about two years later, whereby the petitioner agreed to pay to the Power Co. $5,000 in full satisfaction of the Power Co.'s claim for the excess water used. At the same time, under date of February 21, 1905, the parties entered into a new agreement with respect to the petitioner's use of water from the Power Co.'s canal, the principal provisions of which were that, in lieu of the right to take water from the canal acquired by the petitioner under the aforesaid contract of 1897, the Power Co. granted the petitioner the right to take sufficient water from the canal to produce at all times 1,050 horsepower. The right to produce 600 of the 1,050 horsepower was granted in perpetuity. The right to take sufficient water to produce the remaining 450 horsepower was granted for a term of 100 years, 477 commencing March 1, 1904, for2042 which the petitioner agreed to pay an annual rental of $2,500 for the first year and $2,750 for each year thereafter. At the same time a similar agreement was entered into between the Power Co. and the United Industrial Co. The petitioner's and the United Industrial Co.'s water-power rights were on a parity and were given priority over all other rights theretofore or thereafter to be granted. The agreement provided, further, that should the petitioner at any time take from the canal water in excess of the amount agreed upon, additional payment for such excess at the rate of $10 per horsepower per annum would be made to the Power Co. It stated specifically, however, that this provision did not constitute a sale of additional horsepower at the rate named. During the period from 1906 to 1909 the Power Co. built a dam entirely across the Roanoke River near the mouth of the canal, of sufficient height to divert into the canal a minimum flow of the entire river at all times. The head was raised from 27 to 30 feet and the canal was cleaned out and widened to accommodate the excess flow of water. At or about the same time it built a hydroelectric plant to convert the water power2043 into electric current for transmission to other users. It sold additional electric power to the petitioner at a per kilowatt rate equal to $18 per horsepower, and sold to the Rosemary Manufacturing Co., which had a plant some two miles distant, night power at a per kilowatt rate equal to $23 per horsepower. The electric power sold to the Rosemary Manufacturing Co. was to augment its steam power and was to be used only between the hours 6 p.m. to 6 a.m. In his computation the respondent has included in petitioner's invested capital the amount of $60,000 representing the value of the water-power rights acquired by the petitioner under the contract of February 18, 1897, with the Carolina Construction Co. At the hearing of this appeal the respondent made the contention, amending his answer in conformity therewith, that the amount of $60,000 representing the value of the water-power rights acquired under the contract of 1897 was erroneously included in petitioner's invested capital and should now be excluded therefrom. Also, in his computation the respondent has allowed deductions on account of the exhaustion of the additional water-power rights acquired under the contract of 1905, 2044 based upon a March 1, 1913, bonus value thereof of $33,098.50 prorated over the remaining life of the contract (92 years). 478 The following is an analysis of depreciable asset accounts as shown on the petitioner's books for the fiscal years ended August 31, 1916, to August 31, 1921, inclusive: TotalMachinery:Aug. 31, 1916, balance$474,396.73Additions 191765,263.23Additions 1918285,730.17Additions 191953,679.78Additions 1920278,123.93Additions 1921202,752.66Balance Aug. 31, 19211,359,946.50Brick Buildings:Aug. 31, 1916, balance165,516.74Additions 1917104,487.86Additions 1918106,111.74Additions 191945,313.45Additions 1920100,979.83Additions 1921120,136.25Balance Aug. 31, 1921642,545.85Tenements:Aug. 31, 1916, balance97,560.48Additions 191737,403.05Additions 191860,461.57Additions 1919136,547.41Additions 192061,766.11Additions 192111,839.85Balance Aug. 31, 1921405,378.47Equipment:Aug. 31, 1916, balance44,522.01Additions 191732,646.39Additions 191850,263.08Additions 191915,599.10Additions 1920$55,504.54Additions 192170,583.05Balance Aug. 31, 1921269,118.17Power plant:Aug. 31, 1916, balance18,101.42Additions 1917373.96Additions 191816,519.47Additions 1919210.71Balance Aug. 31, 192135,205.56Fire protection:Aug. 31, 1916, balance9,598.13Additions 191715.50Additions 191837,459.87Additions 19197,907.94Additions 19204,011.03Additions 192111,312.6270,305.09Electrical equipment:Additions 191835,262.96Additions 19193,206.17Additions 192042,778.34Additions 192137,217.30Balance Aug. 31, 1921118,464.77Construction equipment:Additions 19203,109.122045 The principal items of machinery subject to depreciation during the taxable years under consideration were those used in the process of carding, spinning, spooling, warping, dyeing, weaving, and napping. Napping is the process of picking or loosening the fibre on woven goods to produce flannels. The machines for this work are composed of a large cylinder around which revolve 36 small cylinders. The small cylinders are wrapped tightly with a rubberized web cemented in position, in which are imbedded numerous small steel wires with the exposed ends hooked so as to catch the fibres of the cloth passing over them and form the naps. These machines require precise adjustment and considerable care in their upkeep. They have to be rewrapped or "reclothed" about every six years at a cost of from $250 to $300 for each machine. The bearings and other small working parts have to be replaced occasionally. The petitioner had 40 or 50 machines in 1917. They cost new about $2,000 apiece. The petitioner used both the plain type and the dobby type looms. It had 350 looms installed in 1899. The dobby type looms were used for making figured materials and were considerably more complicated2046 than the plain ones, some having as many as 16 harnesses, 479 whereas the plain looms had only two. During the taxable years under consideration the petitioner's mill was equipped principally with Draper automatic looms with dobby attachments. All of the 350 looms in use in 1899 had been discarded prior to 1917. The carding machinery was similar to that used in the napping process. There were two units of the main mill buildings, one of which was erected about the year 1899 and the other about the year 1917. One was of brick construction with a Barrett specification type roof and the other was of concrete construction with a standard mill roof of composition on timber. The floors were of wood, some of which were laid on concrete. Some parts of the floors have been replaced several times within the past 30 years. The roof on the first unit has been patched several times and entirely replaced once. The heavy machinery was located on the top floor where the manufacturing process was begun. In 1917 the petitioner's tenement houses numbered about 200 or 250. Some of them were built in 1897. They were constructed of second growth pine and cost originally about $5002047 each. They had shingled roofs which required replacing every five or six years. The houses were supported by sills resting on brick pillars above the ground surface. Frequent repairs had to be made to keep the houses in livable condition. Some of them have been practically rebuilt. The power plant consisted of water wheels, flume, pen stock, head gate, and rope drive belts. There was also a steam plant used for heating purposes. The equipment consisted of beltings, shafts, and other such items. The fire protection consisted of water mains, hydrants, hose carts, hose, etc. The electrical equipment consisted of motors, electrical wiring, starting boxes, switches, etc. The construction equipment consisted of a concrete mixer, hoisting machine, picks, shovels, spades, and other small tools. The average life of the assets of the petitioner under the conditions of operation of the mills for the years 1917 to 1921, inclusive, was as follows: YearsMachinery14 2/7Mill buildings33 1/3Tenant houses20Power plant12 1/2Equipment10Fire protection equipment14 2/7Electrical equipment (Mill No. 2)10Construction equipment6 2/32048 Prior to the tax years here involved the petitioner kept its plant and equipment in a state of good repair and in highly efficient working 480 order. The cost of replacements and major repairs, as well as the cost of minor repairs, was charged to expense account. In or about 1917 a revenue agent examining the petitioner's books of account explained to the petitioner's officers that the cost of replacements and of extraordinary repairs, such as the reroofing of buildings, replacement of floors, etc., should not be charged to expense accounts and claimed as deductions from gross income in income-tax returns. The petitioner then set up on its books an account designated "extraordinary repairs," to which major repair items were thereafter charged and the cost of replacements was charged against depreciation reserve accounts. From August 31, 1899, to August 31, 1916, the petitioner charged off in its books of account a total of $82,080 for depreciation. Of this amount $72,080 was charged to machinery account and $10,000 was charged to tenement account. Its supplies account and expense account, both of which were considered operating expenses for those years, aggregated2049 $366,498.73 and $84,127.25, respectively. During those years the tenement houses were repaired and kept in good condition continuously and the cost thereof charged to rent account. The expenses for labor and wages in connection therewith were charged to wages. During the years 1917 and 1918 the petitioner in order to meet the demands of war-time trade operated its mill on an average of about 20 per cent overtime. At the same time it was losing many of its trained employees, whose places had to be filled largely by inexperienced workers. Weavers took the place of skilled mechanics in the repair of machinery. The machines were improperly cared for during this period and depreciation was sustained at a greater rate than in normal years. It was difficult to obtain repair parts for the machinery and the quality of such parts when obtained was often inferior. The following statement shows the amount of depreciation claimed as a deduction from gross income in the income-tax returns filed by the petitioner for the tax years under review, the depreciation allowed by the respondent, and the depreciation disallowed: YearDepreciation claimed on returnDepreciation allowedDepreciation disallowedAug. 31, 1917$43,648.74$37,610.65$6,038.09Aug. 31, 191881,806.6654,974.2126,832.45Aug. 31, 192099,392.0087,464.0211,927.98Aug. 31, 1921148,736.86107,091.1741,645.692050 In the computation of the amount allowed by the respondent he has used a composite rate of 4 per cent upon the book cost of the assets at the beginning of the year and a 2 per cent rate upon those 481 acquired during the year, the theory being that the additions were owned for a period of 6 months. This is the same rate used by the respondent in computing allowable depreciation for the previous taxable periods from 1913 to 1916. No question is raised by the respondent as to the correctness of the costs of the several classes of assets shown by the petitioner's books as stated above. The respondent has reduced petitioner's invested capital at August 31, 1916, by the amount of $120,293.68 representing an addition to depreciation reserve as of that date. OPINION. SMITH: The petitioner contends, first, that it is entitled to have included in its invested capital as paid-in surplus the amounts of $120,000 and $62,505 representing the alleged bonus value of the water-power rights acquired under the contracts of 1897 and 1905, respectively, with the Power Co. The respondent in his computation of the deficiencies herein has included in petitioner's invested capital an2051 amount of $60,000 representing the value of the water-power rights acquired under the contract of 1897, but has not included in invested capital any amount in respect of the later contract of 1905. The respondent now affirmatively contends, and has so amended his answer, that the $60,000 item was improperly included in petitioner's invested capital and should be eliminated therefrom. The pertinent parts of the revenue acts involved are found in section 207 of the 1917 Act and section 326 of the 1918 Act. These provisions, which are substantially alike in so far as affects the question in dispute, permit the inclusion in invested capital of all "paid-in or earned surplus." Our first question then is whether there was any paid-in or earned surplus in respect of the water-power rights acquired by the petitioner under the contracts of 1897 and 1905. We think not. Both of these transactions occurred between the petitioner and two other corporations, neither of which owned any of petitioner's stock. Under the earlier contract of 1897 from the Carolina Construction Co. the petitioner acquired valuable water rights, the only consideration being that it erect and operate its mill upon2052 the site designated. Neither the Carolina Construction Co. nor the Power Co., through which it acquired the power rights conveyed to the petitioner, was a stockholder of the petitioner. We have heretofore held that contracts of this nature secured from a nonstockholder do not give rise to a paid-in surplus. Cf. ; ; . Although the evidence 482 shows that there was an interrelationship between all of these corporations, that is, the Carolina Construction Co., the Power Co., and the petitioner, through mutuality of stock ownership, it does not show to what extent their stock was mutually owned. In fact, we have before us no evidence as to the specific stockholdings in any one of these corporations. In this respect we think that the evidence is insufficient to support the petitioner's contention that these corporations were "similarly" owned and that the conveyance of 1897 from the Carolina Construction Co. was in effect a conveyance to the petitioner from its own stockholders. Nor do we deem it material that certain stockholders2053 of the petitioner, Habliston, Cohen, and Emry, joined in the conveyance from the Carolina Construction Co. by virtue of an option which they held on the water rights conveyed. Their option never having been exercised, the conveyance was, nevertheless, from the Carolina Construction Co. in its corporate capacity. As to the conveyance of 1905 from the Power Co., whereby the petitioner acquired the right to the use of water to produce 450 additional horsepower, its position is less favorable, since in that agreement the water-power rights were conveyed in consideration of the payment of an annual rental per horsepower equivalent to at least a substantial part of its market value. There is evidence that this latter transaction was entered into at arm's length. The agreement which embodied the conveyance of the water-power rights terminated a dispute, threatening litigation, in which the Power Co. was pressing a claim against the petitioner for several thousand dollars for alleged excess water power used under its former agreement. This fact likewise argues against the petitioner's contention that the corporations here were similarly or mutually owned. Upon the facts shown, we think2054 that the petitioner is not entitled to include in its invested capital any amount in respect of the water-power rights acquired either under the deed of 1905 or that of 1897. The respondent has reduced petitioner's invested capital as of August 31, 1916, by the amount of $120,293.68 representing depreciation alleged to have been sustained in prior years over and above that shown by the petitioner's books of account. Petitioner contends that this reduction of its invested capital was unwarranted. The basis of this claim is that the petitioner's depreciable properties had always been kept in repair and in a highly efficient working order; that the cost of all major repair items such as the reroofing of the buildings, the replacement of floors, the replacement of parts of machines, the cost of reclothing nappers, etc., had been charged to operating expense in the years in which such costs were incurred and that, therefore, the capital account was not inflated by such 483 costs and that the earned surplus shown by its books was not overstated by reason of not charging off a sufficient amount for depreciation. The petitioner shows that from August 31, 1899, to August 31, 1916, it2055 expended a total of $366,498.73 for supplies, which included the cost of replacements, and $84,127.25 for expense account or cost of repairs, and that both of these accounts were charged to expense; that such amounts were exclusive of the cost of repairs on tenant houses which were charged to rent and wages account and that the charge-off of $82,080 for depreciation of physical assets, $72,080 of which was charged directly to machinery account and $10,000 to tenement account, offset depreciation actually sustained; furthermore, that none of the 350 looms with which the petitioner began operation in 1899 were in use at August 31, 1917, all having been discarded or exchanged for modern up-to-date looms. Upon this showing we think that the petitioner has overcome the presumption of the correctness of the respondent's action in adjusting its corporate surplus as of August 31, 1916, on account of depreciation for prior years and that the invested capital should not be reduced by the $120,293.68 alleged depreciation sustained in excess of that charged off by the petitioner. See 2056 ; ; ; ; ; ; . The petitioner contends that it is entitled to an increase in the annual deduction allowed by the respondent on account of the exhaustion of the water-power rights acquired under the lease of 1905. The respondent has allowed an annual deduction of $359.77 computed upon a bonus value at March 1, 1913, of $33,098.50 spread ratably over the remaining life of the lease. The petitioner claimed no deduction from gross income in its income-tax returns in respect of the exhaustion of this lease. The respondent contends that inasmuch as the petitioner in its petition did not specifically allege any error with respect to the proper amount of exhaustion to be allowed upon this lease, the Board has no jurisdiction to determine the issue. The petitioner has, however, alleged that the respondent erred in disallowing amounts2057 for depreciation for each of the taxable years and we think that the petitioner is entitled to prove depreciation upon any depreciable asset, even though the allegation of error with respect to the disallowance of a portion of the claimed depreciation did not cover this specific asset. The allegation of error that the respondent erred in disallowing a portion of the depreciation claimed on the return puts in issue the entire question as to the correct amount of exhaustion and depreciation allowable. 484 The deficiency notice which formed the basis of the petition in this case stated in part as follows: 5. The March 1, 1913 bonus value of the 100-year lease, based on the remaining life of 92 years, an indicated annual saving of $2,650.00 and interest at 8%, has been determined for depreciation purposes as $33,098.50. The allowable yearly depreciation over a period of 92 years is $359.77. (Article 162, Regulations 45 and Regulations 62.) The computation of the respondent was based upon the theory that the water-power rights had a value of $15 per horsepower per year. The evidence shows that between 1906 and 1909 the Power Co. sold additional water power to the petitioner2058 at the rate of $18 per horsepower and that it sold surplus water power to other users at a per kilowatt rate equal to $23 per horsepower. A competent witness for the petitioner testified that the March 1, 1913, value of the water power was between $20 and $25 per horsepower. Upon this basis we think that the respondent should have found the fair rental value of the water-power rights in question was $20 per horsepower on March 1, 1913, and that the exhaustion of the water-power rights should be computed accordingly. The method of computation of the March 1, 1913, bonus value of the water-power rights is not in question. The petitioner contends that the respondent has allowed inadequate deductions for depreciation of physical assets in each of the years involved, in that he has computed the depreciation on most of the assets at too low a rate. The respondent has used a composite rate of 4 per cent throughout on all classes of property. The petitioner contends that, since its physical assets were segregated in its books according to proper classification, the respondent should not have used a flat rate as applied to all classes of property, but should have depreciated each group2059 separately at the following rates: Per centMachinery7Mill buildings3Tenant houses5Power plant8Equipment10Fire protection equipment7Electrical equipment, Mill No. 210Construction equipment15Petitioner submits that although the composite rate used by the respondent for years prior to the taxable year may have given an adequate depreciation deduction, it did not produce an adequate depreciation deduction for the years involved for the reason that the physical assets were operated under war-time conditions and operated considerably overtime. Petitioner submits that it is an established policy to apply specific rates of depreciation to specific assets and that a flat or composite rate is justified only in a case where it is impossible to segregate the cost of assets; that such condition does not obtain in the instant case. The respondent, on the other hand, contends that it is not 485 possible to apply specific rates to some of the classes of assets for the reason that the costs of the different assets within the same class are not properly segregated on the petitioner's books of account, and that in any event a composite2060 rate reaches the same result provided it be high enough to provide a reasonable deduction for depreciation. Although the Board has approved the use of composite rates in particular cases (, where a composite rate on the entire plant for the year 1920 was allowed at the rate of 6 1/2 per cent), we think that specific rates should be applied to specific assets where the cost of the specific assets is sufficiently accurately shown. Of course, assets within the same class often depreciate at different rates and the difficulty of applying specific rates to such assets is exemplified in the case of the power plant in this proceeding. Thus, it was testified with respect to the power plant that "bars" at the Roanoke Mills had been replaced every 7 years; that a penstock lasted 20 years; that petitioner's experience is that a water wheel has to be replaced every 10 years to get the best efficiency of operation. The principal assets of the petitioner are its machinery, brick buildings, and tenant houses. The evidence adduced warrants a conclusion that 3 per cent is a proper rate to be applied to the brick buildings; that 7 per cent2061 is a proper rate for the machinery account during the tax years under review, although 5 per cent is a proper rate for prior years; that 5 per cent is a proper rate for the tenant houses; 8 per cent for the power plant as a whole; 10 per cent for equipment; 7 per cent for the fire protection equipment; 10 per cent for the electrical equipment, and 15 per cent for the construction equipment. In his brief the respondent objects to any adjustment of depreciation allowances and contends that, since the petitioner has not shown the March 1, 1913, value of its assets acquired prior to and on hand at that date, no proper basis for a recomputation of depreciation deductions has been provided. We think that this objection is untimely and not well taken. Nowhere in the pleadings or in the presentation of this case was any question raised by either party as to the basis for computing the deductions. The respondent has used the cost figures shown in the petitioner's books, which were admitted in evidence without objection from counsel and which appear to us fairly to represent what they purport. The petitioner has taken exception only to the rate used by the respondent. We think that the*2062 figures provided constitute the proper basis for the recomputation at the rates above specified. Reviewed by the Board. Judgment will be entered under Rule 50.MURDOCK dissents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620598/	JOHANNES L. KUH and ADRIANA KUH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKuh v. CommissionerDocket No. 410-82.United States Tax CourtT.C. Memo 1983-572; 1983 Tax Ct. Memo LEXIS 217; 46 T.C.M. (CCH) 1405; T.C.M. (RIA) 83572; September 15, 1983. Adriana Kuh, pro se. M. K. Mortensen, for the respondent. WILESMEMORANDUM OPINION WILES, Judge: Respondent determined a deficiency in petitioners' 1977 Federal income tax in the amount of $695. The sole issue for decision is whether petitioners are entitled to a deduction for certain educational expenses under section 162(a). 1Some of the facts have been stipulated and are found accordingly. Johannes L. Kuh and Adriana Kuh (hereinafter petitioner), husband and wife, resided in Escondido, California, when they filed their 1977 joint Federal income tax return, and when they filed their petition in this case. During 1977, petitioner's sole218 employment was as a teacher's assistant by Palomar Community College District (hereinafter Palomar), San Marcos, California. Petitioner assisted teachers in Palomar's Pre-Discharge Education Program, a 13-week high school diploma curriculum for active duty servicemen who were stationed at Camp Pendleton and who had failed to graduate from high school prior to entering the armed forces. Under California law, a teacher's assistant is authorized to work only under the immediate supervision of a credentialed classroom teacher to whom the assistant is assigned. See Cal. Educ. Code Sec. 10020 (West 1978). 2219 During 1977, petitioner attended two semesters at San Diego State University. The first semester ran from January through June of such year, and was attended by petitioner in order to obtain her baccalaureate degree. 3 Petitioner enrolled in the following courses during such semester: the secondary school; teaching of reading in the secondary school; advanced grammar and composition; German literature from the beginning to the reformation; and German literature of the 18th Century. The second semester at San Diego State University ran from September 1977 through January 1978, and petitioner enrolled in the following courses: instruction in media equipment and production, humanistic and social aspects of teaching; behavioral and physiological aspects of teaching; student teaching; and health education for secondary teachers. Under California law, a baccalaureate degree or higher degree and a fifth year of study are part of the requisites for obtaining a teaching credential in the public elementary and secondary schools. See Cal. Educ. Code Sec. 44259 (West220 1978). 4 Sometime after 1977, petitioner met the requirements to become an accredited teacher and she obtained a teaching credential from the State of California. Petitioner's teaching credential entitled petitioner to teach grades kindergarten through twelfth and, upon receiving such credential, petitioner obtained employment in various public school districts in north San Diego county. 221 On her 1977 Federal income tax return, petitioner claimed an educational expense deduction in the amount of $2,655. The claimed deduction was attributable to expenses incurred by petitioner in attending courses at San Diego State University. In the notice of deficiency, respondent disallowed the claimed deduction on the following alternative three theories: (i) the expenses were incurred to meet the minimum educational requirements for qualification in petitioner's employment; (ii) the expenses qualified petitioner for a new trade or business; and (iii) the petitioner did not verify that the amounts in issue had actually been incurred. In their petition, petitioners raised no issue with respect to whether or not the claimed educational expenses were paid or incurred. In the stipulation of facts filed herein, the parties state that petitioner incurred $2,383 in expenses, but they still dispute whether or not such expenses were deductible. 5 At trial, no issue was raised with respect to the difference between the $2,383 stipulated and the $2,655 claimed on the return. Consequently, we conclude that petitioners have conceded such difference and we proceed with the issue of222 the deductibility of the stipulated expenses. Petitioner argues that she was in the trade or business of teaching because she was a teacher's aide. Consequently, she maintains that the educational courses at San Diego State University were taken in order to maintain and improve the skills required in her profession. Respondent, on the other hand, maintains on brief that the educational expenses in question were nondeductible because they were incurred by petitioner to help her meet the minimum educational requirements for qualification as a teacher. We agree with respondent. There is no evidence in the record as to what the minimum education requirements were for the petitioner's position as a teacher's assistant during 1977. See sec. 1.162-5(b), Income Tax Regs. It appears, however, that petitioner did not intend to continue as a teacher's assistant as she continued to pursue the requirements for a teacher's credential and, once such credential was obtained, she sought employment as an accredited teacher with the north San Diego county public223 school districts. While the record is not very detailed with respect to petitioner's job duties as a teacher's assistant at Palomar, it is clear that petitioner was only authorized to act as a teacher's assistant under the immediate supervision of a licensed or certified teacher. Accordingly, petitioner, as a teacher's aide, did not perform those duties and carry out the responsibilities which are essential to the teaching function.See Diaz v. Commissioner,70 T.C. 1067">70 T.C. 1067, 1075 (1978), affd. without published opinion 607 F.2d 995">607 F.2d 995 (2d Cir. 1979); Grover v. Commissioner,68 T.C. 598">68 T.C. 598, 602 (1977); Davis v. Commissioner,65 T.C. 1014">65 T.C. 1014, 1019 (1976); Weiszmann v. Commissioner,52 T.C. 1106">52 T.C. 1106, 1110 (1969), affd. per curiam 443 F.2d 29">443 F.2d 29 (9th Cir. 1971). We find the instant case virtually indistinguishable from Diaz v. Commissioner,supra, which involved a taxpayer who claimed deductions during 1973 and 1974 for expenses incurred in obtaining a bachelor of science degree in education while working as a paraprofessional in the New York City public school system. At that time, an individual seeking224 provisional certification as a teacher in New York was required to have a baccalaureate degree. Subsequent to receiving her baccalaureate degree in June 1974, the taxpayer obtained employment as a teacher in a day care center but she was not able to find employment during 1974 as a teacher in the New York City public school system. We held that the claimed deduction should be disallowed because the taxpayer's program of study "will lead to qualifying the taxpayer in a new trade or business." Diaz v. Commissioner,supra at 1075; see sec. 1.162-5(b)(3)(i), Income Tax Regs. We also held that the taxpayer's expenses were incurred in order for her to meet the minimum educational requirements for qualification as a teacher and, therefore, the claimed deduction should be denied. Diaz v. Commissioner,supra at 1076. See sec. 1.162-5(b)(2)(i), Income Tax. Regs.Since we find the instant case to be virtually indistinguishable from Diaz v. Commissioner,supra, we hold for the reasons expressed therein (see discussion, supra), that petitioner is not entitled to a deduction for educational expenses under section 162(a). 225 To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended.↩2. This section provides as follows: Nothing in this chapter shall be construed as preventing school districts from hiring, employing, or otherwise using teacher aides, instructional aides, or teacher-assistants under the terms of existing law and financial support formulas. The commission may study the various roles of such paraprofessionals and routinely report its findings. Public and private colleges, universities, and community colleges may develop cooperative programs with school districts or school governing boards to place undergraduate and graduate students in public and private classrooms as teacher aides or assistants. Such assignment may be, at the discretion of the institution, the basis for securing college credit. A certificate to serve as a temporary teacher-assistant shall be issued, by the county superintendent of schools of the county in which service is to be rendered, to the holder of a recommendation from an accredited college, university, or community college. The certificate shall authorize the holder to serve as a teacher-assistant. No such certificate shall be granted for a period exceeding two years. The teacher-assistant certificate shall not be used in lieu of a teaching credential. The holder of such a certificate shall work under the immediate supervision of a credentialed classroom teacher to whom the teacher-assistant is assigned, who shall be present in the classroom while the teacher-assistant is performing his classroom duties or who shall be available at all times to provide guidance and direction to the teacher-assistant.↩3. The record does not indicate where or when petitioner completed her prior college training.↩4. This section provides: The minimum requirements for the teaching credential, except designated subjects, are: (a) A baccalaureate degree or higher degree, except in professional education, from an approved institution. (b) A fifth year of study to be completed within five years from the date of issuance of the preliminary credential. (c) An approved program of professional preparation. (d) Passage of a subject matter of examination or its waiver as specified in this chapter. (e) Demonstration of a knowledge of the various methods of teaching reading, to a level deemed adequate by the commission, by successful completion of a program of study approved by the commission or passage of a commission-approved reading examination. This subdivision does not apply to any candidate for a single subject instruction credential who holds a degree in industrial arts, physical education, music, art, or home economics.↩5. The stipulation provides that the $2,383 amount consists of expenses for tuition, books, miscellaneous fees, and transportation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620600/	NORMAN F. DACEY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RespondentDacey v. CommissionerDocket No. 24512-88United States Tax CourtT.C. Memo 1992-187; 1992 Tax Ct. Memo LEXIS 212; 63 T.C.M. (CCH) 2584; Unemployment Ins. Rep. (CCH) P16,539; March 30, 1992, Filed 212 Decision will be entered under Rule 155. Norman F. Dacey, pro se. John Aletta and Robert E. Marum, for respondent. CLAPPCLAPPMEMORANDUM OPINION CLAPP, Judge: This case has been submitted to the Court with the facts fully stipulated pursuant to Rule 122. All section references are to the Internal Revenue Code for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Respondent determined the following deficiencies in and additions to petitioner's Federal income taxes: Additions to TaxYearDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)Sec. 6654Sec. 66611981$ 44,455.06$ 2,222.75--$ 3,406.34--19827,468.88373.441727.14$ 1,867.2219839,462.72473.141579.052,365.68198461,200.793,060.0413,847.7715,300.20198550,016.362,500.8212,866.1512,504.09After a concession with respect to section 6661 by respondent, the issues for decision are: 213 (1) When petitioner ceased to be a citizen of the United States. We hold that petitioner renounced his United States citizenship on April 27, 1988. (2) Whether petitioner is subject to United States income taxes on royalty income received by him from 1981 through 1985. We hold that he is. (3) Whether petitioner is subject to self-employment income taxes on royalty income received by him from 1981 through 1985. We hold that he is. (4) Whether petitioner is subject to income taxes on one-half of the social security benefits of $ 8,839 and $ 9,150 he received in 1984 and 1985, respectively, under section 86. We hold that he is. (5) Whether petitioner is liable for additions to tax under sections 6653(a)(1) and 6654 for tax years 1981 through 1985 and section 6653(a)(2) for tax years 1982 through 1985. We hold that he is. We incorporate by reference the stipulation of facts and attached exhibits. Petitioner resided in Ireland at the time he filed his petition. Petitioner is an author. His book, "How to Avoid Probate!", originally published in 1966 with updated versions published in 1980 and 1983, was a best seller and has sold over 2-1/2 million copies. Petitioner made 214 numerous radio and television appearances in the United States promoting the book. Petitioner received royalty income during the tax years 1981, 1982, 1983, 1984, and 1985 of $ 84,389.32, $ 22,886.38, $ 28,082.52, $ 130,085.32, and $ 106,510.42, respectively, on sales of this book. Payments were made by petitioner's New York publisher, Crown Publishers, Inc., either to petitioner at a Connecticut address or to his Connecticut bank account. Petitioner did not file any Forms 1040 or Forms 1040NR with the Internal Revenue Service for the tax years 1981 through 1985. Petitioner was a United States citizen by birth. On May 17, 1980, petitioner applied for a United States passport, declaring in the application that he was a United States citizen and the purpose of the trip was a "holiday". The application also noted that the trip would last for 2 months, and the countries to be visited were Ireland, England, and Italy. On the basis of that application, United States passport number A1746685 was issued to petitioner on June 2, 1980. Petitioner left the United States on or about August 15, 1980, and apparently moved to Ireland. Petitioner took up residence in Portacarron, Oughterard, 215 in County Galway, Ireland, and lived there from 1980 until about 1990 when he moved to Bath, Avon, England. He registered and voted in elections and referenda in Ireland from September 1980 until at least May 1989. Petitioner also registered his car in County Galway, Ireland, in December 1980, renewing it annually through 1987. On January 21, 1985, petitioner again applied for a United States passport, this time through the United States Consulate in Dublin, Ireland. The passport application again required petitioner to declare that he was a United States citizen, as well as attest to certain other facts. The additional representations included that petitioner had not: been naturalized as a citizen of a foreign state; taken an oath, or made an affirmation or other formal declaration of allegiance to a foreign state * * * made a formal renunciation of nationality either in the United States or before a diplomatic or consular officer of the United States in a foreign state * * The application required petitioner to declare that statements made in the application were "true and complete". Petitioner signed and submitted the application on January 21, 1985. Upon that216 application, petitioner was issued United States passport number Z5173919 on January 29, 1985. Petitioner's passport applications of May 17, 1980 and January, 21, 1985, listed his occupation as "author" and "writer", respectively, and both contained above-quoted representations regarding petitioner's United States citizenship status. Petitioner subsequently was issued a passport by the Republic of Ireland on August 29, 1986. Petitioner formally renounced his United States citizenship on April 27, 1988. Petitioner appeared personally before Michael S. Owen, Vice Consul of the United States at the United States Embassy in Dublin, Ireland, and signed both an Oath of Renunciation of the Nationality of the United States and a Statement of Understanding. Before reaching the merits of the case, we first address petitioner's Motion for Recusal, filed September 18, 1991. Petitioner alleges that the Judge to whom this case was assigned acted in a prejudicial manner towards petitioner. Specifically, petitioner claims that he has been prejudiced by the Court's order dated November 7, 1990, setting for hearing petitioner's motion to compel certain discovery, and by the Court's order dated217 January 24, 1991, directing the parties to proceed with the stipulation process with the objective of submitting the case to the Court under Rule 122. On September 21, 1988, petitioner timely filed a petition with this Court requesting a redetermination of the tax determined to be owing by respondent for tax years 1981 through 1985. The case was set for trial in Hartford, Connecticut, on March 19, 1990. Petitioner, who was in Ireland at the time, moved the Court for a continuance for health reasons. The Court granted that motion, and the case was subsequently recalendared for trial in Hartford, Connecticut, on November 26, 1990. Petitioner filed five separate motions before that trial date. Petitioner moved the Court to compel respondent to agree to certain stipulations and to grant summary judgment for petitioner; these motions were denied after due consideration on the merits. Petitioner also moved the Court to continue the case again, this time citing dissatisfaction with respondent's answers to his interrogatories. The Court denied petitioner's motion to continue the case because petitioner failed to put forth specific reasons as required by Rule 91(f). Petitioner then218 moved the Court to compel respondent to answer the above-mentioned interrogatories. The Court set this matter for hearing at the trial session in Hartford, Connecticut, on November 26, 1990. Finally, petitioner moved the Court to reconsider continuing the case because health concerns prohibited petitioner from traveling to the United States. The Court's order dated November 14, 1990, granted a continuance and directed each party to propose how the matter could best be brought to resolution: ORDERBased on petitioner's motion filed November 13, 1990, to reconsider denial of motion for continuance filed October 19, 1990, and the attached certificates of two different doctors setting forth petitioner's various health problems, in which both doctors advise against petitioner's traveling at this time, it is ORDERED that petitioner's above-referenced motion is granted in that this Court's order dated October 29, 1990, denying petitioner's motion for continuance is vacated and set aside. It is further ORDERED that this case is continued from the Court's November 25, 1990, Hartford, Connecticut trial session. It is further ORDERED that jurisdiction of this case is retained219 by the undersigned. It is further ORDERED that petitioner shall file, on or before December 7, 1990, a report with respect to how he proposes to proceed with this case given the state of his health, his physical presence outside the United States, and his pro se status before the Court, bearing in mind that somehow, at some time, this matter must be concluded. It is further ORDERED that respondent shall file, on or before December 7, 1990, a report on the status of his communications with petitioner and any suggestions that respondent might have as to how this case can proceed to a conclusion.Respondent indicated that the case was susceptible to submission under Rule 122, while petitioner requested a separate hearing on the discovery matter in Hartford, Connecticut, in May 1991. After due consideration of the proposals, the Court concluded that the case was susceptible to submission under Rule 122 and that, because of the unusual logistical circumstances, this was the best way to proceed. The Court's order dated January 24, 1990, directed the parties to continue the stipulation process to that end: ORDERPursuant to the Court's order dated November 14, 1990, each220 of the parties herein has filed a report with suggestions as to how this case may proceed to a conclusion. The Court has considered both reports and finds that petitioner's suggestions are inadequate in that petitioner merely suggests that a hearing in this matter be rescheduled at a time and place convenient to the Court on or about May 1, 1991, which the Court considers to be an unrealistic suggestion in light of the prior continuances granted to petitioner for health reasons. The Court considers the suggestions contained in respondent's letter to petitioner dated November 30, 1990, to be a reasonable and rational outline of a course of action which would bring this matter to a conclusion. It appears to the Court that, given the state of petitioner's health, his presence outside the United States, and his continuing inability to travel to the United States for trial, the only way this case can be concluded is to have it submitted to the Court as a fully stipulated case under Rule 122 of the Tax Court Rules of Practice and Procedure. It appears that the case is susceptible of submission in this matter. After due consideration, it is ORDERED that petitioner proceed immediately221 to respond to respondent's proposed stipulation of facts with the ultimate objective of submitting this case to the Court under Rule 122. It is further ORDERED that each of the parties shall file, on or before March 22, 1991, a report with respect to the foregoing. If a complete stipulation of facts is not ready for submission on or before March 22, 1991, and if the Court determines that this is the result of either party's failure to fully cooperate in the preparation thereof, the Court may order sanctions against the uncooperative party.The Court did not force petitioner to adopt or accede to any particular course of action regarding his case. The Court was simply trying, as it must, to move the case along and bring the matter to conclusion. No bias or preconceptions about petitioner or the merits of the case were involved in the Court's rulings or handling of the case. The Judge to whom the case was assigned was not, and is not, biased against petitioner. After consideration, petitioner's Motion for Recusal, filed September 18, 1991, is denied. Petitioner also questioned the propriety of respondent's notice of deficiency on several grounds. Petitioner claimed that222 numerous improperly motivated audits of his tax returns were performed by respondent, including this one at the behest of the United States Department of State because of its displeasure with petitioner's political views. Petitioner further asserts that respondent's agents pursued this case as an "act of private revenge", disregarded the regulations as well as this Court's Rules, and "prepared [the] claim in a careless inaccurate and inefficient manner." Generally, this Court will not look behind the statutory notice of deficiency to examine the propriety of respondent's motives or the evidence used or procedures involved in making her determinations. Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324, 327 (1974). A trial before this Court is a proceeding de novo to determine a taxpayer's correct tax liability. Our findings and holding are based on the merits of the case and not on any previous record developed at the administrative level. This Court has recognized a narrow, limited exception to the general rule where there is substantial evidence of unconstitutional conduct by respondent, and the integrity of our judicial process would be impugned. 223 Greenberg's Express, Inc. v. Commissioner, supra at 327-328. After a review of the record, we do not find any credible evidence of unconstitutional conduct by respondent in this case. We also have considered petitioner's arguments for review of respondent's procedures prior to issuing the notice of deficiency in this case and find them without merit. 1. Loss of United States CitizenshipTurning to the merits of the case, we first address the question of when petitioner lost his United States citizenship. Loss of United States citizenship is governed by the Immigration and Nationality Act of 1952, ch. 477, sec. 349(a)(1), (2), and (5), as amended, 8 U.S.C. sec. 1481(a)(1), (2), and (5) (1988). See sec. 1.1-1(c), Income Tax Regs. Title 8 U.S.C. section 1481(a) provides that a United States citizen shall lose his or her nationality if he or she voluntarily performs a statutorily designated expatriating act with the requisite intention of relinquishing United States citizenship. Vance v. Terrazas, 444 U.S. 252">444 U.S. 252, 261 (1980). Title 8 U.S.C. section 1481(b) assigns the burden of proof to the party claiming that the loss has occurred. 224 Of the seven enumerated acts in 8 U.S.C. section 1481(a), only three have possible application in this case: (1) obtaining naturalization in a foreign state upon his own application, or * * * (2) taking an oath or making affirmation or other formal declaration of allegiance to a foreign state or * * * * * * (5) making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State * * Petitioner, a United States citizen by birth, asserts that he lost his United States citizenship under either paragraphs (2) or (5). Although not expressly, petitioner also seems to make an argument for expatriation under paragraph (1). Petitioner initially claims that he lost his United States citizenship upon entry into Ireland in 1980. Petitioner maintains Irish authorities told him he already was a citizen of Ireland by descent. According to petitioner, both his grandfathers were born in Ireland; therefore, his parents were Irish citizens and, thus, so is he. Petitioner asserts that his name was entered into a "Registry of Foreign Births" at this time but fails to 225 provide any evidence to this effect. Petitioner also claims that he lost his United States citizenship by virtue of a letter dated January 1, 1981, and mailed from Galway, Ireland, on that date to the United States Department of State. In the letter, petitioner primarily cites his dissatisfaction with certain aspects of United States foreign policy as the reason for his "ultimate protest -- the renunciation of my United States citizenship", which he claims the letter performs. The State Department has no record of the letter. As the party claiming loss of United States citizenship, petitioner bears the burden of proving such loss, 8 U.S.C. section 1481(b), as well as the burden of proving that respondent's deficiency determination was incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). Petitioner has failed to show that he lost his United States citizenship at any time during the years at issue. No evidence exists in the record establishing that petitioner obtained naturalization in Ireland upon his own application or that of an authorized agent as required by 8 U.S.C. section 1481(a)(1). Nor is there evidence that petitioner took an oath, made226 an affirmation, or any other type of formal declaration of allegiance to Ireland as required by 8 U.S.C. section 1481(a)(2). We need not decide whether petitioner was an Irish citizen by descent because the expatriating statute requires more than an acknowledgment of dual citizenship to effectuate loss of United States citizenship. United States v. Matheson, 532 F.2d 809">532 F.2d 809 (2d Cir. 1976); Jalbuena v. Dulles, 254 F.2d 379">254 F.2d 379 (3d Cir. 1958). Petitioner presents only an Irish passport issued to him on August 29, 1986, County Galway automobile registration documents from 1980 through 1987, and a certification stating that petitioner voted in Irish elections from 1980 through 1989. None of this evidence establishes that petitioner satisfied the statutory expatriation requirements. Both the passport, which was issued after the time period at issue, and the Irish automobile registration are irrelevant to loss of United States citizenship. In addition, the Supreme Court held in Afroyim v. Rusk, 387 U.S. 253 (1967), that participation in foreign elections is not an act of expatriation. Thus, petitioner's arguments under 8 U.S.C. 227 section 1481(a)(1) and (2) must fail. The State Department has certified its complete records on petitioner's citizenship status, and review of them fails to disclose the letter petitioner claims to have mailed in 1981. However, even if we were to accept that the letter was mailed by petitioner from Ireland as petitioner claims and was received by the State Department in 1981, it would fail to effectuate a loss of citizenship. The letter is legally insufficient under 8 U.S.C. sec. 1481(a)(5) (1988), which requires formal renunciation to be "in such form as may be prescribed by the Secretary of State * * ." The Secretary did prescribe forms required to be used by persons renouncing United States citizenship under paragraph (a)(5), and the letter was not on any such form. The State Department's regulations in effect in 1981 required that the renuncient sign forms containing specific expatriating language and describing the repercussions of the act. Such forms are the very ones used by petitioner when he successfully renounced his United States citizenship at the American Embassy in Dublin, Ireland, in 1988. See 22 C.F.R. sec. 50.50 (1991). This was not a nominal requirement; 228 expatriation is a serious act that should be undertaken with a full understanding of the consequences. Moreover, paragraph (a)(5) requires that when a renunciation occurs in a foreign state,it shall be made "before a diplomatic or consular officer of the United States * * ". Petitioner simply did not comply with these requirements until April 27, 1988. Moreover, when petitioner applied for and received another United States passport in 1985, he expressly represented that he was still a United States citizen and had not taken actions to renounce that citizenship or obtain nationalization in a foreign state. Petitioner cannot gain some governmental benefits on the basis of certain representations and then take a precisely contrary position in order to avoid tax liability; he is estopped from taking the contrary position. United States v. Matheson, supra at 819; Rexach v. United States, 390 F.2d 631">390 F.2d 631, 632 (1st Cir. 1968). Therefore, petitioner's claim of loss of United States citizenship prior to 1988 under 8 U.S.C. section 1481(a)(5) also must fail. On April 27, 1988, petitioner personally appeared at the American Embassy in Dublin, 229 Ireland. The American consular officer, Michael S. Owen, explained the seriousness and consequences of renunciation of United States citizenship. Petitioner was required to and did read the Statement of Understanding in connection with his desire to expatriate. Petitioner then signed the Statement of Understanding and the Oath of Renunciation of the Nationality of the United States, and by doing so, fulfilled the requirements of 8 U.S.C. section 1481(a)(5) in the manner and form prescribed by the Secretary of State. See 22 C.F.R. sec. 50.50 (1991). We hold that petitioner lost his United States citizenship on April 27, 1988. He was a United States citizen until that date. 2. Royalty IncomeAs a citizen of the United States during the years at issue, petitioner is subject to United States Federal income tax on his worldwide income. Sec. 1; Cook v. Tait, 265 U.S. 47">265 U.S. 47 (1924); sec 1.1-1(a)(1) and (c), Income Tax Regs. It is unnecessary to determine whether that income was from sources within or without the United States since petitioner is not a nonresident alien. See sec. 861. Petitioner's residency status is likewise irrelevant. Petitioner points230 out that the United States-Irish Tax Convention exempts from United States taxation certain royalty income of Irish residents. United States-Ireland Income Tax Treaty, Sept. 13, 1949, art. VIII, par. (1), 2 U.S.T. (Vol. 2) 2303, 2311. The convention, however, expressly excludes United States citizens from the definition of a resident of Ireland. Id. at art. II, par. (1)(g), 2 U.S.T. (Vol. 2) 2307. Petitioner's royalty income received during the years at issue is includable in his gross income as a United States citizen. Sec. 61(a)(6). Since no related deductions were claimed relating to production of that income, those amounts represent petitioner's taxable income for those years. Sec. 63(a). Thus, we hold that petitioner is fully taxable on the royalty income he received during 1981, 1982, 1983, 1984, and 1985 in the amounts of $ 84,389.32 22,886.38, $ 28,082.52, $ 130,085.32 and $ 106,510.42, respectively. 3. Self-Employment TaxesWe also must decide whether petitioner is liable for self-employment tax on his royalty income under sections 1401 and 1402. Petitioner bears the burden of proof on this issue as he does with all of the remaining issues. With certain231 exceptions not relevant here, self-employment income is defined generally as net income from a "trade or business" as that term is defined in section 162. Sec. 1402(a), (c),and (d); sec. 1.1402(a)-1, Income Tax Regs. It is undisputed that the royalty income petitioner received arose from writing and updating his book, "How to Avoid Probate!". Petitioner's authorship, updating efforts, and radio and television appearances were undertaken with a profit objective. He expended significant personal time and effort in this pursuit. We hold that petitioner engaged in a trade or business as an author and promoter of his writings. See Hittleman v. Commissioner, T.C. Memo. 1990-325; Allen v. Commissioner, T.C. Memo 1982-93">T.C. Memo. 1982-93. Payment in the form of royalties in subsequent years does not alter the trade or business nature of the activity, nor defeat the fact that the royalties were derived from petitioner's self-employment. See Oates v. Commissioner, 18 T.C. 570">18 T.C. 570, 585 (1952), affd. 207 F.2d 711">207 F.2d 711 (7th Cir. 1953). Moreover, the record indicates that an updated version of petitioner's book was published during one232 of the years at issue. Petitioner argues that, as a nonresident alien, he is exempt from the tax pursuant to the parenthetical language of section 1402(b). We have held, however, that petitioner was a United States citizen for all of the years at issue. Petitioner also claims that royalty income cannot be self-employment income. This Court has held to the contrary. Hittleman v. Commissioner, supra; Allen v. Commissioner, supra.Petitioner puts forth no other argument, and the record is devoid of any additional evidence relating to this issue. We hold that petitioner has failed to satisfy his burden of proof on this issue and is liable for self-employment tax for 1981 through 1985. 4. Tax on Social Security BenefitsPetitioner also received social security benefits during 1984 and 1985 of $ 8,839 and $ 9,150, respectively. Section 86 provides that one-half of the social security benefits received by taxpayers with incomes in excess of certain limits are subject to income tax. Petitioner's income for 1984 and 1985 as determined above exceeds the limits for all filing categories. See sec. 86(c). Petitioner's sole argument233 on this issue is that he believes the social security benefits he received during 1984 and 1985 were the tax-free "return of premiums he paid over a 47-year period". The statute, however, provides for no such basis accounting. Rather, the law requires inclusion of social security benefits in gross income where the taxpayer's income exceeds limits that are exceeded in this case. Thus, we hold that petitioner is liable for income taxes on $ 4,419.50 and $ 4,575 for 1984 and 1985, respectively. 5. Additions to TaxLast, we must decide whether petitioner is liable for additions to tax under sections 6653(a)(1) for 1981 through 1985 and section 6653(a)(2) for tax years 1982 through 1985. Negligence has been defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Liability for section 6653(a) additions to tax results from a holding that the underpayment of tax was due to negligence or intentional disregard of the rules or regulations. Petitioner bears the burden of proof. Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972).234 Petitioner wrote a book on the subject of probate in the United States, including discussion of the related taxes. In addition, he made many radio and television appearances regarding his book. Authorship in a complex area such as this implies at least some level of awareness and sophistication of the existence and importance of tax statutes and regulations governing United States citizens and their transactions. We believe petitioner was cognizant of the requirement to attend to tax matters and was capable of acquiring the relevant information or assistance to properly comply with his tax obligations. Thus, we hold that petitioner is liable for the additions to tax under section 6653(a). Liability for section 6654 additions to tax turns on whether a sufficient estimated tax is paid for each year in issue. This addition is imposed unless petitioner can show he comes within one of the exceptions set forth in section 6654(e). See Pring v. Commissioner, T.C. Memo 1989-340">T.C. Memo. 1989-340. Since petitioner did not file any returns or make any payments for the years at issue, and we have held that petitioner received substantial taxable income during those years, and petitioner235 has not shown that any of the exceptions of section 6654(e) apply, we hold that petitioner is liable for the additions to tax under section 6654. Decision will be entered under Rule 155. Footnotes1. 50 percent of the interest due on the deficiency.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620601/	SUNNYSIDE COAL & COKE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sunnyside Coal & Coke Co. v. CommissionerDocket No. 9442.United States Board of Tax Appeals9 B.T.A. 984; 1927 BTA LEXIS 2473; December 29, 1927, Promulgated 2473 1. DEPRECIATION. - A reasonable allowance for depreciation of construction and machinery equipment used by the petitioner in mining coal during the fiscal year ended April 30, 1921, found to be 8 per cent of the amount carried in the capital asset account. 2. DEPLETION. - The petitioner during the fiscal year ended April 30, 1921, mined 74,760 tons of coal owned under mining rights on March 1, 1913. It is entitled to a depletion deduction for that year in an amount found by applying the per-ton unit rate based upon the March 1, 1913, value of the coal in the ground to the entire production of said fiscal year. 3. INVESTED CAPITAL. - Coal-mining rights acquired by the petitioner over a long period of years both before and after March 1, 1913, should be reflected in invested capital for the fiscal year ending April 30, 1921, in the amount of their cost, against which there should be reflected a reserve for depletion based upon the cost of the original coal content, but in no event greater than the sum of the allowable deductions from gross income during the years of operation. John E. McClure, Esq., for the petitioner. Granville S. Borden, Esq., for the2474 respondent. TRUSSELL 984 In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the fiscal year ending April 30, 1921, for which the respondent has determined a deficiency of $2,157.30. Petitioner alleges error on the part of the respondent (1) in failing to allow an adequate deduction for depreciation; (2) in failing to allow an adequate deduction for depletion of coal property; (3) in reducing invested capital by an amount of $16,407.97. At the trial petitioner was permitted to amend its petition so as to claim a depreciation deduction upon mining construction and equipment at the rate of 15 per cent instead of 10 per cent as originally claimed. The respondent was permitted to amend his answer by making affirmative allegations to the effect that a certain construction and equipment account upon which depreciation was claimed and which was reflected in invested capital should be either entirely eliminated or largely reduced on account of prior exhaustion and depreciation. FINDINGS OF FACT. Petitioner is a corporation, organized in 1886 under the laws of the State of Indiana, with principal offices at2475 Evansville. It is engaged 985 in the business of operating a coal mine on the No. Five Vein of coal in the City of Evansville. Soon after date of organization petitioner acquired "Sunnyside Mine and Equipment," which represented a tipple, shaft, underground workings, fan, outside chutes, pipe lines, and haulage equipment. These assets were carried on the books as Sunnyside Mine and Equipment, as shown below: Dec. 31, 1899$107,682.81Dec. 31, 1905107,682.81Dec. 31, 1912100,047.60May 1, 1917100,047.60May 1, 1918$100.047.60May 1, 1920100,047.60May 1, 1921100,047.60Prior to the year 1916, the petitioner did not set up a reserve for depreciation of these assets, but made large expenditures for replacements, betterments and additions to property during those years which were charged to expense. Commencing with the year 1916, petitioner changed its policy by establishing a depreciation reserve to offset depreciation sustained on the property, but the policy of charging replacements, betterments, and additions to expense was not then changed. The petitioner also owned and used in its business other depreciable property, the asset2476 value of which is not here in question. For the years ending in 1917 and 1918 the petitioner took depreciation on its assets at approximately 5 per cent per year. For the fiscal year ending April 30,1921, it claimed depreciation at the rate of 10 per cent, and was allowed depreciation by the respondent at the rate of 8 per cent. The 10 per cent rate was based upon a claim for accelerated depreciation and obsolescence brought about by what was termed a "squeeze" in a portion of the mine workings which required the expenditure of large amounts of money for timbering and repairing, beginning with the year 1920. These costs were placed upon the books in an account known as "Development and Improvement." During the fiscal year ending April 30, 1921, expenditures were made for repairing the tipple which, according to the testimony, amounted to some $9,000. The 10 per cent rate was also based upon a claim of obsolescence due to the fact that strip mining was being adopted in the adjoining county and also due to the action of the mine inspectors which resulted in closing the mine for a period until certain improvements could be made. On March 1, 1913, petitioner owned certain leaseholds2477 on coal lands and also held fee title to certain coal rights in other lands. The depletion claimed is in respect to the fee-owned rights only. It has been stipulated that on March 1, 1913, the petitioner owned in fee 447,000 tons of coal. This coal was acquired at various times 986 prior to March 1, 1913, and the cost thereof as shown by the books up to March 1, 1913, was $28,922.09. Subsequent purchases were made as follows: 1914$50.00191760.0019177.50191765.001917150.00Apr. 30, 19183,000.00Total3,332.50making a total cost to April 30, 1918, of $32,254.09. Prior to March 1, 1913, the petitioner had written off $21,172.09 of this amount, and prior to April 30, 1918, it had set up a reserve for depletion of $1,216.62. It had requested that the amount of $21,172.09 be restored to capital, which was permitted by the Commissioner in years prior to the one at issue. In computing depletion the petitioner used the cost of its coal lands as a basis, resulting in a rate of depletion of 6.4799 cents a ton. This rate was allowed by the Commissioner for the years 1917 and 1918. In June, 1923, the Commissioner determined that the fair2478 market value of the coal content of the lands of the petitioner at March 1, 1913, was $14,630, and accordingly for the fiscal years ending April 30, 1919, and April 30, 1920, a rate of 3.2677 cents a ton, based upon this value, was allowed. The Commissioner also set up an amount for the years 1915 and 1916 as depletion sustained, computed upon the 3.2677 rate. The total depletion thus computed by the Commissioner to May 1, 1920, was $13,925.29, and the Commissioner allowed for the year ending April 30, 1921, only the difference between this amount and the fair market value at March 1, 1913, of $14,630, or $704.71. The tons mined and the depletion allowed computed by the Commissioner for the various accounting periods subsequent to March 1, 1913, were as follows: YearTons minedDepletion allowed191511,2891 $368.90191622,1341 723.291917 to Feb. 5, 191724,1782 1,566.73May 1, 1917, to May 1, 191896,3112 6,240.95May 1, 1918, to May 1, 191989,6602 2,929.91May 1, 1919, to May 1, 192064,1262 $2,095.51May 1, 1920, to May 1, 192174,7602 704.71382,45814,630.002479 In computing invested capital the respondent, finding the petitioner's coal rights and privileges set up on some balance sheet theretofore 987 presented in the amount of $31,037.97, subtracted from this figure the March 1, 1913, value of the coal content of the lands in the amount of $14,630 and eliminated the balance of $16,407.97 from invested capital. OPINION. TRUSSELL: (1) As regards the issue of depreciation, we are of the opinion that the testimony furnished by the petitioner does not support petitioner's claim either for accelerated depreciation or obsolescence. We are also convinced that the record as made fails to support the affirmative allegations made in the respondent's amended answer, and we, therefore, conclude that the computations made by the respondent, the results of which are shown in the deficiency letter, provide for the period under consideration an entirely reasonable allowance for depreciation of the properties involved and that the Commissioner's determination as set forth in his deficiency letter should not be modified, and that the 8 per cent rate used furnishes in all respects a reasonable allowance. The testimony concerning the asset2480 item here under consideration also fails to support the affirmative allegations of the Commissioner's answer that invested capital should be modified on account of prior exhaustion of this asset account. (2) The petitioner began mining coal from its so-called fee property in the year 1915. During the year 1915 the petitioner was entitled to a deduction for depletion under the provisions of the Revenue Act of 1913, section II, subdivision G(b) (second) - * * * All losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation by use, wear and tear of property, if any; and in the case of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made; * * . During the calendar years 1916 and 1917 the petitioner was entitled to depletion deductions under the provisions of the Revenue Act of 1916, section 12, subdivision (b), second - * * (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product2481 thereof which has been mined and sold during the year for which the return and computation are made, * . For the subsequent periods of January 1, 1918, to the close of the fiscal year here under consideration the petitioner was and is entitled to deductions for depletion under the provisions of the Revenue Acts of 1918 and 1921, section 234(a)(9) - In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, 988 according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date: * * . The comparable section and provisions of the Act of 1921 are in substantially the same language as the above quoted portion of the Act of 1918. The respondent has applied the unit of depletion found under the provisions of the 1918 Act to the coal mined in the calendar years 1915 and 1916 and set up a hypothetical depletion2482 reserve for those years based upon that computation. For the period from January 1, 1917, to April 30, 1917, he has allowed a depletion deduction in the amount of $1,566.73, and for the fiscal year ended April 30, 1918, in the amount of $6,240.95. For the following years he has applied the unit rate of 3.2677 cents upon the coal removal. He thus found that an allowance for depletion in the year ended April 30, 1921, in the amount of $704.71 completes the total of the March 1, 1913, value. In making this computation the Commissioner appears to have entirely overlooked the fact that under the 1913 Act the petitioner was entitled to a depletion deduction upon an entirely different basis from that provided in the Acts of 1918 and 1921, and that for the calendar years 1916 and 1917 the petitioner was again entitled to depletion deductions upon an entirely different basis than under the 1913 Act or the subsequent Acts of 1918 and 1921. Under the provisions of the Acts of 1913 and 1916 the amount which a taxpayer was entitled to recover through depletion was wholly different under each of said Acts as well as under the Acts of 1918 and 1921, and we are of the opinion that the amounts2483 allowable under the 1913 and 1916 Acts whether greater or less than the amounts allowable under the later Acts should not be permitted to limit the depletion deductions authorized by the Acts of 1918 and 1921. And, if it may be that under the 1913 and 1916 Acts an amount may have been allowed as a deduction greater than the amount authorized by law, the remedy is in seeking a revision of the tax returns for those years and not in depriving the taxpayer of his authorized deduction under the 1918 and 1921 Acts. Cf. United States v. Ludey,274 U.S. 295">274 U.S. 295; 47 Supreme Court 608, 611, where the court said: * * If in any year he has failed to claim, or has been denied, the amount to which he was entitled, rectification of the error must be sought through a review of the action of the bureau for that year. On March 1, 1913, the petitioner owned coal in the ground in the amount of 447,000 tons. Prior to May 1, 1920, the petitioner had 989 removed 307,698 tons of this same coal. During its fiscal year ended May 31, 1921, it had removed 74,760 tons of this same coal and under the provisions of the Revenue Acts of 1918 and 1921, the petitioner2484 is entitled to a deduction for each ton of coal mined in an amount based upon the agreed March 1, 1913, value, which amount is 3.2677 cents per ton. (3) The respondent's elimination of $16,407.19 from invested capital was erroneously made. The March 1, 1913, value of a capital asset has no relation to the computation of invested capital and in the situation here presented the petitioner's asset item of coal lands and coal rights should be reflected in invested capital for the fiscal year ended April 30, 1921, in the amount of their cost, which we have found to be $32,254.09, but against which there should be charged the amount of a depletion reserve found by applying the cost per ton of the original estimated coal content of the mine to the number of tons removed, but in no event greater than the amount of depletion actually allowable as deductions from gross income during the years of operation. The deficiency should be recomputed in accordance with the foregoing opinion. Reviewed by the Board. Judgment will be entered upon 15 days' notice, pursuant to Rule 50.Footnotes1. Set upon by Commissioner, 1923. ↩2. Allowed by Commissioner. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620602/	APPEAL OF MATCHILESS METAL POLISH CO.Matchless Metal Polish Co. v. CommissionerDocket No. 1513.United States Board of Tax Appeals2 B.T.A. 79; 1925 BTA LEXIS 2554; June 17, 1925, Decided Submitted April 16, 1925. 2554 F. A. Thulin, Esq., for the taxpayer. Willis D. Nance, Esq., for the Commissioner. 79 Before GRAUPNER, TRAMMELL, and GREEN. This appeal is from a deficiency in income and profits tax in the sum of $4,687.06 for the year 1920. The deficiency arose from the 80 refusal of the Commissioner to allow as deductions certain additional compensation to officers and employees of the taxpayer. From the oral and documentary evidence submitted the Board makes the following FINDINGS OF FACT. 1. The taxpayer is an Illinois corporation, with its principal place of business at Chicago, Ill.2. On January 24, 1920, at a meeting of the board of directors of the taxpayer, fixing the salaries of officers for the ensuing year, the following action was taken: Moved by Mr. Ellwanger and seconded by Mr. Buchanan, that the tentative salaries or drawing accounts for the officers for the ensuing year shall be as follows: President$175.00 per weekVice-President150.00 per weekSecretary-Treasurer110.00 per weekSubject to revision for officers and for other employees at the close of the year. Carried. * * On August 11, 1920, at2555 a special meeting of the board of directors, further reference to the salaries resulted in the following action: Moved by Mr. Dennis and seconded by Mr. Whitson, that inasmuch as the cost of living has not decreased and rentals are on the increase, the salaries of the officers to be increased to the following amounts: President$200.00 per weekSecretary125.00 per weekTreasurer110.00 per weeksame to take effect as of date of July 1, 1920, and the authority is hereby given to the president to reduce these salaries as he may see fit in case the business of the company in his judgment does not warrant the continued increase. Carried. The additional salaries in controversy are over and above the salaries due in pursuance of the action at this meeting. On May 21, 1921, the following action was taken in reference to 1920 salaries: Moved by Mr. Buchanan and seconded by Mr. Warriner that in accordance with a resolution passed at the Board of Directors meeting of January 24, 1920, and in view of our Auditor's report which it seems has been unduly delayed an adjustment of the salaries of the following named officers and employees be made on a basis of their2556 compensation or salary for the year 1920 and that the lump sum of this extra compensation shall not exceed the sum of $10,000.00 and that it be made payable as of December 31, 1920, to the following: Of the $10,000 increase, $5,930 was paid to officers and $4,070 was distributed to employees. It is this $10,000 increase that is in controversy. The above extracts from the minutes of the board of directors are the only references to 1920 salaries upon the records of the taxpayer. 81 3. The taxpayer kept its books on an accural and calendar-year basis. In its original return for 1920, $22,759 for salaries of officers and employees was claimed as a deduction. In its amended return, after the meeting of May 21, 1921, $32,795 was claimed for the year 1920. Additional salaries in tentative amounts between $7,500 and $10,000, depending upon the profits at the end of the year, were discussed informally among the members of the board of directors in December, 1919, and also a number of times during the year 1920, but no formal or definite action was taken until the meeting of May 21, 1921. At an adjourned meeting of the directors, held February 5, 1921, the financial report2557 of the company for 1920 as presented by the treasurer was adopted, and salaries for the year 1921 were fixed, but no action taken as to the 1920 salaries. As an explanation of the delay in fixing additional salaries for 1920, the taxpayer claimed that it was not entirely satisfied that the profits set forth in its financial report were correct owing to alleged peculations by its vice president. It was decided to have a public accountant go over the books in order definitely to ascertain the profits for 1920. The accountant was unable to complete his work until May, 1921, and thereafter the directors' meeting above referred to was had and a formal resolution made increasing the salaries $10,000 as of December 31, 1920, and the amended tax return was filed accordingly. The Commissioner disallowed said increase and asserted a deficiency of $4,687.06, from which the taxpayer duly appealed. DECISION. The determination of the Commissioner is approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620603/	Achille O. Van Suetendael and Elizabeth P. Van Suetendael v. Commissioner. Achille O. Van Suetendael v. Commissioner.Van Suetendael v. CommissionerDocket Nos. 107681, 109703, 108929.United States Tax Court1944 Tax Ct. Memo LEXIS 108; 3 T.C.M. (CCH) 987; September 25, 1944108 William A. Walsh, Jr., Esq., for the petitioners. Francis S. Gettle, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The respondent determined deficiencies in income tax against the petitioners for the years 1936 to 1938, inclusive, as follows: DocketYearNo.PetitionerAmount1936107681Achille O. Van Sueten-dael$5,499.59Elizabeth P. Van Sueten-dael1937108929Achille O. Van Sueten-dael2,993.861938109703Achille O. Van Sueten-dael$1,380.06Elizabeth P. Van Sueten-dael The proceedings were consolidated. Not all of the adjustments are in dispute. Petitioners have conceded certain adjustments made by the respondent and the respondent has agreed that petitioners are entitled to certain deductions claimed by them on their returns but disallowed in the notice of deficiency. The only issue for determination is whether securities sold by petitioner, Achille O. Van Suetendael, during the taxable years were capital assets under section 117 (b) of the Revenue Act of 1936 and section 117 (a) (1) of the Revenue Act of 1938, and, therefore, subject to the limitations upon gain and loss set forth109 in section 117. Petitioners filed joint returns for the years 1936 and 1938, and separate returns for the year 1937. These returns were filed with the collector for the fourteenth district of New York. Findings of Fact The petitioners are husband and wife, and reside in Yonkers, New York. The husband, who will be referred to hereinafter as the petitioner, kept his books and filed his returns on the cash receipts and disbursements basis. During the taxable years, and for some years prior thereto, the petitioner was primarily engaged in buying and selling securities. Approximately 90 percent of the securities purchased by him were interest-bearing bonds and the other 10 percent consisted of preferred and common stock. His income was derived principally from interest on the bonds purchased and from interest on bank deposits. He maintained an office in Yonkers and had one employee who acted as his secretary-typist and general assistant. He was not a member of any stock exchange. His name was listed in several statistical financial publications as a dealer in securities, and in the Yonkers city and telephone directories under the classification of "investments". He also listed offerings110 to buy or sell securities at a certain price in the National Daily Quotation Service, for which he paid an annual subscription fee. This service was circularized among investment and trading houses in the United States. Petitioner has registered with the Securities and Exchange Commission, the State of New York, and the Bureau of Internal Revenue as a broker or dealer in securities. From time to time he has advertised in a Yonkers newspaper offering to buy or sell certain securities. Occasionally, his name appeared in the advertising section of the Columbia Aluminl News under the caption "Investment Securities". He has also written to individuals, banks, and insurance companies offering securities at stated prices. Over a period of years, he has occasionally distributed calendars and pocket manuals containing data on securities of companies listed on the leading stock exchanges. Prior to the taxable years, petitioner, to a small degree, had participated in selling groups for the purpose of distributing new issues of securities. The record of the securities purchased by petitioner was kept in a single card file which he called an inventory. Each security purchased was listed upon 111 a separate card which contained the name of the security, the cost, and statistical data concerning the security. During the taxable years, petitioner maintained separate accounts with Eastman, Dillon & Company, Ira Haupt & Company, and Chisholm & Chapman, all of whom were brokers, having membership on the New York Stock Exchange and the New York Curb Exchange. The great proportion of the securities sold by the petitioner during these years were sold to or through Eastman, Dillon & Company and Ira Haupt & Company. Excluding sales to petitioner's wife and son, approximately 77 percent of petitioner's total sales in these years were made to or through Eastman, Dillon & Company and Ira Haupt & Company. Some of the securities purchased by petitioner from these brokers were kept by them for petitioner. Many of the specific securities sold to or through Eastman, Dillon & Company and Ira Haupt & Company had been previously purchased by petitioner from these same brokers. The following table shows the total number of sales made by petitioner in each year, excluding sales made by him to his wife, the number of sales made to or through Eastman, Dillon & Company and Ira Haupt & Company, and 112 the number of these sales in which petitioner had previously acquired the security sold from Eastman, Dillon & Company and Ira Haupt & Company. ABCDEFGHSales inSales inwhich thewhichspecificthe specificsecuritysecuritysoldsoldthroughthroughEastman-Ira HauptDillon Co.Co. hadhad beenbeen pur-purchasedchasedSales topreviouslySalespreviouslyTotalEastman-throughto IrathroughNo. ofDillon &Eastman-% ofHauptIra Haupt% ofYearSalesCo.Dillon Co.D to C& Co.Co.G to F193638027325694%302273%19372301089992%322270%1938440287No record of81No record ofpetitioner'spetitioner'svendorvendorThe following table for the years 1936 and 1937 shows the period of holding by petitioner of the securities bought from and sold to or through Eastman, Dillon & Company and Ira Haupt & Company: No. ofSold on SameYearAccountTransactionsDay AcquiredHeld One DayHeld Two Days1936Eastman, Dillon & Co.25641051936Ira Haupt & Co.221937Eastman, Dillon & Co.992211937Ira Haupt & Co.22113 Held More ThanHeld More ThanHeld More ThanHeld More ThanTwo Days ButOne Week ButTwo Weeks ButOne MonthNot More ThanNot More ThanNot More ThanNot More ThanYearOne WeekTwo WeeksOne MOnthTwo Months1936231838271936116193756169193713Held More ThanHeld More ThanHeld More ThanTwo Months ButThree MonthsSix Months ButNot More ThanBut Not MoreNot More ThanHeld More ThanYearThree MonthsThan Six MonthsOne YearOne Year19363335372619362841937815241119374122For the year 1938, there are exhibits which show the record of securities sold by petitioner to Eastman, Dillon & Company and to Ira Haupt & Company, but these exhibits do not show the name of the vendor of each security from whom petitioner made each purchase. Most of the securities purchased from petitioner by Eastman, Dillon & Company and Ira Haupt & Company were purchased by them as brokers for their customers. Where they acted in such capacity, they charged petitioner a commission. When they purchased for their own account, there was no commission charged. The record does114 not show the charge for commissions in 1936 and 1937. However, of the total sales of $282,347 made by petitioner to Eastman, Dillon & Company in 1938, only the amount, of $68,137.25 (24 percent of the total sales) was made without a charge for commissions. Of the total sales of $69,296.75 made by petitioner to Ira Haupt & Company in 1938, only the amount of $15,163.50 (22 percent of the total sales) was made without a charge for commissions. No sales were made in 1938 to Chisholm & Chapman free of a charge for commission. The following tables show the number of sales in 1936, 1937, and 1938, with the total profit and loss on the sales, and the period of holding with respect to the losses. 1936No. ofSellingSalesCostPriceProfitLossEastman, Dillon & Co.273$459,991.25$467,695.13$18,772.99$11,069.11Ira Haupt & Co.30109,824.38112,800.633,035.0058.75Chisholm & Chapman1219,507.8510,063.251,137.0010,581.60Others65115,688.33108,415.616,814.5014,087.22Totals380$705,011.81$698,974.62$29,759.49$35,796.68Analysis of 1936 LossPeriod of HoldingOne year or less$ 1,513.26More than one, not more than two years1,623.75More than two, not more than five yearsMore than five, not more than ten years32,078.68More than ten years580.99Totals$35,796.68115 1937No. ofSellingSalesCostPriceProfitLossEastman, Dillon & Co.108$199,629.40$190,585.60$ 4,528.86$13,572.66Ira Haupt & Co.3250,787.1046,732.86928.094,982.33Chisholm & Chapman715,032.5017,087.412,054.91E. P. Van Suetendael40130,267.50131,262.50995.00Others83243,678.40234,444.519,872.0319,105.92Totals270$639,394.90$620,112.88$18,378.89$37,660.91Analysis of 1937 LossPeriod of HoldingOne year or less$15,791.35More than one, not more than two years5,766.94More than two, not more than five years6.28More than five, not more than ten years8,329.17More than ten years7,767.17Totals$37,660.911938Loss - (Gain)No. ofShort-18 to 24Over 24BrokerSalesCostSalesTermMonthsMonthsEastman, Dillon & Co.287$299,749.83$282,347.00$1,439.58$7,113.75$ 8,849.50Ira Haupt & Co.8174,119.3969,296.752,925.141,593.75303.75Chisholm & Chapman1714,190.1512,223.90(583.72)2,549.97Miscellaneous55111,366.73113,676.88(3,340.84)1,030.69Totals440$499,426.10$477,544.53$ 440.16$8,707.50$12,733.91Limited to 66 2/3%$5,805.00Limited to 50%$ 6,366.95116 In the above tables, the words "others" and "miscellaneous" include a number of brokers or members of stock exchanges, recognized dealers in securities, and a few individuals or firms who were not in those categories. In 1936, there were fourteen such individuals or firms and in 1937, there were twenty-four. There is no record for 1938. Sales to petitioner's wife in 1937 amounted to $131,262.50, with a profit of $995. During the taxable year 1938, petitioner made twenty-eight separate sales, amounting to $85,467.50, to his wife, on which no gain or loss was realized. During the same year, petitioner made eleven sales, amounting to $31,502.50, to his son, Peter T. Van Suetendael, on which no gain or loss was realized. Petitioner's income tax returns show the following sources of income and losses: 193619371938Fees, salary, etc.1 $ 265.002 $ 1,140.00Interest on bank deposits, notes, etc.7,982.45$ 7,747.7710,791.76Interest on tax-free covenant bonds25,012.0017,020.25Interest on bonds10,099.9831,683.25Dividends603.341,054.49786.97Interest on Government obligations40.00RentLoss - (61.99)950.29Other income2,700.00Short-term gain3 49.99Long-term gain3 753.75Loss on sale of securities(25,233.33)(25,217.61)(28,664.82)117 The petitioner reported in his income tax returns for the taxable years losses from the operation of his business computed as follows: 193619371938Net cost of goods sold$708,983.78$641,766.30$614,627.25Total receipts698,721.05622,480.97591,417.84Loss10,262.7319,285.3323,209.41Deductions for salary, interest, rent, etc.14,970.605,932.285,455.41Total loss shown on returns$ 25,233.33$ 25,217.61$ 28,664.82In reporting the transactions of the sales of securities in each year on his return, petitioner took the view that all of the securities sold were non-capital assets, so that he computed the result of all the transactions in each year simply by taking the total cost of the securities and the total receipts from sales. Under this method of reporting his transactions, petitioner showed a net loss for each year. Petitioner, on his118 returns, did not break down all of the transactions in each year, to separate the sales at a profit from the sales at a loss. Also, he did not break down his transactions to show the period of holding in each instance. Such break-downs have been shown in the above tables. The respondent, in determining the deficiencies, held that the securities sold by petitioner were capital assets, and he therefore applied the limitations of section 117 in computing petitioner's net income from the sale of such securities. He disallowed the total amount of losses reported in each year from sales of securities and determined that petitioner realized a net capital gain of $11,911.34 for 1936, a net capital loss of $2,000 for 1937, and a short-term loss of $49.99 and a long-term loss of $12,171.95 for 1938. The securities which the petitioner sold during the taxable years were capital assets and did 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. Opinion119 In this proceeding, as well as in a former proceeding before the Board of Tax Appeals involving prior taxable years, the petitioner has attempted to show that he was recognized in the security trade as a dealer in securities. He has placed great emphasis on the fact that he had registered with the Securities and Exchange Commission and the State of New York as a security dealer. Similarly, he has pointed to advertisements placed by him in newspapers, bulletins, and pamphlets indicating that he dealt in securities during the taxable years. On brief, he argues that the entire case resolves itself to the one question of whether he was engaged in business as a dealer in securities. That, however, is not the issue. The phrase "dealer in securities" is not defined in the statute, although it is defined in the Regulations. Regulations 94, Article 22 (c)-5. The only issue for determination here is whether the securities sold by petitioner during the taxable years were capital assets under section 117 (b) of the Revenue Act of 1936 1 and section 117 (a) (1) of the Revenue Act of 1938. 2 For the purpose of this proceeding both sections of the Act are substantially identical. 120 Under the cited sections of the Revenue Acts, all property is to be treated as capital assets unless the taxpayer is able to bring himself within one of the stated exceptions in the definition of capital assets. As far as this proceeding is concerned, the only possible exceptions which petitioner could rely upon are that the securities sold were "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". The securities which petitioner sold during the taxable years cannot be classified as stock in trade or property subject to inventory in his hands unless they were held by him primarily for sale to customers in the ordinary course of his business. Thus, the issue turns upon whether or not the securities sold by petitioner during during the taxable years were held by him primarily for sale to customers in the ordinary course of business. This is probably the reason why petitioner has placed such stress upon the contention that he was a dealer in securities121 since securities in the nature of stock in trade held primarily for sale to customers are held only by dealers in securities. See . However, there may be many sales of securities by so-called dealers in securities which do not come within the exceptions set forth in the definition of capital assets. The fact that petitioner had a teletype machine, four telephones and statistical financial publications in his office, was listed as a "dealer" in certain publications, and advertised himself as willing to buy or sell securities is not determinative of the issue. The subject matter of the cited sections is property and it must be shown that the property itself comes within the exceptions stated in the definition of capital assets. The respondent has determined that the securities sold by the petitioner during the taxable years were not held by him primarily for sale to customers in the ordinary course of his business. The burden of proving otherwise is upon petitioner. The question is predominantly one of fact. The petitioner did not testify at the hearing. However, his file of cards upon which was recorded each 122 security purchased and sold by him was introduced in evidence. From these cards, respondent prepared summaries of the transactions during the taxable years. Petitioner does not contend that the transactions as set forth in the summaries are in any way incorrect, nor has he filed any schedules based upon those transactions, although he has had full opportunity to do so. For the taxable years 1936 and 1937, the schedules prepared by respondent list the name of each security sold, the date acquired, the date sold, the cost, selling price, profit or loss, interest paid or received, and the name of the vendor from whom the security was purchased by petitioner, as well as the vendee to whom petitioner sold the security. The schedules for these years, however, do not show the number of transactions in which petitioner was charged a selling commission by Eastman, Dillon & Company and Ira Haupt & Company on securities sold to or through them. This information is shown in the schedules for 1938, but the name of the vendor from whom petitioner purchased the securities sold through Eastman, Dillon & Company and Ira Haupt & Company is not shown. For this reason, the findings of fact do not show123 the complete facts for all of the taxable years. However, they do reveal a fairly complete picture of the manner in which petitioner bought and sold securities during these years. From an analysis of the schedules showing all of petitioner's transactions in securities during these years, we cannot find as a fact that petitioner held the securities sold by him during the taxable years primarily for sale to customers in the ordinary course of his business. The facts are just as consonant with the theory that petitioner held the securities for speculation or for investment. It is well established that taxpayers who buy securities for speculation or investment hold them as capital assets and not primarily for resale to customers. ; , affirmed on point considered here, ; , certiorari denied, . One who holds securities124 in the nature of stock in trade primarily for resale to customers is regularly engaged in the purchase of securities at wholesale. He is a middleman in distributing the securities and he does not resell to the same class of persons from whom he buys. Here, petitioner did not make wholesale purchases of securities. The securities purchased were in relatively small quantities and were diversified. In this respect, he acted no differently from an ordinary purchaser. Most of the securities purchased by petitioner were resold to or through the same brokers from whom they were bought. Here again, petitioner acted in the same manner as an ordinary purchaser having an account with a broker. Approximately 77 percent of all the securities sold by petitioner during the taxable years, excluding those sold to his wife and son, were sold to or through Eastman, Dillon & Company and Ira Haupt & Company. In most of these transactions, the companies acted as brokers and did not purchase the securities as principals for their own account. These brokers or their clients125 cannot be considered as petitioner's customers. ;;Over 92 percent of the securities sold by petitioner to or through Eastman, Dillon & Company and Ira Haupt & Company had been previously acquired by him from the same two brokerage houses. Many of these securities were resold by petitioner at a profit on the same day in which he purchased them or a short time thereafter. Obviously, in those cases, he never actually received the securities since the brokers who purchased and sold them for him were the same. The result of those transactions was that petitioner merely received or was credited with the profit. In this respect, his operations were similar to a trader purchasing securities on margin. Petitioner could not have intended to purchase these securities for resale to "customers" as that word is used in the statute. Some of the securities purchased through the two brokerage houses were not delivered to petitioner, but were kept by the brokers. It may be that they were retained as126 collateral for loans, which would be another indication that petitioner was purchasing and holding the securities for speculation. Our analysis of these schedules, together with the record as a whole, warrants the conclusion that the securities purchased by petitioner were not held as stock in trade primarily for resale to customers. Although petitioner did make efforts to sell some of the securities through channels other than brokers and dealers, and actually did sell a small amount of the securities to other parties, we cannot find even as to those securities that they were purchased primarily for resale to customers. A mere statement in behalf of petitioner that they were purchased or held for that purpose is insufficient. We think that the purchases and sales of all of the securities were engendered by the speculative advantage which might be derived by petitioner, or the income which he might receive therefrom. Respondent points out that during the taxable years, petitioner's principal source of income was derived from interest on the bonds owned by him and that the great proportion of his losses127 resulted from securities which he had held for a long period of time. He argues that petitioner, during each of the taxable years, selected securities which he had held for a long time and which were then unprofitable to him and disposed of those securities at the best possible price to anyone who would buy them in order that the loss sustained thereon should offset his income from the interest-bearing bonds held by him. The facts indicate that petitioner received interest on bonds in 1936 in the amount of $25,012; in 1937 in the amount of $27,120.23; and in 1938 in the amount of $31,683.25. During the same period petitioner reported on his income tax returns, business losses in substantially the same amounts. The facts also show that in 1936, of the total losses of $35,796.68 sustained by petitioner from the sale of securities, $32,659.67 was sustained on securities held by him for more than five years. In 1937, of the total losses of $37,660.91 sustained by petitioner, $16,096.34 was sustained from securities held more than five years. In 1938, of the total losses of $25,806.13 sustained by petitioner, the amount of $21,441.41 was a long-term loss sustained on securities held for128 more than 18 months. Respondent also argues that as to the securities held for a long period, petitioner did not hold them for resale to customers, but for the income which he might derive therefrom. The facts apparently support respondent's contentions. Respondent also states in his brief that in all of the years since 1929, petitioner has reported substantial income from interest and dividends, yet, in all of these years, his sales of securities have resulted in substantial annual losses which were offset against his income. There appears to be ground for this statement. See Achille O. Van Suetendael, B.T.A. Memorandum Opinion, Docket No. 95739, May 21, 1940. Petitioner has placed considerable reliance upon . The facts of that case, however, are not shown in the opinion and the court merely affirmed the decision of the district court, which had found that the securities sold were held by the taxpayer for resale to customers in the ordinary course of business. The facts in the district court decision are not reported. .129 A careful study of the whole record, including all of the exhibits in evidence, convinces us that petitioner has not sustained the burden of proof imposed upon him of showing that the securities sold during the taxable years were held by him Primarily for sale to customers in the ordinary course of his business. The proof is just as susceptible of a construction that some of the securities were acquired and held by petitioner for speculation and some for investment. We think that a reasonable conclusion from all of the facts is that petitioner intended to sell the securities in any way he could and to any purchaser regardless of whether or not the purchaser could be deemed a "customer" within the meaning of the statute. It is therefore held that the securities sold by petitioner during the taxable years were capital assets and subject to the limitations of gain and loss set forth in sections 117 of the Revenue Acts of 1936 and 1938. Respondent's determination is sustained. Respondent has conceded that petitioners are entitled to certain deductions which were disallowed in the notice of deficiency. Accordingly, Decision will be entered under Rule 50. Footnotes1. Fees for appraisals. ↩2. Fees for services received from Westchester Service Corporation, Yonkers, New York. ↩3. A joint income tax return was filed for the year 1938 by petitioner and his wife. The short-term gains and the long-term gains, shown above, were on securities owned by petitioner's wife.↩1. SEC. 117. CAPITAL GAINS AND LOSSES. (b) Definition of Capital Assets. - For the purposes of this title, "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. ↩2. SEC. 117. CAPITAL GAINS AND LOSSES. (a) Definitions. - As used in this title - (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);↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620604/	Leonard Jackson, Petitioner v. Commissioner of Internal Revenue, RespondentJackson v. CommissionerDocket No. 8667-71United States Tax Court73 T.C. 394; 1979 U.S. Tax Ct. LEXIS 12; November 28, 1979, Filed 12 Decision will be entered under Rule 155. Respondent determined that petitioner received taxable income from drug trafficking activities, based solely upon information furnished by an unreliable informant. Petitioner's testimony lacked credibility and respondent offered no substantive evidence. Held, respondent may not rely upon the usual presumption of correctness attaching to the notice of deficiency because respondent's determination was shown to be arbitrary and excessive. Weimerskirch v. Commissioner, 672">67 T.C. 672 (1977), revd. 596 F.2d 358">596 F.2d 358 (9th Cir. 1979), distinguished. Alvin Geller, for the petitioner.Michael P. Casterton, for the respondent. Nims, Judge. Irwin, J., concurring. Quealy, J., dissenting. Featherston, Fay, and Dawson, JJ., agree with this dissenting opinion. NIMS395 Respondent determined a deficiency in petitioner's income tax for the calendar year 1970 of $ 94,080 and additions thereto under sections 6651(a), 1 6653(a), and 6654(a) of $ 23,520, $ 4,704, and $ 3,011, 2 respectively.14 The only issues presented are whether petitioner received unreported profits of $ 153,475 from illegal activities in 1970 and whether he is liable for additions to tax.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.Petitioner Leonard Jackson maintained his legal residence in New York, N.Y., at the time he filed his petition herein. Petitioner has never filed an income tax return for the taxable year 1970. Petitioner maintained no books or records for 1970.Petitioner has led a life of crime since his first juvenile offenses at age 11 in 1945. His first conviction on drug-related offenses was for possession of drugs in 1959. On July 29, 1965, petitioner was convicted of unlawfully, willfully, and knowingly receiving, concealing, selling, and facilitating the transportation, concealment, and sale of heroin. United States v. Jackson, Crim. No. 63-211 (S.D. N.Y., filed July 29, 1965), affd. by unpublished opinion (2d Cir. 1966). Petitioner was arrested again on July 8, 1971, but this case was dismissed. Later, he was convicted by a jury on December 15, 15 1972, of conspiracy to unlawfully and knowingly distribute and possess with intent to distribute Schedules I and II narcotic drug-controlled substances in violation of title 21 U.S.C. secs. 812, 841(a)(1), 841 (b)(1)(A), and 396 846. United States v. Jackson, Crim. No. 72-940 (S.D. N.Y., filed Dec. 15, 1972). He was serving a 10-year sentence received as a result of this conviction at the time of trial.Petitioner was released from prison in August 1968 after serving the sentence resulting from the 1965 conviction. He obtained employment with Bethlehem Steel in Hoboken, N.J., but was laid off from the job in late 1969. For 6 to 8 weeks in 1970, he collected unemployment benefits of $ 50 per week from New York State. Petitioner did not hold any other jobs during the year. He had no savings when he was released from prison in 1968 or when he was laid off from Bethlehem Steel in 1969.Two reports based upon the following information were prepared and forwarded to the revenue agent auditing petitioner.In 1971, an informant provided information to a special agent of the Drug Enforcement Administration (hereafter DEA) and to other agents16 with whom the special agent worked concerning petitioner's alleged drug activities. The informant gave the agents detailed information concerning an organization in Harlem known as "Red Jackson's" which petitioner allegedly headed and which allegedly sold and distributed heroin during a period including November and December 1970. The informant claimed he was a member of petitioner's organization from the summer of 1970 until June or July 1971, when he was arrested by agents of the New York Task Force, a combined effort of DEA agents, New York City Police, and New York State Police, formed to combat narcotics trade in New York City. The DEA special agent who provided the information to the revenue agent in this case was a group supervisor with this force.The informant told the task force that he was familiar with several "lieutenants" apparently in charge of distributing heroin in petitioner's organization. The informant stated that petitioner was the controller of the organization and that each "lieutenant" had as many as 10 or 11 street distributors. The informant's primary function was to supervise the street distributors of one of the "lieutenants." The informant claimed17 that the "lieutenant" for whom he distributed sold approximately 500 quarter ounce bags of heroin daily at $ 50 per bag. The informant also had two or three distributors who worked directly for him. The informant never told the agents that he had seen any of the "lieutenants" give petitioner money. He also did not state 397 whether petitioner had ever given him heroin or if he had seen petitioner with heroin during 1970. The informant did tell the agents, however, that he had seen petitioner in the cutting mills during 1971.The revenue agent prepared his report, upon which respondent determined that petitioner realized taxable income for the taxable year 1970 in the amount of $ 153,474, 3 relying solely upon the two reports and on conversations with the special agent. The information regarding petitioner's alleged involvement in the narcotics ring during November and December 1970 was based entirely on what the informant told the special agents and other agents. The informant did not testify during the trial of this case although a writ of habeas corpus ad testificandum was issued by this Court on June 3, 1976, commanding his presence in order that he might testify.18 After the informant was arrested in mid-1971 on drug-related charges, he hoped that by cooperating with the task force he would obtain a lighter sentence. Nonetheless, before his trial, he jumped bail and fled New York. After being rearrested in Detroit, the informant refused to cooperate further. The informant was later convicted of the charges for which he was arrested; however, the special agent believed the information provided him by the informant was credible. Other information provided by the informant resulted in a conviction against a member of petitioner's organization.OPINIONPetitioner generally contends that respondent's determination that he received income from illegal activities is erroneous; that the information used by respondent in reconstructing his income was insufficient to establish the correctness of the deficiency, thereby shifting the burden of going forward with the evidence to respondent. Petitioner argues in the alternative that if the 398 burden of going forward with the evidence rests upon him, he has met his burden of proof.Respondent contends that the notice of deficiency is entitled to the ordinary presumption of correctness. Respondent's19 position is that the only question presented is whether petitioner has met his burden of proof, not whether respondent has introduced any evidence of petitioner's illegal activities. Respondent then maintains that petitioner's testimony, which was the only evidence offered to support petitioner's position, was not credible, and that petitioner has, therefore, failed to carry his burden of proof.Preliminarily, some attention must be given to certain items which make up the meager record in this case:The deficiency notice. -- Respondent's determination was explained as follows: Explanation of Adjustments(a) It is determined that you realized taxable income in the amount of $ 153,475.00, computed in detail below, from your activity as a dealer in narcotics. You did not report this income for Federal income tax purposes.Gross income from heroin sales$ 1,525,000Cost of the heroin sold1,350,000Gross profit175,000Allowable expenses as determined:Salaries of distributors$ 8,000Salaries of millworkers4,000Equipment1,025Glassine envelopes150Rent2,700Transportation1,000Miscellaneous4,65021,525Net profit from this activity153,47520 (b) You are allowed one exemption, for yourself, as provided by Code section 151.(c) You are allowed the standard deduction provided by Code section 141.From the foregoing, it will be observed that, on its face, the basis of the determination was set forth with substantial particularity but, as we will indicate subsequently, that proved to be deceptive.The deficiency notice also contains the statement that "An 399 assessment of the deficiency and additions to the tax mentioned has been made to the extent of $ 60,007.39 under the provisions of the internal revenue laws applicable to jeopardy assessments."Stipulation of facts. -- The parties stipulated copies of the judgments reflecting petitioner's criminal convictions in 1965 and 1972. They also stipulated that petitioner was a resident of New York City at the time the petition herein was filed, that he filed no tax return for 1970, and that respondent determined that petitioner realized taxable income in the amount of $ 151,850 for the taxable year December 31, 1970, from petitioner's activities as a dealer in narcotics, and further determined a tax deficiency plus penalties as indicated above. Nothing further21 of substance was stipulated.Petitioner's evidence. -- Petitioner's evidence consisted of the foregoing stipulated facts plus his own uncorroborated testimony that his only source of funds during 1970 was unemployment compensation in the amount of $ 50 per week and $ 1,000, which he borrowed from Manufacturer's Hanover Bank in New York. He denied categorically dealing in or using narcotics, including heroin, during 1970. He stated that he arranged apartments for certain women to live in at their own expense, and that he lived with five or six women during that year. He frequented Freddie's Bar, located in his childhood neighborhood at 119th Street at Eighth Avenue in New York, on an almost daily basis and played the numbers game relentlessly.Notwithstanding the petitioner's almost total lack of funds or source of income in 1970 (if his testimony is to be believed), the Government managed to seize $ 54,715 in cash plus an Eldorado Cadillac at the time of petitioner's arrest on July 8, 1971, on the suspicion of dealing in narcotics, according to the opening statement of respondent's counsel. The record contains absolutely no explanation of the source of these funds or property, 22 and, in fact, respondent's counsel categorically stated that "respondent maintains that the cash seized in 1971 has no bearing at all on the issue before this Court in the 1970 year."On balance, petitioner's testimony can only be received with the profoundest skepticism as to its truthfulness. Since his only attempt to meet his burden of challenging respondent's determination consisted of self-serving denials of his involvement, we do 400 not give and need not give credence to his testimony. Gerardo v. Commissioner, 549">552 F.2d 549 (3d Cir. 1977).Respondent's evidence. -- Respondent's evidence consisted solely of the testimony of the revenue agent assigned to perform an audit for the year 1970 and that of a supervisory special agent of the United States Department of Justice, Drug Enforcement Administration. Petitioner's counsel objected to the admissibility of the entire testimony of these two witnesses on the grounds of hearsay. Respondent's counsel stated in response to these objections that "we're not offering it for the truth of the cases, but just for purposes of the reasonableness of the statutory notice, that it is not arbitrary23 and capricious."Since Jackson's testimony lacks credibility, and he produced no other evidence, under ordinary circumstances, his evidence would be insufficient to overcome the usual presumption of correctness of respondent's determination. It is axiomatic that, unless otherwise provided by law, the Commissioner's deficiency is presumed to be correct. The presumption is procedural and transfers to the taxpayer the burden of going forward with the evidence to show that the Commissioner's determination is incorrect. Barnes v. Commissioner, 408 F.2d 65">408 F.2d 65 (7th Cir. 1969).In asking this Court to determine whether a notice of deficiency is arbitrary, the petitioner is, in essence, asking the Court to go behind the notice of deficiency. As a general rule, this Court will not look behind a notice of deficiency to examine the evidence used or the propriety of the Commissioner's motives or administrative policy or procedure in making the determination. Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324, 327 (1974); Suarez v. Commissioner, 58 T.C. 792">58 T.C. 792, 813 (1972). As we observed in Rosano v. Commissioner, 46 T.C. 681">46 T.C. 681, 687 (1966),24 "the Commissioner's determination may often rest upon hearsay or other inadmissible evidence, and we know of no rule of law calling for a review of the materials that were before the Commissioner in order to ascertain whether he relied upon improper evidence." The rationale for this rule is that a trial before the Tax Court is a proceeding de novo; our determination of a petitioner's tax liability must be based on the merits of the case and not any previous record developed at the administrative level. Greenberg's Express, Inc. v. Commissioner, 62 T.C. at 328.401 This Court has on rare occasions recognized a possible exception to this rule and has looked behind the notice of deficiency in cases involving unreported income where the respondent introduced no substantive evidence but rested on the presumption of correctness and the petitioner challenged the notice of deficiency on the grounds that it was arbitrary. Weimerskirch v. Commissioner, 67 T.C. 672">67 T.C. 672 (1977), revd. 596 F.2d 358">596 F.2d 358 (9th Cir. 1979). See Human Engineering Institute v. Commissioner, 61 T.C. 61">61 T.C. 61, 66 (1973),25 appeal dismissed (6th Cir., Apr. 1, 1975), cert. denied 423 U.S. 860">423 U.S. 860 (1975). This is one of those rare occasions where the exception is applicable and, for reasons hereafter stated, we find the respondent's determination to be arbitrary and excessive within the rule of Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935), and its progeny, the effect being to shift to the respondent the burden of coming forward with evidence to establish the existence and amount of any deficiency. Suarez v. Commissioner, 58 T.C. at 814. This, respondent has failed to do.In the Gerardo case, the Court of Appeals for the Third Circuit, in affirming in part and reversing in part a Memorandum Decision of this Court (T.C. Memo. 1975-341), found, in effect, that part of respondent's determination in that case was arbitrary, i.e., without rational foundation in fact and based upon unsupportable assumptions. The situation in that case was somewhat analogous to the one before us.The Tax Court in Gerardo found as a fact that the taxpayer derived unreported income from his involvement in a lottery operation for the period26 from April 4, 1966, through February 3, 1967. The Court of Appeals found ample support for our finding of substantiation in the record of the taxpayer's wagering activity for the period from August 5, 1966, through February 3, 1967 (the "approved period").However, the Court of Appeals expressed concern that "no evidence appears in the record which links Gerardo to the gambling operation during the period April 4, 1966, through August 5, 1966," and, to the extent that the Government based its deficiency determination on alleged gambling activity during such period, the determination was held arbitrary.As to the approved period, the Commissioner's determination was based in part upon the Government agent's personal observation of the taxpayer's operation, his activities as an undercover agent, and his conversations with a coconspirator of 402 the taxpayer during this period. Similarly, in Avery v. Commissioner, 574 F.2d 467">574 F.2d 467 (9th Cir. 1978), where a DEA agent testified that he, himself, bought heroin 3 times from the taxpayer, the Government's estimate of the extent of the taxpayer's heroin sales was held to be rationally based and presumptively27 correct.The foregoing is in sharp contrast to the situation before us, where neither Government agent could testify as to any direct contact with the taxpayer nor his activities during the period in question, and the Government presented no other evidence as to the petitioner's involvement with heroin sales during such period. Paraphrasing the language of the Circuit Court in Gerardo, no evidence appears in the record which links Jackson to any narcotics operation during 1970.In Pizzarello v. United States, 408 F.2d 579">408 F.2d 579 (2d Cir. 1969), cert. denied 396 U.S. 986">396 U.S. 986 (1969), the Second Circuit found a jeopardy assessment to be excessive, arbitrary, and without factual foundation where no rational foundation for the assessment had been established. Although Pizzarello was an action to enjoin a levy under a jeopardy assessment, the Court recognized the presumption of validity of a tax assessment and the burden on the taxpayer to prove invalidity, citing Helvering v. Taylor for support, but stated that "Such a presumption is not evidence and disappears upon the introduction of evidence to overcome it." The Second Circuit28 stated that the taxpayer's gambling income for 3 days was insufficient, without other evidence, to permit an inference that the taxpayer operated as a gambler for 5 years. See also Carson v. United States, 560 F.2d 693">560 F.2d 693 (5th Cir. 1977).In the case before us, the evidence which causes the presumption of correctness to disappear was introduced by the Government itself although, of course, such was not its intended purpose. For example, it is clear that the individual who provided the critical "evidence" to the Government agent falls far short of being a respectable third party citizen-informant. Not only had he just been arrested for narcotics violations at the time he gave his statement, thereby giving rise to the reasonable inference that any of his statements were made with the hope of currying favor with the authorities, but he later jumped bail even though he was working as an informant at that time.Any further doubts one may have regarding the informant's credibility could only be exacerbated by his actions after he was subpoenaed by respondent to testify in this case: He flatly 403 refused to cooperate. In short, the informant's credibility29 was highly suspect, to say the least. The testimony by the DEA agent that he believed the informant to be credible is not sufficient. Furthermore, the trier of the facts found that the informant never told the agents that he had seen any of the "lieutenants" give petitioner money. He, the informant, also did not state whether petitioner had ever given him heroin during 1970, the year in question.Unquestionably, as respondent correctly notes, in a case such as this, involving an alleged illegal enterprise where the taxpayer has filed no returns and kept no records, respondent is given great latitude in determining the method to be utilized in determining income. The projection method used in this case is one method which has received widespread judicial approval. 4 Nevertheless, the elaborate construct set out in the deficiency notice, based solely as it was on a secondhand report of peripheral statements made by an unreliable informant, turns out to be sheer gossamer. We consequently find respondent's determination arbitrary and excessive.30 What the result might have been had the Government offered no evidence we are not prepared to say. Suffice it to say, however, that having presented the testimony of the two agents to demonstrate the basis of the determination, and having by these witnesses convinced us that the determination was arbitrary, the Government is elevated on its own powder charge and we are required to decide nothing beyond our present finding that the determination was arbitrary. Under this posture of the case, the burden is no longer on petitioner to show that he owes nothing, or the correct amount, if any, that he does owe. Helvering v. Taylor, supra. And, as previously noted, respondent has introduced no evidence to support the deficiency determination.Recent case law supports the above result. In United States v. Janis, 428 U.S. 433">428 U.S. 433 (1976), a wagering tax case, the Supreme 404 Court was required to decide whether evidence obtained by State law enforcement officers in violation of the taxpayer's rights under the Fourth Amendment could be introduced by the Government in a civil tax case. Without such evidence, the assessment31 would be, in the Court's words, "naked and without any foundation." The Court stated that without the illegal evidence "The determination of tax due then may be one 'without rational foundation and excessive' and not properly subject to the usual rule with respect to the burden of proof in tax cases," citing Helvering v. Taylor, supra. While the Supreme Court's dictum regarding the effect of the "naked" assessment was not dispositive of the primary issue (i.e., the Fourth Amendment question), nevertheless, it is strongly indicative of the Court's inclinations on this issue.In Weimerskirch (decided by this Court prior to the Supreme Court's Janis decision), the revenue agent obtained the factual basis for his computation of omitted income attributable to sales of heroin from statements of two confidential informers and information from the Drug Enforcement Administration of the Department of Justice, the Yakima Police Department, and the Spokane Police Department. The trial judge examined, in camera, the revenue agent's work file and the informers' statements and, while refusing to permit the disclosure of this material to the taxpayer, ruled32 that respondent's determination was not arbitrary and unreasonable.The Ninth Circuit reversed our Weimerskirch decision, relying substantially on the Supreme Court's dictum in Janis, and holding that "A deficiency determination that is not supported by the proper foundation of substantive evidence is clearly arbitrary and erroneous." With deference to the Circuit Court, we would find practical difficulty in applying such a broadly stated rule. In any event, since we find for the petitioner on the narrow grounds that respondent's own evidence convinces us that his determination was arbitrary, we may leave for another 405 day the exploration of the procedural parameters of the "naked" assessment rule.Decision will be entered under Rule 155. IRWINIrwin, J., concurring: As the trier of facts in this case, I agree with the majority's findings of fact and in its conclusion that petitioner was not a credible witness. I also concur in the result reached by the majority. QUEALYQuealy, J., dissenting: In my opinion, the record in this case fails to support a finding that the notice of deficiency was "arbitrary and capricious." Respondent had reasonable cause, 33 based upon information derived from informants, that the petitioner was engaged in the distribution and sale of illegal drugs during November and December of 1970. If true, the resulting income is subject to tax. In the absence of any records, it was incumbent upon the respondent to proceed upon the basis of the best information available to him. To do so, regardless whether the method adopted by the respondent can be relied upon with any degree of exactitude, does not mean that it was "arbitrary and capricious." Weimerskirch v. Commissioner, 672">67 T.C. 672 (1977), revd. 596 F.2d 358">596 F.2d 358 (9th Cir. 1979).The petitioner had an opportunity before this Court to prove that he was not, in fact, engaged in the sale of narcotics during the period in question. Admittedly, proof of a negative is difficult. Petitioner relied solely on his self-serving denial. The trial judge in this case did not believe his testimony. It may be that if petitioner had also presented evidence to show what activities he was engaged in during the period in question, greater credibility might have been given to his testimony.If the income from illegal activities, 34 and particularly the sale of narcotics, is to be taxed, it must be recognized that determination by the respondent of the amount to be taxed will not be derived from books and records, bank deposits, or other more conventional sources. Drug dealers deal strictly in cash and do 406 not keep books and records. In determining the amount of income derived from such activities, respondent can only be expected to act on the basis of whatever information may be available to him. The fact that respondent is unable to determine with exactitude the resulting income to be taxed does not make his action "arbitrary and capricious."While I recognize that my views may differ from those expressed by the Ninth Circuit in reversing our decision in the Weimerskirch case, I am not prepared to follow the reversal of the Tax Court in that case. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the taxable year in issue.↩2. Respondent conceded that the sec. 6654(a) addition to tax should be only $ 1,128.96. Petitioner made no arguments at trial or on brief relating to the additions to tax aside from his testimony relevant to the unreported income issue, and we must assume that petitioner has rested the resolution of the penalty issues upon our determination of whether he received income from illegal activities.↩3. Respondent's determination of petitioner's gross sales was based upon the informant's estimate of the amount of heroin distributed by the "lieutenant" for whom he was a supervisor. Although the informant stated that there were three or four "lieutenants," alleged sales by these other "lieutenants" were not included in respondent's recomputation of petitioner's income. On this basis, respondent determined that petitioner's organization sold 500 quarter ounce bags at $ 50 per bag of heroin (at one-quarter strength) each day during Nov. and Dec. 1970 (a total of 61 days). The cost of the heroin to petitioner was then estimated to be $ 25,000 per kilogram based upon the task force's experience in undercover operations, and expenses were estimated at $ 20,000 to $ 23,000. Thus, gross income for the 61-day period was computed at $ 175,000: $ 1,525,000 gross sales, less cost of goods sold at $ 1,350,000.↩4. See, e.g., Gerardo v. Commissioner, 552 F.2d 549">552 F.2d 549 (3d Cir. 1977); Gordon v. Commissioner, 572 F.2d 193">572 F.2d 193 (9th Cir. 1977), cert. denied 435 U.S. 924">435 U.S. 924 (1978), affg. on this issue and revg. on another issue 63 T.C. 51">63 T.C. 51 (1974); Mitchell v. Commissioner, 416 F.2d 101">416 F.2d 101 (7th Cir. 1969), affg. T.C. Memo. 1968-137; Fiorella v. Commissioner, 361 F.2d 326">361 F.2d 326 (5th Cir. 1966), affg. T.C. Memo. 1964-275; Pinder v. United States, 330 F.2d 119">330 F.2d 119 (5th Cir. 1964); O'Neill v. United States, 198 F. Supp. 367">198 F. Supp. 367 (E.D. N.Y. 1961); Ches v. Commissioner, T.C. Memo. 1976-387, affd. in an unpublished opinion (4th Cir. 1978); Fox v. Commissioner, 61 T.C. 704">61 T.C. 704 (1974); Delsanter v. Commissioner, 28 T.C. 845">28 T.C. 845 (1957), revd. on another issue 267 F.2d 39">267 F.2d 39↩ (6th Cir. 1959).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620605/	CHARLES HALLOCK WHITEHEAD, EXECUTOR OF THE ESTATE OF MARY HEATON WHITEHEAD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Whitehead v. CommissionerDocket No. 32062.United States Board of Tax Appeals24 B.T.A. 1111; 1931 BTA LEXIS 1540; December 8, 1931, Promulgated 1540 1. Where the executor of an estate who is the residuary legatee and has in his possession the bulk of the devised property has been discharged and thereafter receives a deficiency notice and files a petition for the redetermination of the asserted deficiency, all the requirements of section 308(a) of the Revenue Acts of 1924 and 1926 have been satisfied and the Board of Tax Appeals has jurisdiction. 2. Decedent's interest to the extent of one-half of its value in a joint tenancy held properly included in her gross estate for Federal tax purposes, under section 402(d) of the 1921 Act. Lynn Webb, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. LANSDON 1111 OPINION. LANSDON: During her lifetime Mary Heaton Whitehead was the owner of certain real estate in the State of Missouri, valued at $45,000. She also owned an interest in certain personal property derived from the estate of her husband, Charles H. Whitehead, deceased in 1908, whose will, among other things, provided as follows: 1112 All the rest and residue of my estate whether real, personal or mixed and wherever situate I give, devise and bequeath1541 to my wife Mary H. Whitehead and to my son Charles Hallock Whitehead and to the survivor of them to have and to hold as joint tenants and not as tenants in common. The said Mary H. Whitehead and Charles Hallock Whitehead shall keep the property herein given to them separate and apart from their individual estates. They shall have absolute control of and dominion over said property as joint owners so long as they both shall live, and either may at any time withdraw from the joint estate such sum or sums of money as said beneficiaries may jointly agree upon, provided that an equal sum of money shall at the same time be turned over to the other beneficiary. The said Mary H. Whitehead and Charles Hallock Whitehead shall so long as both shall live, keep an account showing the property received by them under this will together with the earnings thereof and the amounts expended, or distributed as above provided, and upon the death of either of said beneficiaries the balance of said joint estate shall vest absolutely in the survivor. It is my intention by this provision of my will to allow my said wife and son the unrestricted enjoyment and benefit of my said estate during their joint1542 lives the balance remaining at the death of either to go to the survivor. It is stipulated that the value of the decedent's interest in such property for Federal estate-tax purposes, if subject thereto, at the time of her death was $177,313.10. Mary Heaton Whitehead died in 1922, and the son, Charles Hallock Whitehead, was appointed one of two joint executors of her estate. These executors filed their report in final settlement of the estate with the probate court of Jackson County, Missouri, on July 12, 1924, on which date an order was issued discharging them from their trust. No Federal estate-tax return was filed by the executors in behalf of the estate of Mary Heaton Whitehead, but more than two years after its settlement, on April 21, 1927, the petitioner, as beneficiary, filed with the collector of internal revenue at Kansas City, Mo., a preliminary notice, as required under the Revenue Act of 1926, purporting to give information in respect to its assets. This notice reported personal property valued at $37,485 as constituting the gross estate of the decedent at the time of her death. The respondent determined that the real estate belonging to the decedent at the1543 time of her death was subject to the Federal estate tax, and asserted a deficiency in respect thereto of $292.18, of which he notified the petitioner in a letter dated September 1, 1927, addressed to him as "Executor Estate of Mary Heaton Whitehead." From the assertion of this deficiency the petitioner appealed to this Board on October 28, 1927. At the hearing of this case the respondent, upon authority of the decision of the United States Supreme Court in , conceded that the real estate involved, valued at $45,000, should be excluded from consideration in determining the tax, if any, due from the estate. The respondent, however, has 1113 filed an amended answer in which he avers that the decedent's interest in the personal property bequeathed by Charles H. Whitehead to Mary Heaton Whitehead and Charles Hallock Whitehead as joint tenants should be included in the taxable estate and moves that the deficiency be accordingly increased in the proper amount on the basis thereof. As reasons why the respondent's request should not be granted, the petitioner contends (1) that inasmuch as the estate of Mary Heaton Whitehead was1544 settled and the executors discharged in July, 1924, there was no taxable entity of that name in existence at the time the deficiency was asserted, and the Board is, therefore, without jurisdiction to redetermine the tax; and (2) that in view of the terms of the will, which gave to decedent only a joint interest in the personal property, with remainder vesting absolutely in the surviving tenant, upon her death, no interest survived in the personal property which could be included in her gross estate. We see no merit in the jurisdictional question raised by the petitioner. The settlement of the estate and final discharge of the executors, before the tax obligations were discharged, neither extinguished the tax nor relieved the petitioner from his liability under the law to pay it. Section 400 of the Revenue Act of 1921 includes the following: The term "executor" means the executor or administrator of the decedent, or, if there is no executor or administrator, any person in actual or constructive possession of any property of the decedent. Section 300 of the Revenue Act of 1924 reenacts this definition with slight changes that are not material in this proceeding. Charles Hallock1545 Whitehead, the petitioner here, was the regularly qualified executor of this decedent, the residuary legatee and the distributee of the bulk of the estate. As the executor, he received the deficiency notice and petitioned for a redetermination. In the light of the facts and the statutory provisions above cited, we are of the opinion that all the requirements of section 308(a) of the Revenue Acts of 1924 and 1926 have been satisfied and that the Board has jurisdiction over this proceeding. In respect of the personal property in dispute, section 402(d) of the 1921 Revenue Act seems to anticipate the exact situation which here obtains and provides as follows: To the extent of the interest therein held jointly or as tenants in the entirety by the decedent and any other person, or deposited in banks or other institutions in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than a fair consideration in money or money's worth: Provided, That where such property or any part thereof, or part of the consideration1546 with which 1114 such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than a fair consideration in money or money's worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: Provided further, That where any property has been acquired by gift, bequest, devise, or inheritance, as a tenancy in the entirety by the decedent and spouse, or where so acquired by the decedent and any other person as joint tenants and their interests are not otherwise specified or fixed by law, then to the extent of one-half of the value thereof; * * Therefore, we must hold contrary to petitioner's contention on this point. The parties have stipulated that at the date of her death the value of the interest of Mary Heaton Whitehead in the joint tenancy created by the will of her husband in 1908 was $177,313.10. This amount should be included in her estate subject to Federal estate tax. *1547 ; ; . Reviewed by the Board. Decison will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620607/	Charles Zarkin, Lewis Pudnos, Samuel Feiertag, Boris Wengel, and Leo Siegel, Co-partners, Doing Business as Zenith Export & Processing Co., 332 E. 28th Street, New York, New York, Petitioners, v. United States of America, RespondentZarkin v. United StatesDocket No. 815-R.United States Tax Court29 T.C. 642; 1958 U.S. Tax Ct. LEXIS 278; January 13, 1958, Filed 278 Charles Zarkin owned and controlled a corporation which substantially financed the partnership petitioner. One individual managed both business entities. Charles Zarkin's copartners in the partnership were related to him by blood or marriage, and were employees of his corporation. Held, the partnership petitioner and the corporation were under common control within the meaning of section 403 (c) (6) of the Renegotiation Act of 1943, and the partnership realized excessive profits in its fiscal years 1944 and 1945, of $ 10,000 and $ 35,000, respectively. Robert R. Daly, Esq., for the petitioners.David V. Seaman, Esq., for the respondent. Train, Judge. TRAIN642 OPINION.Pursuant to the Renegotiation Act of 1943, the respondent unilaterally determined that the petitioner Zenith Export & Processing Co. realized excessive profits in its fiscal years ended August 31, 1944 and 1945, in the amounts of $ 10,000 and $ 35,000, respectively.The only issue to be decided is whether the petitioner was under the control of, or controlling, or under common control with Zarkin Machine Co., Inc., within the meaning of section 403 (c) (6) of the Renegotiation Act of 1943. 279 1280 All the facts have been stipulated and are hereby found as stipulated.Zenith Export & Processing Co., hereinafter referred to as Zenith, was organized as a partnership on September 27, 1943, by petitioners Charles Zarkin, Lewis Pudnos, Samuel Feiertag, Boris Wengel, and Leo Siegel, each having an equal partnership interest. The partnership 643 was organized for the specific purpose of engaging in the business of packing commodities, including machinery parts, for export, and it was thus engaged during the 1944 and 1945 fiscal years here involved. All of the sales made by Zenith during the period in question were pursuant to contracts or subcontracts as defined in the Renegotiation Act. During its fiscal years 1944 and 1945, Zenith had sales of $ 127,859.18 and $ 215,135.66, respectively. Each of these amounts was less than the statutory $ 500,000 minimum which a contractor's renegotiable sales must aggregate in any fiscal year before the contractor is subject to renegotiation. Renegotiation in this case was based on a finding of the Navy Price Adjustment Board that during the entire period in question Zenith and Zarkin Machine Co., Inc., were under common control. Sec. 281 403 (c) (6), supra note 1. The combined renegotiable sales of Zenith and Zarkin Machine Co., Inc., hereinafter referred to as Zarkin Machine, were substantially in excess of $ 500,000 in each fiscal year involved.Zarkin Machine is a corporation organized under the laws of the State of New York in 1928. During the years in question, Charles Zarkin was the legal or beneficial owner of all of the outstanding stock of Zarkin Machine, acted as its president and chief executive officer, and was in actual, as well as legal, control of Zarkin Machine.The respondent contends that Charles Zarkin, personally and through his corporation, Zarkin Machine, had actual control of or the power of control over Zenith and, since he also controlled Zarkin Machine, that the two business entities were under his common control within the meaning of section 403 (c) (6) and Renegotiation Regulations 348.4 2 during the years here involved.282 We agree with the respondent.The question of control is one of fact to be determined in light of the entire factual background. Hoffman v. United States, 23 T.C. 569">23 T.C. 569 (1954). Actual control rather than legal control is determinative. Hug Co. v. War Contracts Price Adjustment Board, 14 T.C. 621">14 T.C. 621 (1950). We conclude, in view of all the facts, that Zenith and 644 Zarkin Machine, though separate businesses, were under the common control of Charles Zarkin during the fiscal years in question.Prior to the formation of Zenith, when Zarkin Machine had received orders for parts which required special processing and packaging for overseas shipment, it intended to subcontract the work. However, Jerome L. Reinitz, the factory superintendent of Zarkin Machine, was informed by an Army inspector that there was no contractor in the general area that could perform this operation, and that earlier experiences in shipments overseas had resulted in failures. Charles Zarkin then directed Reinitz to attend a school run by the Quartermaster Corps to ascertain the type of processing and packaging required. After attending the283 school, Reinitz suggested to Charles Zarkin that Zarkin Machine enter the business of processing and packaging for overseas shipment; Zarkin refused but gave Reinitz permission to go into the packaging business while remaining factory superintendent for Zarkin Machine. Thereupon, Reinitz formed a partnership with Murray Schlessinger on or about August 1, 1943, thus providing the processing and packaging service required by Zarkin Machine. Almost immediately, the new business prospered. In September 1943, Charles Zarkin became interested in the business and at that time the partnership here involved was created.The new partnership, Zenith, acquired the business of Reinitz and Schlessinger, and in consideration therefor Charles Zarkin paid Schlessinger $ 2,300. Thus, it was Zarkin's money that bought out Reinitz' partner, not that of the newly formed partnership. Reinitz and Zenith entered into an employment agreement whereby Reinitz became general manager of Zenith. This agreement, executed solely by Charles Zarkin on behalf of Zenith, provided that Reinitz was to receive as a commission a certain percentage of all sales to Zenith's accounts other than to Zarkin Machine. While284 Reinitz was not made a partner in Zenith, he was its first general manager and, although Gene Fabio became general manager sometime in 1944, Reinitz continued to work for the partnership throughout the period in question.These facts surrounding the organization of Zenith demonstrate that Charles Zarkin was instrumental in the development of the packaging and processing business and was the moving force behind the formation of the partnership. As an equal partner he had no greater legal authority to do this organizing and acting for the partnership than did his copartners. Nevertheless, they silently acquiesced in his actions. Such acquiescence is evidence of Zarkin's leading position in and actual control of Zenith. Hoffman v. United States, supra; Hug Co. v. War Contracts Price Adjustment Board, supra.Of Zarkin's four partners, Leo Siegel and Samuel Feiertag were his brothers-in-law, Boris Wengel was his first cousin by marriage, 645 and Lewis Pudnos was his cousin. All of them except Leo Siegel were employed by Zarkin Machine prior to and during the fiscal years in question. Only one of them, Lewis Pudnos, 285 a shipping clerk for Zarkin Machine, worked for Zenith; he acted as a consultant in problems involving packaging and shipping. He and Zarkin were the only partners authorized to sign checks for the partnership.Since Zarkin's copartners were his close relatives, they were subject to the influence of family relation and, with one exception, they were Zarkin Machine employees, which necessarily gave Zarkin a degree of control over them. Lowell Wool By-Prod. Co. v. War Contracts Price Adjustment Board, 14 T.C. 1398">14 T.C. 1398 (1950), affd. 89 U.S. App. D.C. 281">89 U.S. App. D.C. 281, 192 F.2d 405">192 F.2d 405 (C. A., D. C. 1951); Hug Co. v. War Contracts Price Adjustment Board, supra. Though equal partners, they participated in Zenith only to the extent of making a small contribution to capital. Lewis Pudnos alone worked for Zenith; the others took absolutely no part in the management or rendered any services. Only Zarkin received any compensation from Zenith. Zarkin effectively dominated his copartners, the group having legal control of Zenith.Benjamin Poller, brother-in-law of Charles Zarkin, was attorney for Zarkin Machine and became attorney for286 and supervised the office work of Zenith, including such matters as billing and disbursements. According to the partnership agreement, Poller was the sole arbitrator of any disputes and questions which might arise among the partners. Poller played a major role in inducing Charles Zarkin to go into the packaging business, in bringing in his relatives, and getting the partnership organized as a family enterprise.Reinitz, as general manager of Zenith, and Poller, as office supervisor and attorney for Zenith and final arbitrator of partnership disputes, had immediate control of Zenith. Because of their respective relationships to Zarkin, Reinitz, factory superintendent of Zarkin Machine, and Poller, attorney for Zarkin Machine and Zarkin's brother-in-law, were subject to Zarkin's influence and control. See Pechtel v. United States, 18 T.C. 851">18 T.C. 851 (1952); Lowell Wool By-Prod. Co. v. War Contracts Price Adjustment Board, supra; Hug Co. v. War Contracts Price Adjustment Board, supra. Although others superseded Reinitz as general manager, he continued to work for Zenith, and it has not 287 been shown that his authority in Zenith was lessened.Each partner contributed $ 500 to partnership capital. However, this $ 2,500 of working capital proved insufficient to meet the demands of the business. Therefore, Zarkin Machine made advances to Zenith which were utilized for payroll, materiel purchases, and working capital. During Zenith's fiscal year 1944, Zarkin Machine advanced to Zenith $ 27,584.15 to help meet a payroll totaling $ 50,255.73, and 646 paid wages of $ 7,160.70 to 11 of its own employees used by Zenith. In the same year Zarkin Machine also advanced $ 4,386.60 for petty cash, and paid various bills for Zenith in the amount of $ 15,660.96. In fiscal year 1945, Zarkin Machine charged Zenith the sum of $ 2,373.36 for labor used and cash advanced for Zenith's payroll which totaled $ 58,546.73.As of the end of February 1944, Zarkin Machine had advanced to Zenith a total of $ 30,136.87, part of which had been repaid, but in anticipation of D-day, June 6, 1944, the needs of the services for packaging were such that the volume of business greatly increased. By August 31, 1944, Zenith had received total advances of $ 82,105.73 from Zarkin Machine, and at the288 end of the first fiscal year, a balance of $ 23,580.52 remained due from Zenith to Zarkin Machine. The average amount of debt owed by Zenith to Zarkin Machine at the end of each month during fiscal year 1944 was $ 5,890.26, and the average during fiscal year 1945 was $ 6,124.94. The average amount of cash on hand for each month during fiscal year 1944 was $ 5,088.44 and the average during fiscal year 1945 was $ 11,549.All of these advances of money were later repaid to Zarkin Machine by Zenith.During Zenith's fiscal year 1944, approximately 10.9 per cent of its gross sales were to Zarkin Machine, which ranked third in number of sales in a total of 105 customers. During Zenith's fiscal year 1945, approximately 12.4 per cent of its gross sales were to Zarkin Machine, which ranked first in number of sales in a total of 96 customers.Thus, substantially all of Zenith's working capital during its first fiscal year and a considerable portion its second year was supplied by Zarkin Machine. It advanced to Zenith over one-half of its first year's payroll. The facts disclose these and other important benefits that Zenith received from Zarkin Machine, including loans, labor, and patronage, 289 upon which Zenith was dependent for its existence To the extent that Zenith was economically dependent on Zarkin Machine, Charles Zarkin through his corporation exercised an element of control over Zenith. See Lowell Wool By-Prod. Co. v. War Contracts Price Adjustment Board, supra; Pechtel v. United States, supra; Warner v. War Contracts Price Adjustment Board, 14 T.C. 1320">14 T.C. 1320 (1950).The partnership agreement provided that the partners were to share in profits equally but $ 100 per week was to be first paid and was so paid to Charles Zarkin for services to be rendered. He acted as Zenith's financial adviser, performing no other services. Zarkin never had anything whatsoever to do with the solicitation of business for Zenith, obtaining orders, or producing the orders.On March 25, 1945, the active business of Zenith ceased with the sale of some of its assets to persons not otherwise here involved.647 That Zenith and Zarkin Machine were separate entities and engaged in different types of businesses is not controlling. Haas v. United States, 23 T.C. 892">23 T.C. 892 (1955);*290 Hoffman v. United States, supra. The facts show that Zenith was a family enterprise, controlled and dominated by Charles Zarkin to some extent directly and in other respects through Zarkin Machine.Petitioner cites Southland Steel Co. v. War Contracts Price Adj. Bd., 13 T.C. 652">13 T.C. 652 (1949), in support of its contention that common control was not present here, but that case is clearly distinguishable.We hold that petitioner Zenith Export & Processing Co. and Zarkin Machine Co., Inc., were under the common control of Charles Zarkin within the meaning of section 403 (c) (6) of the Renegotiation Act of 1943, and that the said petitioner realized excessive profits in its fiscal years 1944 and 1945 of $ 10,000 and $ 35,000, respectively.An order will be entered accordingly. Footnotes1. Sec. 403 (c) (6) provides: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.↩2. 348.4 Tests of "Control". In determining whether the contractor controls or is controlled by or under common control with another person, the following principles should be followed:(1) Corporate Control: A parent corporation which owns more than 50% of the voting stock of another corporation controls such other corporation and also controls all corporations controlled by such other corporation.(2) Individual Control: An individual who owns more than 50% of the voting stock of a corporation controls the corporation and also controls all corporations controlled by the corporation.(3) Partnership Control: A general partner who is entitled to more than 50% of the profits of a partnership controls the partnership.(4) Joint Venture Control: A joint venturer who is entitled to more than 50% of the profits of a joint venture controls the joint venture.(5) Other Cases↩: Actual control is a question of fact. Whenever it is believed that actual control exists even though the foregoing conditions are not fulfilled, the matter may be determined by the Department or Service conducting the renegotiation.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620608/	Richard W. TeLinde and Catharine L. TeLinde, Petitioners, v. Commissioner of Internal Revenue, RespondentTeLinde v. Comm'rDocket No. 29712United States Tax Court1952 U.S. Tax Ct. LEXIS 219; 93 U.S.P.Q. (BNA) 183; 18 T.C. 91; April 18, 1952, Promulgated 219 Decision will be entered under Rule 50. Payments received by petitioner, a physician, for the sale of his first book, held to be long term capital gain, as the proceeds of the sale of a capital asset of which, under the evidence, the holding period commenced on completion and extended more than 6 months until delivery of the manuscript. Joshua W. Miles, Esq., and D. Sylvan Friedman, Esq., for the petitioners.Stephen P. Cadden, Esq., for the respondent. Opper, Judge. OPPER183 91 Petitioners challenge respondent's determination of deficiencies in income tax for the years 1947 and 1948, of $ 8,756.87 and $ 935.42, respectively, all of which is in dispute. The issue in controversy is whether 92 payments received in connection with the publication of a book were royalties, and in the alternative, if the amounts constituted proceeds from the sale of a capital asset, whether the asset was held for more than 6 months. Some of the facts have been stipulated.FINDINGS OF FACT.The stipulated facts are hereby found accordingly.Petitioners, husband and wife, filed joint returns for the years in question with the collector of internal revenue at Baltimore, 220 Maryland.Petitioner Richard W. TeLinde, hereinafter called petitioner, is a physician, surgeon, lecturer, and the writer of many articles on medical subjects. He graduated from medical school in 1920, subsequently taking special training in gynecology. Since 1925 he has been engaged in the private practice of medicine, specializing in gynecology. Since 1939 he has been a professor of gynecology at the Johns Hopkins University, and gynecologist-in-chief at the Johns Hopkins Hospital.During petitioner's years of specialization in practice and as a teacher he prepared and accumulated notes and illustrations relating to his special field. On some occasions he spoke before various medical societies, receiving no payment for such effort aside from his compensation as professor at the University.Prior to August 1941 petitioner was approached by representatives of J. B. Lippincott Company, hereinafter called the publisher, who suggested to petitioner that he had material which could be used as the basis for a book on gynecology. Thereafter petitioner had various discussions with the publisher's representatives.On August 20, 1941, petitioner and the publisher entered into a "Memorandum221 of Agreement." There have never been 184 any amendments to that document. The agreement was stated to be: " * * relative to the publication of a work of approximately 500-550 pages, 7 x 10 vol., tentatively entitled, 'Operative Gynecology,' to include description of approximately 80 or 90 operations, the illustrations to be line drawings to be drawn by Mr. James F. Didusch under the Author's direction and supervision, * * " to be published in May 1943. The instrument provided, in part, that petitioner agreed:(a) To grant, and he does hereby grant, to the Publisher the exclusive right to publish the said work in book form throughout the world. To permit the Publisher to take out the United States copyright in the name of The Publisher; he or his legal representative to execute the necessary renewal papers if so requested.(b) To deliver to the Publisher on or before November 15, 1942, the complete manuscript copy of the said work properly prepared for the use of the compositors, together with the originals of such illustrations as it may be mutually decided to use.93 The instrument stated, among other matters, that petitioner guaranteed that he was the sole proprietor of the222 said work, and that he would indemnify the publisher for losses incurred if the work violated any copyright or contract, or contained libelous or objectionable matter. Petitioner agreed to read proof, to perform other necessary duties while the work was passing through the press, and to make revisions for any future editions. Petitioner also agreed that so long as the agreement was in force, he would not permit to be published any other material written or edited by him which would interfere with the sale of the book.The publisher agreed, among other matters, to determine typography and layout for text and illustrations; to manufacture and publish the work at its expense, the plates and books to be its property; to take out United States copyright in its name; to pay "royalties" to petitioner of 10 per cent of the list price on sales in the United States and 5 per cent of the list price upon copies sold in, or for export to, foreign countries, and "in lieu of royalty" on privileges of reprint or other reproduction, to pay to petitioner 50 per cent of sums received. "Royalty accounts" were to be computed and statements were to be rendered and paid on specified dates during each223 year. The instrument concluded by providing that:This agreement shall continue in force for the entire term of copyright and all renewals thereof, but in the event that any time after two years from the date of the first publication of the said work, the Publisher deems it no longer merchantable or profitable, and gives written notice to the Author of his desire and intention to discontinue publication, this contract shall terminate, and subsequent rights of the Publisher shall revert to the Author. The Author shall have a thirty-day option to purchase the plates and stock at not more than manufacturing cost, in default of which the Publisher shall have the right to sell remaining copies and sheets as a remainder, free of royalty, and to melt the plates.After August 20, 1941, petitioner proceeded to assemble his material and to prepare the manuscript. Although he had already done some work, most of his work was done subsequent to that date. Petitioner's method of procedure was to collect the material from his talks, lectures, and teaching, to add further matter from unwritten ideas which he had in mind, and to write out the manuscript in longhand. His secretary typed out his224 written drafts, making minor corrections in grammar and punctuation. Further alterations were made by petitioner in the draft of each chapter.On undisclosed dates between August 20, 1941, and the summer of 1944, petitioner finished the various chapters. All of the chapters were written and the major portion of his work on the manuscript was completed by the summer of 1944. Thereafter some minor corrections, rearrangements, typing, and proofreading were done, which were completed in January 1945. The publisher desired a completed manuscript. In August 1945 petitioner delivered the manuscript to 94 the publisher. Subsequently minor changes were made by petitioner upon receipt of the galley proofs.The book "Operative Gynecology," as published, has 750 pages and about 38 chapters. It is abundantly illustrated, the last plate being numbered 309, with a substantial part of the text being devoted to matter descriptive of the illustrations. Each chapter deals with a phase of gynecology, and contains descriptions of various operations, their techniques, possible complications, and related problems. The work contains some original material as well as knowledge well established225 in the field of gynecology.On October 2, 1946, the publisher copyrighted the book. That day was also the date of publication. On the same date the publisher sold the first copies, although orders had been received in advance of that date. In addition to being published in English, it was translated 185 and published in Spanish in Argentina and in Portuguese in Brazil. The publisher made an accounting to petitioner for the proceeds of both domestic and foreign sales.Petitioner has never entered into any other contracts granting motion picture, television, radio, camera, lantern slide, pamphlet, magazine, or lecture rights, or any other rights to reproduce or use the book.On April 30, 1947, petitioner received his first payment from the publisher in the amount of $ 6,676.45. On October 31, 1947, he received his second payment in the amount of $ 7,066.75.Petitioner's tax return for 1947 reported as income the above sum of $ 6,676.45. The 1947 return did not report the second payment of $ 7,066.75. That amount was included in petitioner's 1948 return which reported payments received in the latter year. Both returns treated all payments from the publisher as "long-term capital 226 gains."Respondent's notice of deficiency stated: "It is held that the royalties paid to you by J. B. Lippincott Co. in connection with book entitled Operative Gynecology, are taxable as ordinary income. In the alternative, if it should be held to have been a sale, the asset in that event was held less than 6 months and the amount would be taxable as a short-term capital gain."OPINION.The parties are apparently in agreement that what petitioner transferred to his publisher was a capital asset. They differ first as to whether that transfer was a sale on the one hand or a license on the other, so that in the former event it would be subject to the capital gains provisions.While the contract to assign is not entirely without ambiguity, it seems to us its fair intendment is that petitioner transferred, for the full term of the copyright, and the publisher received all of the rights incorporated in the property, leaving nothing for which petitioner 95 could issue licenses to others or use himself. This has been treated as the essential touchstone for determining whether such an arrangement was in fact a sale. ;227 ; cf. , certiorari denied .The copyright was to be issued in the name of the publisher. The book is referred to as "its property." Although petitioner was to receive compensation for "reprint or other reproduction," the publisher was specifically granted such rights as translation into foreign languages and it is evident that the publisher and not petitioner was to be in position to grant any such license. It is even provided that petitioner cannot publish "any other material written or edited by him which would interfere with the sale" of the book. Under such circumstances, the provision for reassignment to petitioner if publication does not succeed can as well be viewed in the light of a reconveyance as of the reservation of any present right in the property on petitioner's part. And it is by now too well settled to admit of any discussion that mere payment of a consideration on the basis of sales or otherwise in a fashion commonly referred to as "royalties" does not suffice228 to transmute what would otherwise be a sale into a mere license. . We are accordingly satisfied that the transfer was a capital transaction.A further alternative issue is presented by respondent's insistence that even so we are dealing with a short term gain because petitioner's holding period was less than 6 months. In this respect also we view the determination as erroneous. It is evident that the original agreement dealt with property which was not yet in existence. Under such circumstances, as the parties virtually agree, it was impossible to pass present title or to consider that the contract was itself a sale. . It follows that the contract did not encompass the passage of title.By the middle of 1944 the work had been substantially completed, and by January of 1945 even such mechanical operations as the typing, proofreading, and correction of the manuscript were finished. Not later than that date and probably as of the middle of 1944 it is thus necessary to conclude that petitioner had in his hands the completed article which he229 had contracted to deliver. Delivery, however, did not take place until August of 1945. This brought about the passage of title under these facts. See . There was thus a period of at least six months and probably a year during which petitioner held the property while it was in existence and prior to its sale. The holding period to authorize treatment as a long term capital gain is accordingly furnished by the record. . 96 We conclude that petitioner's treatment of the proceeds as long term capital gain was correct.In view, however, of the failure to report the receipt of a part of the payment as of the year in which it was received,Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620609/	SCOTT G. HILL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHill v. CommissionerDocket No. 26261-87.United States Tax CourtT.C. Memo 1988-198; 1988 Tax Ct. Memo LEXIS 231; 55 T.C.M. (CCH) 788; T.C.M. (RIA) 88198; May 4, 1988. Scott G. Hill, pro se. Victoria Gunn, for the respondent. WELLSMEMORANDUM OPINION WELLS, Judge: This case is before us on respondent's motion to dismiss this case for lack of jurisdiction as to the taxable year 1984 and to strike all references to the taxable year 1984 from the amended petition. Respondent contends that the petition filed by petitioner did not raise any issues regarding the taxable year 1984 and that no other petition was filed within the 90-day period with respect to the taxable year 1984, as required by section 6213. 1 Petitioner filed an objection to respondent's motion. 232 On May 7, 1987, respondent sent two notices of deficiency to petitioner, 2 both dated May 8, 1987. One of the notices related to the taxable years 1981, 1982, and 1983, and determined deficiencies and additions to tax as follows: Additions to TaxYearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)66541981$ 2,877.67$ 566.41$ 143.88$ 162.281982$ 1,761.00$ 310.25$ 88.05$ 108.381983$ 2,703.00$ 675.75$ 135.15$ 263.64233 The other notice related to the taxable year 1984 and determined a deficiency and additions to tax as follows: Additions to TaxYearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)665466611984$ 12,430.00$ 2,905.75$ 621.50$ 718.06$ 3,107.50Both notices made adjustments relating to petitioner's failure to file returns for the years covered by the notices. On August 4, 1987, petitioner filed a petition with this Court which contained references only to the taxable years 1981, 1982, and 1983 and failed to make any mention of taxable year 1984. However, petitioner attached both notices of deficiency to his petition. On November 9, 1987, petitioner filed a motion for leave to file an amendment to his petition. That motion stated that amendment of the petition was necessary to include taxable year 1984 in the petition and also stated that petitioner's intent to include the notice of deficiency for taxable year 1984 was shown by the fact that the notice was attached to the petition. That motion was granted on November 20, 1987. On March 9, 1988, respondent filed234 his motion to dismiss for lack of jurisdiction as to the taxable year 1984. The issue for decision is whether the petition filed in this case is sufficient to give us jurisdiction over the taxable year 1984. The amended petition cannot independently confer jurisdiction upon this Court because it was filed more than 90 days after the issuance of the notices of deficiency. ; section 6213(a); Rules 13(c), 41(a). The facts in this case do not differ materially from those of 3 In O'Neil, respondent issued to the taxpayer a notice of deficiency which covered four consecutive years. The taxpayer filed a timely petition with this Court and attached a copy of the notice of deficiency. The petition clearly referred to and made objections to the deficiencies determined for the first three years but did not mention the fourth year or the deficiency determined for the fourth year. We held that the petition did not confer upon us jurisdiction over the fourth year. 235 Our consistent policy is to be liberal in treating as petitions all documents filed by taxpayers within the 90-day period if they were intended as petitions. , and cases cited therein. See also . Nevertheless, a document must contain objective facts indicating that a deficiency is being contested before it is treated as a petition with respect to that deficiency. . See also . While detailed allegations of error were set out with respect to the taxable years 1981, 1982, and 1983, none were set out with respect to taxable year 1984. In that regard it should be noted that "Each year is the origin of a new liability and of a separate cause of action." . The only distinguishing factor between O'Neil and the instant case is that in O'Neil the year omitted from the petition was covered by the same notice of deficiency while, in the instant case, the omitted year was covered by a236 different notice of deficiency. That, however, is a distinction without a difference. The attachment to the petition of the notice of deficiency covering taxable year 1984, standing alone, is not sufficient to confer jurisdiction over the deficiency for taxable year 1984 where no reference is made to the notice of deficiency in the petition and no allegation of error is set out in the petition with respect to the deficiency for taxable year 1984. The terms of the petition itself must indicate that the determination for a particular year is disputed. . Since the amended petition was not filed within 90 days after issuance of the statutory notice for 1984, respondent's motion will be granted. If petitioner wishes to contest his tax liability for 1984, he must do so in another forum. To reflect the foregoing, An appropriate order will be entered.Footnotes1. Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect during the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. Respondent submitted a copy of United States Postal Service Form 3877 with his motion to establish the mailing of the notices of deficiency. Listed on the Form 3877 are petitioner's name, address, and Social Security identification number, an identification of the four years covered by the notices of deficiency at issue, and a verification of the May 7, 1987, postmark. In , we noted that the Form 3877 represented direct evidence of Form 3877, we find that respondent mailed an envelope containing both notices of deficiency on May 7, 1987, in the same envelope. 50 percent of the interest due on the underpayment.↩ 50 percent of the interest due on the undepayment. 3. The facts of the instant case are also very similar to those of , affd. without published opinion . In Franks, the Commissioner issued two notices of deficiency, one for taxable year 19980 and one for taxable year 1981. Both notices made adjustments primarily related to the same investments of the taxpayer. The taxpayer filed a petition which contained references only to the taxable year 1981 and attached the notice of deficiency for the 1981 taxable year. The petition did not mention the 1980 taxable year and the notice of deficiency for taxable year 1980 was not attached. The taxpayer moved to amend the petition to include the 1980 taxable year and the Court granted his motion to amend; however, since the amendment was not filed within 90 days after the notice of deficiency was issued, we granted respondent's motion to dismiss with respect to the taxpayer's 1980 taxable year. In the instant case, petitioner attached the notice of deficiency for the 1984 taxable year to the petition but neither referred to the notice of deficiency covering taxable year 1984 nor set out any allegations of error with respect to the deficiency for taxable year 1984 in his petition. Thus, the only difference between the instant case and Franks v. Commissioner↩ is that in the instant case the notice of deficiency for the omitted year (1984) was attached to the petition.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620610/	M. Seth Horne and Maurine D. Horne, Petitioners v. Commissioner of Internal Revenue, RespondentHorne v. CommissionerDocket No. 2645-70United States Tax Court59 T.C. 319; 1972 U.S. Tax Ct. LEXIS 18; November 27, 1972, Filed 18 Decision will be entered under Rule 50. Petitioner (husband) was a partner in a three-man firm. The three partners, as individuals, owned all the stock in COINC, which, in turn, owned all the stock in CORP and CO. All three corporations performed construction work. N/A, a bonding company, wrote bonds for all three corporations. All three corporations indemnified N/A on cross-indemnity agreements. In 1960, CO notified N/A that it, N/A, would have to perform on its bond. Because the three corporations were close to insolvency, N/A asked COINC's stockholders to indemnify it. Only petitioner agreed to do so. As a part of the sorting-out process that followed, the partnership was dissolved, the partnership property was distributed, the partners exchanged interests in various properties, and the corporations were reorganized. Concerning the reorganization, petitioner received all the stock in CO -- to which substantially all the assets of COINC and CORP had been transferred -- in return for all his stock in COINC. At approximately the same time, petitioner entered into an agreement whereby he became jointly and severally liable with CO, for any losses incurred by N/A on its19 bond. CO continued in existence. COINC and CORP became inactive. Years later the petitioner paid N/A roughly $ 600,000 and recouped less than half of this amount from CO. Held: On the facts, petitioner's promise to indemnify the bonding company was not part of the purchase price of the CO stock. Estate of McGlothin v. Commissioner, 370 F. 2d 729 (C.A. 5, 1967), affirming 44 T.C. 611">44 T.C. 611 (1965), distinguished. Nor was petitioner compensated for his losses. Rather the losses on the so-called indemnity agreement must be treated as bad debt losses falling within sec. 166, I.R.C. 1954, and disallowed as such because they were not worthless in the years at issue. Petitioner was as much a guarantor as an indemnitor. Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956), applicable. Hubert E. Kelly and Charles L. Arnold, for the petitioners.Harold E. Patterson, for the respondent. Dawson, Judge. DAWSON319 Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1966, 1967, and 1968 in the amounts of $ 56,280, $ 23,378, and $ 66,078, respectively.Petitioners have conceded one issue. The only issue remaining for decision is whether they are entitled to a deduction for amounts paid in connection with an indemnity agreement entered into by them on behalf of their wholly owned corporation. The issue is argued under sections 162, 165, 166, and 212, I.R.C. 1954.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation of facts, the supplemental stipulation of facts, and the exhibits attached to both 320 are incorporated herein by this reference. We 22 have limited our findings to those facts which are pertinent to our decision.The petitioners, M. Seth Horne and Maurine D. Horne, are husband and wife and, at the time of filing the petition herein, were residents of Phoenix, Ariz. They filed joint Federal income tax returns for the years 1966, 1967, and 1968 with the district director of internal revenue at Phoenix, Ariz.M. Seth Horne (herein called petitioner) is a real estate developer and investor. He became interested in the field when trying to start up a restaurant in the Washington, D.C., area. Near the end of World War II, he surveyed the real estate business prospects in that area and began development operations on a full-time basis.In 1947, petitioner was joined by Harold A. Naisbitt, an accountant, in a joint venture for the development of a piece of property in Fairfax County, Va. About 2 years later, W. B. Ingersoll, a practicing dentist, purchased a part of petitioner's interest in the joint venture. On January 5, 1951, Horne, Ingersoll, and Naisbitt formed a general partnership (herein called HIN or the partnership) to engage in the business of real estate development. Petitioner had a 65.6-percent interest23 in the partnership; Ingersoll had a 20-percent interest; and Naisbitt had a 14.6-percent interest. Petitioner acted as general manager, Naisbitt handled the accounting problems, and Ingersoll was available for consultation. So long as petitioner was a partner in HIN, he did not engage in any other business activities on a strictly individual basis. Although he owned certain rights concerning real property in his own name (as recited in the indemnity agreement detailed below), he owned them in conjunction with his partners. Nevertheless, due to his participation in HIN, he remained in the real estate business.The business activities of the partnership consisted of acquisition, zoning, financing, and management of real properties. Its first large-scale project was an apartment complex and shopping center situated on 100 acres near Seven Corners, Va. 124 James Stewart & Co., Inc. (herein called COINC), is a corporation organized under the laws of the State of New York in 1913. It conducted a general engineering and contracting business; and by 1951 it had acquired a respected international reputation. In 1927, COINC321 caused James Stewart Corp. (CORP) to be organized pursuant to the laws of the State of Delaware. CORP operated as a wholly owned subsidiary of COINC. It, too, performed general engineering and contracting work.In 1951, soon after the formation of HIN, the petitioner and his partners became interested in acquiring COINC, thinking that COINC's construction activities would complement the partnership's real estate activities. On January 1, 1952, they purchased all of the common stock of COINC, consisting of 12,168 shares, and 2,055 shares of preferred stock for a total of $ 150,000. Later, on December 31, 1954, they purchased the remaining 4,533 shares of preferred stock for an additional $ 150,000. After an adjustment due to taxes assessed against COINC, the total purchase price for both common and preferred stock amounted to $ 246,406.25. All stock was acquired in the names of the individual partners 25 according to each partner's interest in HIN. Petitioner's basis in the COINC stock was $ 194,442.50.On July 28, 1952, COINC -- then controlled by petitioner and his partners in HIN -- caused James Stewart Co. (CO) to be incorporated under the laws of the State of Texas. Like CORP, CO was COINC's wholly owned subsidiary and performed construction and general contracting work. The plan was for COINC to base its operations in New York and perform contracts in the Eastern States, for CORP to base its operations in Chicago and perform contracts throughout the Midwest, and for CO, based in Texas, to service the western part of the country.From the start petitioner, Ingersoll, and Naisbitt were active in the management of COINC as members of its board of directors. Also, petitioner was immediately made vice president of COINC. He held that office until 1955, when he was elevated to president and chairman of the board -- positions which he held through 1960. Petitioner and Naisbitt were also members of the board of both CORP and CO. In 1953, petitioner was elected vice president of CORP and, in 1954, chairman of its board. Petitioner was president of CO from its inception.As for26 the relationship between the partnership and the corporations, HIN was the manager of COINC, and CORP and CO were its operational arms. HIN engaged in all phases of real estate development -- though after acquiring COINC, a great deal of the partners' time was devoted to overseeing the parent and its subsidiaries. The corporations only performed construction work, except CO developed some land on the Papago Indian Reservation (Papago Indian Project), near Sells, Ariz., and some mining claims near Tombstone and Camp Verde, Ariz.322 For the years 1953 through 1960, the net income of COINC, CORP, and CO, exclusive of any net operating loss deductions, was as follows:YearCOINCCORPCO1953$ 32,554.97 $ 8,707.20 $ 33,773.99 19549,391.29 121,644.15 (52,543.84)195536,723.78 19,567.59 (77,982.91)195638,379.79 236,126.55 13,621.82 195784,020.79 69,316.32 98,356.31 1958(122,994.30)(329,306.37)(230,013.29)1959(39,547.41)(10,474.26)(165,019.40)1960(75,967.18)(138,196.22)(159,282.89)During the years 1952 through 1960, petitioner received no compensation of any kind from COINC, CORP, or CO for services rendered. Nor27 did Ingersoll or Naisbitt receive any compensation. Also, none of the corporations paid any dividends during those years. CORP and CO did, however, pay management fees to COINC, and COINC in turn paid management fees to the partnership. The following schedule shows the fees paid by COINC to HIN:YearManagement fee1952$ 28,801.63195333,499.92195455,500.00195550,000.00195650,000.00195761,303.94195850,000.00195955,000.00196051,001.10The partnership was operated on the accrual basis of accounting and used the calendar year as its taxable year. Its Federal income tax returns for the years 1952-60 reveal the following:Petitioner'sshare ofPetitioner'sPayments fromTotalordinaryshare ofpartnership toYearTotal incomedeductionsincome 1capital gains 2petitioner1952$ 77,832.21$ 57,903.42$ 5,937.29 $ 871.73 195393,350.1971,834.255,484,86 (506.37)1954104,044.6772,945.8411,541.63 1,574.40 1955108,690.02130,835.61(14,527.50)9,534.82 $ 16,200.001956191,988.41132,255.4539,184.82 12,262,49 20,700.001957126,814.85114,677.506,541.17 12,262.49 26,492.85195884,000.00119,008.29(37,999.98)14,633.96 23,200.001959131,072.27100,837.1919,834.21 122,590.14 3,803.371960156,124.04116,322.4826,109.80 56,565.76 17,795.6028 In the conduct of their construction business the three corporations were required to furnish performance bonds on the jobs that they undertook. All three corporations obtained bonds from New Amsterdam Casualty Co. (herein called New Amsterdam or the bonding company). COINC and CORP agreed to indemnify New Amsterdam for any losses incurred as surety for CO; CORP and CO agreed 323 to indemnify New Amsterdam from any losses incurred as surety for COINC.Beginning in 1958 and continuing through 1960, the corporations suffered financial losses; by October 1960 they were in severe financial trouble. For its taxable year ended December 31, 1960, CO had a net operating loss of $ 539,090.21, inclusive of a net operating loss carryover of $ 379,807.32. CO's difficulties were due to losses incurred in connection with construction work in Southern California and the Papago Indian Project. In all, CO's net worth was adversely affected by approximately $ 1.75 million.As a consequence of the above difficulties, in the summer of 1960, petitioner and Naisbitt notified New Amsterdam that CO could not complete all its 29 contracts and that it, as surety, would probably have to make some performance in accordance with the bonds written on CO's behalf. They also informed New Amsterdam that COINC and CORP did not have sufficient funds to meet their obligations as indemnitors under the cross-indemnity agreements. At this point, the bonding company estimated its "exposure" at approximately $ 1.2 million. Also at this point in time none of the partners in HIN, including the petitioner, were individually liable to the bonding company for amounts paid on performance bonds.To better secure itself, New Amsterdam requested petitioner, Ingersoll, and Naisbitt to contract to indemnify it for any loss incurred on the three corporations' bonds. Ingersoll and Naisbitt balked. Petitioner, however, acceded. He did so realizing that unless he agreed the corporations would be taken over by the bonding company, their assets would be liquidated, and they would probably end up in bankruptcy. Not only would he lose his investment in COINC but, most importantly, his credit reputation would be ruined. Thus, because the ability to borrow large amounts of money is crucial to the conduct of a real estate development business, 30 he could no longer participate in such a business -- on an individual basis or as a major figure in a partnership or corporation.Negotiations between petitioner and New Amsterdam concerning the terms of the indemnity agreement commenced in October 1960 and continued until January 20, 1961, when an agreement was signed. Naisbitt participated in the early stages of the negotiations in order to help effectuate the separation of his and Ingersoll's affairs from the affairs of the petitioner. Sometime before January 20, 1961, the petitioner began the process of acquiring clear title to a tract of land (the Shirley Highway Property) of "very great value." The land is 324 located on Shirley Memorial Highway in the City of Alexandria, Va. It was being acquired "out of the partnership." 2Meanwhile, on November31 16, 1960, New Amsterdam instituted a suit against CO and Mayer Central Building Corp. in the U.S. District Court for the District of Arizona asserting, among other things, that it, New Amsterdam, was not liable on bonds executed in connection with a contract between CO and Mayer.The January 20 indemnity agreement between petitioner and New Amsterdam, recites as follows: That CO entered into eight construction contracts, including the Mayer Central Building Corp. contract, for a total contract price of approximately $ 12 million and that New Amsterdam was surety on those contracts; that, in addition, New Amsterdam was surety on the Papago Project, that claims had been and would be made against New Amsterdam on its bond, and that those claims would exceed $ 500,000; that COINC had previously agreed to act as indemnitor of New Amsterdam for losses sustained as surety for CO, that CORP had previously agreed likewise, that CORP and CO had previously jointly and severally agreed to act as indemnitor of New Amsterdam for losses sustained as surety for COINC, and that CO had previously agreed to act as indemnitor of New Amsterdam for losses sustained as surety for it, CO; that CO and CORP32 were both wholly owned subsidiaries of COINC and that petitioner, Ingersoll, and Naisbitt were the sole shareholders of COINC; that New Amsterdam had filed the above-mentioned suit against CO and Mayer Central Building Corp.; that the petitioner was "in the process of acquiring" clear title to the Shirley Highway Property; that CORP presently held certain rights under an agreement to purchase certain mining claims (the Charleston Claims); that petitioner, Ingersoll, Naisbitt, and COINC, together with another individual, presently held interests in certain rights under an agreement to purchase agriculture lease rights in property located in Yuma County, Ariz. (the Hall-Morrison Property); that petitioner, Ingersoll, Naisbitt, and COINC, together with another individual, presently owned certain real property and held certain interests in grazing lands (collectively referred to as the Palomas Ranch Property) and that said property was subject to a mortgage; that CO presently held certain rights under a joint venture agreement with Freesh Land Ventures, Inc., in land (the Papago Farm Property) owned by the Papago Indian Tribe; and that CO presently held a lease of mineral rights in Yavapai33 County, Ariz. (the Sodium Sulfate Mine Property), and an option involving said property.325 The indemnity agreement further provides, in summary, as follows:1. The petitioner will obtain clear title to the Shirley Property and convey it to a trustee, the Mount Vernon Bank & Trust Co. of Fairfax County, Va., to be held as security for his promise to indemnify New Amsterdam.2. Petitioner and CO will cause CORP to convey to CO CORP's rights to and interest in the Charleston Claims.3. Petitioner and CO will cause COINC to convey to CO CORP's rights to and interest in the Hall-Morrison Property and the Palomas Ranch Property, plus (1) any amounts due from New Amsterdam to COINC for past services rendered 3 and (2) a life insurance policy on petitioner's life, naming COINC as beneficiary (petitioner and CO agreed to pay all premiums as they became due and to designate New Amsterdam as the new beneficiary).34 4. Upon receiving the assets named in 2 and 3 above, CO will transfer such assets to a trustee, a Phoenix law firm, so as to secure CO's promise to indemnify New Amsterdam.5. CO will endorse and deliver to New Amsterdam two promissory notes executed by one Lawrence D. Mayer and his wife Pauline, each in the sum of $ 50,000.6. CO will assign all balances due and to become due on the eight construction contracts recited above; then, after all of the above,7. New Amsterdam will dismiss with prejudice the action against CO and Mayer Central Building Corp.8. New Amsterdam will fulfill the obligations of CO in connection with the eight construction contracts recited above, in accordance with its obligation as surety.9. New Amsterdam will release COINC and CORP from their cross-indemnity agreements.10. New Amsterdam will release CO and CORP from their cross-indemnity agreement, except as to five bonds executed in connection with five contracts, none of which are included among the eight construction contracts recited above.11. CO and petitioner jointly and severally agree to pay to New Amsterdam (1) amounts expended by New Amsterdam pursuant to bonds issued in connection with the 35 eight contracts recited at the beginning of the agreement, (2) all amounts for which CO is obligated under its separate indemnity agreements, 4 and (3) interest on all of said amounts at the rate of 4 percent per annum.326 12. All amounts due from CO and petitioner on the above indemnity obligation will be paid in five semi-annual installments, beginning 5 years after the date of this agreement.Prior to the signing of the January 20 indemnity agreement, but contemporaneous with the negotiation of the agreement, the partners of HIN agreed, first, to dissolve 5 the partnership and distribute certain properties "owned by the partnership" to the individual partners in accordance with the following schedule:Percentage interest distributed to:PropertyPetitionerIngersollNaisbitt1. Esso Station land at NE cornerof Patrick Henry Dr. and ArlingtonBlvd., Fairfax Co., Va65.620.014.42. Hot Shoppe land at SE corner ofPatrick Henry Dr. and ArlingtonBlvd., Fairfax Co., Va65.620.014.43. Foster Tract between ArlingtonBlvd. and South St., Fairfax Co.,Va65.620.014.44. Parcel 7 of Willston South, atSW corner of Patrick Henry Dr., andArlington Blvd., Fairfax Co., Va65.520.014.45. Parcel 8 of Willston South, FairfaxCo., Va18.047.534.56. Medical Clinic land, Houston, Tex65.620.014.47. Mohave Property, Mohave Co., Ariz1008. Palomas Ranch Property, Yuma andMaricopa Counties, Ariz1009. Eagle Tail Ranch, Yuma andMaricopa Counties, Ariz10010. South PhoenixProperty, Phoenix,Ariz10011. Casa Grande Property, Pinal Co.,Ariz10012. Arizona Land Title Bldg., Tucson,Ariz10036 Second, the petitioner, Ingersoll, and Naisbitt exchanged interests in certain parcels of land, including those six parcels listed above as not owned 100 percent by petitioner. Petitioner gave up his interest in part of the "Esso Station land" and in three tracts near land owned by Naisbitt off Arlington Boulevard in Fairfax County, Va.6 In return, petitioner received the interests of Ingersoll and Naisbitt in the remaining portion of the "Esso Station land," the "Hot Shoppe land," the "Foster Tract," "Parcel 7 of Willston South," "Parcel 8 of Willston South," the "Medical Clinic land," and the "Shirley Highway Property." Both the dissolution/distribution and the exchange of interests occurred pursuant to agreements dated January 1, 1961.37 Shortly after the signing of the January 20 indemnity agreement, the petitioner, Ingersoll, and Naisbitt agreed to a separation of CO from COINC and CORP. The petitioner received all the stock in CO -- heretofore held by COINC, which was in turn owned by all three of the partners. Ingersoll and Naisbitt were left with all the stock in COINC and thus with the ownership of both COINC and CORP. As a part of this "settlement," the following assets, worth at least $ 555,000, were transferred from COINC and CORP (through 327 COINC) to CO: The Papago Farms Property, the Palomas Ranch Property, the Hall-Morrison Property, the Charleston Claims, a life insurance policy on petitioner's life, and accounts receivable due from New Amsterdam. In return, COINC received additional stock in CO. Evidently these shares, in addition to all other shares of CO stock held by COINC, were distributed to petitioner in redemption of his shares in COINC. This separation was effective as of December 31, 1960, though not agreed to until January 26, 1961. After the separation there were virtually no assets left in COINC and CORP, and both companies became inactive. Ingersoll and Naisbitt terminated38 their relationship with CO, and petitioner resigned his offices with COINC and CORP.After the execution of the indemnity agreement, CO went about its construction business. Petitioner directed the affairs of the company as its president and principal managing officer. During each of the years 1961, 1962, and 1963, he received $ 12,000 per year in salary. For 1964, 1965, and 1966 he received no salary. In 1967 he received a salary of $ 9,500. Petitioner's wife received $ 4,800 as salary in 1963.As of January 1, 1960, CO was, however, insolvent in that liabilities exceeded assets by approximately $ 530,000, and the company was unable to meet its debts as they matured. At the end of calendar year 1962, CO had a net operating loss of $ 677,000. Since CO had income amounting to $ 457,000 in 1964, this loss was carried forward.In accordance with the bonding arrangement and its agreement with petitioner and CO, New Amsterdam made payments on behalf of CO. Although New Amsterdam originally anticipated having to pay out $ 1 to $ 1.5 million, the total amount of the payment was not determined until 1964 or 1965. Ultimately it paid out only $ 597,430.44.Petitioner, pursuant to the39 January 20 indemnity agreement, paid the following amounts to New Amsterdam: $ 237,434.46 in 1966, $ 121,749.22 in 1967, and $ 238,246.76 in 1968. The money came in large part from the sale of the Shirley Highway Property in 1964. Petitioner then deducted one-half of these amounts, that is, $ 118,717, $ 60,875, and $ 119,123, in 1966, 1967, and 1968, respectively, as "losses pursuant to Indemnity Agreement of 1/20/61." The remaining halves were treated as loans to CO by petitioner and as accounts payable by CO. 7In 1963, petitioner organized the Seth Horne Development Corp. under the laws of the State of Arizona to perform real estate development 328 work. In March 1967, CO was merged into Seth40 Horne Development Corp., and the latter adopted the former's name -- James Stewart Co. (We will refer to this Arizona version of CO as CO(ARIZ).) At all pertinent times the petitioner was the majority shareholder of CO(ARIZ).The total assets, liabilities, capital, and surplus (or deficit) of CO and its successor, CO (ARIZ), as of 1960 through 1967 as reflected in its returns, were:12/31/6012/31/6112/31/6212/31/63 1Total assets$ 947,212$ 1,651,782$ 1,761,341$ 3,591,409Total liabilities$ 1,479,531$ 1,675,044$ 1,876,291$ 3,162,935Capital stock25,000580,000580,000580,000Paid-in capitalSurplus (deficit)(557,319)(603,262)(694,950)(151,526)Total liabilities andcapital947,2121,651,7821,761,3413,591,40912/31/6412/31/6512/31/6612/31/67Total assets$ 2,825,849 $ 2,772,814 $ 2,779,001$ 3,663,941Total liabilities$ 2,568,189 $ 2,357,178 $ 1,975,541$ 3,042,209Capital stock580,000 580,000 580,000605,000Paid-in capital237,434179,592Surplus (deficit)(322,340)(164,364)(13,974)162,860)Total liabilities andcapital2,825,849 2,772,814 2,779,0013,663,94141 The increase in capitalization from $ 25,000 to $ 580,000 reflects the treatment of the transfer of assets from COINC to CO as a purchase of additional shares.Stewart-Southern, Inc. (Southern), was a California corporation which was organized in 1955 and, in 1961, was owned 50 percent by petitioner, his relatives, and his friends (the Horne group) and 50 percent by outsiders. In August 1961, CO purchased the stock of the Horne group in Southern for $ 441,303.75. In March 1963, CO bought the remaining stock for approximately $ 450,000. On June 14, 1963, Southern was liquidated and its assets transferred to CO. By far the most important of these assets was a piece of property in San Diego, Calif., known as the Rose Canyon Warehouse, having a book value in excess of $ 2 million. Also in June 1963, CO gave to petitioner a fourth mortgage on the Rose Canyon Warehouse. 8 It was provided, however, that the mortgage would be null and void if the mortgagor, CO, paid New Amsterdam the sum of $ 404,144 according to the terms and 329 conditions of the indemnity agreement between petitioner and New Amsterdam.42 At this time, June 1963, a costly suit of the Papago Indian Tribe was threatened against CO. The reason for giving the fourth mortgage to petitioner was to protect the property from execution in the event a future lawsuit was lost.The merger agreement between CO and Seth Horne Development Corp., leading to the creation of CO (ARIZ), provided, among other things, for the petitioner to be compensated for the release of the fourth mortgage by the receipt of additional shares in Seth Horne Development Corp. (soon to be CO (ARIZ)). A release was necessary in order to obtain refinancing on the property. The mortgage was released on or about June 30, 1967. At that time there remained less than $ 450,000 of indebtedness on the Rose Canyon Warehouse.At all times from 1966 to 1968, CO and its successor, CO (ARIZ), had a net worth in the accounting sense (excess of assets over liabilities) of over $ 600,000, and in 1971 its net worth was approximately $ 5 million.Respondent disallowed the claimed losses with this explanation:The deductions of $ 118,717.00, $ 60,875.00, and $ 119,123.00 which you claimed for the taxable years 1966, 1967 and 1968 respectively as indemnity loss resulting43 from transfers of those amounts to the New Amsterdam Casualty Company for or on behalf of The James Stewart Company, [CO] * * are disallowed. It is determined that the funds transferred represented contributions to capital rather than losses incurred in a transaction entered into for profit. If, however, it is found that such transfers were loans, it is determined that a bad debt deduction is not allowable under Section 166 of the Internal Revenue Code because it has not been established that the debt became worthless in the taxable year in which the deduction was claimed. If, however, it is found that such transfers were loans which became worthless in the taxable year in which the deduction was claimed, it is determined that the debt was a non-business bad debt since the debt was a personal loan and was not created in connection with your trade or business. In the latter event, the losses of $ 118,717.00, $ 60,875.00 and $ 119,123.00, respectively, are subject to the limitations of Section 1211 of the Internal Revenue Code.OPINIONIn late 1960 the petitioner, Seth Horne, held a majority interest in a three-man partnership, HIN. Petitioner also held interests in the Shirley44 Highway Property, the Hall-Morrison Property, and the Palomas Ranch Property. The three partners, as individuals, owned all the stock of COINC, in proportion to their respective interests in HIN. COINC, in turn, owned two subsidiaries, CORP and CO. CORP and CO paid management fees to COINC, and COINC paid management fees to HIN. The principal business of HIN was the 330 holding and development of real estate, including the performance of construction jobs. Petitioner's business, as of 1960 and early 1961, was the same as that of the partnership.Beginning in 1958 and continuing through 1960, the three corporations incurred large operating losses. For its taxable year ended December 31, 1960, CO alone had a net operating loss of $ 539,090.21, inclusive of loss carryovers.In the summer of 1960, CO notified its bonding company, New Amsterdam, that it could not complete certain contracts and that the bonding company would have to step in. New Amsterdam, upon discovering that the three corporations were in severe financial trouble, asked the three stockholders of COINC to become personally liable for amounts paid on the surety bonds. Petitioner's fellow stockholders (and45 partners) refused. Petitioner, however, agreed to indemnify the bonding company in order to protect his credit reputation and thus his business as a developer.It was then agreed among the parties -- the petitioner, his partners, and the bonding company -- (1) that petitioner would obtain clear title to the Shirley Highway Property and transfer it to a trust as security for his (the petitioner's) promise to indemnify New Amsterdam; (2) that COINC and CORP (through COINC) would transfer certain properties and accounts receivable having a fair market value in excess of $ 555,000 to CO; (3) that petitioner's stock in COINC would be completely redeemed in exchange for all the stock in CO; (4) that COINC, CORP, and the other two shareholders/partners would not be liable to New Amsterdam; (5) that petitioner would indemnify New Amsterdam. Among the partners it was also agreed that HIN would be dissolved; that certain properties would be distributed to the partners, who would then hold some properties as cotenants; and that they would exchange interests in those parcels held in cotenancy so that petitioner would own certain parcels "free and clear." All of the above was accomplished. 46 Afterwards, the former partners went their separate ways. The petitioner rebuilt CO's construction business and, when the losses on the bonds were established, reimbursed New Amsterdam. Upon the advice of counsel the petitioner treated one-half of his indemnity payments as loans due from CO and one-half as ordinary losses. He has collected some money from CO, but not yet one-half of the amounts paid. The Commissioner disallowed the claimed loss deductions.The petitioner, through his able counsel, takes a shotgun approach. He contends that the amounts in question are deductible under section 165(c) (1) and (2) or, alternatively, under section 212 or, perhaps 331 more appropriately, under section 162. He argues that section 166, Putnam, 9 and Generes10 are inapplicable.Respondent argues as follows: First, the losses on the indemnity47 agreement are part of the purchase price of CO's stock. Second, the petitioner suffered no losses. He was adequately compensated for the indemnity payments that he made. Third, if the losses are deductible at all, they are deductible only under section 166. He contends that the petitioner must lose under section 166, however, because the debts in question are not worthless. Finally, he claims that if the debts are worthless, they are nonbusiness rather than business bad debts. 1148 To begin with, we disagree with respondent that the losses on the indemnity agreement must be treated as a part of petitioner's basis in the CO stock. While the facts of the sorting-out process which followed the corporations' financial crisis are somewhat confusing, we are convinced, after carefully reviewing them, that petitioner's promise to indemnify New Amsterdam was not partial consideration for the subsidiary's stock, which Naisbitt and Ingersoll agreed would be transferred from COINC to petitioner in exchange for petitioner's COINC stock. Naisbitt and Ingersoll were never personally liable to New Amsterdam as indemnitors or guarantors of any of the corporations' debts; therefore, the exchange of stock was not conditioned on petitioner's indemnity promise as consideration for New Amsterdam's promise to release Naisbitt and Ingersoll. In other words, there was no three-way agreement. Also Naisbitt and Ingersoll were not purchasing the release of COINC and CORP from their cross-indemnity agreements. It is apparent that both corporations, after having transferred their assets to CO, would be abandoned. Furthermore, there is no indication that New Amsterdam insisted upon 49 the reorganization (petitioner did this) or that the transfer of assets from COINC and CORP to CO depended upon petitioner's entering into the agreement. Cf. Estate of McGlothin v. Commissioner, 370 F. 2d 729 (C.A. 5, 1967), affirming 44 T.C. 611">44 T.C. 611 (1965); Albert J. Harvey, Jr., 35 T.C. 108 (1960).In Estate of McGlothin v. Commissioner, supra, the taxpayer, a stockholder of P corporation, guaranteed the market value of certain 332 assets owned by P as part of a merger between another corporation and P. His losses on the guaranty were treated as capital expenditures. There it was found that the guaranty agreement was a critical condition necessary for the acquisition of the other corporation's stock by the taxpayer. Here we find, to the contrary, that the indemnity agreement, though contemporaneous with, was not consideration for, the stock received in the reorganization.The case of Albert J. Harvey, Jr., supra, is even farther afield. In Harvey, the taxpayer was an employee, director, and major shareholder of H&O50 corporation. H&O being in need of funds, the taxpayer requested a friend to personally guarantee a loan from a bank to H&O. In consideration for the friend's guaranty, all the shareholders, including the taxpayer, transferred one-half of their stock to the friend. The taxpayer then agreed to indemnify the friend against any loss by reason of the latter's guaranty of the loan. In consideration for this agreement to indemnify, the friend assigned to the taxpayer all the H&O stock which he, the friend, had previously acquired in return for his guaranty. H&O went bankrupt; the friend paid off on his guaranty; and the taxpayer paid the friend in accordance with the indemnity agreement. On these facts we held that the losses on the indemnity agreement were part of the purchase price of the stock received from the friend:The net effect of the entire transaction * * * was that petitioner, being a substantial shareholder and director of H & O, was able to obtain additional funds for H & O by pledging his property and in return he received stock of H & O. In substance, this transaction constitutes an acquisition of H & O stock by petitioner for his guaranty of the H & O loan. * * 51 * * * Petitioner, by his indemnity agreements, assumed a contingent liability and thus acquired the H & O stock without making any immediate payment therefor. [Albert J. Harvey, Jr., supra at 112-113.]We find no such tic-for-tac consideration in this case.We also disagree with the contention that petitioner was adequately compensated by CO for the amounts paid on the indemnity agreement and that, therefore, he suffered no losses. Respondent points to the fact that in 1963 petitioner was given a fourth mortgage on a warehouse in southern California. Later, the petitioner released the mortgage in order to help CO's successor obtain financing, receiving in return additional shares in the successor. Petitioner's explanation is that the fourth mortgage was of indeterminable value and was given simply to further protect the property from execution in connection with a foreseeable lawsuit. The facts are laid out in sufficient detail in our Findings of Fact. Because we believe the testimony given on petitioner's behalf, 333 we find that the fourth mortgage was not compensation for petitioner's indemnity losses.Turning to the sections of 52 the Code argued by the parties, we think it best to proceed section by section.Section 162. -- Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred in carrying on any trade or business. For this section to be applicable to these facts the petitioner must show, among other things, that he was in a business -- herein the real estate development business -- to which the payments might "proximately" relate, that the payments were not Welch v. Helvering12 type capital payments made to purchase a good name, and that he did not stand as a creditor in relation to his principal, CO, after making payment. Although respondent attempts to characterize petitioner's business as that of a corporate executive and points to testimony to the effect that petitioner did not engage in any business on an individual basis so long as he was a member of HIN partnership, the partnership's business and hence, in this case, the petitioner's business was real estate development -- from acquisition of land, to construction of improvements, to management of the property. Since he was in the real estate development business before undertaking the indemnity53 liability and remained in that business thereafter, the disputed amounts cannot be said to be capital expenditures to acquire goodwill. Compare Welch v. Helvering, 290 U.S. 111 (1933); Falstaff Beer, Inc. v. Commissioner, 322 F. 2d 744 (C.A. 5, 1963); Carl Reimers Co., Inc. v. Commissioner, 211 F. 2d 66 (C.A. 2, 1954), with Samuel R. Milbank, 51 T.C. 805 (1969); L. Heller & Son, Inc., 1109">12 T.C. 1109 (1949); Scruggs-Vandervoort-Barney, Inc., 779">7 T.C. 779 (1946); Edward J. Miller, 37 B.T.A. 830">37 B.T.A. 830 (1938). The question which remains is whether upon payment to the bonding company in fulfillment of the indemnity agreement, petitioner became entitled to reimbursement from CO or, restated, whether the Putnam case and section 166 apply. The answer would ordinarily lie in State statutory or case law. Santa Anita Consolidated, Inc., 50 T.C. 536">50 T.C. 536, 559-560 (1968). See also Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956);54 Bert W. Martin, 52 T.C. 140">52 T.C. 140, 143 (1969), affirmed per curiam 424 F. 2d 1368 (C.A. 9, 1970). In this case, however, the parties have not cited, and we have not discovered, any dispositive Arizona law. Nevertheless, upon consideration of the general case law, treatises, and restatements, we conclude that the correct answer is that the petitioner was actually both an indemnitor and a guarantor; that he did acquire a "remedy over" against CO, his and the bonding company's principal, and that this "remedy over" represents a debt falling within the provisions of section 166. See United States v. Hoffman, 423 F. 2d 1217334 (C.A. 9, 1970), for the proposition that an indemnitor in a four-party indemnity situation is to be treated the same as a guarantor. See generally, United States v. Generes, 405 U.S. 93">405 U.S. 93 (1972); Reid v. Pauly, 121 Fed. 652 (C.A. 9, 1903).55 A guarantor is one who promises either that another will perform his duty, or that, if another does not perform his duty, he will, non-performance by the other being a condition precedent to the guarantor's duty to pay. In the broader sense of the word "surety," a guarantor is also a surety; and, for the purposes of this discussion, an indorser is like a guarantor. An indemnitor is one who promises to hold another harmless from loss in respect to an obligation to a third person. "The great difference between the two [a guarantor and indemnitor] lies in the character of the promisee. In * * [guaranty] the promise runs to an obligee * * , present or prospective. In indemnity the promise runs to an obligor * , present or prospective." Simpson, Law of Surety-ship 28 (1950). Whether a party is a guarantor or an indemnitor or both depends upon an analysis of the legal character of the actors and their obligations, not the terminology used. In the four-party indemnity situation, there is, for example, a principal-contractor, a creditor-obligee, a surety (or guarantor) -bonding company, and an indemnitor-shareholder. The principal owes the creditor-obligee money or, 56 more likely, some type of performance. The surety (or guarantor) promises the creditor-obligee that he will pay or perform if the principal does not. Clearly, in relation to the creditor-obligee, the surety (or guarantor) is an obligor. As a guarantor, however, he is entitled as a matter of law to be reimbursed by his principal; in this respect, he is also an obligee. The indemnitor promises the surety (or guarantor) that he will secure him against any loss on his obligation to the creditor-obligee. In this light the indemnitor is a true indemnitor since his promisee, the surety (or guarantor), is an obligor. But his promisee is also an obligee, vis-a-vis the principal; and, in this other light, the indemnitor is also a guarantor, with all the rights and privileges of a guarantor. For instance, the so-called indemnitor in the four-party indemnity situation is entitled to subrogation to the rights of the surety (or guarantor) against the principal, i.e., any rights of the creditor-obligee against the principal acquired through subrogation and any right to reimbursement. "Much of the difficulty and confusion that exists in the cases in distinguishing between the contract of indemnity57 and the contract of suretyship [or guaranty] lies in the common failure to recognize the fact that the former is always accompanied by * * the latter whenever the four-party indemnity situation is involved." Simpson, supra at 30; Restatement, Security, sec. 96. Thus, petitioner, the indemnitor in the above illustration, was as much a guarantor as an indemnitor. It is now well established that a guarantor, upon payment, stands in a 335 creditor-debtor relationship with his principal. In this particular case the petitioner was subrogated to the rights of the bonding company against the corporation, rights which the bonding company acquired through subrogation from the creditors for whose benefit the bonds were executed. It is equally well established that given such a creditor-debtor relationship, the guarantor, here the petitioner, must look to the bad debt provisions of section 166 for the deduction of related losses. And there is no doubt that the debt arising out of a guarantee that has been performed is a debt within the meaning of that term as used in section 166. Putnam v. Commissioner, supra.13 See also Robert E. Gillespie, 54 T.C. 1025">54 T.C. 1025, 1031 (1970),58 and the cases cited therein.59 In United States v. Hoffman, supra, the taxpayers, owners of an electric contracting corporation, had indemnified the bonding company which wrote bonds for the corporation and had had to make good. They claimed tax refunds for the amounts lost on the ground that these were losses deductible under section 165(c)(2). The District Court held for the taxpayers, stating (266 F. Supp. at 886):Putnam is not in point. Unlike Putnam, the Hoffmans were indemnitors. An indemnitor has a primary obligation to the creditor and he is not subrogated to the creditors' rights. See: Howell v. Commissioner of Internal Revenue, 8 Cir. 1934, 69 F.2d 447">69 F. 2d 447.The Court of Appeals for the Ninth Circuit reversed, relying upon Stratmore v. United States, 420 F. 2d 461 (C.A. 3, 1970), a case involving guarantors. "That the Stratmores were guarantors and the Hoffmans were indemnitors is not a persuasive distinction between the two cases." United States v. Hoffman, supra at 1218. The principal of Putnam was applied. Thus the Hoffman60 case treats indemnitors in a four-party situation like guarantors.By far the most in-depth judicial discussion of the problem appears in Chief Judge Andrews' opinion in Jones v. Bacon, 40 N.E. 216">40 N.E. 216 (N.Y. Ct. App. 1895), affirming 25 N.Y. Supp. 212 (1893). In that case the indemnitor promised to hold the plaintiff harmless if he, the plaintiff, 336 would guarantee the debt of the principal to a bank. Upon the principal's default the plaintiff paid the required amount to the bank, released the principal, who was insolvent, and sued the indemnitor on the indemnity agreement. The indemnitor defended on the ground that the release defeated the plaintiff's right of action. The court so held, reasoning that but for the release, the indemnitor would have been subrogated to the rights of the indemnitee against his principal. The court said (40 N.E. at 216):The indemnitor of the plaintiff, on restoring to him this sum in performance of the contract of indemnity, would be entitled to be substituted to the claim of the plaintiff against Kingsbury [the principal]. This stands upon the most obvious61 principles of natural justice. * * * There was no privity of contract between the indemnitor and Kingsbury, but there was between the plaintiff [the indemnitee-guarantor] and Kingsbury. On paying the plaintiff what he had been compelled to pay for Kingsbury, pursuant to the contract of indemnity, the indemnitor would stand as the equitable assignee of the plaintiff of the obligation of Kingsbury to him. * * See also Aetna Casualty Co. v. Phoenix Co., 285 U.S. 209">285 U.S. 209, 214 (1932). 1462 Since it is our view that a debtor-creditor relationship did arise, section 162 cannot apply. E.g., Oddee Smith, 55 T.C. 260">55 T.C. 260, 267 (1970), remanded on another issue 457 F.2d 797">457 F.2d 797 (C.A. 5, 1972); Josef C. Patchen, 27 T.C. 592">27 T.C. 592, 600 (1956), affirmed in part and reversed in part on another issue 258 F.2d 544">258 F.2d 544 (C.A. 5, 1958). See and compare Samuel R. Milbank, supra, where no debtor-creditor relationship arose.Section 165. -- Section 165(c) provides a deduction, in the case of individuals, for losses incurred in a trade or business or losses incurred in a transaction entered into for profit. This provision cannot be relied upon where section 166 is applicable. Spring City Co. v. Commissioner, 292 U.S. 182 (1934) (involving sec. 234(a)(4) and (5) of the Revenue Act of 1918, 40 Stat. 1077, predecessors of sec. 166 and 165); Putnam v. Commissioner, supra (decided under the Internal Revenue Code of 1939); Inman-Poulsen Lumber Co. v. Commissioner, 219 F. 2d 15963 (C.A. 9, 1955) (also decided under the Internal Revenue Code of 1939).Section 212. -- Section 212 allows as a deduction all the ordinary and necessary expenses paid or incurred for the production or collection of income and for the management, conservation, or maintenance of 337 property held for the production of income. Petitioner maintains that real estate development was his source for the production of income and that that source would have been impaired if he had not agreed to enter into the indemnity agreement with the bonding company. In addition, he says that his actions helped preserve CO, the property from which he derived his income. It is unnecessary to analyze these arguments in light of the facts since petitioner, whether he knew it or not, had a fixed, readily assertable right to payment by CO. This one fact alone makes section 212 inapplicable. Estate of Elmer B. Boyd, 28 T.C. 564">28 T.C. 564, 566 (1957). Cf. Electric Tachometer Corp., 37 T.C. 158 (1961).Section 166. -- Section 166(a) provides that there shall be allowed as a deduction any debt which becomes wholly worthless within the taxable64 year. Subsection(d) provides, with respect to nonbusiness debts, that any loss resulting therefrom shall be treated as a short-term capital loss. Paragraph 2 of subsection(d) states that "the term 'nonbusiness debt' means a debt other than -- (A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or (B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business."As we have previously indicated, it is our opinion that this is basically a section 166 case. We might add that we do not think that petitioner should be viewed as a mere volunteer, nor that his right to payment by CO should be characterized as simply an unadjudicated claim. See and compare Phillip H. Schaff, 46 B.T.A. 640">46 B.T.A. 640 (1942).It is unnecessary for us to decide the question of whether the losses of the petitioner were business or nonbusiness bad debt losses because we find that the debts were not worthless in the year claimed. It appears from the testimony not only that some amounts -- less than one-half the total amount -- have been repaid, but also that CO was financially able to repay additional65 amounts. CO never went bankrupt. Indeed, in each of the 3 years before us, CO's net worth exceeded $ 600,000. The fact that there were operating losses does not contradict this conclusion. Pachella's Estate v. Commissioner, 310 F.2d 815">310 F.2d 815 (C.A. 3, 1962), affirming 37 T.C. 347">37 T.C. 347 (1961). See Higgenbotham-Bailey-Logan Co., 8 B.T.A. 566">8 B.T.A. 566 (1927).To reflect the conclusions reached herein,Decision will be entered under Rule 50. Footnotes1. The partnership's returns for 1952 and 1953 state that its principal business activity was the renting of business furniture. Its returns for 1954 through 1960 state that its principal business activity was the performance of executive services for COINC, discussed in the text below. These statements are obviously not controlling. Furthermore, respondent apparently does not object to petitioner's characterization of the partnership's business as real estate development.↩1. After payments to partners.↩2. Including sec. 1231 gains.↩2. The details of this transaction are unclear. It appears, however, that the land was held in cotenancy by the petitioner, Ingersoll, and Naisbitt, and that petitioner was in fact acquiring title from them.↩3. Evidently, COINC occasionally helped in the performance of contracts taken over by New Amsterdam, as surety, from other construction companies.↩4. This apparently includes amounts expended pursuant to the bond issued in connection with the Papago Indian Project.↩5. While we note that the pertinent agreement is titled "Memorandum Agreement of Partial Liquidation of Partnership Assets," we accept the parties' characterization of this event as a complete dissolution of the partnership.↩6. The three tracts apparently did not come out of the partnership.↩7. At first, in 1966, CO treated the entire amount paid by the petitioner to the bonding company during that year (i.e., $ 237,434.46) as paid-in capital. This was corrected the next year, so that one-half of the amount paid to the bonding company was treated as paid-in capital and one-half as an account payable.↩1. Per amended return.↩8. The three prior mortgages existed as follows: The first mortgage, dated Sept. 1, 1957, was executed in favor of the Bank of America Trust & Savings Association to secure payment of promissory notes totaling $ 3,500,000. It is not known to what extent these notes were paid. The second mortgage, dated Mar. 28, 1963, went to the "outsiders," the former owners of 50 percent of Southern, to secure payment of three purchase notes amounting to $ 750,000, exclusive of interest. The third mortgage, dated June 4, 1963, went to the Horne group in connection with the purchase of Southern to secure payment of notes worth $ 441,303.75.↩9. Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82↩ (1956).10. United States v. Generes, 405 U.S. 93↩ (1972).11. The tax consequences of the corporate reorganization are not directly at issue in this case.Respondent does not argue that the losses, if allowed, are capital losses because they are an outgrowth of the earlier, essentially capital transaction. See Arrowsmith v. Commissioner, 344 U.S. 6">344 U.S. 6 (1952); Wener v. Commissioner, 242 F. 2d 938 (C.A. 9, 1957); Rees Blow Pipe Manufacturing Co., 41 T.C. 598">41 T.C. 598 (1964), affd. 342 F. 2d 990 (C.A. 9, 1965). Nor does he argue that the indemnification of the bonding company and the losses pursuant thereto represent some sort of unusual contribution to capital. See J. Meredith Siple, 54 T.C. 1↩ (1970), and cases cited therein.12. Welch v. Helvering, 290 U.S. 111">290 U.S. 111↩ (1933).13. The deduction for bad debts first appeared in the Act of Mar. 2, 1867, as an amendment to the Act of Mar. 3, 1865, ch. 78, 13 Stat. 471, 479, which in turn amended sec. 117 of the Act of June 30, 1864, ch. 173, 13 Stat. 223, 281. ("* * * and in addition to one thousand dollars exempt from income tax as hereinbefore provided. * * * debts ascertained to be worthless * * .") In the Revenue Act of 1918, the deduction appeared in sec. 214(a)(7): "Debts ascertained to be worthless and charged off within the taxable year * *." Revenue Act of 1918, ch. 18, 40 Stat. 1057, 1067. In connection with the 1918 provision, the following floor discussion took place:"Mr. Graham of Illinois. How about losses caused by indorsements on accommodation paper? That is, where one signs as security for another and makes a loss in that way, does the bill take care of that, so that such a loss can be deducted?"Mr. Kitchin. If he charges it off and does not hold the other man responsible for it, it can be deducted."56 Cong. Rec. App. 678. The remaining history of the deduction up to and including sec. 23(k), I.R.C. 1939, is traced in fn. 9 of Putnam v. Commissioner, supra↩ at 85.14. Because of our choice as to the disposition of this case, we need not consider two other grounds for finding a creditor-debtor relationship between petitioner and CO. (1) It is argued that as a general rule indemnitors should be treated as guarantors for sec. 166 purposes. Compare United States v. Hoffman, 423 F. 2d 1217 (C.A. 9, 1970), and Jones v. Bacon, 40 N.E. 216">40 N.E. 216N.Y. (Ct. App. 1895), supra, with Howell v. Commissioner, 69 F. 2d 447 (C.A. 8, 1934). (2) It is argued that as a coindemnitor who was not directly benefited by the indemnification, the petitioner was entitled to 100-percent contribution from CO, the coindemnitor who was directly benefited, and that this represents a sec. 166 debt. But see Security Insurance Co. v. Johns-Manville Sales Corp., 442 P. 2d 555↩ (Ariz. Ct. App. 1968), for an example of how difficult it is to weigh the equities in such a case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620611/	Vaughn V. Chapman and Mildred E. Chapman, Petitioners v. Commissioner of Internal Revenue, RespondentChapman v. CommissionerDocket No. 6034-65United States Tax Court48 T.C. 358; 1967 U.S. Tax Ct. LEXIS 86; June 21, 1967, Filed 86 Decision will be entered under Rule 50. Petitioners made a contribution to the Missionary Dentist, Inc. (a.k.a. Worldwide Dental Health Service). Held, the contribution does not qualify for the additional 10-percent allowance for charitable contributions under sec. 170(b)(1)(A), I.R.C. 1954. Held, further, petitioners have not met their burden of proving that an expenditure for a garden party was motivated primarily by business rather than personal consideration and therefore such expense is nondeductible under sec. 262, I.R.C. 1954. W. Ewart G. Suffel, for the petitioners.Harold E. Patterson, for the respondent. Fay, Judge. Raum, J., concurs in the result. Dawson, J., concurring. Tietjens and Simpson, JJ., agree with this concurring opinion. Tannenwald, J., concurring. Hoyt, J., agrees with this concurring opinion. FAY358 Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1961 in the amount of $ 413.24.The issues for determination are (1) whether contributions made by petitioners to the Missionary Dentist, Inc. (a.k.a. Worldwide Dental Health Service), were made to a church, educational organization, or a hospital within90 the meaning of section 170(b)(1)(A) of the Internal Revenue Code of 19541 and (2) whether the expenses of a garden party given by petitioners are properly deductible as ordinary and necessary business expenses of Vaughn V. Chapman's dental practice.FINDINGS OF FACTSome of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.359 Vaughn V. Chapman (hereinafter sometimes referred to as Vaughn) and Mildred E. Chapman (hereinafter sometimes referred to as Mildred), husband and wife, filed a joint Federal income tax return for the calendar year 1961 with the district director of internal revenue at Tacoma, Wash. The residence of Vaughn and Mildred is in Seattle, Wash.During the year 1961, Vaughn was engaged in the practice of dentistry and Mildred was employed as91 a school teacher.In the taxable year 1961 petitioners made contributions to the Missionary Dentist, Inc. (a.k.a. Worldwide Dental Health Service) (hereinafter sometimes referred to as the Missionary Dentist), in the amount of $ 5,865.16. The sum of $ 5,061.11, which was equal to 30 percent of petitioners' adjusted gross income for 1961, was claimed by them as a charitable contribution deduction in their joint income tax return for that year.The Missionary Dentist is a religious and charitable organization which was incorporated in 1950. The organization was exempt from income taxation pursuant to section 101(6) of the Internal Revenue Code of 1939, 2 as a religious and charitable organization. It is interdenominational and is not affiliated with or subservient to any church group or denomination; rather, it is totally independent.92 The purpose of the Missionary Dentist, as stated in its articles of incorporation, is:The object of this organization shall be to care for the dental health of missionaries, religious workers and all others in the Mission Fields of the United States and foreign countries in need of dental care, to supply dentists, dental technicians and hygienists for Missionary Boards of various denominations and for independent Missionary Boards. The underlying object of this organization shall be the promotion of the Gospel of the Lord Jesus Christ, around the world, and the evangelization of the world on the basis of the principles of the Protestant Faith. This shall be a non-profit, religious, charitable and benevolent organization.In the United States, the organization conducts regular services and in addition provides various churches with speakers and literature concerning its objects.The organization's members are all trained in Bible and church work. Some are ordained ministers and others are seminary or Bible school graduates. The organization does not itself conduct a seminary or Bible school but, as it is interdenominational, seeks to draw upon 360 the graduates of other 93 Christian-Protestant schools for ministers and other trained personnel.According to its constitution, membership in the organization is limited to those, who, inter alia,(1) are members in full communion of an accredited Christian community;(2) have passed through an accredited dental school and have obtained a State license in some State of the United States or a license from a foreign country if deemed accredited by the board of directors; and(3) have some satisfactory spiritual preparation and personal experience with the lost such as shall meet satisfaction of the board of directors.The underlying function of the members of the organization is to preach the Gospel around the world, using dentistry as a means by which to contact people. In general, the organization sends its members in teams to foreign countries where they set up base clinics. While there, in addition to caring for the dental health of the area, the members conduct religious services and attempt to establish small indigenous churches among the people of the area. In one instance, they have set up a small school, located in Cameroun, Africa, where dentistry is taught.Finally, the members seek to improve94 the type of dental care available in foreign countries. This segment of the members' activity is usually confined to supervision of the local practitioners who are encouraged to practice in the base clinics.In addition to their contribution to the Missionary Dentist, petitioners also made contributions to various organizations totaling in amount $ 75. Respondent has stipulated that petitioners are entitled to deduct these contributions to the extent they do not exceed 30 percent of their 1961 adjusted gross income.Also in 1961 petitioners expended the sum of $ 89.50 in entertaining students and faculty members of the school at which Mildred taught. This entertainment was in the form of a garden party, which took place at their home.The primary purpose of the garden party was to enable Mildred to socialize with her students and colleagues. In addition, however, Vaughn's presence at the party gave him the incidental benefit of meeting persons who might constitute potential patients because in the normal course they would usually become aware of the fact that he was a member of the dental profession.On their joint Federal income tax return, this expenditure was first characterized95 as a requirement of Mildred's employment. Petitioners now suggest that the expenditure was more properly an expense of Vaughn's dental practice.361 OPINIONThe first issue for determination is whether the contributions made by petitioners to the Missionary Dentist qualify for the additional 10 percent of adjusted gross income allowance as provided for by section 170(b)(1)(A).Section 170(b)(1)(A) provides that in the case of an individual a contribution deduction will be allowed to the extent that the aggregate of such contributions does not exceed 10 percent of the taxpayer's adjusted gross income, if such contribution is made to:(i) a church or a convention or association of churches,(ii) an educational organization referred to in section 503(b)(2), or(iii) a hospital referred to in section 503(b)(5), * Petitioners contend that the Missionary Dentist meets each of the three above classifications and as such their contribution to it qualifies for the additional 10-percent allowance. Respondent, on the other hand, urges that the organization is neither a church, an educational organization, nor a hospital as those terms are defined in the statute and as such petitioners' 96 deduction is limited to the general 20-percent allowance contained in section 170(b)(1)(B).We are of the opinion that the Missionary Dentist does not qualify under either clause (i), (ii), or (iii) of section 170(b)(1)(A) as it is neither a church, an educational organization, nor a hospital within the intent of those clauses.Before proceeding further, it is appropriate to point out the particular limits of our present inquiry. We are not here concerned with the question as to what constitutes a "religion" within the purview of the first amendment of the Constitution; we are solely concerned with divining what Congress intended when it granted an additional 10-percent allowance for a special class of charitable contributions.Petitioners' initial and main contention is that the Missionary Dentist qualifies as a church or a convention or association of churches within the purview of clause (i).Respondent does not dispute the fact, nor could he, that this is a religious organization. We have no doubt whatsoever that the Missionary Dentist is a religious organization whose purpose and method of operation are both laudatory and worthy of public support, and we feel that its members97 are to be commended for their efforts. What respondent does contend is that not every religious organization is necessarily "a church or a convention or association of churches" within the purview of section 170(b)(1)(A) and that this organization, though admittedly religious, is not a church or a convention or association of churches.The phrase "church or a convention or association of churches" originated in the Revenue Act of 1950 in section 301(a) in relation to 362 the taxation of the unrelated business income of exempt organizations, the so-called Supplement U tax (section 421(b)(1), I.R.C. 1939, and presently sec. 511(a)(2)(A), I.R.C. 1954). S. Rept. No. 2375, 81st Cong., 2d Sess., p. 106, (1950), states:While churches, and associations or conventions of churches, * * * are exempt from the Supplement U tax, religious organizations are subject to such tax even though organized under church auspices. This is also true of organizations with charitable, educational, etc., purposes which are organized under church auspices. * * The phrase again appears in the Revenue Act of 1951 in section 402(b) amending section 1701 of the 1939 Code in relation to exemptions from 98 the excise tax on admissions. 3 In the original House version, an exemption from the tax was granted to religious institutions generally as had been the case under the original section 1701(a) prior to October 1, 1941. In the Senate, however, this exemption was limited to "a church or a convention or association of churches." In commenting on this amendment to the House version, the Senate Finance Committee report states:Under the House bill, as under section 1701 prior to October 1, 1941, the exemption from tax applies if the proceeds of the admissions inure exclusively to the benefit of religious * * * institutions. Your committee, however, proposes to limit the exemptions to certain defined classes * * * within these categories. Under the amendment proposed by your committee, religious institutions are restricted to churches or conventions or associations of churches. * * * [S. Rept. No. 781, Part 2, 82d Cong., 1st Sess., p. 68 (1951), 1951-2, C.B. 592.]The Senate amendments were eventually adopted, as section 402(b) (1)(A)(i) of the Revenue Act of 1951.99 In enacting the Internal Revenue Code of 1954, Congress enacted section 170(b)(1)(A)(i), the provision in question. In the House version of the bill, the phrase "churches or conventions of churches" was again employed with the additional phrase "or a religious order." See generally H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 25 (1954). The Senate, however, deleted the latter phrase in order to clarify the provision. S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 30 (1954), states:Your committee understands that "church" to some denominations includes religious orders as well as other organizations which, as integral parts of the church are engaged in carrying out the functions of the church whether as separate corporations or otherwise. It is believed that the term "church" should be 363 all inclusive. 4 To retain the phrase "or a religious order" in this section of the bill will tend to limit the term and may lead to confusion in the interpretation of other provisions of the bill relating to a church, a convention or association of churches. * * The Senate version was accepted by both Houses of100 Congress. See Conf. Rept. No. 2543, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 29 (1954).The House Ways and Means Committee also stated that:This amendment by your committee is designed to aid these institutions in obtaining the additional funds they need, in view of rising costs and the relatively low rate of return they are receiving on endowment funds. [H. Rept. No. 1337, supra.]It is our opinion, based upon the foregoing legislative history of the phrase "church or convention101 or association of churches," that indeed, as respondent contends, though every church may be a religious organization, every religious organization is not per se a church. Where Congress, in creating an additional allowance over and above the allowance for contributions to religious organizations, used a new word or phrase in the statute, it must reasonably be concluded that a different connotation was intended. In the circumstances of section 170(b)(1)(A)(i), we find that a more limited concept was intended than that denoted by the term "religious organization."It is our opinion that Congress did not intend that the word "church" be used in a generic or universal sense. We think that this conclusion is buttressed in particular by the fact that in explaining the deletion of the phrase "or a religious order" the concept of "church" appears to be synonymous with the concept of "denomination." In addition, phrases appearing throughout the quoted legislative history, such as "under church auspices" and "as integral parts of the church" lend credence to our view that the term is intended to be synonymous with the terms "denomination" or "sect" rather than to be used in any universal102 sense. This is not to imply, however, that in order to be constituted a church, a group must have an organizational hierarchy or maintain church buildings.We must now determine whether the Missionary Dentist is within the limits of this statutory definition. We are of the opinion that it is not "a church or convention or association of churches" within the intendment of section 170(b)(1)(A)(i).364 To summarize briefly the facts presented, the Missionary Dentist is an evangelical organization whose primary function is to spread the Gospel of Christianity throughout the world. It is interdenominational and seeks to draw its missionaries from established Christian-Protestant churches. It maintains neither a seminary nor a Bible school, yet many of its members are graduates of such schools. Its members are for the most part practicing dentists or technicians. It regularly conducts religious services and seeks to promote its missionary activity by taking part in the services of other organizations as well as through the normal advertising media. In order to accomplish its goal, to spread the Gospel of Christianity, it sends out evangelical teams to preach throughout the 103 world. These teams use dental services as the means by which they contact prospective converts to Christianity. These teams conduct religious services and urge the people to establish small indigenous churches in that particular locale. They do not attempt to promote membership in their own missionary organization.We think it apparent from this record that the organization in question is not of a type that could be said to be a denomination or sect. It is a group of missionary workers drawn from many Christian churches who give of their time and talents to spread universal Christian beliefs. All its members must be in full communion of an accredited Christian community in order to be affiliated with the organization. It is interdenominational and independent of any connection with the churches with which its members are affiliated. It does not seek converts other than to the principles of Christianity generally and if successful urges these converts to establish their own native churches.Petitioners urge that because the organization's members preach and conduct religious services they are within the statutory definition. We cannot agree. Though these are, without doubt, 104 functions normally associated with a church, this per se is not conclusive. The test as envisioned by Congress is, was the organization "a church" or an integral part of a church which is engaged in carrying out church functions. The Missionary Dentist is not a church. It is merely a religious organization comprised of individual members who are already affiliated with various churches. Nor is the Missionary Dentist an integral part of any church within the purview of respondent's regulations. See sec. 1.511-2(a)(3)(ii), Income Tax Regs. The record is clear that the organization is interdenominational, totally independent of, and therefore not an integral part of any church.Without going further, we are of the opinion that the record lends no support to any argument that the organization might qualify as 365 "a convention or association of churches," and petitioners have not so argued.Petitioners next urge that the Missionary Dentist qualifies as an educational institution within the purview of section 170(b)(1)(A)(ii). Section 503(b)(2) defines an educational organization for the purposes of section 170(b)(1)(A)(ii) as --(2) an * * * organization which normally maintains105 a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on;Though the record reveals that the Missionary Dentist operates one small school and seeks to "educate" local dentists, these are merely incidental activities. The major function of the organization, according to its articles of incorporation, is the evangelization of the world on the basis of the principles of the Protestant faith. This statement of religious purpose was further emphasized by the organization's president (Vaughn) at the trial of this matter. In explaining the purpose of the educational activity, he stated:Our purpose in doing this is to talk to them about Jesus Christ. If we didn't have the gospel in it we would fold up and quit. The whole thing is to make people acquainted with Jesus Christ and what he can do for them.We do not believe that section 503(b)(2) was intended to encompass an organization which is engaged in noneducational activity but which incidentally engages in some form of educational activity to further its major function. We, therefore, hold that the Missionary106 Dentist is not an educational organization within the purview of section 503(b)(2).Nor are we of the opinion that it can qualify as a hospital within the meaning of section 503(b)(5). Section 503(b)(5) defines a hospital as --(5) an organization the principal purposes or functions of which are the providing of medical or hospital care or medical education or medical research or agricultural research.The record does not reveal sufficient information to enable us to conclude that one of the principal purposes or functions of the Missionary Dentist is to provide medical or hospital care. We must, therefore, hold that petitioners have not met their burden of proof in this regard. The information which does appear in the record tends to militate against their position, for as petitioners state on brief, "The dental services performed provide just one of the means employed by our work to get them to hear the Gospel message." Petitioners have not shown that their dental activity in 1961 was one of the principal purposes or functions and because incidental activity is insufficient under section 503(b)(5)366 to characterize the Missionary Dentist as a "hospital," we must reject107 petitioners' contention.We, therefore, hold for the respondent on this first issue, namely, that a contribution to the Missionary Dentist does not qualify for the additional 10-percent allowance provided for in section 170(b)(1)(A).With regard to the second issue for determination, namely, the deductibility of the amount of $ 89.50, the cost of a garden party, we hold that this expenditure is not properly deductible as an ordinary and necessary expense of Vaughn's dental practice.Whether expenditures of this type are deductible as ordinary and necessary expenses of Vaughn's business within section 1625 is primarily a question of fact, Commissioner v. Heininger, 320 U.S. 467 (1943); James Schulz, 16 T.C. 401">16 T.C. 401 (1951), and the burden of proof is upon the taxpayers. Bennett's Travel Bureau, Inc., 29 T.C. 350 (1957). Petitioners must show that the purpose of the expenditure was primarily business rather than social or personal. James Schulz, supra.108 We are not satisfied that petitioners have met this burden. In fact, we feel that the entire record reveals to the contrary, namely, that the primary motivation was social and personal rather than business. We agree with petitioners that Vaughn may well indirectly profit in a professional sense from increasing his social contacts, but we are of the opinion, on the facts before us, including the circumstance that the expenditure was first characterized as pertaining to Mildred's occupation as a teacher, that the expenditure was primarily motivated by social considerations and as such it is not deductible. See sec. 262; 6James Schulz, supra;Louis Boehm, 35 B.T.A. 1106">35 B.T.A. 1106 (1937).Decision will be entered under Rule 50. DAWSON; TANNENWALDDawson, J., concurring: I agree with 109 the conclusions in this case, but I would like to add the following comments.I think the Missionary Dentist is not a "church" within the definition of that term as implied in section 1.511-2(a)(3)(ii), Income Tax Regs., which seems to me appropriate and reasonable. Cf. De La Salle Institute v. United States, 195 F. Supp. 891">195 F. Supp. 891, 900-906 (N.D. Cal., 1961). To be a "church" a religious organization must engage in "the ministration of sacerdotal functions and the conduct of religious worship" 367 in accordance with "the tenets and practices of a particular religious body." The Missionary Dentist, however worthy its cause and service might be, simply does not conduct religious worship according to the "tenets and practices of a particular religious body." It is interdenominational. It is not affiliated with any particular religious body. Its purpose is not to propagate the tenets or beliefs of a specific religious group. Moreover, proof is lacking as to the ministration of sacerdotal functions by members of the organization. Consequently, I believe it fails to qualify as "a church or a convention or association of churches" within the ordinary110 meaning of those terms.Tannenwald, J., concurring: I agree with the conclusion that the Missionary Dentist is neither a church nor a hospital nor an educational organization but I disagree as to some of the reasoning which has been adopted to support that conclusion.My main difficulty with the majority opinion stems from its definition of "church" as requiring an organizational structure in terms of a denomination or sect. Granted that Congress clearly intended that the word "church" have a restrictive meaning, I do not think that this should be the touchstone any more than I think that an organization must own or utilize buildings or other physical facilities to be so considered. In approaching the question of what Congress had in mind, we should take a common sense approach and posit our conclusion on the meaning of "church" in ordinary, everyday parlance.In this context, we should look not only at the purposes of the organization but the means by which those purposes are accomplished. Clearly, religious purposes and means are not enough. Otherwise there would have been no necessity for Congress to distinguish between a "religious organization" and a "church." There111 is no question but that propagation of the faith coincides with the purpose of a "church." But not every evangelical organization is a church in the sense with which we are concerned herein.In my opinion, the word "church" implies that an otherwise qualified organization bring people together as the principal means of accomplishing its purpose. The objects of such gatherings need not be conversion to a particular faith or segment of a faith nor the propagation of the views of a particular denomination or sect. The permissible purpose may be accomplished individually and privately in the sense that oral manifestation is not necessary, but it may not be accomplished in physical solitude. A man may, of course, pray alone, but, in such a case, though his house may be a castle, it is not a "church." Similarly, in my opinion, an organization engaged in evangelical activity exclusively through the mails would not be a "church."368 I recognize that my emphasis on spiritual togetherness as a characteristic of a "church" might well present problems if we were dealing with a constitutional question or if we were called upon to determine the philosophical, theological, or ecclesiastical112 refinements of the word. But we are called upon herein to deal with a very narrow -- indeed, prosaic -- question: Is the petitioner entitled for income tax purposes to an extra 10-percent deduction for contributions to a "church"?Applying the standards which I have delineated, it is my judgment that, on the record before us, the Missionary Dentist is not a "church" in the sense that Congress used the word. A sizable segment of its efforts to propagate the faith was performed on an individual basis. To be sure, it is stipulated that the Missionary Dentist conducted religious services, but the testimony in regard to such services was so general that the significance of those services in relation to the total activities of the organization cannot be determined. Moreover, petitioner cannot escape the fact that, irrespective of its purpose, a large part of the efforts of the Missionary Dentist was the furnishing of dental service, that this service was the ostensible vehicle for all its activities, and that its other activities, though considered important, were nevertheless accessorial. The degree to which the critical element of spiritual togetherness is missing is too large to113 enable us to accept petitioner's contention.Nor can the Missionary Dentist qualify as a "hospital." Here again, Congress intended that a restricted meaning be given to this word. Section 503(b)(5) specifies "an organization, the principal purposes or functions of which are the providing of medical or hospital care or medical education or medical research or agricultural research." Section 170(b)(1)(A)(iii) specifies, as far as is applicable to this case, "a hospital referred to in section 503(b)(5)." The dictionary definition of "hospital" is "an institution or place where sick or injured persons are given medical or surgical care." Webster's New International Dictionary (3d ed. 1961). Assuming that an outpatient clinic may qualify as a hospital ( sec. 1.170-2(b), Income Tax Regs.) and important as the care of teeth may be, a dental clinic simply does not fit the common, everyday meaning of "hospital." Yet, dental service is essentially all that the Missionary Dentist provided. The facts that on occasion a patient remained at the clinic because of travel necessitated by distances involved or that oral surgery was sporadically performed do not require a different conclusion.As 114 far as any claim that the Missionary Dentist was an "educational organization" is concerned, the simple answer is that the record herein, with the possible exception of one small school which constitutes a very minor part of its activities, is devoid of any evidence that "a regular 369 faculty and curriculum" was maintained which "a regularly enrolled body of pupils or students" normally attended. Sec. 503(b)(2). Footnotes1. Respondent has conceded that contributions made by petitioners to various organizations, totaling $ 75, qualify for the additional 10-percent allowance.↩2. Sec. 101(6) provides:SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS. (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation;↩3. Sec. 1701, though rendered inapplicable by sec. 541(b) of the Revenue Act of 1941, was reinstated by sec. 402(a) of the Revenue Act of 1951.↩4. Congress, in stating "that the term 'church' should be all inclusive," did so in the specific context of including within its scope "religious orders as well as other organizations which as integral parts of the church are engaged in carrying out the functions of the church." There is no indication whatsoever to suggest that the concept "church" be "all inclusive" to the point of encompassing all religious organizations and to so interpret this language would be to read it out of the context in which it was used.↩5. 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, * * *↩6. SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620612/	LARRY O. GILL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; QUILTING CREATIONS BY D.J., INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGill v. CommissionerDocket Nos. 20100-91, 20188-91United States Tax CourtT.C. Memo 1994-92; 1994 Tax Ct. Memo LEXIS 93; 67 T.C.M. (CCH) 2311; March 1, 1994, Filed 93 Decision will be entered under Rule 155. For petitioners: David J. Lewis and Mark J. Skakun. For respondent: Dawn Marie Krause. CHIECHICHIECHIMEMORANDUM FINDINGS OF FACT AND OPINION CHIECHI, Judge: Respondent determined the following deficiencies in, and additions to, petitioners' Federal income tax for the taxable years indicated: Additions to TaxYearSection Section PetitionerEndedDeficiency6651(a)16653(a)(1)Larry O. Gill12/31/86$ 15,617$ -- $ -- 12/31/8726,8411,401--12/31/889,109-- 455Quilting Creations4/30/868,371393--by D.J., Inc.4/30/8734,4438,611--4/30/8876,867-- --Additions to TaxSectionSectionSection Petitioner6653(a)(1)(A)6653(a)(1)(B)6661(a) Larry O. Gill$ 781 $ 3,904 2,144 6,710----2,277Quilting Creations4,649 --by D.J., Inc.8,148 8,6113,843 19,21750% of the interest due on the portion of theunderpayment attributable to negligence.Respondent determined that the entire amount ofeach underpayment was due to negligence.94 The issues for decision in these consolidated cases are: (1) Is Quilting Creations by D.J., Inc. (Quilting) entitled to certain depreciation deductions with respect to a house in Dundee, Ohio, and do certain amounts Quilting expended for that house constitute constructive dividends to Larry O. Gill (Gill)? We hold that Quilting is not entitled to those depreciation deductions and that those expenditures constitute constructive dividends to Gill. (2) Is Quilting entitled to claim certain deductions relating to a house in Bolivar, Ohio, in excess of those allowed by respondent? We hold it is not. (3) a. Is Quilting entitled to deduct as additional compensation certain contributions it made to Gill's individual retirement account and certain premiums it paid for life insurance policies on the lives of Gill and Debra Bell (Bell)? We hold that Quilting is entitled to deduct those amounts. b. Are Quilting's payments of premiums on a policy insuring Bell's life includible in Gill's income as constructive dividends or additional compensation to him? We hold that they are not. (4) Is Quilting entitled to deduct certain expenses it incurred relating to various race cars, and do 95 those expenses constitute constructive dividends to Gill? We hold that Quilting is entitled to deduct those expenses to the extent allowed herein and that they do not constitute constructive dividends to Gill to the extent stated herein. (5) Are petitioners liable for the additions to tax for negligence for each of the years at issue? We hold that they are to the extent stated herein. (6) Are petitioners liable for the addition to tax for substantial understatement of income tax for each of the years at issue except Quilting's taxable year ended April 30, 1986? We hold that they are to the extent stated herein. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioner Gill resided in Bolivar, Ohio, at the time he filed his petition. The principal place of business of petitioner Quilting at the time it filed its petition was Zoar, Ohio. Gill married Bell in 1978. Gill and Bell separated in 1985 and divorced on January 17, 1986. Gill has an eleventh grade education and no training or work experience in income tax matters. After Gill and Bell separated, Gill took some business classes. Petitioners' accountant, Harry Shaw (Shaw), prepared, or at96 least worked on and reviewed, each of the returns filed by Gill and Quilting for each of the years at issue. Bell performed the bookkeeping for Quilting until sometime in 1986. Thereafter, Quilting hired an employee to take over the bookkeeping. During the years at issue, Gill had no role in Quilting's bookkeeping and accounting, having relied on Bell, the employee of Quilting who replaced Bell as bookkeeper, and Shaw with respect to these matters. Bell started Quilting as a sole proprietorship in 1979. Gill originally worked in the business on a part-time basis, but was fully involved in the business by 1982. Quilting was incorporated under the laws of Ohio on August 6, 1984. At all material times, Quilting was engaged in the design and manufacture of stencils. The stencils designed and manufactured by Quilting are used for quilts, arts and crafts, and clothing. Prior to the time Bell and Gill separated in 1985, Bell owned the majority of the Quilting stock and made most of the business decisions relating to Quilting's operations. 2 Following their separation, Gill became, and remained throughout the years at issue, the sole shareholder of Quilting. During those years, 97 Gill was the sole officer of Quilting and was in charge of running the business. In the early years of its operations, Quilting marketed its products directly to consumers through retail trade shows throughout the United States. By 1985, Quilting had phased out marketing its products at retail trade shows and was marketing only at wholesale trade shows where it sold its products to retailers and large corporations. During the years 1986 through 1988, Quilting attended wholesale trade shows on a worldwide basis. During those years, about 10 percent of Quilting's customers were located in Ohio. For the years indicated, Quilting had the following amounts of total gross receipts and gross receipts from Ohio that were included in total gross receipts: Taxable YearGross ReceiptsEnded Gross ReceiptsFrom Ohio April 30, 1986$ 1,087,314$ 48,000April 30, 19871,423,35760,000April 30, 19881,506,63072,00098 In September 1978, Gill and Bell purchased a house in Dundee, Ohio (the Dundee house), on which they made the mortgage loan and real estate tax payments. The purchase price was $ 32,000. The title to, and the mortgage loan for, the Dundee house were in the name of Ruby Hostetler, Gill's mother-in-law. When Quilting began operations in 1979, it operated out of the Dundee house. In 1983, it moved its operations to a manufacturing facility in Zoar, Ohio (the manufacturing facility). The manufacturing facility is located about 20 miles from the Dundee house. Gill found it difficult to live 20 miles away from Quilting's operations because there was a frequent breakdown of equipment at the manufacturing facility that needed repair. Consequently, in 1983, Gill and Bell moved their residence to an unused portion of the manufacturing facility. From 1983 until its sale in April 1989, the Dundee house was used by Quilting to store materials such as cardboard and plastic. The materials stored at the Dundee house were placed on skids on the floor. On August 13, 1986, Gill and Quilting executed a written agreement (Dundee lease), which was retroactive to December 1, 1984, under which99 Gill agreed to rent the Dundee house to Quilting for three years at $ 100 per month. The Dundee lease required Gill, as the lessor, to pay the property taxes and cost of electricity for the house. In addition, it provided that Quilting, as the lessee, was required to pay "Any damages done to building and property from any person employed by lessee". Shaw drafted and set the terms of the Dundee lease. During Quilting's use of the Dundee house, a skylight in the house was leaking which caused a lot of damage to the house. In addition, a leak in the porch resulted in damage to the lower level of the house. During the years 1986 through 1988, Quilting incurred expenses to (1) replace the roof on the house, (2) repair the heating and plumbing systems, (3) put in new dry wall and trim molding, and (4) remove the skylight. Quilting's expenditures with respect to the Dundee house during those years were $ 4,710.05, $ 13,532.57, and $ 2,821.67, respectively. Quilting claimed depreciation deductions relating to those expenditures in its returns for its taxable years ended April 30, 1987, and April 30, 1988, in the amounts of $ 374 and $ 1,819, respectively. Under the separation agreement100 between Gill and Bell, Gill received Bell's interest in the Dundee house. In April 1989, the Dundee house was sold for $ 34,000. Gill received all sales proceeds remaining after payment of closing costs and the outstanding mortgage loan balance. On October 10, 1985, Quilting purchased a house in Bolivar, Ohio (the Bolivar house), from Freeman Hostetler, Gill's father-in-law. The purchase price was $ 69,000. At the time of its purchase, the Bolivar house, which is located two to three miles from the manufacturing facility, had a finished first floor and an unfinished second floor. Sometime in 1985, Gill moved from the manufacturing facility into the Bolivar house. On August 13, 1986, Gill and Quilting executed a written agreement (Bolivar lease), which was made retroactive to October 1, 1985, under which Quilting agreed to lease the house to Gill for two years at $ 200 per month. The Bolivar lease required Quilting, as the lessor, to pay the property taxes and cost of electricity for the house. In addition, it provided that Gill, as the lessee, was required to pay for any damage to the property from any person he employed. Shaw drafted and set the terms of the Bolivar lease. 101 Gill did not pay the rent due under the Bolivar lease for any of the years at issue. For its taxable year ended April 30, 1987, Quilting recorded the rent due under that lease by making an accounting entry in the amount of $ 2,400. During its taxable years ended April 30, 1986, 1987, and 1988, Quilting made expenditures relating to the Bolivar house in the amounts of $ 4,940, $ 12,921, and $ 7,780, respectively. These expenditures were for real estate taxes, interest, electricity, repairs and maintenance, building improvements, and land improvements. In its return for each of those years, Quilting deducted those expenditures and claimed depreciation deductions for the Bolivar house. On September 17, 1984, Quilting held a meeting (September 17 meeting) attended by Gill and Bell. At that meeting, it was agreed that, as additional compensation to Gill and Bell, Quilting would contribute the maximum annual amount allowable to individual retirement accounts (IRA) for Gill and for Bell. Shaw kept the minutes of the September 17 meeting. During each of its taxable years ended April 30, 1986, 1987, and 1988, Quilting contributed $ 2,000 to an IRA for Gill. In its income tax return102 for each of the taxable years ended April 30, 1987, and 1988, Quilting deducted the $ 2,000 contribution it made on Gill's behalf as part of employee benefits. Shaw had also made an adjusting entry for Quilting's taxable year ended April 30, 1985, and allocated to compensation the IRA contribution made by Quilting for that year on behalf of Gill. Quilting did not provide Gill with a Form 1099 for any of the IRA contributions it made during 1986 through 1988. Gill reported as income, but not as a dividend, the IRA contribution for 1988, but not for 1986 or 1987. During each of the years 1986, 1987, and 1988, Quilting paid an annual premium of $ 1,553.50 to Franklin Life Insurance Company (Franklin Life) for certain life insurance policies. Quilting deducted this annual premium as part of employee benefits in its income tax return for each of its taxable years ended April 30, 1987, and 1988. Of the total annual premium of $ 1,553.50, $ 1,011.30 was for a life insurance policy on Gill with Bell as the beneficiary and $ 542.20 was for a policy on Bell with Gill as the beneficiary. 3Quilting also paid the premiums for certain life insurance policies that it owned on two other employees. 103 Quilting first provided life insurance for one of those employees beginning in 1986. In 1978, Gill raced cars six or seven times over a one-to-two-month period. 4 In 1983, Gill was asked to substitute for another race car driver who was unavailable. Gill agreed to act as a substitute driver, but crashed the car during the race. 104 Gill did not race cars again until a decision was made around the time Bell and Gill separated in 1985 that race car sponsorship would be a good way to publicize Quilting. Gill, who, as the sole officer of Quilting, made all the decisions with regard to Quilting's advertising during the years at issue, concluded that such an advertising program would create a unique image for Quilting because no other company in its industry sponsored race cars. To implement this advertising strategy, Gill personally purchased a blue Camaro (blue Camaro), raced it six or seven times, and sold it after it was wrecked. Thereafter, on June 26, 1986, Gill personally purchased a red Camaro (red Camaro), raced it about eight times, and sold it on September 25, 1986. Also on September 25, 1986, Gill personally purchased a Trans Am (Trans Am) that he raced. Gill reported $ 200 in income from these racing activities in his tax return for 1987. Gill reported gross income from racing activities in his tax return for 1988 in the amount of $ 5,704. During the years 1986 through 1988, Quilting sponsored Gill's race cars. Sometime in 1987, Gene Pringle (Pringle) approached Gill and asked if Quilting would105 sponsor his car racing activities. Gill and Pringle were unacquainted prior to this contact. Because of Pringle's prior success as a race car driver, Quilting agreed to sponsor Pringle. During the years 1986 through 1988, Gill drove race cars sponsored by Quilting at tracks in various cities in Ohio. 5 The cars were raced during the racing season, which ran from May to September. The name "Quilting Creations" was prominently displayed in large letters on both sides of the race cars sponsored by Quilting. Following a race in 1986, Gill was interviewed by ESPN, a sports television network, but the interview was never broadcast. During 1987 and 1988, Pringle drove a car prominently displaying the name Quilting Creations in a variety of races at tracks in Ohio, at least two of which were broadcast by the national broadcast media. In addition, by displaying a picture of one of the race cars at the trade shows where it marketed its products, Quilting expected and was able to call attention and draw people to its booth at those shows. Gill's racing and business activities were also the subject of a November 1988 article in Craft and Needlework Age, a significant publication in Quilting's106 industry. The race cars were also mentioned in correspondence during 1989 from customers of Quilting located in Japan and Australia. 107 During the years 1986 through 1988, Quilting paid expenses associated with its race car sponsorship in the amounts of $ 15,319.57, $ 50,602.55, and $ 25,490.23, respectively. For taxable years ended April 30, 1986, 1987, and 1988, Quilting claimed deductions for the following amounts: TaxableTotalRace Car Sponsorship ClaimedYear EndedAdvertisingAs Part of Total AdvertisingApril 30, 1986$ 68,105 $ -- April 30, 1987100,51030,910April 30, 1988236,45144,252The $ 30,910 claimed by Quilting for its taxable year ended April 30, 1987, included (1) $ 3,000 with respect to a general purpose trailer (the trailer) that, although used to haul the race cars to the track, was principally utilized to carry business supplies and (2) $ 1,600 with respect to a semitrailer that was used to store materials at Quilting's plant and that was not used in the race car activities. The remainder of that amount (namely, $ 26,310) was attributable to expenses Quilting incurred with respect to the blue Camaro, the red Camaro, and the Trans Am, the three cars it sponsored during that year. Of the $ 44,252 claimed by Quilting for its taxable year ended April 30, 1988, $ 108 3,077 was incurred to sponsor Pringle's race car and the balance was incurred to sponsor the Trans Am. 6OPINIONPetitioners bear the burden of proving that respondent's determinations in the notice of deficiency are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933). In deciding the issues presented herein, we will take into account the testimony of Gill, Bell, and Shaw which, having observed their demeanor at trial, we find credible and forthright. The principal issues in these cases relate to whether, for the 109 respective years at issue, (1) Quilting is entitled to certain deductions, and (2) Gill received constructive dividends as a result of certain expenditures by Quilting. With respect to the deductions claimed by Quilting, the statutory provisions applicable to the contested items are sections 162 and 167. The determination of whether an expenditure satisfies the requirements for deductibility under those provisions is a question of fact. Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, 475 (1943); Southeastern Canteen Co. v. Commissioner, 410 F.2d 615">410 F.2d 615, 622 (6th Cir. 1969), affg. in part and revg. in part T.C. Memo. 1967-183; Quinn v. Commissioner, 65 T.C. 523">65 T.C. 523, 526 (1975). Section 162 generally allows a deduction for ordinary and necessary business expenses. In general, an expense is ordinary under section 162 if it is considered "normal, usual, or customary" in the context of the particular business out of which it arose. Deputy v. du Pont, 308 U.S. 488">308 U.S. 488, 495-496 (1940). Ordinarily, an expense is necessary if it is appropriate and helpful110 to the taxpayer's trade or business. Commissioner v. Tellier, 383 U.S. 687">383 U.S. 687, 689 (1966); Carbine v. Commissioner, 83 T.C. 356">83 T.C. 356, 363 (1984), affd. 777 F.2d 662">777 F.2d 662 (11th Cir. 1985). Even if an expense is ordinary and necessary, it is deductible under section 162 only to the extent it is reasonable in amount. E.g., United States v. Haskel Engineering & Supply Co., 380 F.2d 786">380 F.2d 786, 788-789 (9th Cir. 1967); Commissioner v. Lincoln Electric Co., 176 F.2d 815">176 F.2d 815, 817 (6th Cir. 1949), revg. a Memorandum Opinion of this Court dated Oct. 27, 1947. In deciding whether an expense is ordinary and necessary within the meaning of section 162, courts generally have focused on the existence of a reasonably proximate relationship between the expense and the taxpayer's business and the primary motive or purpose for incurring it. E.g., Greenspon v. Commissioner, 229 F.2d 947">229 F.2d 947, 954-955 (8th Cir. 1956), affg. on this issue 23 T.C. 138">23 T.C. 138 (1954); Henry v. Commissioner, 36 T.C. 879">36 T.C. 879, 884 (1961);111 Larrabee v. Commissioner, 33 T.C. 838">33 T.C. 838, 841-843 (1960). In general, where an expenditure is primarily associated with profit-motivated purposes, and personal benefit can be said to be distinctly secondary and incidental, it may be deducted under section 162. E.g., International Artists, Ltd. v. Commissioner, 55 T.C. 94">55 T.C. 94, 104 (1970); Sanitary Farms Dairy, Inc. v. Commissioner, 25 T.C. 463">25 T.C. 463, 467-468 (1955); Rodgers Dairy Co. v. Commissioner, 14 T.C. 66">14 T.C. 66, 73 (1950). Conversely, if an expenditure is primarily motivated by personal considerations, no deduction for it will be allowed. E.g., Henry v. Commissioner, supra; Larrabee v. Commissioner, supra.Section 167 generally allows a depreciation deduction with respect to property used in a trade or business or held for the production of income. In determining whether such a deduction is permitted, courts ordinarily have focused on whether the acquisition and/or maintenance of property was primarily associated with profit-motivated purposes. E.g., 112 International Artists, Ltd. v. Commissioner, supra.With respect to the constructive dividends determined by respondent, it is well established that when a corporation confers an economic benefit on a stockholder in his or her capacity as such, without an expectation of reimbursement, that benefit constitutes a constructive dividend to the stockholder. E.g., Hagaman v. Commissioner, 958 F.2d 684">958 F.2d 684, 690 (6th Cir. 1992), affg. in part and remanding in part T.C. Memo. 1987-549; Magnon v. Commissioner, 73 T.C. 980">73 T.C. 980, 993-994 (1980). The existence of a constructive dividend is a question of fact. Hagaman v. Commissioner, supra; Loftin & Woodard, Inc. v. United States, 577 F.2d 1206">577 F.2d 1206, 1215 (5th Cir. 1978). With these general principles in mind, we now turn to the issues presented. 1. Dundee HouseGill was the owner of the Dundee house during each of the years at issue. 7Quilting used the Dundee house from 1983 through April 1989 to store materials such as cardboard and plastic. During the 113 years 1986 through 1988, Quilting incurred expenses to (1) replace the roof on the house, (2) repair the heating and plumbing systems, (3) put in new dry wall and trim molding, and (4) remove the skylight. During those years, Quilting's expenditures relating to the Dundee house were $ 4,710.05, $ 13,532.57, and $ 2,821.67, respectively. Quilting claimed depreciation deductions relating to those expenditures in its returns for its taxable years ended April 30, 1987, and 1988 in the amounts of $ 374 and $ 1,819, respectively. Respondent determined that Quilting's expenditures for improvements to the Dundee house were made for the purpose of benefiting Gill, and not Quilting, and she therefore disallowed the depreciation deductions claimed by 114 Quilting with respect to them. 8 When a corporation incurs expenses to improve property for the primary purpose of benefiting a shareholder, the corporation is not entitled to depreciation deductions with respect thereto. E.g., International Trading Co. v. Commissioner, 275 F.2d 578">275 F.2d 578, 586 (7th Cir. 1960), affg. T.C. Memo 1958-104">T.C. Memo. 1958-104; see International Artists, Ltd. v. Commissioner, supra; Challenge Manufacturing Co. v. Commissioner, 37 T.C. 650">37 T.C. 650, 659 (1962). Petitioners contend that (1) Quilting was required to pay for any damage to the Dundee house during the period Quilting used it, (2) the Dundee house was used in Quilting's trade or business, and (3) therefore Quilting is entitled to depreciation deductions with respect to its expenditures on that house. Contrary to 115 petitioners' position, the Dundee lease executed by Gill and Quilting did not require Quilting to pay for all damage to the Dundee house. Rather, it required Quilting to pay only for damage caused by its employees. The only evidence in the record suggesting that the damage to the Dundee house was caused by a Quilting employee is Gill's testimony that Quilting's failure to heat the house during the winter damaged it. However, Gill also testified that a leak in the skylight caused a lot of damage to the Dundee house and that a leak in the porch caused the damage to the first floor. There is no evidence suggesting that a Quilting employee caused the leaks to the house that resulted in much of the damage. The record is also devoid of evidence establishing that a Quilting employee caused the damage to the roof, the heating system, or the plumbing system. Based on the entire record, we conclude that Quilting's expenditures to repair the Dundee house were made for the primary purpose of benefiting Gill, and not Quilting. See Challenge Manufacturing Co. v. Commissioner, supra.Accordingly, on the present record, we conclude that Quilting is not entitled116 to the depreciation deductions it claimed for the years at issue with respect to the expenditures it incurred on the Dundee house. Respondent also determined that Quilting's expenditures relating to the Dundee house are constructive dividends to Gill. Petitioners disagree, contending that the value of the Dundee house was not enhanced by the repairs Quilting made to the house and that therefore no economic benefit was conferred upon Gill. As support for their position, petitioners point to the fact that the Dundee house was purchased in 1978 for $ 32,000 and was sold in 1989 for $ 34,000. However, this could have been attributable to a variety of factors, such as the market for similar housing, and does not control whether Gill received an economic benefit from Quilting's expenditures on the Dundee house. Quilting's expenditures on the Dundee house included amounts incurred to replace the roof, to repair the heating and plumbing systems, to put in dry wall and trim molding, and to remove a skylight that was leaking. These expenditures clearly conferred an economic benefit upon Gill as owner of the house. Nothing in the record supports a conclusion that the benefit to Gill was117 not equal to the amount of Quilting's expenditures, as determined by respondent. Accordingly, based on the record here, respondent's determination that Quilting's expenditures relating to the Dundee house constitute constructive dividends to Gill is sustained. 9Magnon v. Commissioner, supra at 994; Challenge Manufacturing Co. v. Commissioner, supra at 663. 2. Bolivar HouseQuilting purchased the Bolivar house in 1985 from Gill's father-in-law. Sometime in 1985, Gill moved into the house and lived there throughout the years at issue. During its taxable years ended April 30, 1986, 1987, and 1988, Quilting made certain expenditures relating to the Bolivar house in the amounts of $ 4,940, $ 12,921, and $ 7,780, respectively. These expenditures were made for real estate118 taxes, interest, electricity, repairs and maintenance, building improvements, and land improvements. Quilting deducted currently or claimed depreciation deductions in respect of those expenditures in its returns for the years at issue. Respondent originally disallowed all of those deductions on the ground that the acquisition and maintenance of the Bolivar house benefited Gill, rather than Quilting. After certain concessions, the following amounts of deductions with respect to the Bolivar house, consisting of depreciation and certain other expenses, are in dispute: Taxable YearEnded Amount April 30, 1986$ 6,520.00 April 30, 198715,622.58April 30, 198811,177.14Where a corporation acquires and maintains property for the primary purpose of benefiting a shareholder, the corporation is not entitled to deductions under sections 162 or 167 with respect to that property. E.g., International Artists, Ltd. v. Commissioner, 55 T.C. at 104. Quilting claims that its overriding purpose in acquiring and maintaining the Bolivar house was to free up space at its manufacturing facility by providing Gill with a place to live outside of, but119 near, the manufacturing facility. Respondent contends that Gill received all of the benefits from the Bolivar property and that it was acquired and maintained for Gill's benefit. We agree with respondent. While the need for additional manufacturing space may have required Gill to vacate the manufacturing facility, it did not require Quilting to provide Gill with alternative housing. Indeed, the corporate purpose asserted by Quilting was fulfilled when Gill left the manufacturing facility and was not served in any meaningful way by the acquisition and maintenance of the Bolivar house. The separation agreement between Gill and Bell supports our conclusion that the Bolivar house was acquired and maintained for the primary purpose of benefiting Gill, and not Quilting. That agreement, which is dated 13 days after Quilting purchased the Bolivar house, states that Gill had arranged to acquire the Bolivar house and that Bell had arranged to acquire a separate piece of property equal in value to the Bolivar house. The agreement further provides that Gill "shall own, have and enjoy" the Bolivar house "as his separate property" and that agreement further provides that Gill was to acquire120 all of the stock in Quilting. These provisions in the separation agreement suggest that the primary consideration in acquiring the Bolivar house was Gill's separation from Bell, and not a corporate purpose of Quilting. On the instant record, we conclude that Quilting's acquisition and maintenance of the Bolivar house was motivated primarily for the personal benefit of Gill and that any benefit to Quilting was merely incidental. International Trading Co. v. Commissioner, 275 F.2d at 586; Challenge Manufacturing Co. v. Commissioner, 37 T.C. at 659. Accordingly, we conclude that, except as conceded by respondent, the expenditures incurred by Quilting with respect to the Bolivar house are not deductible under either section 162 or section 167.10121 3. IRA Contributions and Life Insurance PremiumsDuring each of its taxable years ended April 30, 1986, 1987, and 1988, Quilting contributed $ 2,000 to an IRA on behalf of Gill. Quilting deducted the $ 2,000 payment as part of employee benefits for each of its taxable years ended April 30, 1987, and 1988. Quilting paid $ 1,553.50 to Franklin Life for life insurance on Gill and Bell during each of the years 1986 through 1988. Of the $ 1,553.50 paid to Franklin Life each year, $ 1,011.30 was for a policy on Gill with Bell as the beneficiary and $ 542.20 was for a policy on Bell with Gill as the beneficiary. For each of its taxable years ended April 30, 1987, and 1988, Quilting claimed a deduction as part of employee benefits for the amounts it incurred from 1986 through 1988 to provide Gill and Bell with life insurance. Respondent determined that the IRA contributions made on behalf of Gill and the life insurance premiums Quilting paid for policies on Gill and Bell are not deductible by Quilting and that those expenditures constitute constructive dividends to Gill. Gill concedes that his income includes the IRA contributions and the amounts Quilting expended in providing122 him with life insurance. Gill disputes respondent's determination that Quilting's payment of the cost of providing Bell with life insurance resulted in income to him. 11 Petitioners contend that the IRA contributions and the insurance premiums are deductible by Quilting as additional compensation. 123 The basic inquiry governing the proper characterization of the amounts at issue is whether they were incurred by Quilting with the intent to compensate Gill and Bell. King's Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511">98 T.C. 511, 514 (1992). The presence of an intent to compensate is a question of fact. Id.Gill testified that the IRA payments were intended to be additional compensation. Petitioners submitted into evidence minutes of the September 17 meeting at which it was agreed that, as additional compensation to Gill and Bell, Quilting would contribute to an IRA for Gill and Bell the maximum annual amount allowable. 12Gill also testified that it was the policy of Quilting to provide life insurance to all of its key employees as a means of providing them with additional compensation. Gill explained that Quilting124 provided life insurance to two of its employees in addition to himself and Bell and that one of those employees had been receiving life insurance coverage since 1986. Based on the present record, we believe that petitioners have demonstrated that the IRA contribution made by Quilting on behalf of Gill in each of its taxable years ended April 30, 1986, 1987, and 1988 was intended to be compensation to Gill and that the life insurance premiums paid by Quilting from 1986 through 1988 on policies insuring the lives of Gill and Bell were intended by Quilting to constitute additional compensation to Gill and Bell, respectively. Accordingly, we conclude that those amounts are deductible by Quilting as ordinary and necessary compensation expenses under section 162. Because Gill conceded that the IRA contributions made by Quilting on his behalf in its taxable years ending April 30, 1986, 1987, and 1988 and premium payments on the policy insuring his life made by Quilting from 1986 through 1988 were includible in his income, there remains only the question whether the premiums paid by Quilting on the policy insuring Bell's life during those years are includible in Gill's income. 13125 Our holding that Quilting is entitled to deduct as additional compensation to Gill and to Bell the respective life insurance premiums it incurred for policies on each of them also disposes of respondent's determination that Quilting's payment of the cost of insuring Bell's life resulted in a constructive dividend or additional compensation to Gill. 14 A corporate expenditure may constitute a constructive dividend only if it does not give rise to a deduction on behalf of the corporation. P.R. Farms, Inc. v. Commissioner, 820 F.2d 1084">820 F.2d 1084, 1088 (9th Cir. 1987), affg. T.C. Memo. 1984-549. Accordingly, we conclude that Quilting's payments of premiums on the policy insuring Bell's life do not constitute constructive dividends to Gill. We further conclude that these payments do not constitute additional compensation to Gill. This is because we have found that they are additional compensation to Bell. 126 4. Race Car SponsorshipDuring its taxable years ended April 30, 1987, and 1988, Quilting incurred expenses of $ 30,910 and $ 44,252, respectively, to sponsor certain race car activities.15 Section 162 allows a deduction for the ordinary and necessary expenses incurred in carrying on a trade or business. In order to show that the cost of its race car sponsorship is an ordinary and necessary expense, Quilting must establish that the sponsorship was proximately related to Quilting's business. Henry v. Commissioner, 36 T.C. at 884. To do this, Quilting must show that its race car sponsorship was reasonably calculated to advertise that business. E.g., Schulz v. Commissioner, 16 T.C. 401">16 T.C. 401, 407 (1951); see also Snow v. Commissioner, 31 T.C. 585">31 T.C. 585, 592 (1958). Moreover, the claimed advertising purpose must not be merely a "thin cloak for the pursuit of a hobby" by Gill. Rodgers Dairy Co. v. Commissioner, 14 T.C. at 73; see Challenge Manufacturing Co. v. Commissioner, 37 T.C. at 658-659. 127 We will consider first whether Quilting's race car sponsorship was reasonably calculated to advertise Quilting and was therefore proximately related to its business. If we find for Quilting, we will decide whether the amounts incurred for such sponsorship were reasonable. It is respondent's position that the race car sponsorship was instituted primarily for the personal benefit of Gill and conferred only an incidental benefit on Quilting. Respondent advances a number of contentions to support her position. We have considered all of them and find none to be persuasive. Respondent appears to be most troubled by Quilting's claim to deductions for its race car sponsorship because racing appears to be an enjoyable activity for Gill. 16 However, respondent concedes that the mere fact that Gill found racing pleasurable will not prevent Quilting from deducting the cost of its race car sponsorship, provided that the primary purpose of that sponsorship was to benefit Quilting by advertising its business. Sanitary Farms Dairy, Inc. v. Commissioner, 25 T.C. at 467. 128 Based on the entire record, we find that the race car sponsorship was instituted primarily for Quilting's benefit and had only incidental benefits for Gill. We note that Gill had very limited experience in 1978 and 1983 in car racing before 1986 (his first taxable year at issue) and went back into it only after deciding that it would be a good way to publicize Quilting. We also find it significant that respondent does not point to any evidence, and we have found none, that shows Gill derived any personal benefit from Quilting's sponsorship of Pringle. Quilting's willingness to sponsor Pringle, with whom Gill had had no contact prior to the time that Pringle approached Quilting to seek its sponsorship, indicates to us that Quilting regarded its race car sponsorship as a bona fide, albeit unconventional, method for publicizing its business. Indeed, it was the unusual nature of this publicity that led Quilting to conclude that it would create a unique image for itself in its industry -- an image that Quilting expected would distinguish it from its competitors and promote its business. 17 Moreover, by displaying a picture of one of the race cars at the trade shows where it marketed129 its products, Quilting expected, and was able, to call attention and draw people to its booth at those shows. 18The cars sponsored by Quilting were raced by Gill and Pringle at various tracks in Ohio. The cars ran during the racing season, which lasted from May to September. The name Quilting Creations was prominently displayed on both sides of the race cars. In 1986, Gill was interviewed by ESPN, a national sports network. 130 Although the interview was never broadcast, the fact that it occurred indicates that Quilting's race car sponsorship had the potential to provide national exposure for Quilting. During the time Quilting sponsored Pringle, he drove a car prominently displaying the name Quilting Creations in at least two races that were broadcast by the national media. Quilting obtained further publicity from its race car sponsorship when an article about Quilting and the car racing activities appeared in the November 1988 issue of Craft and Needlework Age, a significant publication within Quilting's industry. Furthermore, the race cars sponsored by Quilting were occasionally mentioned by Quilting's customers in their correspondence with Quilting during 1989, indicating that the race car sponsorship aided in producing favorable publicity and a distinctive image for Quilting. It is significant that these letters came from customers in Japan and Australia, showing that word of Quilting's promotional program had even spread overseas. While the article in Craft and Needlework Age and the letters from customers were written shortly after the years at issue, this circumstance does not render them irrelevant. 131 A promotional activity does not have to produce an immediate effect in order for its cost to be considered a legitimate business expense. Based on the record here, we conclude that Quilting viewed the race car sponsorship as a long-term promotional program. Quilting seemed willing to sponsor Gill's and Pringle's car racing based on the prospect of future promotional benefits to it, and the record establishes that the expected benefits were beginning to materialize. Respondent argues that petitioners have not identified any one sale that can be attributed to Quilting's race car sponsorship. Quilting's failure to point to specific additional sales is not necessarily fatal to its case. Moreover, we conclude from the instant record that the race car sponsorship by Quilting was not intended to generate sales immediately. Rather, it was expected to publicize Quilting by creating a unique image for it, thereby helping to generate sales in the future. Respondent also points out that only 10 percent of Quilting's customers were located in Ohio where the cars it sponsored were raced. However, the record does not support respondent's premise, and Quilting does not contend, that it expected132 the principal benefit of its race car sponsorship to be derived from placing its name before those people who attended those races. Based on that record, we find that Quilting intended to benefit from the publicity given the races by the media (comprising the local media in Ohio and the national and international media) that covered them. Thus, the fact that only a relatively small percentage of Quilting's actual or prospective customers had the opportunity to view in person the cars sponsored by Quilting does not necessarily establish that Quilting's sponsorship was primarily intended to benefit Gill. The letters in the record show that word of the race car sponsorship was widely disseminated among Quilting's customers. We have not required promotional activities like those at issue here to take place at a venue accessible to a majority of a business' customers in order for their cost to be deductible. See Rodgers Dairy Co. v. Commissioner, 14 T.C. at 72-73. Moreover, the record shows that Quilting's sales in Ohio increased substantially during the years at issue, suggesting that Quilting could well have realized some benefit in Ohio from exposure133 of its name at the racetracks. Respondent further contends that the fact that Quilting's race car sponsorship was not mentioned in its craft magazine advertising and catalogs during the years at issue and did not substitute for conventional forms of advertising supports her position. We disagree. Quilting sought to distinguish itself from its competitors by developing a unique image in its industry and creating a device to attract potential customers to its booth at trade shows through the publicity that it expected to obtain by its race car sponsorship. We do not believe that these benefits would have been readily obtainable through conventional advertising. Quilting's race car sponsorship seems to us to be a supplement to its conventional advertising. Based on our consideration of the entire record, we conclude that Quilting's race car sponsorship was reasonably calculated to gain publicity for Quilting that would allow it to distinguish itself from its competitors and that that sponsorship was expected to provide Quilting with more than incidental benefits. We thus find that Quilting's race car sponsorship was undertaken primarily for Quilting's benefit and was proximately134 connected to its business, as required by section 162. Therefore, we are not prepared to disallow entirely the deductions claimed by Quilting for the expenses incurred for that sponsorship. Nonetheless, in order to sustain its tax return position, Quilting must still establish that the deductions it claimed are reasonable in amount. See United States v. Haskel Engineering & Supply Co., 380 F.2d at 788. In deciding whether the amount of a deduction is reasonable, courts have, when appropriate, resorted to an arm's-length standard and have held an amount unreasonable if it is greater than the amount that would have been negotiated between parties dealing at arm's length. E.g., Audano v. United States, 428 F.2d 251">428 F.2d 251, 256 (5th Cir. 1970); Southeastern Canteen Co. v. Commissioner, 410 F.2d at 619-620. We find it appropriate in the present case to look to the arm's-length standard that is disclosed in the record. Although Quilting's sponsorship of race cars was unique in its industry, there is evidence in the record indicating the amount that Quilting would have paid to sponsor race cars in135 an arm's-length transaction, namely, the amount incurred by Quilting to sponsor Pringle's race car activities that is also at issue in this case. 19 Based on the present record, we find that the expense incurred by Quilting during its taxable year ended April 30, 1988, to sponsor Pringle's activities (i.e., $ 3,077) was reasonable. We therefore sustain Quilting's deduction of that amount. The expenses incurred by Quilting to sponsor Pringle's race cars contrast markedly with the $ 26,310 20 and the $ 41,175 incurred by Quilting with respect to Gill's race car activities during its taxable years ended April 30, 1987, and 1988, respectively. We conclude that the expenses incurred by Quilting to sponsor Gill's race cars were excessive in relation to the benefits136 reasonably expected to be obtained in return. If Quilting considered the advantages afforded by sponsoring Pringle's car to have been worth about $ 3,000, the record does not explain why Quilting would have needed to incur so much additional expense in order to obtain essentially the same type of benefits from sponsoring Gill's race cars. 21137 Where a taxpayer establishes his or her entitlement to a deduction, but does not establish the amount of that deduction, we are permitted to estimate the amount allowable. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 543-544 (2d Cir. 1930); see Cinelli v. Commissioner, 502 F.2d 695">502 F.2d 695, 699 (6th Cir. 1974), affg. T.C. Memo 1973-140">T.C. Memo. 1973-140. However, there must be sufficient evidence in the record to permit us to conclude that deductible expenses were incurred in at least the amount allowed; otherwise "relief to the taxpayer would be unguided largesse." Williams v. United States, 245 F.2d 559">245 F.2d 559, 560 (5th Cir. 1957); see also Luman v. Commissioner, 79 T.C. 846">79 T.C. 846, 859 (1982). We must also explain the method used to arrive at our estimate. Concord Control, Inc. v. Commissioner, 615 F.2d 1153">615 F.2d 1153, 1156 (6th Cir. 1980), remanding on this ground T.C. Memo. 1976-301. As noted above, we have found the amount of Quilting's sponsorship of Pringle (namely, $ 3,077) to be an arm's-length amount that qualifies 138 as an ordinary and necessary expense under section 162. We therefore will use that amount as the basis for estimating the deduction allowable for Quilting's sponsorship of Gill's race cars. The sponsorship of Pringle does not appear to have extended over more than one of Quilting's taxable years, and, although it is not clear from the record, it appears that Pringle had only one car that he raced. Consequently, we will allow Quilting a deduction of $ 3,077 for each car that Gill raced during each of its taxable years ended April 30, 1987, and April 30, 1988. We have found from the record that Gill raced three cars (a blue Camaro, a red Camaro, and a Trans Am) during the former year and one car (a Trans Am) during the latter year. Accordingly, Quilting will be allowed to deduct race car sponsorship expenses of $ 9,231 for its taxable year ended April 30, 1987, and $ 6,154 22 for its taxable year ended April 30, 1988. Because Quilting139 included as part of its advertising expense deduction for its taxable year ended April 30, 1987, certain amounts with respect to two trailers it used during that year, we must also decide whether those amounts are deductible. Most of those amounts do not even relate to Quilting's race car sponsorship or its other advertising during that year. Thus, it appears to us that most of those expenses were misclassified in Quilting's tax return for that year. Quilting claimed a $ 3,000 deduction with respect to the trailer that was used primarily to carry business supplies. Only a relatively small part of its use was connected with Quilting's race car sponsorship. We have already allowed Quilting to deduct what we have found to be a reasonable amount for its race car sponsorship for its taxable year ended April 30, 1987. Petitioners have not established that any additional deduction is warranted based on the use of the trailer in connection with that sponsorship. Therefore, we will allow a deduction only with respect to Quilting's use of the trailer to haul its business supplies. At trial, Gill testified that the trailer was used throughout the year to transport business supplies for140 Quilting and was used to haul race cars one day of the week during the racing season. Using our best judgment, and based on all the evidence in the record, we find that 90 percent of the $ 3,000 deduction claimed for the trailer is allocable to the former use and 10 percent is allocable to the latter use. Cohan v. Commissioner, supra. Accordingly, Quilting is entitled to deduct $ 2,700 with respect to the trailer for its taxable year ended April 30, 1987. Quilting also claimed a $ 1,600 deduction with respect to a semitrailer that was used exclusively to store materials at Quilting's plant and was not used in connection with its race car sponsorship. We therefore conclude that Quilting is entitled to the full amount of that deduction for its taxable year ended April 30, 1987. Having concluded that the amounts related to Quilting's race car sponsorship and to the trailer and semitrailer are deductible in part, we hold that Gill did not receive constructive dividends in respect of the deductions we have allowed. 23P.R. Farms, Inc. v. Commissioner, 820 F.2d at 1088. 141 We must further decide whether the remaining amounts claimed as race car sponsorship expenses for which we have allowed no deductions constitute constructive dividends to Gill. See id. We conclude that such amounts, including the $ 300 amount disallowed with respect to the trailer, 24 are constructive dividends to him for his years at issue during which they were paid. The amounts we have disallowed consist of expenses incurred by Quilting with respect to race cars owned by Gill. Quilting thus conferred a benefit on Gill in those amounts. Greenspon v. Commissioner, 23 T.C. at 150-151. 142 We note that Gill, as an individual, was on the cash method of accounting during the years at issue. Quilting was on the accrual method. They had different taxable years: Gill had a calendar taxable year and Quilting had a taxable year ending April 30. In making her determinations in the notice of deficiency issued to Gill, respondent did not simply include in Gill's income for each of his taxable years at issue the disallowed race car sponsorship expenses claimed by Quilting for each of its taxable years that ended in each such year. Rather, it seems to us that respondent included in Gill's income disallowed expenses for each of his taxable years during which Quilting paid such expenses. In order to permit calculation of the amount of Gill's constructive dividends for each of his taxable years at issue, we will first make findings as to when Quilting should be treated as having paid the amounts we have allowed it to deduct as race car sponsorship expenses. The constructive dividends determined by respondent for each of Gill's years at issue should then be reduced by the allowed amount of race car sponsorship expenses so treated as having been paid during each such year. For143 purposes of calculating the amount of expenses related to Gill's race cars to be included in Gill's income for each of his taxable years at issue, we find that the expenses we have allowed Quilting to deduct for its race car sponsorship for each of its taxable years ended April 30, 1987, and April 30, 1988, were paid by Quilting over the period consisting of May to September of each of the calendar years 1986 and 1987, respectively, which were the 1986 and 1987 car racing seasons. We further conclude that those permitted expenses will reduce the constructive dividends that respondent determined Gill received in each of those calendar years. The amount of constructive dividends respondent determined Gill received in 1986 and 1987 must also be reduced by the amount we have allowed Quilting to deduct with respect to the trailer and the semitrailer. In this connection, we will treat Quilting's payment of expenses connected with the trailer and the semitrailer as having occurred ratably over the period of their use throughout Quilting's taxable year ended April 30, 1987. The portion of the $ 3,000 expense related to the trailer that we have not allowed Quilting to deduct (namely, $ 144 300) will be treated as having been paid over the course of May to September 1986, i.e., over the 1986 car racing season. Respondent's determination of the amount of constructive dividends Gill received in each of the years 1986 and 1987 must therefore be reduced by the amount of the expenses that we have allowed Quilting to deduct with respect to the trailer (namely, $ 2,700) and the semitrailer (namely, $ 1,600) and that we have treated as having been paid in each of those years. The balance of the constructive dividends determined by respondent for each of Gill's taxable years remaining after the foregoing adjustments are taken into account will be sustained. 5. Additions to Tax for NegligenceRespondent determined that Gill is liable for the additions to tax under section 6653(a)(1)(A) and (B) for 1986 and 1987 and the addition to tax under section 6653(a)(1) for 1988. Respondent also determined that Quilting is liable for the additions to tax under section 6653(a)(1)(A) and (B) for each of its taxable years at issue. 25 Section 6653(a)(1)(A) (section 6653(a)(1) for Gill's 1988 taxable year) imposes an addition to tax equal to five percent of the underpayment of tax145 if any part of that underpayment is due to negligence. Section 6653(a)(1)(B) imposes an addition to tax equal to 50 percent of the interest due on the portion of the underpayment attributable to negligence. Respondent determined that the entire amount of Gill's underpayment for each of the years 1986 and 1987 was due to negligence and that the entire amount of Quilting's underpayment for each of its taxable years at issue was due to negligence. Negligence, for purposes of section 6653(a), has been defined as a lack of due care or a failure to do what a reasonable person would do under the circumstances. Leuhsler v. Commissioner, 963 F.2d 907">963 F.2d 907, 910 (6th Cir. 1992), affg. T.C. Memo 1991-179">T.C. Memo. 1991-179; Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). 146 The general rule is that the duty to file an accurate return cannot be avoided by placing responsibility on an agent. Pritchett v. Commissioner, 63 T.C. 149">63 T.C. 149, 174 (1974). However, it is well settled that a taxpayer may avoid the additions to tax for negligence by demonstrating reasonable reliance on the advice of a professional or expert. Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 423-424 (1988), affd. without published opinion 940 F.2d 1534">940 F.2d 1534 (9th Cir. 1991); Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 888 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. , 111 S. Ct. 2631 (1991); Industrial Valley Bank & Trust Co. v. Commissioner, 66 T.C. 272">66 T.C. 272, 283 (1976). In the case of claimed reliance on an accountant who prepared the taxpayer's return, the taxpayer must establish that the correct information was provided to the accountant and that the item incorrectly claimed or reported in the return was the result of the accountant's error. Ma-Tran Corp. v. Commissioner, 70 T.C. 158">70 T.C. 158, 173 (1978);147 Enoch v. Commissioner, 57 T.C. 781">57 T.C. 781, 803 (1972). Gill has an eleventh grade education and no training or work experience in the tax field. Gill testified that he and Quilting relied entirely on their accountant, Shaw, in filing income tax returns for the years at issue. Shaw prepared, or at least worked on and reviewed, each of the returns filed by Gill and Quilting for each of those years. Shaw testified that he believed that Quilting was entitled to the deductions it claimed in its returns for its taxable years at issue with respect to the Dundee house and that he believed the amounts expended by Quilting on that house did not constitute constructive dividends to Gill. While we do not agree with Shaw's conclusions, we find there was some, albeit not a very strong, basis for them. Accordingly, we believe that Quilting reasonably relied on Shaw's advice in claiming the deductions regarding the Dundee house and that Quilting was not negligent with respect to those items. We similarly find that Gill reasonably relied on Shaw's advice in not reporting Quilting's expenditures on the Dundee house as constructive dividends and that Gill was not negligent148 in failing to report those expenditures as constructive dividends. Shaw also testified that, in preparing or reviewing Quilting's returns, he believed that the deductions claimed with respect to the Bolivar house were properly deductible by Quilting. We find that Quilting reasonably relied on Shaw's advice and that Quilting was not negligent in erroneously claiming the deductions for the Bolivar house. Gill concedes that his use of the Bolivar house constituted a constructive dividend in the amount of $ 3,600 for each of the years at issue and that he failed to report that dividend for each such year. We infer from this concession that Gill did not pay the rent due under the lease for any of the years at issue. Shaw's testimony concerning Gill's failure both to pay the rent under the lease and to report his use of the house as income in his return was vague and confusing. There is no evidence establishing that Gill informed Shaw that he had not paid the rent due for the Bolivar house. Based on the record presented, we are unable to conclude that Gill's failure to report his use of the Bolivar house in his return was due to an error by Shaw or that Gill provided Shaw with all149 of the relevant information concerning that matter. Ma-Tran Corp. v. Commissioner, supra; Enoch v. Commissioner, supra.Gill has not offered any other evidence to establish that his failure to report his use of the Bolivar house as income was not due to negligence. Accordingly, we sustain respondent's determination that Gill's failure to report his use of the Bolivar house as a constructive dividend for each of the years 1986 through 1988 was due to negligence. Respondent determined an adjustment to Quilting's cost of goods sold for its taxable year ended April 30, 1988, which Quilting has conceded. Shaw testified that the adjustment related to a change in the applicable tax law which became effective in 1986. Shaw admitted that he was aware of the change in the law but that he assumed, albeit incorrectly, that the change was taken into account in the inventory figures which he received from Quilting. However, Quilting supplied Shaw with erroneous information that Shaw used to prepare Quilting's return. Since the underpayment resulted from the erroneous data supplied to Shaw by Quilting, and Quilting has150 not shown that it was not negligent in preparing and furnishing those data to Shaw, we sustain respondent's determination with respect to the underpayment resulting from this error. Enoch v. Commissioner, supra.Respondent also determined that Gill failed to report the IRA contributions for his taxable years 1986 and 1987, and Gill has conceded that determination. Although Gill reported all of the income reflected on the Forms W-2 issued by Quilting for each of the years 1986 and 1987, the IRA contributions were not reflected on those forms. Nor did Quilting issue any Forms 1099 with respect to those contributions. Because Quilting intended those payments to be compensation to Gill, Quilting should have reported them on the Forms W-2 issued to Gill. Gill claims that the omission of the IRA contributions was a result of Shaw's failure to include them in the gross income reported in his returns. Neither Quilting nor Gill, however, supplied Shaw with information concerning the IRA contributions made on Gill's behalf by Quilting in those years. At trial, Shaw testified that he assumed those contributions were included in the payroll sheets Quilting151 prepared with respect to Gill, which he did not see. Shaw further testified that he saw only the Forms W-2 furnished by Quilting, which he assumed had been correctly prepared. Accordingly, Gill cannot use his reliance on Shaw to shield himself from the additions to tax for negligence. Enoch v. Commissioner, 57 T.C. at 803. Gill also argues that Shaw was nonetheless aware of the IRA contributions, and Gill thus reasonably relied on him to see that they were properly treated in his return. The record shows that Shaw was aware of the IRA payments and was personally familiar with Quilting's accounting practices with respect to the IRA contributions. Shaw kept the minutes of the September 17 meeting at which it was decided that Quilting would make contributions to IRA accounts on behalf of Gill and Bell in 1984 and subsequent years. Furthermore, Shaw prepared or reviewed Quilting's returns in which those contributions were deducted as part of employee benefits. While Gill might have been able to show the omission from his income of the 1986 and 1987 IRA contributions was not negligent if Shaw had advised him that those contributions were not includible152 in his income, that is not the situation presented here. Shaw was fully aware that the IRA contributions were taxable to Gill. Indeed, he included the 1985 and 1988 IRA contributions in Gill's gross income. Shaw's failure to include the IRA contributions for 1986 and 1987 resulted from Quilting's failure to report them in the Forms W-2 which it provided to Gill for each of those years. While Shaw's reliance on the erroneous Forms W-2 issued by Quilting in preparing Gill's 1986 and 1987 returns might have been understandable if Shaw had not been familiar with Quilting's affairs, Shaw not only knew of the payments but also had made an adjusting entry for the year ended April 30, 1985, and allocated as compensation to Gill Quilting's IRA contribution for that year. The failure to include Quilting's 1986 and 1987 IRA contributions in Gill's gross income was due in part to Shaw's failure to check whether the appropriate accounting entries had been made by Quilting, as he had done in the prior year. While Quilting's failure to include the IRA contributions in Gill's Forms W-2 for 1986 and 1987 was the principal reason those amounts were not reported in Gill's return, Shaw should also153 have checked whether they were included, given his high degree of familiarity with Quilting's accounting practices and his view that the IRA contributions were additional compensation to Gill. Accordingly, we sustain respondent's determination that the omission from Gill's 1986 and 1987 returns of the IRA contributions was due to negligence. See American Properties, Inc. v. Commissioner, 28 T.C. 1100">28 T.C. 1100, 1117 (1957), affd. per curiam 262 F.2d 150">262 F.2d 150 (9th Cir. 1958). Shaw further testified that he believed that Quilting was entitled to the deductions it claimed in its returns for its taxable years at issue with respect to its race car sponsorship. We believe that Quilting reasonably relied on Shaw's advice in claiming the entire amount of those deductions and that Quilting was not negligent with respect to that tax return treatment. We also find that Gill reasonably relied on Shaw when Gill filed his tax returns for the years at issue and did not include therein any expenditures incurred by Quilting for its race car sponsorship. Petitioners did not present any evidence concerning the other items at issue that they have conceded. 154 Therefore, there is no basis for the Court to determine whether the underpayment resulting from those items was not the result of negligence. Accordingly, we conclude that petitioners have not sustained their burden of proving that the remaining portion of the respective underpayment of Gill and of Quilting for each of the years at issue was not due to negligence. We have found that a portion of Gill's underpayment for each of the years at issue was due to negligence. Accordingly, we conclude that Gill is liable for the addition to tax under section 6653(a)(1)(A) for 1986 and 1987 and under section 6653(a)(1) for 1988. We further conclude that Gill is liable for the addition to tax under section 6653(a)(1)(B) on that portion of the underpayment for each of the years 1986 and 1987 that we have found is attributable to negligence. We have also determined that a portion of Quilting's underpayment for its taxable years ended April 30, 1986, 1987, and 1988 was due to negligence. We therefore conclude that Quilting is liable for the addition to tax under section 6653(a)(1) for its taxable year ended April 30, 1986, and under section 6653(a)(1)(A) for each of its taxable years ended155 April 30, 1987, and 1988. We further conclude that Quilting is liable for the addition to tax under section 6653(a)(2) for its taxable year ended April 30, 1986, and under section 6653(a)(1)(B) for each of its taxable years ended April 30, 1987, and 1988, on that portion of the underpayment for each of those years that we have found is attributable to negligence. 6. Addition to Tax for Substantial Understatement of Income TaxRespondent determined that Gill is liable for the addition to tax under section 6661(a) for 1986 through 1988 and that Quilting is liable for that addition for each of its taxable years ended April 30, 1987, and 1988. Section 6661, in general, imposes an addition to tax in the amount of 25 percent of the amount of any underpayment attributable to a substantial understatement of income tax. An understatement is generally defined as the amount by which the taxpayer's correct tax exceeds the reported tax. Sec. 6661(b)(2). An understatement is substantial if it exceeds the greater of 10 percent of the correct tax or $ 5,000 ($ 10,000 in the case of a corporation). Sec. 6661(b)(1)(A). Petitioners do not argue that the treatment of items causing their156 respective understatements for the years at issue was adequately disclosed in their returns or that there was substantial authority for the treatment of those items. 26 We therefore conclude that petitioners have conceded those points. See Rybak v. Commissioner, 91 T.C. 524">91 T.C. 524, 566 (1988). Petitioners' only argument against imposition of the addition to tax imposed by section 6661 is that respondent abused her discretion in failing to waive it. In this connection, section 6661(c) allows respondent to waive all or part of the addition to tax under section 6661 upon a showing by the taxpayer157 that there was reasonable cause for the understatement and that the taxpayer acted in good faith. The regulations under section 6661 provide: In making a determination regarding waiver of the penalty under section 6661, the most important factor * * will be the extent of the taxpayer's effort to assess the taxpayer's proper tax liability under the law. * * * In addition, circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge, and education of the taxpayer. * * * Reliance on an information return or on the advice of a professional (such as an appraiser, an attorney, or an accountant) would not necessarily constitute a showing of reasonable cause and good faith. Similarly, reliance on facts that, unknown to the taxpayer, are incorrect would not necessarily constitute a showing of reasonable cause and good faith. Reliance on an information return, professional advice, or other facts, however, would constitute a showing of reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith. * * * 158 [Sec. 1.6661-6(b), Income Tax Regs.]Section 6661 does not state that the taxpayer's proof of reasonable cause and good faith will excuse the taxpayer from being held liable for the addition to tax imposed by that provision. Rather, the statute provides that respondent may waive imposition of that addition in cases in which she determines that the taxpayer's failure was due to reasonable cause and was premised on good faith. Mailman v. Commissioner, 91 T.C. 1079">91 T.C. 1079, 1084 (1988). Respondent's judgment and ability to provide uniform treatment to similarly situated taxpayers deserves our deference, and we should not generally substitute our judgment for hers. Mailman v. Commissioner, supra; Casalina Corp. v. Commissioner, 60 T.C. 694">60 T.C. 694, 701 (1973), affd. per curiam 511 F.2d 1162">511 F.2d 1162 (4th Cir. 1975). Nevertheless, we will not sustain respondent's determination of the additions to tax under section 6661 if we conclude that she has exercised her discretion arbitrarily, capriciously, or without a sound basis in fact. Karr v. Commissioner, 924 F.2d 1018">924 F.2d 1018, 1026 (11th Cir. 1991),159 affg. Smith v. Commissioner, 91 T.C. 733">91 T.C. 733 (1988); Mailman v. Commissioner, supra. Thus, the question for the Court is not whether petitioners' respective understatements were due to reasonable cause and were premised on good faith within the meaning of section 6661(c), but rather whether respondent abused her discretion under that section in failing to waive the addition to tax. Petitioners argue that they satisfied the criteria for waiver of the addition because their respective understatements resulted from their reliance on an accountant to prepare their returns for the years at issue. However, petitioners have not placed in the record documentation or other evidence establishing that they submitted to respondent at any time during their dealings with her representatives at the administrative level, or even up to the time of trial, information relating to their reliance on an accountant that would show there was reasonable cause for those understatements and that they acted in good faith. Thus, assuming arguendo that petitioners requested a waiver that respondent refused to grant, 27 the instant record cannot*160 support a finding by us that respondent abused her discretion. Consequently, the addition to tax under section 6661(a) will be imposed if, after making the Rule 155 computations, petitioners' respective understatement of income tax for each of the years at issue for which respondent determined that the addition to tax under section 6661 applies is substantial within the meaning of that section. Mailman v. Commissioner, supra.Decisions will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. At the time of their separation, Gill and Bell owned 49 shares and 51 shares, respectively, of the common stock of Quilting.↩3. It is not clear from the record who owned the life insurance policies on Gill and/or Bell.↩4. Gill testified that he first raced in 1976 and did not race again until 1983. Bell testified that Gill raced in 1978 for a brief period shortly after she and Gill were married. We conclude from the entire record that Gill and Bell were referring to the same racing activities when they testified and that Gill first raced in 1978. In this regard, we note that petitioners' counsel advised the Court at trial that Gill had just learned that his mother had lung cancer and that Gill was disoriented and confused as to certain dates.↩5. The stipulations of the parties refer to two race cars. However, Gill testified that he drove three race cars during the years at issue, but that he never owned more than one at any time. When Pringle's car is taken into account, Quilting sponsored a total of four race cars during certain years at issue. Quilting, however, never sponsored more than two cars at any one time during that period. It is not clear to us whether the stipulations were intended to refer to the total number of race cars sponsored by Quilting (namely, four) or to the number of cars sponsored by Quilting at any one time during certain years at issue (namely, two). While we are not bound by a stipulation clearly contrary to facts disclosed by the record, Jasionowski v. Commissioner, 66 T.C. 312">66 T.C. 312, 318↩ (1976), in order to harmonize the stipulations with the evidence received at trial, we interpret the stipulations to refer to the number of cars sponsored by Quilting at any one time (namely, two) during certain years at issue.6. Shaw testified that Quilting incurred expenses of $ 42,175 to sponsor Gill during this year, but, when this figure is added to the $3,077 Quilting incurred to sponsor Pringle, the sum is $ 45,252, and not the $ 44,252 amount the parties stipulated Quilting incurred sponsoring race cars during its taxable year ended April 30, 1988. We conclude that Shaw misspoke in testifying to the cost Quilting incurred in sponsoring Gill's race car during that year.↩7. Following Gill's and Bell's separation in 1985, Gill received Bell's interest in the Dundee house. Thus, when that house was sold in April 1989, Gill received all the proceeds from the sale remaining after payment of closing costs and the outstanding mortgage loan balance.↩8. Neither party contends that Quilting's expenditures on the Dundee house should have been expensed rather than depreciated.↩9. There is no suggestion by petitioners that Gill did not receive constructive dividends during the years at issue because Quilting's earnings and profits were inadequate.↩10. Respondent determined that Gill received a constructive dividend equal to $ 3,600 for each year at issue with respect to Quilting's expenditures on the Bolivar house. Gill conceded the correctness of respondent's determination.↩11. We note that there appears to be some confusion as to the extent of Gill's concession that the life insurance premiums paid by Quilting are includible in his income. In the stipulation of facts (stipulation) filed at the beginning of the trial, Gill conceded that the premiums paid for insurance on his life were includible in his income, but he did not make a similar concession as to the amounts paid to insure Bell's life. At the beginning of the trial, in outlining for the Court the points no longer in dispute, counsel for petitioners stated there was no dispute as to the income to Gill, but only with respect to the deductibility of the payments by Quilting. Respondent's counsel then stated that she understood that the life insurance issue, as far as it concerned the question whether Quilting's premium payments were includible in Gill's income, was being conceded in full by Gill. Petitioners' brief follows the stipulation, while respondent's brief proceeds on the assumption that Gill conceded that the entire amount of premiums paid for insurance on the lives of both Gill and Bell was includible in his income. Based on our review of the record, we find that Gill's counsel did not intend to make any concession beyond that contained in the stipulation. Accordingly, we conclude that the question whether Gill received a constructive dividend or additional compensation on account of Quilting's payments to insure Bell's life is still in dispute.↩12. Although Quilting made such contributions on behalf of Gill, the record does not disclose whether Quilting made any such contributions on behalf of Bell.↩13. Respondent did not determine that any IRA contributions made by Quilting on Bell's behalf constituted income to Gill.↩14. Although it is not altogether clear, it appears, and we assume herein, that respondent is taking the position that Quilting's premium payments on the policy insuring Bell's life constitute additional compensation to Gill, even if they are not constructive dividends to him.↩15. The parties stipulated to a number of exhibits relating to the race car sponsorship issue, subject to certain objections by respondent. Respondent objected to admission of certain of these exhibits on relevance grounds. Two of the exhibits are letters written in 1989 by customers of Quilting that mention the race cars sponsored by Quilting. We find these letters relevant to the race car sponsorship issue, and we thus do not sustain respondent's objection. We shall rely on those letters to the extent stated herein. The remaining two exhibits to which respondent made relevance objections concern stencils made by Quilting for use by Volvo GM Heavy Truck Company to mark shipping crates. We also find these exhibits relevant, but we do not rely on them in reaching our decision. At trial, the parties disagreed as to the admissibility of two other exhibits offered by petitioners that relate to the race car sponsorship issue. Respondent objected to these exhibits on grounds of hearsay. We conditionally admitted those exhibits and indicated that we would address the question of their admissibility in our opinion. Those exhibits consist of articles that were published after the years at issue concerning the use of race car sponsorship to advertise various companies. We understand that petitioners are not offering those exhibits for the truth of the matters contained therein. Thus, we do not sustain respondent's hearsay objections.↩16. Respondent also points out that Gill reported income from the racing activity in his personal income tax returns and that Quilting accounted for the race car expenses in a separate category from its other advertising expenses. The fact that Gill kept the winnings from the racing activities and reported those winnings in his returns means only that Quilting was not in the trade or business of racing. Nor do we not find it significant that Quilting accounted for its race car sponsorship in a separate category from the rest of its advertising. That sponsorship was admittedly a unique type of advertising within its industry.↩17. Quilting also contends that its sponsorship of certain race cars was designed to assist it in marketing stencils for use on vehicles. However, we need not, and therefore do not, consider this contention because we agree with Quilting's principal argument that its sponsorship of race cars was intended to generate publicity for itself.↩18. Although not entirely clear, we conclude on the basis of the entire record that Quilting's practice of displaying a picture of one of the race cars at the trade shows in which it participated took place during at least some of the years at issue.↩19. Gill and Pringle were unacquainted prior to the time Pringle approached Gill concerning a sponsorship, and Pringle was a track champion at that time. The races in which Pringle participated during the years at issue received coverage by the national media.↩20. This figure is computed by subtracting the following two items (discussed below) from the $ 30,910 total deducted by Quilting as the cost of its race car sponsorship for its taxable year ended April 30, 1987: (1) The $ 3,000 claimed with respect to the trailer that was used principally to haul business supplies, and (2) the $ 1,600 claimed with respect to the semitrailer that was not used in connection with Quilting's race car sponsorship.↩21. Petitioners contend that the amount incurred by Quilting for its race car sponsorship during each of its taxable years at issue was reasonable because it equaled only 2.17 percent of gross receipts for the taxable year ended April 30, 1987, and 2.94 percent of gross receipts for the taxable year ended April 30, 1988. Petitioners rely on Brallier v. Commissioner, T.C. Memo 1986-42">T.C. Memo. 1986-42, where we allowed a corporation to deduct the cost of sponsoring certain race car activities to the extent they did not exceed three percent of the taxpayer's gross receipts. Our conclusion in that case was premised upon our finding that such a level of expenditures was expected of the taxpayer, a franchisee of a national restaurant chain, in order to promote the chain's restaurants generally and that the chain accepted the taxpayer's racing sponsorship expenditures as a substitute for contributions to the chain's national advertising fund. Our holding in Brallier was thus based on the particular circumstances of that case, and we did not intend to create a rule of thumb for deciding whether a certain level of expenditure was reasonable or unreasonable. See also Lang Chevrolet Co. v. Commissioner, T.C. Memo. 1967-212↩, where we found that racing expenditures of .7 and one percent of gross sales reasonable for a taxpayer in a "highly competitive" business.22. This amount consists of $ 3,077 to sponsor Gill and $ 3,077 to sponsor Pringle.↩23. The amounts we have allowed relate not only to the race car sponsorship but also to the trailer and semitrailer used in Quilting's business. We have allowed Quilting to deduct $ 2,700 with respect to the trailer and the entire $ 1,600 claimed with respect to the semitrailer.↩24. Because the record does not disclose the value of the use of the trailer in connection with Gill's race car activity, we may, and will, use a pro rata portion of the deduction claimed by Quilting to measure the constructive dividend received by Gill. See United Aniline Co. v. Commissioner, 316 F.2d 701">316 F.2d 701, 705 (1st Cir. 1963), affg. T.C. Memo. 1962-60↩.25. With respect to Quilting's taxable year ended April 30, 1986, it appears respondent made her determination under the wrong version of sec. 6653(a). Sec. 6653(a)(1)(A) and (B) are applicable only to returns due (without regard to extensions) after December 31, 1986. Tax Reform Act of 1986, Pub. L. 99-514, sec. 1503(e), 100 Stat. 2743. Because Quilting's return for the taxable year ended April 30, 1986, would, under sec. 6072(b), have been due July 15, 1986 (the 15th day of the third month after the end of that year), the provisions of sec. 6653(a) prior to their amendment by the Tax Reform Act of 1986 would have applied to that return. Since the Tax Reform Act of 1986 did not make changes in sec. 6653(a) that would affect the outcome of the instant case, we will treat respondent's determination as having been made under the version of sec. 6653(a) applicable to Quilting's return for its taxable year ended April 30, 1986.↩26. Section 6661(b)(2)(B) provides for the reduction of an understatement by that portion that is attributable to either (1) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment; 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.↩27. The record is insufficient for us to decide whether or not respondent considered and/or rejected a request for a waiver. Mailman v. Commissioner, 91 T.C. 1079">91 T.C. 1079, 1084↩ (1988).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620613/	EDGAR L. PASCHALL and LUCY G. PASCHALL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPaschall v. CommissionerDocket Nos. 26522-81, 9037-82.United States Tax CourtT.C. Memo 1983-521; 1983 Tax Ct. Memo LEXIS 268; 46 T.C.M. (CCH) 1197; T.C.M. (RIA) 83521; August 24, 1983. Edgar L. Paschall, pro se. Robert P. Crowther, for the respondent. SCOTTMEMORANDUM OPINION SCOTT, Judge: Respondent determined deficiencies in petitioners' income tax for the calendar years 1978, 1979 and 1980 in the amounts of $633.89, $817.63 and $988.35, respectively. Certain minor adjustments made by respondent with respect to petitioners' claimed deductions for the years 1978 and 1979 have been conceded by petitioners, leaving for our decision only whether petitioner Edgar L. Paschall is liable for self-employment taxes under the provisions of sections269 1401 and 1402 1 on his income earned as an ordained minister in each of the years here in issue.All of the facts have been stipulated and are found accordingly. Petitioners, husband and wife, who resided in McKenzie, Tennessee, at the time of the filing of their petition in this case, filed joint Federal income tax returns for the calendar years 1978, 1979 and 1980 with the Director, Internal Revenue Service Center, Memphis, Tennessee. During each of the years here in issue, Mr. Paschall was a minister at the Southside Missionary Baptist Church in McKenzie, Tennessee. Mr. Paschall was ordained as a minister on July 15, 1973. The first two years in which Mr. Paschall (petitioner) had net earnings from self-employment of $400 or more, some part of which was from services performed by him as a minister, were 1973 and 1974. Mr. Paschall did not apply for an exemption from self-employment tax before the due date of his 1974 calendar year income tax return and has not, to date, made an application for such an exemption.270 Respondent, in his deficiency notices, determined that petitioner was liable for self-employment tax on his income from performance of his ministerial duties. In his petition, petitioner alleged that it was against his religious conviction to pay "social security" tax and that as pastor of the Southside Missionary Baptist Church he developed this conviction after the expiration of the two-year period allowed by section 1402(e) for filing the exemption form. He further alleged that "This two year limitation is an unfair ruling and violates my first amendment rights." At the trial, petitioner explained in some detail the basis of his conviction which had been developed in 1977 that "social security" tax was contrary to the scriptures. He further took the position that because of his religious beliefs, to require him to pay self-employment tax merely because he had not formed this conviction within the first two years after he was ordained violated his rights under the First Amendment to the Constitution. The exact issue presented by petitioner in this case was presented and decided in Ballinger v. Commissioner,78 T.C. 752">78 T.C. 752 (1982), adverse to the position taken*271 by petitioner. In that case we specifically held that to deny a minister the exemption from self-employment tax because he had formed the belief that it was contrary to his religious faith to pay such tax more than two years after the due date of his return for the second year after he received income as an ordained minister, was not violative of a minister's First Amendment rights. We do not consider it necessary to repeat the reasons we set forth in a detailed discussion in Ballinger v. Commissioner,supra, but on the basis of that case conclude that requiring petitioner to pay self-employment tax under the circumstances here present does not violate his constitutional rights under the First Amendment to the Constitution. Decisions will be entered for the respondent.Footnotes1. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years here in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620617/	WILLIAM C. PHILLIPS, II AND GRACE M. PHILLIPS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPhillips v. CommissionerDocket No. 8854-91United States Tax CourtT.C. Memo 1993-514; 1993 Tax Ct. Memo LEXIS 525; 66 T.C.M. (CCH) 1219; November 9, 1993, Filed 525 Decision will be entered under Rule 155. William C. Phillips, II and Grace M. Phillips, pro sese. Alan R. Peregoy, for respondent. SWIFTSWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent determined a deficiency in petitioners' 1985 joint Federal income tax and additions to tax as follows: Additions to TaxSec.Sec.Sec.Sec.Deficiency66516653(a)(1)6653(a)(2)6661$ 143,921$ 35,996$ 7,349 $ 35,98050 percent of the interest due on the portionof the underpayment attributable to negligence.All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. After settlement, the primary issue remaining for decision is whether amounts credited in 1985 to petitioner William C. Phillips, II's (petitioner's) draw account with Creative Energy Management, Inc. (CEM) constituted additional income. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners resided in Timonium, Maryland, at the time the petition was filed. During 1984 and until January 25, 1985, petitioner was an employee and526 an independent commissioned salesman for CEM, a company which sold computers to regulate the operation of heating and air conditioning equipment. Petitioner drew checks on CEM's checking account in favor of himself and in favor of third parties in order to pay a variety of his personal expenses. Checks drawn on CEM's checking account in favor of petitioner or in favor of third parties in order to cover petitioner's personal expenses were accounted for by CEM as increases or as debits to petitioner's draw account with CEM. On January 3, 1985, a check in the amount of $ 15,000 was drawn on CEM's checking account in favor of Shearson Lehman Brothers, Inc. (Shearson), and the $ 15,000 was deposited into a new investment account at Shearson in the name of and for the benefit of petitioners. On January 25, 1985, petitioner's employment relationship with CEM was terminated. On that date, petitioner's draw account with CEM had a total outstanding debit balance of $ 89,046. On or about January 31, 1985, and in connection with the termination of petitioner's employment, $ 40,000 in commissions and $ 7,930 in wages to which petitioner was entitled from CEM but which had not yet been paid527 to petitioner were credited by CEM to petitioner's draw account with CEM thereby reducing the amount reflected on CEM's books as owed by petitioner to CEM. Between March 28, 1985, and December 17, 1985, 4 checks in the total amount of $ 14,581 were drawn on petitioners' account with Shearson. Petitioners were the payees on the checks. The checks were mailed to petitioners' home address, and the checks were endorsed with signatures that appear to be petitioners'. On November 30, 1985 (the close of CEM's 1985 fiscal year), $ 40,805 in commissions to which petitioner was entitled from CEM but which had not yet been paid to petitioner were credited by CEM to petitioner's draw account with CEM thereby reducing the amount reflected on CEM's books as owed by petitioner to CEM. On March 31, 1988, petitioners' 1985 joint Federal income tax return was untimely filed. On that return, petitioners reported $ 31,298 in commission income and $ 10,000 in wages earned by petitioner from CEM. On audit of petitioners' 1985 joint Federal income tax return, respondent determined, among other things, that petitioner received in 1985 additional commission income from CEM in the amount of $ 49,697528 and that, because petitioners owned the Shearson investment account, petitioners received in 1985 additional dividend income in the amount of $ 483 and additional short-term capital loss in the amount of $ 492, which dividend income and short-term capital loss were attributable to transactions entered into on behalf of petitioners' investment account with Shearson. OPINION Commission income earned by an independent salesman is to be included in gross income and is subject to self-employment income tax. Secs. 61(a)(1), 1402(b). Commissions that are credited against a salesman's draw account and used to pay advances made to the salesman through the draw account are included in the salesman's commission income for the year in which they are so credited. See Newmark v. Commissioner, 311 F.2d 913">311 F.2d 913, 915 (2d Cir. 1962), affg. T.C. Memo. 1961-285; Kelly v. Commissioner, T.C. Memo. 1991-324, affd. without published opinion 988 F.2d 1218">988 F.2d 1218 (11th Cir. 1993); Lehew v. Commissioner, T.C. Memo. 1987-389. A total of $ 80,805 was reflected in the books529 and records of CEM as the amount of commissions paid to petitioner in 1985. The commissions were received by petitioner by way of the credits to petitioner's draw account reflecting reductions in the indebtedness petitioner owed to CEM. Petitioner alleges that he was not entitled to commissions of $ 80,805 and that the books and records of CEM were inaccurate. On the evidence before us, we hold that petitioner received in 1985 commission income from CEM in the amount of $ 71,493. 1Petitioners make no argument that the commission income is not subject to the tax on self-employment income under section 1401. Petitioners do not dispute that if we conclude that they owned the Shearson account, their dividend income for 1985 would be increased by $ 483 and their short-term capital loss for 1985 would be increased by $ 492. The documentary evidence introduced at trial (particularly the530 4 checks written to and endorsed by petitioner on this account after his termination by CEM) and the testimony of various witnesses, establish that petitioners owned the Shearson account. We so hold. Petitioners' dividend income and short-term capital loss for 1985 are accordingly increased by $ 483 and by $ 492, respectively. Respondent determined that petitioners are liable for additions to tax under sections 6651, 6653(a)(1) and (2), and 6661. Petitioners have the burden of proof to show that respondent erroneously determined these additions to tax. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933). Petitioners have not offered any evidence nor made any separate arguments regarding these additions to tax. We sustain respondent's determination that petitioners are liable for these additions to tax. We note that petitioners have raised in their brief various tax protester type arguments. We have considered these arguments and have found them to be meritless. See Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984); McCoy v. Commissioner, 76 T.C. 1027">76 T.C. 1027, 1029-1030 (1981), affd. *531 696 F.2d 1234">696 F.2d 1234 (9th Cir. 1983). Decision will be entered under Rule 155. Footnotes1. This amount takes into account $ 9,312 that respondent concedes was erroneously treated as commissions by CEM and by respondent.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620618/	WALTER S. GURNEE AND C. J. O'CONOR, EXECUTORS, ESTATE OF BELL B. GURNEE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gurnee v. CommissionerDocket No. 10429.United States Board of Tax Appeals13 B.T.A. 262; 1928 BTA LEXIS 3285; August 17, 1928, Promulgated 3285 The fact that estate tax paid in the taxable year exceeds the income of the estate does not render a beneficiary's distributive share nontaxable. Edward H. Green, Esq., for the petitioners. Maxwell E. McDowell, Esq., for the respondent. ARUNDELL262 The respondent determined an overassessment of income tax for 1919 in the amount of $306.26 and deficiency for 1920 in the amount of $1,817.14. The overassessment arises out of the partial rejection of a claim in abatement. The petition filed sought a redetermination of taxes for both years, but at the hearing counsel for petitioners abandoned the 1919 proceeding. The question for 1920 is whether respondent erred in taxing as income the amount received by Bell B. Gurnee as a beneficiary of the estate of Walter S. Gurnee, the executors of that estate having paid a Federal estate tax in that year in excess of its income. FINDINGS OF FACT. Petitioners are the duly qualified executors of the estate of Bell B. Gurnee, who died in 1925, a resident of the State of New York. In 1920 decedent received from the executors of the estate of Walter S. Gurnee, as a beneficiary under his will, the3286 sum of 263 $34,613.78, which was returned as income. Of this sum $17,306.89 was included in Schedule H as dividends and subjected only to surtax, and the balance, $17,306.89, was included as other income from fiduciaries in Schedule C and subject to both normal tax and surtax. In the same year, 1920, the executors of the estate of Walter S. Gurnee paid a Federal estate tax in the amount of $375,793.61. The entire income of the estate for that year was less than the Federal estate tax paid and the estate had no net income in that year. OPINION. ARUNDELL: It is the contention of the petitioners that the amount which Mrs. Gurnee received in 1920 as a beneficiary under the will should not be included in income. The argument is that the law taxes only the beneficiary's distributive share in the net income of an estate, and, as the estate here had no net income there was no distributive share upon which the law could operate. It is not contended that the estate had no gross income; the lack of net income was due to the payment of the Federal estate tax. This question at first glance would seem to be governed by the decision in 3287 , and the decisions of the Board which are collated in . The petitioners argue that the Baltzell decision is not opposed to their contention here but on the contrary supports it. Their theory is that the court recognized a distinction between income from capital transactions and income in which a beneficiary could share, and that inasmuch as there was sufficient income of the latter class, the beneficiary was taxable on the amount received. True, the losses involved in the Baltzell case were capital losses, but we do not understand the decision to rest on that fact. Our understanding of the basis of the decision is that the distributive share of a beneficiary which is to be returned as income must be determined in accordance with the terms of the trust regardless of the amount of gains or losses of the trust entity. This result naturally follows from the well established fact that the estate or trust and the beneficiary are separate taxable entities. 3288 . What income the estate may have, or what deductions it may take are of no interest to a beneficiary where the latter's distributive share is fixed by the terms of the instrument creating the estate or trust. The principle involved in this case is the same as that in the case of , although the question is put in a different form. In that case the beneficiary claimed a deduction for estate taxes which he paid to prevent the sale of real estate comprising a part of the corpus of the estate. The deduction claimed was *264 disallowed on the ground that the taxes under , were allowable as a deduction only to the estate and not to the beneficiary. The fact that the question is framed differently in the two cases does not change the result. See also . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620619/	New York Fruit Auction Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentNew York Fruit Auction Corp. v. CommissionerDocket No. 3734-80United States Tax Court79 T.C. 564; 1982 U.S. Tax Ct. LEXIS 34; 79 T.C. No. 36; September 28, 1982, Filed 34 Decision will be entered for the respondent. Corporation A acquired all the stock of corporation B. Corporation A was then merged into corporation B. Held, neither sec. 334(b)(2), I.R.C. 1954, nor the "integrated transaction" doctrine applies to permit a step-up in basis of the assets of corporation B. Michael A. Varet, for the petitioner.Vincent R. Barrella, for the respondent. Tannenwald, Chief Judge. TANNENWALD565 Respondent determined deficiencies in petitioner's Federal income tax in the amounts of $ 27,007, $ 24,480, and $ 23,945 for the taxable years 1974, 1975, and 1976, respectively. The sole issue for our determination is whether petitioner is entitled to a stepped-up basis in its assets, equal to the price paid for petitioner's stock by Cayuga Corp. 1FINDINGS OF36 FACTSome of the facts have been stipulated and are found accordingly.Petitioner New York Fruit Auction Corp. is a corporation with offices located at Hunts Point Food Center, Bronx, N.Y. Prior to and during the years at issue, petitioner was engaged in the business of conducting daily produce auctions at the Hunts Point Terminal Market in Bronx, N.Y.The majority of petitioner's shares was owned by DiGiorgio Corp. (DiGiorgio). Some time prior to January 1, 1972, DiGiorgio concluded that it wished to divest itself of its stock in petitioner. By letter agreement dated June 8, 1972, and executed by DiGiorgio on June 12, 1972, DiGiorgio and Monitor Petroleum Corp. (MPC) entered into an agreement whereby MPC was to acquire DiGiorgio's stock holdings in petitioner.On July 12, 1972, Cayuga Corp. (Cayuga) was incorporated for the purpose of acquiring petitioner's stock. MPC formally assigned its rights under the June 8, 1972, letter agreement to Cayuga on July 27, 1972. Cayuga acquired all petitioner's stock owned by DiGiorgio, i.e., 31,413 shares of class A voting stock (80.27 percent of the outstanding shares) and 26,573 566 shares of class B nonvoting stock (73.22 percent37 of the outstanding shares) on August 1, 1972. 2On September 29, 1972, C. Sub. Inc. (C. Sub.) was incorporated as a wholly owned subsidiary of Cayuga. Apparently for the purpose of eliminating petitioner's minority shareholders, C. Sub. was merged into petitioner on November 10, 1972, and, in accordance with the merger agreement, the minority shareholders were paid $ 45 per share for petitioner's stock. The merger became effective on November 10, 1972.On August 9, 1973, Cayuga was merged into petitioner. The owners of petitioner after the merger were the former owners of Cayuga. Apparently, the merger took the form of a downstream merger on the advice of petitioner's counsel. The record disclosed no reason why an upstream merger would not have been feasible. 338 OPINIONThe sole issue for our determination is whether petitioner is entitled to a cost-of-stock basis 4 in its assets. Apparently, Cayuga's only asset was the stock in petitioner. Therefore, the assets whose bases are at issue are those assets which were owned by petitioner, rather than Cayuga, prior to the merger. Respondent contends that there exists no authority which would permit petitioner to step up the basis of its assets. Petitioner argues that it is entitled to a step-up in basis: (1) Pursuant to section 334(b)(2); 5 or (2) because the series of interrelated transactions which took place "in substance constituted the purchase of [petitioner's] assets by Cayuga."Generally, a corporation's39 basis in its assets is their historical cost. See sec. 1012. Unless the Code provides otherwise, petitioner's basis in its assets remains equal to the cost of those 567 assets despite the fact that petitioner's stock has changed hands. See B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders par. 1.05, at 1-14 (4th ed. 1979).We deal first with petitioner's argument that it is entitled under section 334(b)(2) to a cost-of-stock basis in its assets. 6Section 334(b)(2) is applicable only to liquidations within the meaning of section 332(b). Yoc Heating Corp. v. Commissioner, 61 T.C. 168">61 T.C. 168, 175 (1973). Section 332(b) requires a complete liquidation of a subsidiary into its parent, and such a liquidation 568 can be accomplished by a statutory merger. Sec. 1.332-2(d) and (e), Income Tax Regs.40 The merger of Cayuga into petitioner did not result in the complete liquidation of petitioner. "A status of liquidation exists when the corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs, paying its debts, and distributing any remaining balance to its shareholders." Sec. 1.332-2(c), Income Tax Regs. At least through the trial of this case, petitioner remained an active corporation and, thus, was not liquidated within the meaning of section 332(b). Assuming that petitioner is correct that the direction which the merger took (downstream) was the result of an error of counsel and that the downstream merger resulted in no "substantive difference and that no benefit or advantage was gained thereby" (but see note 9 Infra), these factors do not relieve petitioner of compliance with the requirements of section 332(b).Insofar as section 334(b)(2) is concerned, we are unwilling to ignore the form of the transaction deliberately chosen by the participants in preference to [any] form suggested by petitioner or other possible forms that come to mind. * * * Section 332(b), the statutory threshold to section 334(b)(2), has41 been construed to require strict compliance with its formal requirements. * * Under the circumstances of this case, we see no reason why we should adopt a different approach. * * * [Yoc Heating Corp. v. Commissioner, 61 T.C. at 175-176. Citations omitted.]See also Matter of Chrome Plate, Inc. v. United States, 614 F.2d 990">614 F.2d 990, 996 (5th Cir. 1980). 742 Having concluded that petitioner is not entitled to increase the basis of its assets pursuant to section 334(b)(2), we turn to petitioner's contention that it is entitled to the benefit of the Kimbell-Diamond doctrine, namely, that where stock of a corporation is acquired for the purpose of liquidating the corporation and obtaining its assets, we will disregard the intermediate steps of the transaction and treat it merely as a 569 purchase of the corporation's assets. See Kimbell-Diamond Milling Co. v. Commissioner, 14 T.C. 74">14 T.C. 74 (1950), affd. per curiam 187 F.2d 718">187 F.2d 718 (5th Cir. 1951). See also Griswold v. Commissioner, 45 T.C. 463">45 T.C. 463, 472 (1966), affd. 400 F.2d 427">400 F.2d 427 (5th Cir. 1968).In International State Bank v. Commissioner, 70 T.C. 173">70 T.C. 173 (1978), we held that the Kimbell-Diamond doctrine no longer has vitality in respect of transactions meeting the requirements of section 332. See also Matter of Chrome Plate, Inc. v. United States, supra. Whatever the vitality of the Kimbell-Diamond doctrine in43 respect of transactions falling outside the purview of section 332, 8 we do not believe that the present case falls within the scope of that doctrine.Petitioner argues at length that the record clearly shows that the persons who arranged the purchase of petitioner's stock by Cayuga intended from the outset to acquire the assets of petitioner and that we should give effect to that intention. We think the record is far from clear as to the44 existence of any such intention. In any event, such an intention is not in and of itself enough. For the Kimbell-Diamond doctrine to be applicable, the purchaser must acquire the sought-after assets. See Mills Pharmaceuticals, Inc. v. Commissioner, 57 T.C. 308">57 T.C. 308, 314 (1971). This simply did not occur in this case.Petitioner's plea that we should look through form to substance and ignore this critical fact is without merit. We have in several instances cut through form and opted for substance, even to the extent of resurrecting a corporation which was eliminated during what purported to be an (F) reorganization ( Casco Products Corp. v. Commissioner, 49 T.C. 32">49 T.C. 32 (1967)), 945 or, as in the several cases relied upon by petitioner, 10570 applied the "integrated transaction" doctrine to determine the actual purchaser of assets. But such approaches do not permit us to supply an essential fact which is missing herein, namely, that petitioner did not acquire the assets in a transaction which justifies according them a stepped-up basis.That the result for which petitioner contends might have been accomplished in another fashion (the merger or liquidation of petitioner into Cayuga) is beside the point. Petitioner cannot escape the form of the transaction which it utilized. Compare Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331 (1945), with United States v. Cumberland Pub. Serv. Co., 338 U.S. 451">338 U.S. 451 (1950), and Wall v. United States, 164 F.2d 462 (4th Cir. 1947), with Priester v. Commissioner, 316">38 T.C. 316 (1962). See also Waltham Netoco Theatres, Inc. v. Commissioner, 49 T.C. 399">49 T.C. 399, 404-405 (1968), affd. 401 F.2d 333">401 F.2d 333 (1st Cir. 1968).46 Decision will be entered for the respondent. Footnotes1. In accordance with a joint motion of the parties, the issue of the valuation of petitioner's assets was severed from the issue of petitioner's entitlement to a step-up in basis. See Rule 141(b), Tax Court Rules of Practice and Procedure.↩ If we find for respondent in this case, the valuation of petitioner's assets becomes a moot question.2. At no time pertinent herein were any of the shareholders of Cayuga shareholders of petitioner or otherwise related parties within the meaning of sec. 334(b)(3), I.R.C. 1954↩.3. Although, in general, petitioner was required to obtain New York City's consent prior to assigning its lease of the Hunt's Point Terminal Market, the lease could be assigned to petitioner's successor corporation resulting from a merger, consolidation, or reorganization without such consent.↩4. The cost-of-stock basis refers to the cost which Cayuga paid to purchase petitioner's stock.↩5. Unless otherwise indicated, 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.↩6. Sec. 334(b)(2) provides in pertinent part:(2) Exception. -- If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of section 332(b)), and if -- (A) the distribution is pursuant to a plan of liquidation adopted -- * * * (ii) not more than 2 years after the date of the transaction described in subparagraph (B) (or, in the case of a series of transactions, the date of the last such transaction); and(B) stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), was acquired by the distributee by purchase (as defined in paragraph (3)) during a 12-month period beginning with the earlier of, (i) the date of the first acquisition by purchase of such stock, or(ii) if any of such stock was acquired in an acquisition which is a purchase within the meaning of the second sentence of paragraph (3), the date on which the distributee is first considered under section 318(a) as owning stock owned by the corporation from which such acquisition was made,then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. * * Sec. 332(b) provides in pertinent part:SEC. 332(b). Liquidations to Which Section Applies. -- * * a distribution shall be considered to be in complete liquidation only if -- (1) the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and the owner of at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends); and * * (2) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; * ↩ * * A distribution otherwise constituting a distribution in complete liquidation within the meaning of this subsection shall not be considered as not constituting such a distribution merely because it does not constitute a distribution or liquidation within the meaning of the corporate law under which the distribution is made; * * *7. Since the sec. 332(b) requirement of a liquidation of the subsidiary has not been met, we need not address the argument put forth by respondent at trial that, because Cayuga's percentage of ownership of petitioner's stock exceeds 80 percent only because of the acquisition of petitioner's minority shares at the time of the merger of C. Sub. into petitioner, Cayuga did not acquire 80 percent of petitioner's stock by purchase. In this connection, see Madison Square Garden Corp. v. Commissioner, 58 T.C. 619">58 T.C. 619, 625-626 (1972), affd. in part and revd. in part 500 F.2d 611">500 F.2d 611↩ (2d Cir. 1974).8. See, e.g., B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders par. 11.44, at 11-48 (4th ed. 1979), for the proposition that "the purchase of stock by an individual with an intent to liquidate the corporation in order to obtain its assets -- a transaction outside of § 334(b)(2) because the purchaser is not a corporation -- may be treated as a purchase of assets." (Emphasis added. Fn. ref. omitted.) See also concurring opinion of Tannenwald, J., in International State Bank v. Commissioner, 70 T.C. 173">70 T.C. 173, 181↩ (1978).9. Casco Products↩ illustrates the potential for tax benefits which might be available to petitioner -- i.e., availability of future carrybacks -- and undermines petitioner's contentions to the extent that they rest on the absence of any difference in tax benefits whether Cayuga was merged into petitioner or vice versa.10. Yoc Heating Corp. v. Commissioner, 61 T.C. 168">61 T.C. 168 (1973); Long Island Water Corp. v. Commissioner, 36 T.C. 377">36 T.C. 377 (1961); Southwell Combing Co. v. Commissioner, 30 T.C. 487">30 T.C. 487 (1958); Wire Fabrics Corp. v. Commissioner, 16 T.C. 607↩ (1951).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620621/	United Artists Corporation of Japan v. Commissioner.UA Corp. v. CommissionerDocket No. 272.United States Tax Court1944 Tax Ct. Memo LEXIS 204; 3 T.C.M. (CCH) 574; T.C.M. (RIA) 44210; June 13, 1944204 T. Newman Lawler, Esq., 152 W. 42nd St., New York, N. Y., for the petitioner. Ellyne E. Strickland, Esq., for the respondent. DISNEYMemorandum Findings of Fact and Opinion DISNEY, Judge: This proceeding involves income taxes for the calendar years 1938 and 1939. Deficiencies were determined by the Commissioner in the amount of $2,443.44 for the calendar year 1938 and in the amount of $2,800 for the calendar year 1939. Part of the deficiency for each year, 1938 and 1939, is due to the disallowance by the Commissioner of an amount claimed by the petitioner as credit against its income tax liability on account of foreign income tax allegedly paid to a foreign country. Petitioner has not assigned this phase of the Commissioner's determination as error and has withdrawn any claim to this alleged credit. Effect will be given thereto in the decision to be entered under Rule 50. The only issue presented is whether income earned by the petitioner in Japan in 1938 and 1939 and received in Japanese yen, which were allegedly "blocked" by the Japanese Government, should be included in petitioner's gross income for Federal income tax purposes in United States dollars. From evidence adduced, 205 we make the following Findings of Fact United Artists Corporation of Japan (hereinafter sometimes referred to as petitioner) is a corporation duly organized and existing under the laws of the State of Delaware, with its principal office in New York City. Until December 7, 1941, petitioner was engaged in the business of distributing in Japan motion picture photoplays of independent producers. Petitioner obtained these photoplays from its parent corporation, United Artists Corporation (hereinafter sometimes referred to as United), which owns all of the stock of petitioner. The film rentals or license fees derived by petitioner from the licensing of photoplays for exhibition in Japan are divided 60 per cent to the producers and 40 per cent to petitioner. Of the 40 per cent retained by petitioner, 5 per cent is payable to United as commission. Petitioner, during 1938 and 1939, maintained its books and records on an accrual basis of accounting. Prior to July 1937, petitioner experienced no difficulty in exporting money from Japan. It was petitioner's custom to remit to New York all monies not required in the operation of its business in Tokyo and to pay the producers their share as206 soon as the money was received in New York. In July 1937, the Japanese Government restricted to 1,000 yen a month the amount of Japanese yen which could be exported without a special permit, and in December 1937 the maximum was further reduced to 100 yen a month. The free importation of goods into Japan was also stopped during 1937 and it became impossible to import motion pictures into Japan without a special permit from the Japanese Government. Toward the end of 1938, the importation of new pictures was altogether prohibited. Violations of these regulations were punishable by fines and imprisonment. Japanese Exchange Control Authorities inspected the books and banking transactions almost monthly, and otherwise rigidly enforced the regulations so as to deter evasion. Applications for permission to export sums in excess of the maximum set forth above were formal documents which had to be made in quintuplicate in Japanese to the Minister of Finance. Petitioner could not barter and thus remove funds from Japan without a permit and it was impossible for a company doing business in Japan to sell American dollars against delivery in Japanese yen in Japan, except with a permit. Japanese207 yen could be used in the purchase of Japanese securities, such as Government bonds, but they could not be taken out of the country without a permit. These permits were difficult to obtain and would not be given except in connection with the importation of goods deemed essential by Japan, such as scrap iron, gasoline and cotton. Furthermore, the State Department of the United States advised the Motion Pictures and Distributors' Association that it did not look with favor upon investment in Japanese bonds. Japanese yen could also be used by petitioner to pay its operating expenses. The investment of yen in Japan was permitted provided, however, that the business to be carried on was deemed to be essential by the Japanese Government. The petitioner had accumulated a very large deposit account in its American bank, but these deposits were payable by petitioner's bank in Japan and only in the form of yen. The petitioner and seven other American film companies were members of a trade association, known as American Motion Picture Association of Japan (hereinafter sometimes referred to as the Association). The Association's purpose was to deal with problems of the motion picture industry208 as it affected its members and to deal with Japanese exhibitors and with the Japanese Government. After the restrictions of July 1937 were put into effect, the Association appointed a committee to discuss with the Minister of Finance a plan for the remittance of dollars and the importation of motion picture films. These negotiations culminated in an agreement in August 1938. The three principal terms of this agreement were as follows: (1) The eight motion picture companies who were members of the Association were to be allowed to import pictures up to December 31, 1938, of a total print value of $30,000 (minimum print value per foot was 1 1/2 cents); the importation of each picture was subject to the approval of the Department of Finance; (2) The eight companies were to be permitted to export to the United States from royalties obtained from the exhibition of the pictures a total of 3,000,000 yen on or before December 31, 1938; (3) The 3,000,000 yen which were permitted to be remitted were to be converted into dollars and deposited with the San Francisco Branch of the Yokohama Specie Bank, Limited (hereinafter sometimes referred to as Branch Bank), to be payable three years from209 the date of deposit, without interest. The original agreement, written in Japanese, is in Japan; no official transiatlon was ever made of the original agreement. Any violation of the terms of this agreement would result in its cancellation. The print costs totaling $30,000 and the 3,000,000 yen were allocated among the eight companies in proportion to their imports over a period of years prior to the enforcement of the ordinance restricting the importation of films and the exportation of currency. Under this arrangement there were allocated to the petitioner approximately $3,000 to be used for payment of print costs for 1938 and 398,347.50 yen to be remitted from Japan. The petitioner was permitted to and did in fact remit yen to the Branch Bank in accordance with the following schedule: Deposited with Yo-Payable by Yo-kohama Specie Bankkohama Specie BankDateAmountRateAmountDatein Yen9/27/3878,255.00.27 11/16$ 21,666.859/27/4110/29/3878,255.00.27 3/421,715.7610/28/4110/29/3885,327.50.27 3/423,678.3810/28/4112/ 8/3878,255.00.27 1/421,324.4812/ 7/412/ 3/3978,255.00.27 1/421,324.482/ 2/42398,347.50$109,709.95210 These, together with the $3,000 for prints were the only funds which petitioner was permitted to export during 1938 and 1939. It represented the best arrangement petitioner could make as a result of its efforts to secure permission to export funds to the United States. The Branch Bank issued to United receipts evidencing each of the deposits made of these funds. Each of these receipts was marked "non-negotiable" and stated that the amount credited would be paid without interest, three years from the date of deposit to United. Inquiries were made by United as to the possibility of discounting these non-negotiable receipts. Advice was indirectly received from Tokyo that no such action would be tolerated. The deposit made by petitioner on September 27, 1938, and the deposit of $21,715.16 made on October 29, 1938, were collected by United from the Branch Bank in 1941 and paid to various producers of United. This was in accordance with a resolution of the board of directors of United passed on April 4, 1939, to the effect that if United received the sums deposited to its credit in the Yokohama Bank the money so received should be prorated among the pictures imported into Japan prior211 to September 1, 1938, in accordance with the credit balances of such pictures as of December 31, 1938. The American companies were told that if any of them did anything to evade or get around the Japanese financial regulations the money would be returned to Japan. On the first day of January 1938, 1939, and 1040, petitioner owed the producers 165,433.99 yen, 585,677.29 yen, and 1,024,193.84 yen, respectively; and on the first day of January 1938, 1939, and 1940, petitioner owed United 51,919.62 yen, 181,764.48 yen, and 122,107.64 yen. The value of Japanese yen during 1938 and 1939 ranged from a low of 22 United States cents to 28 United States cents. The sum of $23,678.38 deposited by petitioner on October 29, 1938, was in 1941 credited to petitioner's indebtedness to United on the latter's books for commissions, prints, advertising, accessories and other items. Petitioner had no creditors in the United States other than the producers and United. The deposits made by petitioner on December 8, 1938, and February 3, 1939, have never been paid by the Branch Bank for the reason that it was taken over by the Banking Department of the State of California on December 8, 1941, on which date212 a state of war was declared to exist between the United States and Japan. United filed a verified proof of claim with the Superintendent of Banks of the Banking Department of the State of California covering the two unpaid letters of deposit, in which it recited inter alia that "claimant at all times since the issuance of said letters of deposit has been, and now is, the owner thereof and of the sums represented thereby." However, no payment has been made on the proof of claim. Petitioner's gross income and net income as reported by it for the calendar years 1938, 1939, and 1941, were as follows: Gross IncomeNet Income1938$78,082.34$17,988.86193965,087.6720,868.491941114,043.63 yen9,995.82 yenA "rider." identical in all respects except for amounts was attached to petitioner's 1938 and 1939 return. It read as follows: "The taxpayer operates exclusively in Japan. Its taxable income would be * * if converted from the yen at New York City newspaper rates of exchange. There were restrictions during all of 1938 upon the transfer of the yen, thereby preventing conversion of the above income to U.S. Dollars and receipt thereof, in the United States. 213 Under the decision of International Mortgage and Investment Corporation, 36 B.T.A. 187">36 B.T.A. 187It was held that no income was received and, hence, no tax payable." Petitioner also attached the following rider to its 1941 return: "All amounts in this return are in blocked Japanese yen for which no real or effective rate of exchange existed in 1941 and, therefore, any rate of exchange used for the purpose of converting the yen into U.S. Dollars would be arbitrary and the results fictitious. "All data for 1941 are to September 27, 1941 as no accounting reports have been received for the months of October, November and December from our office in Japan due to the present world conditions. "During all of 1941 the funds of the company were under restrictions by the Government of Japan preventing their conversions into dollars and such restrictions have been in force since approximately July 1937. The only exception, however, being a special Exchange Agreement entered into in 1938 between the Government of Japan and the Motion Picture Distributors as a group permitting the Distributors to withdraw an aggregate amount of yen 3,000,000 payable in U.S. Dollars three214 years later. The taxpayer's participation in this Agreement amounted to yen 398,347.50 or $109,709.95. "The entire amount of yen 3,000,000 was earmarked by Japan as payable to creditors of the Distributors and was ordered by that Government to be placed in escrow with the Yokohama Specie Bank payable in U.S. Dollars by that Bank's California Branch. "The taxpayer's participation was made payable to United Artists Corporation of Delaware, as follows: September 27, 1941$ 21,666.85October 28, 194145,394.14December 7, 194121,324.48February 2, 194221,324.48$109,709.95"The funds so deposited were in restricted and non-negotiable form and could not be sold, transferred or assigned. "The amounts due September 27, 1941, and October 28, 1941, were duly received and $43,382.61 was remitted to our Producer-Creditors and the balance of $23,678.38 was retained by United Artists Corporation of Delaware as a creditor of the taxpayer. The payments due December 7, 1941 (Sunday) and February 2, 1942, have not been made as the California branch of the bank was taken over by the California State Banking Authorities on December 8, 1941 when a state of war was declared to exist215 between this country and Japan. "When the monies are released by the California State Banking Authorities, they will be remitted to Producer-Creditors. "In view of the fact that the monies released from freezing in 1941 were definitely ear-marked by the Japanese Government for the creditors of taxpayers and no part thereof could be retained by taxpayer for its own benefit, no taxable income was realized by it in 1941. "Taxpayer's position is based upon the decisions of the U.S. Board of Tax Appeals in International Mortgage & Investment Corporation, 36 B.T.A. 187">36 B.T.A. 187, and Stuart, James & Cooke, Inc., B.T.A. Memo Opinion, February 28, 1938." Opinion The only question presented for determination in this proceeding is whether income earned by the petitioner in Japan in 1938 and 1939 and received in Japanese yen which were "blocked" by the Japanese Government, should be included in petitioner's gross income for Federal income tax purposes in United States dollars under section 22 (a) of the Revenue Act of 1938 and of the Internal Revenue Code. For the purpose of this decision, section 22 of the Internal Revenue Code is the same as section 22 of the216 Revenue Act of 1938. The latter is set forth in the margin. 1Before examining the merits of this controversy, it appears necessary, and it will clarify the record, to advert to certain evidence. On trial the petitioner offered in evidence, over the objection of the respondent, Exhibits Nos. 1, 2, 4, and 5. No. 1 was admitted in evidence and ruling reserved on the admissibility of Nos. 2, 4 and 5. No. 1 purports to be a translation of Articles 1 and 4-(2) of Finance Department, Ordinance No. 1, 1937, of the Japanese Government, together with Article 3 of the Department of Finance Order of 1933. 217 The respondent urges, in substance, that there was not the proper proof of foreign written statute. It has generally been held in the United States that foreign written law should preferably be proved by copy. Jones on Evidence, Second Edition, page 3149; 4 Wigmore on Evidence, 1940 Ed., p. 549. The exhibit is not verified or exemplified by any official of the Japanese Government; "Nevertheless, there are several authoritative decisions that parol proof of foreign statutes is admissible." Jones on Evidence, Second Edition, p. 3149 - cited cases, among them Canale v. People, 52 N.E. 310">52 N.E. 310; and The Pawashick, Fed. Cas. No. 10,851 in which cases parol proof was admitted of foreign law. After discussing the matter at length, Jones concludes, page 3151: * * It would seem from all the foregoing that both expert testimony and properly authenticated copies are admissible in proof of foreign written law, and that if the one is aided by the other, the strongest proof is made which circumstances permit. Jones also says, page 2409: * * * The law of a foreign country or sister state may be proved not only by jurists and lawyers who have practiced their profession218 in that jurisdiction, but also by those not lawyers who, from their official position or business relations have become acquainted with such laws. See also Slater v. Mexican National R.R. Co., 194 U.S. 120">194 U.S. 120. The exhibit in question was shown to two witnesses, both men of much experience in Japan, in the matter of restrictions imposed by the Japanese Government upon the exportation of money. One of them, the Supervisor of the branches of the National City Bank of New York in Japan and Manchuria, residing in Tokyo during the period in question, and familiar with the Japanese restrictions on exportation of money, testified that the exhibit was "Extracts of the Ministry Department of Japan, ordinances that had to do with exchange control, translations of parts of those ordinances"; also, that "They appear to be correct. I don't remember them word for word but I see here it states the amount that could be done without a permit in the way of an exchange transaction reduced from 30,000 yen to 1,000 a month on July 7, 1937 and subsequently revised to 100 yen on December 7, 1937. I wouldn't be sure within a few weeks, but they are quite correct, I think." The219 other witness had been during the period in question managing director of the Japanese subsidiary of Universal Pictures Co. in charge of the Far East territory and a part of that time was chairman of the American Motion Pictures Association of Japan. He was familiar with the restrictions placed by Japan upon the export of money. He testified, as to Exhibit No. 1: "If my recollection serves me, this is a fairly accurate translation of the regulations in force." Petitioner's counsel convincingly demonstrated that every reasonable effort had, without avail, been made to secure an official copy of the Japanese regulations, and that the exhibit had been transmitted from petitioner's manager in Japan. The point of importance here is the provision of the regulation limiting exportation of money. On this point we think the witnesses were competent to, and did, under the authorities above quoted, properly inform the Court of the state of the Japanese law represented by the exhibit, and that the point here at issue being so limited as it is, it should not be held material that they could not verify the entire instrument as a true copy in its every detail and word. Taking judicial notice of220 the existence of a state of war between the United States and Japan, we are convinced that, under all of these circumstances, the best secondary evidence obtainable as to this exhibit was offered to the Court. The impossibility of this petitioner's procuring an authenticated copy of the pertinent Japanese laws and decrees, together with verified translation of the same, must be apparent. "The rule does not mean that men's rights are to be sacrificed and their property lost because they can not guard against events beyond their control; it only means that, so long as the higher or superior evidence is within your possession or may be reached by you, you shall give no inferior proof in relation to it." Thomas v. Thomas, 1 La. 166">1 La. 166, 168, quoted in 4 Wigmore on Evidence, sec. 1192. We are of the opinion that under the circumstances in this case the evidence of men whose businesses required them to be acquainted with Japanese laws and regulations relating thereto may be relied upon without sacrificing improperly the safeguards which rules of evidence afford against the imposition of fraud upon the Court. Wilcocks v. Phillips, 1 Wall. Jr. 47,221 Fed. Cas. No. 17639, involving evidence of the written law of China, wherein the Court, adverting to the "practical needs of man-kind," and to the fact that China (about 1843) was "isolated and peculiar," intimates the propriety in a proper case of admitting oral proof. Japan, at the time here pertinent, was at least as isolated and peculiar, as the China of 1843. Reason and justice require some relaxation of the best evidence rule on foreign written law, in time of war. The record contains no suggestion on the part of the Commissioner that in fact the oral exposition of petitioner's witnesses as to the state of the Japanese law was inaccurate and unreliable. In addition, it may be noted that oral evidence, containing in substance the same information contained in the exhibit, was placed in the record without objection. We properly admitted the exhibit and have found and set forth above the fact of the Japanese restriction upon exportation of money. Exhibits Nos. 2, 4 and 5 were, respectively: a letter to the representative of the American Motion Picture Association of Japan, stating the terms and conditions relative to importation of American motion pictures; a letter to United 222 Artists Corporation of New York, petitioner's parent corporation, from the Japanese manager of the petitioner, under date of August 17, 1938; and under date of August 13, 1938, a letter from such manager to the vice president of United Artists Corporation. These instruments are denied admission in evidence as not properly identified and as hearsay and no findings have been made based thereon. We are of the opinion that the decision in this case is governed by this Court's opinion in International Mortgage & Investment Corporation, 36 B.T.A. 187">36 B.T.A. 187, wherein this Court held that the petitioner therein realized no gain for Federal income tax purposes as a result of the receipt by the petitioner of marks which could not be removed from Germany either physically or by way of credit during the taxable year, where the petitioner's agent in Germany received from mortgagors more marks than the mortgages had cost the petitioner. The following excerpt from this Court's opinion at page 190 of the International Mortgage & Investment Corporation case is, we believe, decisive of the issue in the instant case: * * Measured in marks, the petitioner had income from223 its business in Germany, but income for our Federal income tax purposes is measured only in terms of dollars. * * [citations.] The excess of amount realized over cost of the mortgages during that period was not measurable in terms of dollars. None of the marks received by the petitioner's agents representing repayment of mortgage principal could be removed from Germany either physically or by way of credit during the remainder of the taxable year. The dollar equivalent of those marks could not be obtained. The petitioner did not have unrestricted use and enjoyment of the marks. It had a claim against its agents for the amount of the marks but it could not remove the credit or the marks from Germany. It could not use the marks to retire its bonds as it desired to do. Just at the end of the year there was a regulation passed which permitted reinvestment under certain circumstances. But proceeds of such reinvestment would likewise be blocked and the regulation in no way benefited the petitioner during 1931. The petitioner had no way of obtaining these funds during 1931. It tried to have the funds released, but was unable to have any of them released until a number of years later. Thus224 it appears that these particular marks during 1931 were subject to a very serious restriction and were in no sense the equivalent of free marks. It was, therefore, improper to compute a gain to the petitioner from the repayment of the mortgages by translating the excess marks received into dollars at the rate of exchange applicable to free marks. The petitioner had no gain during 1931 from the receipt of the blocked marks. Respondent relies upon the case of Credit & Investment Corporation, 47 B.T.A. 673">47 B.T.A. 673. We believe that case to be distinguishable on its facts from the instant case for the same reasons for which it was distinguished in the opinion from the International Mortgage & Investment Corporation case, supra. That reason is most succinctly set forth at page 681, wherein this Court states that: "The evidence, in our judgment, falls far short of conclusively showing, as petitioner must show, that the particular marks could not have been transferred out of Germany and sold." Again, at page 682, this Court stated that: "In the face of this evidence it can not be found that the restrictions imposed by the German Government made it impossible225 for petitioner to have taken out the 360,771.89 [marks] if it had endeavored to do so. The authorities relied upon [International Mortgage & Investment Corporation, 36 B.T.A. 187">36 B.T.A. 187] are therefore inapplicable." The evidence in the instant case establishes that petitioner was unable to export more than its 398,347.50 yen during the taxable years in question and that as to those yen which were exported, "The petitioner," as in the International Mortgage & Investment Corporation case, "did not have the unrestricted use and enjoyment * * " thereof. During the taxable years the money in the Yokohama Specie Bank in San Francisco was in no appreciable way less blocked from petitioner's use than if it had been in Japan itself, and was subject to be returned to Japan, if the restrictions upon it were evaded. Respondent also relies upon the case of Phanor J. Eder, 47 B.T.A. 235">47 B.T.A. 235; reversed on other grounds, 138 Fed. (2d) 27. In that case, the taxpayer urged the applicability of the International Mortgage & Investment Corporation case, but this Court held that that case was not in point as it was226 not premised upon any specific legislation as was the deficiency in the Eder case, to wit, section 337 (b) of the Revenue Act of 1938. As this Court pointed out in the Eder case at page 240 of its opinion, Congress, in enacting section 337 of the Revenue Act of 1938 and Supplement P in which that section is included, did not make the legal transfer to the United States of the distributed earnings of a foreign personal holding company a condition precedent to the levying of the tax. Distribution was assumed by the statute and this Court went on to state that "Assumed distribution even when actual distribution was legally impossible, has been held to properly support other income taxes." We have no such statute or assumed distribution in this case, and the principle does not here apply. We hold that the income received by the petitioner in Japan in 1938 and 1939 in Japanese yen is not to be included in petitioner's gross income for those taxable years. We do not have before us any question as to the taxability of the $67,060.99 which was paid by the Branch Bank in 1941 to United in satisfaction of the obligations of the petitioner herein. Decision will be entered under 227 Rule 50. Footnotes1. SEC. 22. GROSS INCOME. (a) General Definition. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities. or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620622/	Leonard S. Krause v. Commissioner.Krause v. CommissionerDocket No. 4073-63.United States Tax CourtT.C. Memo 1967-68; 1967 Tax Ct. Memo LEXIS 193; 26 T.C.M. (CCH) 358; T.C.M. (RIA) 67068; April 5, 1967Leonard S. Krause, pro se, 6655 W. Olympic Bldg., Los Angeles, Calif. Morley H. White, for the respondent. FORRESTERMemorandum Findings of Fact and Opinion FORRESTER, Judge: The respondent determined deficiencies in the petitioner's income tax as follows: YearAmount1955$1,318.931956650.30$1,969.23There was no pretrial stipulation in this case and three issues now remain in dispute. The first of these involves the proper treatment to be accorded a loss on advances to Irving Levin and/or Aircorp, Inc., which advances became worthless in 1956. Petitioner seeks to deduct the loss from ordinary income as a business bad debt under the provisions of section 166(a). 1 The respondent determined that the loss was a "nonbusiness debt" within the provisions of section 166(d) and as such, deductible only as a short-term capital loss. 195 The second issue involves the proper method of reporting gain received from the liquidation of two corporations in which the petitioner held stock. The petitioner alleges that when the corporations redeemed his stock they gave him fractional shares of a purchase money second mortgage on real estate. He further alleges that the terms of the second mortgage were such that the purchaser was obligated to pay the purchase price in five annual installments of principal and interest, and that therefore he is entitled to report his gain on an installment basis. The respondent maintains that the transaction was "closed" in 1955 (the year of liquidation) and that therefore all the gain must be reported in such year. The third and final issue concerns the correctness of the respondent's determination of the value of the property received as a liquidating distribution. General Findings of Fact The petitioner resides in Los Angeles, California. He filed timely individual income tax returns for the years in question with the district director of internal revenue, Los Angeles, California. The petitioner is a doctor of medicine who specializes in psychiatry; he has been so engaged since196 he was discharged from the Army in 1946. Since graduation from medical school in 1941 the petitioner has been interested in the stock market and during the years in issue he was intensively engaged in buying and selling common stocks, and pursuing his market ventures. His dividends from stocks approximated his income from the practice of medicine during the years in issue. In 1955 the petitioner reported a gross income from the practice of medicine of $6,350, and dividend income of $5,575. In 1956 his income from the practice of medicine grossed $6,540 and his dividend income was $8,854. On his 1955 tax return the petitioner reported receiving dividends from 36 companies. He also sold some securities and dealt in egg futures. Similarly in 1956 he reported dividends from 59 companies and showed numerous securities transactions. The petitioner stated on his tax returns for 1955 and 1956 that he was engaged in both the practice of psychiatry and the investment business. Issue 1 Facts and Opinion The respondent has determined that losses which the petitioner sustained in 1956 in dealings with Irving Levin and the latter's company, Aircorp, Inc., were "nonbusiness debts" within197 the provisions of section 166(d). To gain full deductibility of these losses against ordinary income the petitioner must show that the losses in question were incurred in connection with a trade or business of his. The petitioner has made a bewilderingly disjointed and confused record from which he has attempted to show that he was in the business of loaning money or promoting enterprises. We find that he maintained no place of business separate from the office he used to practice medicine, he never advertised the fact that he lent money, and never checked into the credit ratings of people to whom he advanced money. Furthermore, he kept no books of account and introduced as his only records a mass of cancelled checks, and a few promissory notes. The petitioner's own testimony and that of the one witness he called establishes that he made advances to a number of people. Every advance, however, which is cast in the form of a loan does not give rise to indebtedness. ; . Therefore, we must look into each transaction and see if the taxpayer's characterization accords with substantial economic198 realty. Most recently, in , this Court pointed out that whether or not a particular transaction creates a valid debtor-creditor relationship is essentially a question of fact, about which the taxpayer has the burden of proof. . After pointing out numerous factors which are relevant in the proper characterization of a particular transaction, we said: It has been aptly stated that "the essential difference between a creditor and a stockholder is that the latter intends to make an investment and take the risks of the venture, while the former seeks a definite obligation, payable in any event." (C.A. 7, 1942), reversing . Although no one factor by itself is determinative of the question, a significant factor is "whether the funds were advanced with reasonable expectations of repayment regardless of the success of the venture, or were placed at the risk of the business." Gilbert v. Commissioner, 248 F. 2d at 406. Although , involved the disallowance of a net199 operating loss carryover under section 23(e) of the 1939 Code, the case turned on whether the loss was incurred in the taxpayer's trade or business. 2After examining all the advances made by the petitioner we find that they fall into three categories: (1) Personal, nonbusiness advances, (2) investments, and (3) bona fide business loans. Some transactions have aspects of more than one category and where this has occurred we have included the transaction in more than one category. Turning first to those transactions which we find to be personal nonbusiness advances, we note that no number of such advances can either constitute a trade or business or be considered as evidence that petitioner was in the business of lending money. The petitioner made numerous advances, charging and expecting nothing for the use or forebearance of the money. This factor alone labels such an advance as personal and nonbusiness. Included in this category are the advances200 to Elizabeth Barry, Mervin Field and Joe Berlin. We also include advances made to petitioner's friend, James Solomon, in this category on failure of proof of any provision for interest when the advances were made. Solomon was not even called as a witness even though he was shown to have been available. We also categorize advances to Herbert Paul as personal and nonbusiness because they bore interest only after maturity and because petitioner received only $5,900 worth of collateral on this $27,000 obligation. Petitioner also made advances to several of his psychiatric patients, but in none of these instances did he charge any interest. There is some suggestion that these advances to patients were made as part of their therapy. We observe that any such advances would at best be a part of petitioner's practice of medicine, and could not be considered as made in connection with a separate business of lending money. The second category of advances are those which we have found to be investments. Included in this category are a portion of the advances made to Irving Levin and Aircorp, Inc., (the losses here in issue) a portion of the advances made to Maurice Duke, and all the advances201 to Harry Zevin and Artist's Embassy. In 1949 or 1950 the petitioner met Irving Levin when the latter came to install an air conditioner in petitioner's office. By 1954 the petitioner had advanced $90,000 to Levin and/or his company, Aircorp, Inc. The terms of these advances entitled the petitioner to a return of 2 percent per month plus 15 percent of any net profits from the air conditioner contracting business. The only security which the petitioner seems to have received consisted of having Levin name him beneficiary of several life insurance policies, plus an assignment of an account receivable from the price contractor for whom Levin was then working. Neither of these arrangements ever provided the petitioner with valuable, present security, and ultimately both became worthless. The insurance policies were never assigned to the petitioner (nor were they ever intended to have been), and when Levin and his company failed he allowed them to lapse. The account receivable, which was assigned to the petitioner when he made his last advance to Levin, never had any value because it was subject to offsets by the prime contractor. In 1954, the same year that the petitioner made his last202 advance to Aircorp, Inc., the company failed. It made an assignment for the benefit of creditors in that year, and by January of 1956 it had been discharged in bankruptcy. Considering the speculative nature of the venture together with its attendant risks, and the fact that petitioner was to receive 15 percent of whatever net profits the business made, we find that some portion of the $90,000 he advanced to Irving Levin and/or his company was an investment in, and at the risk of the air conditioning business. Petitioner also made a series of advances to Maurice Duke in 1953. These were made in March and April, and totaled $6,000. They were repayable June 4, 1954, and bore interest at the rate of 10 percent and also provided that petitioner was to receive 5 percent of Duke's share of any net proceeds from the distribution of a motion picture which was to be produced. A contract dated July 7, 1954, extended the maturity date of the loan to August 15, 1964, and fully documented the facts of the relationship between the petitioner and Duke. In consideration for extending the maturity date of the loan, petitioner received a payment of interest up to August 1, 1954, and an increase in203 his participation in the net proceeds of the film. In addition to his right to 5 percent of Duke's share of the net proceeds from distribution, he was also given a 5 percent interest in Duke's share of the net proceeds from any sale of the literary property on which the movie was to be based. To whatever extent the petitioner was induced to advance money to Duke because of the latter's promise of a 5 percent participation in any net proceeds of the film, we find that he placed his money at the risk of the venture and invested in the film. The remainder of the $6,000 advance was a loan, but the record affords insufficient basis for us to make any meaningful allocation. Transactions with Harry Zevin and a group called Artist's Embassy, of which Zevin was the manager, were embodied in a note dated September 28, 1956, in the amount of $10,000 signed by Harry Zevin. This note bore no interest charge, but an attached contract of the same date gave the petitioner the right to 33 percent of any net profits in excess of $10,000 which might be realized from the San Francisco production of Artist's Embassy's play "The Desk Set." The petitioner received no security, and on the basis of Zevin's204 testimony we find that one of petitioner's reasons for making this advance was his personal desire to associate with theatrical people. These dealings with Harry Zevin and Artist's Embassy did not give rise to a debtor-creditor relationship. Here, the sole return which the petitioner was to have received from this transaction was 33 percent of net profits, if any, in excess of $10,000 which might be realized from the San Francisco production of a play. Petitioner was taking the risks of the venture and had no reasonable expectation of repayment unless the play was successful. Finally we come to the third category of advances, bona fide loans which bore interest and which, if made with sufficient regularity and in sufficient quantity, could constitute a separate business of lending money. As we pointed out in our discussion of those advances which we found to be investments, some part of the advances to both Irving Levin - Aircorp, Inc., and Maurice Duke were investments, but the balance of each could be said to be a bona fide business loan. The exact proportion of each which constitutes a loan cannot be calculated with any precision, and this indefiniteness, being of the petitioner's205 own making, will weigh heavily against him. The petitioner's continuous relationship with Levin during the period 1949 to 1954, together with the dual character of the advances he made to him makes it impossible to determine either the number of actual loans made, or the times when they were made. Petitioner's testimony that he made between 26 and 50 "loans" is self serving and unsupported. The only specific information we have is that at some time after the last advance was made, a note for $125,000 reflecting all prior advances and accrued interest to date was signed. It bore interest at a rate of 2 percent per month and entitled petitioner to 15 percent of any net profits. Considering this evidence, we find only that some money was loaned during each of the years 1949 to 1954. The petitioner loaned $2,000 in September of 1956 to Allan Kirk and Sandy Scott for the production of a play. He obtained the guaranty of Evelyn Duke to secure payment, and interest was charged. The rate of interest was not established at trial, nevertheless we find that a bona fide loan was made. In 1957 the petitioner lent Joe Figueras and Joseph Gilligan $37,317.50 to enable them to start a business. 206 Interest was charged although the rate was not shown. Petitioner's statement that the rate "was probably ten percent" is not sufficiently definite to allow us to make a finding to this effect. It should be noted that the loans to Kirk and Scott in 1956 and to Figueras and Gilligan in 1957 were made after the loans to Levin and Aircorp, Inc. (the last of which was made in 1954) had gone bad. Because the relevant time period for determining whether petitioner was in the trade or business of lending money is 1949 through 1954 (see at fn. 3, on appeal (C.A. 8, Feb. 17, 1967)), these loans are of somewhat diminished relevance in determining whether during the years 1949 to 1954 the petitioner was engaged in the business of lending money. They may however be considered to suggest a continuing course of conduct. In , a taxpayer was held to be engaged in the business of lending money. There, in addition to the $90,000 in loans he made to one company which gave rise to the bad debt deduction in dispute, the taxpayer showed that he made $116,000 worth of other loans during207 the year in question and that during a seven-year period he loaned money to twenty-seven other people. 3 In deciding the case, the court observed, p. 886, "Her activities in the business of lending money during 1950 were frequent and continuous, that is, extensive, varied and regular." Also cf. . In light of the facts which we have found, we conclude that the petitioner's bona fide lending activity was transacted on too small a scale and with insufficient regularity to allow us to find that he was in the business of lending money. On brief the petitioner has also urged that he was engaged in "any other business which would entitled him to full deduction" 208 from ordinary income. What other business he might have been in is not defined, however at trial there is some testimony which indicates that the petitioner feels he may be a promoter. Suffice it to say that he has failed utterly to so persuade us. No evidence has been introduced to show that his business was starting other businesses or that he was a dealer in enterprises. The decision in , holding that "Devoting one's time and energies to the affairs of a corporation is not of itself, and without more, a trade or business of the person so engaged," severely limited many of the prior promoter cases and general language contained in them is no longer valid. Having found that the $16,500 loss in issue was not incurred in connection with any trade or business of the petitioner, we hold that respondent's allowance of this loss as a nonbusiness bad debt was proper. Issue 2 Facts and Opinion The petitioner owned stock in Harris-Newmark, Inc. and 12th and Maple, Inc. These corporations owned certain real property which was sold in 1955. The respondent concedes that these corporations liquidated in 1955 pursuant to section 337, but has determined209 that the liquidations were closed transactions in 1955 and that all of the gains should have been reported in that year. The petitioner contends that he is entitled to report such gains on the installment basis. Although petitioner does not explain his legal basis for his contention, there are only two theories on which he could possibly prevail. If he could have shown that whatever he received in the liquidations was not the "equivalent of cash," as that phrase is used in , then under the rule in that case ("the requirement has always been that the obligation, like money, be freely and easily negotiable so that it readily passes from hand to hand in commerce,") the values of the distributions would not have constituted "[amounts] realized" within the scope of section 1001(b). However, because the petitioner's proof is wholly inadequate we are unable to make a finding as to precisely what was distributed to him in the liquidations. Without knowing exactly what was distributed we cannot find that it was not the equivalent of cash. A reference to section 453 in petitioner's brief indicates that he feels this section entitles him to210 report his gains in installments. However, section 453 as applied to the casual sale of personalty is applicable only where the payments received in the year of disposition do not exceed 30 percent of the total selling price. Here the petitioner has failed to show how much he received in his initial payments, and we must therefore find that he has failed to bring himself within the provisions of section 453(b)(2)(A)(ii). Furthermore, even if we were to accept the petitioner's allegations that his liquidating distributions consisted in part of a participation in a real estate mortgage made by a third party, the value of such participation certificates would have to be included in computing the amount of the initial payment he received in the year of sale. This is so because the certificates allegedly distributed would not have represented the obligation of either liquidating corporation but that of a third person. Section 453(b)(2)(A)(ii) requires evidences of indebtedness, other than those of the purchaser, which in this case were the liquidating corporations, to be included in computing the amount of the initial payment. ,211 affirmed sub nom. (C.A. 8, 1962). The petitioner alleges that all his gains were contained in these certificates, and the record shows that his gains were (as to each corporation) over 30 percent of petitioner's selling price, therefore it is clear that the requirements of section 453 are not met. The respondent's determination that all gain must be reported in 1955 is sustained. Issue 3 Facts and Opinion The petitioner asserts alternatively that the fair market value of the property distributed to him was worth less than the respondent has determined. Assuming arguendo that part of the property distributed was participation certificates in a mortgage, the petitioner has introduced no evidence which would establish the value of the certificates at the time of distribution. The correspondence which the petitioner introduced indicates that three years after the liquidations he sold a "Harris-Newmark certificate" for $8,300. Even assuming that this certificate was received as part of the liquidation, and that it was sold for a 12 to 15 percent discount in 1958, this is far from adequate proof of its fair market value at the212 time of its distribution. Its sale price three years later, without more, speaks only as to its value at that time. We find, therefore, that petitioner has failed to sustain his burden of proving that the liquidating distributions made to him by 12th and Maple, Inc. and Harris-Newmark, Inc., had a value different from that determined in the deficiency notice. Decision will be entered for the respondent. Footnotes1. All Code references are to the Internal Revenue Code of 1954 unless otherwise specifically noted.↩2. Mr. Justice White has pointed out in , that the concept of a trade or business is the same in 23(e) of the 1939 Code, as in 23(k)(4), the 1939 predecessor of 166(d).↩3. A similarly large quantity of loans was shown in both , where in addition to the debt which gave rise to the bad debt deduction, the petitioner proved numerous other loans to business enterprises, personal loans to employees, and mortgage loans, and in , where the petitioner was shown to have made over $300,000 worth of loans to forty people in five years.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620653/	ORIAN E. WRIGHT & MARY M. WRIGHT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWright v. CommissionerDocket No. 32226-84.United States Tax CourtT.C. Memo 1988-552; 1988 Tax Ct. Memo LEXIS 581; 56 T.C.M. (CCH) 772; T.C.M. (RIA) 88552; December 5, 1988. Orian E. Wright, pro se. Enrique A. Delapaz, for the respondent. GERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent, in separate statutory notices of deficiency dated June 13, 1984, determined the following deficiencies and additions to petitioners' income taxes for 1981: IncomeAdditions to TaxPetitionerTax6653(a) 16651(a)(1)6654(a)Orian E. Wright$ 7,081.00 * $ 354.05$ 1,770.25$ 538.15Mary M. Wright6,792.00 * 339.601,698.00516.19583 Respondent, by motion, also seeks $ 5,000 in damages pursuant to section 6673. The issues for our consideration are: (1) Whether respondent can base his deficiency determination upon petitioners' Forms W-2; (2) whether petitioners are taxable on their wages; (3) whether petitioners are liable for the additions to tax; and (4) whether damages are to be awarded to the United States and against petitioners under section 6673. FINDINGS OF FACT Petitioners resided in Long Beach, California, when they filed their petition in this case. Both petitioners are United States citizens. Petitioner Mary M. Wright received $ 28,357.48 in wages in 1981. Petitioner Orian E. Wright received $ 29,119.00 in wages in 1981. Petitioner did not file any tax return for 1981. Respondent issued statutory notices of deficiency based on Form W-2 information provided to respondent by petitioners' respective employers. In computing the deficiencies, respondent allowed each petitioner his or her personal exemption. OPINION Petitioners have presented the same or similar protestor-type arguments that we have confronted in numerous other cases. Nevertheless, we will deal with their arguments, albeit584 in summary fashion. Petitioners first argue that the presumption of correctness usually attached to respondent's determination, under Rule 142(a), should be removed because the notice of deficiency was without minimal evidentiary foundation, citing, inter alia, , and . See , affd. . Respondent made his determinations based upon information supplied on Forms W-2 by petitioners' respective employers. Moreover, petitioners stipulated that they received wages in the amounts determined by respondent. Therefore, there is ample foundation for respondent's determination, and petitioners retain the burden of going forward as well as the ultimate burden of persuasion. Rule 142(a); . See . Petitioners next argue that wages earned by American citizens -- as opposed to nonresident aliens -- are not subject to Federal income tax. 585 They asset that there is no statutory provision providing for the imposition and payment of taxes by petitioners on their gross wages. This reading of the Code is attenuated, obscure and frivolous. See . Section 1(d) imposes a tax on the taxable income of every married individual who does not file a joint return. Gross income includes all income from whatever source derived, including compensation for services. Sec. 61(a)(1). Taxable income, the base for imposing the tax in section 1, is gross income less certain specified deductions. Sec. 63. Returns with respect to income taxes are required of every individual having gross income of $ 1,000 or more (with exceptions not applicable here). Sec. 6012(a). This applies to petitioners. When a return of tax is required, the person required to make such return shall, without assessment or notice, pay such tax. Sec. 6151. Moreover, petitioners are primarily liable for the payment of taxes on their incomes, notwithstanding the secondary liability on the part of their employers to withhold such taxes. ;586 . Petitioners, on brief, also made a number of constitutional arguments, and other arguments that wages are not income, which we have rejected numerous times. ; ; . We waste no further time addressing other tangential points made by petitioners because they are also frivolous and/or meaningless and without merit. Petitioners have not carried their burden of showing that respondent's determinations are in error. ; Rule 142(a). Additionally, petitioners have not carried their burden of showing that they are not, under the circumstances of this case, liable for the additions to tax determined by respondent. See ; ; ; .587 Respondent also moved for damages pursuant to section 6673. Section 6673 provides for damages up to $ 5,000 when a proceeding is instituted or maintained primarily for delay, or a taxpayer's position is frivolous or groundless. Petitioners have advanced positions that are frivolous and groundless, and that have been rejected numerous times. Moreover, we warned petitioner Orian Wright of this circumstance at trial. Nevertheless, petitioners have continued to pursue these arguments, apparently aided by another individual making protestor-type arguments. See , affd. . Accordingly, we award damages to the United States of $ 5,000. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year at issue. All rule references are to the Tax Court Rules of Practice and Procedure. Plus 50 percent of the interest due on the underpayments.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620655/	Simeon Sharaf v. Commissioner.Sharaf v. CommissionerDocket No. 41688.United States Tax CourtT.C. Memo 1954-231; 1954 Tax Ct. Memo LEXIS 14; 13 T.C.M. (CCH) 1158; T.C.M. (RIA) 54336; December 22, 1954, Filed 14 1. Cost basis of petitioner's stock in Merrimack Loan Company as of January 31, 1945, determined. 2. Respondent's finding of value of real estate received by petitioner on January 31, 1945 as liquidating dividend from Merrimack Loan Company affirmed for failure of proof of error. Stanley M. Brown, Esq., for the petitioner. Jack H. Calechman, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Fact and Opinion Respondent determined a deficiency in income tax of petitioner for the taxable year 1945 in the amount of $9,271.13, and an addition thereto for negligence in the amount of $463.56. The two issues presented involve, (1) a determination of the cost basis of petitioner's stock in the Merrimack Loan Company as of January 31, 1945; and (2) a determination of the fair market value of real estate distributed to petitioner in liquidation of such company. Findings of Fact The petitioner, Simeon Sharaf, is a citizen of the United States, who was born in Russia in or about 1877, immigrated to this country in 1896 and who, since 1898, has been a resident of Concord, New Hampshire. Petitioner filed his individual income tax return for the year 194515 with the collector of internal revenue for the district of New Hampshire. Petitioner was in business in Concord, New Hampshire from 1898 until 1917 as the owner and operator of a clothing department store located on North Main Street. Such business was liquidated in 1917, after which liquidation petitioner was worth approximately $20,000. This amount was made up of $5,000 in fixtures; about $12,000 in receivables, some $5,000 of which constituted loans to other merchants; and the remainder being invested in listed securities. Thereafter, petitioner entered the custommade tailoring business and had an establishment for that purpose in Concord. On May 3, 1926, petitioner organized a New Hampshire corporation in the name and style of Merrimack Loan Company, Inc. (hereinafter called Merrimack) for the purpose of dealing in real estate, buying, selling and dealing in merchandise, and making loans. At the time Merrimack was organized, petitioner was worth approximately $25,000. The authorized capital stock of Merrimack was $25,000, divided into 1,000 shares of the par value of $25 each, of which 700 shares would be preferred stock and 300 shares would be common stock. As initial capital16 petitioner contributed $6,600. In addition to such amount, petitioner at that time also had the following specific assets: $5,000 which had been loaned to his brother in February, 1924; a half interest in the St. Clair Candy Shop which was sold for $3,500; about $5,000 outstanding in short term loans; from $2,000 to $3,000 in stocks; and some overdue trade receivables. As of June 10, 1926, stock certificates representing 475 shares of common stock were issued in the name of petitioner, and a certificate for 27 shares of common stock was issued in the name of petitioner's brother, A. Sharaf. The 27 shares, for which petitioner's brother paid in $675, were subsequently repurchased from his estate by petitioner in or about the year 1936. On May 8, 1930, a stock certificate representing 50 shares of common stock of Merrimack was issued in the name of petitioner. An additional certificate for 48 shares of such stock was issued in petitioner's name on February 17, 1933. No preferred stock was ever issued. All entries in the stock entry record book of Merrimack were made by, or under the direction of, petitioner. No entries were made therein during the period January 1, 1931, and January 1, 1933. Following17 a check of the stock register in 1935 by a deputy collector, petitioner paid documentary tax on the basis of $15,000 of stock outstanding. Statements of Condition of Merrimack filed with the Secretary of State of New Hampshire represented that the corporation had common and preferred stock outstanding, as follows: CommonPreferredDateSharesSharesas ofOutstand-ParOutstand-ParJan. 1ingValueingValue1927264$6,60019282646,60019303007,500220$ 5,50019313007,50040010,00019331253,12570017,50019341253,12570017,500Petitioner was at all times president and treasurer of Merrimack, and supervised its activities. After Merrimack was organized, petitioner acquired for it a small loan license pursuant to c. 269 Public Laws of New Hampshire of 1926, which license was retained until 1934. In accordance with the statute under which it was issued the license entitled Merrimack to make loans in amounts not to exceed $300, and to charge interest not in excess of 3 per cent per month on the unpaid balances. The statute further provided that no person should owe any licensee at any time more18 than $300 for principal. From 1926 - 1934 while Merrimack was a small loan licensee, petitioner, under his own name, made all loans in principal amount over $300 and Merrimack made regulated loans under $300. In 1934, the rate of interest on regulated loans was reduced from 3 per cent to 2 per cent per month. The interest rate on loans of more than $300 was 6 per cent per annum or as otherwise stipulated in writing. Merrimack ceased to be a small loan licensee, and thereafter made only loans in excess of $300 for which it continued to charge interest at 3 per cent. During the existence of Merrimack, petitioner individually engaged in the same sort of business activities as were transacted by it, and had dealt in New Hampshire real estate since about 1920. During this period, petitioner used the same cash book for entries relating to his own individual business affairs as did Merrimack. Such book did not segregate nor identify business transactions of petitioner from those of Merrimack. Merrimack had only one bank account. Petitioner did not maintain a bank account during most of the existence of Merrimack. Petitioner made no distinction between himself and Merrimack when being billed19 for repairs to property or when placing title to acquired property in his or the corporate name. Petitioner was advised in 1932 by respondent's agent that he did not keep adequate corporate records. Petitioner filed a petition for dissolution of Merrimack in the fall of 1944 and a decree of dissolution was issued by the Superior Court, Merrimack County, under date of January 31, 1945. The assets received by petitioner in 1945 in liquidation of Merrimack included cash in the amount of $401.77; accounts receivable of $8,075.50; and certain real estate. Respondent has determined the market value of real estate so received to have been $43,312.50. The cost basis of petitioner's stock in Merrimack as of January 31, 1945, when the company was liquidated, was $15,000. Upon the liquidation of Merrimack, there was distributed to petitioner real estate having an aggregate market value of $43,312.50. Opinion VAN FOSSAN, Judge: The first of the two purely factual questions presented involves a determination of the cost basis of petitioner's stock in Merrimack as of January 31, 1945. Respondent has determined, and here argues, that such basis as of the critical date in question was20 $6,600. Petitioner contends for a basis of $15,000. Petitioner's supporting evidence consists of the stock record book of Merrimack, which shows that 600 shares of common stock with a par value of $25 each, were issued and outstanding on January 31, 1945, and of his uncontradicted testimony that all such stock, for which he had paid in $15,000, was held by him on such date. Respondent, with much reason, decries the lack of any canceled checks, book entries, deposit slips or any other documentary evidence showing payment by petitioner for the stock. Respondent points to the various and varying statements of condition filed with the Secretary of State of New Hampshire, referred to in our findings, and the inconsistencies existing between them and the stock record book of Merrimack retained in petitioner's possession. Thus, respondent submits that, in view of such conflicting records, petitioner's lack of adequate records, and the lack of other creditable evidence, petitioner has not met the burden of proving respondent's determination in error. While it be true that the statements so filed are in direct conflict with the evidence adduced by petitioner, and albeit the petitioner's records21 in general are woefully unreliable and inadequate, it does not necessarily follow that all of petitioner's testimony on this question and the stock record book are false and should be discredited. It is to be noted that, aside from the first two statements filed, such statements are also inconsistent with respondent's determination. Furthermore, a simple mathematical computation indicates that greater invested capital than $6,600, determined by respondent, was needed to produce the amounts of gross income reported by Merrimack for 1932, 1933, 1934 and 1935. A 3 per cent per month return on the larger figure advocated by petitioner comes nearer to the amounts so reported. The most that can be said is that the evidence, when considered as a whole, casts grave doubt upon the accuracy and veracity of the statements of condition filed with the Secretary of State. We believe the stock record book to be the more reliable. That the 600 shares of common stock issued and outstanding in petitioner's name were in excess of the issue authorized in Merrimack's charter has no direct bearing upon nor is of any consequence to the ultimate outcome herein, and respondent does not argue otherwise. Consequently, 22 with some doubt in our minds, we have found as a fact, and here hold, that the cost basis of Merrimack's stock held by petitioner on January 31, 1945, was in the amount of $15,000. The next question involves a determination of the fair market value of real estate distributed to petitioner in the liquidation of Merrimack. Respondent has determined that petitioner received as a distribution in liquidation on January 31, 1945, 19 parcels of real estate having a market value on such date of $43,312.50. Petitioner does not deny that he received 5 parcels of real estate in such liquidation, which real estate had a market value of $16,437.50, but it is petitioner's position that the remaining parcels were purchased by him in his own name prior to liquidation. He has submitted evidence in the form of deeds, mortgages, etc. to show that title to the property was, in fact taken in his individual name prior to liquidation, and that he individually assumed personal liability where financing was involved. Respondent concedes that legal title to all of the real estate, in dispute, was in petitioner's name, but has determined that such property was purchased with corporate funds. He would, therefore, 23 include it in the liquidating dividend received by petitioner. That legal title to the property in controversy was in petitioner or that petitioner individually assumed legal liability when mortgage financing was involved, does not prove from whence came the funds used to pay for the property or to pay off the mortgage. Nor does the fact that the property may have been listed on the local taxing rolls as being taxed to petitioner prove that such taxes were actually paid out of petitioner's individual funds. Petitioner maintained no separate bank account from that of Merrimack, and it further appears that he took no great pains to distinguish between himself and the corporate entity in the acquisition and maintenance of property. For aught the record shows, all such property may very well have been, and probably was, purchased with corporate funds, as determined by respondent. At least, petitioner has failed to prove otherwise. After full consideration and weighing all the facts appearing on this record, we have determined that the petitioner has not carried his burden of proof and that, accordingly, the respondent's determination that the value of the real estate received by petitioner*24 on January 31, 1945, in the liquidation of Merrimack was in the amount of $43,312.50, has not been disproved. Accordingly, we here so hold. Respondent's imposition of the so-called negligence penalty has not been assigned as error and is, therefore, not in issue before us in this proceeding. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620656/	John Lezdey and Noreen Lezdey v. Commissioner.Lezdey v. CommissionerDocket No. 286-63.United States Tax CourtT.C. Memo 1964-78; 1964 Tax Ct. Memo LEXIS 257; 23 T.C.M. (CCH) 485; T.C.M. (RIA) 64078; March 24, 1964257 John Lezdey, pro se, 57-66 79th St., Elmhurst, N. Y. John B. Murray, Jr., for the respondent. RAUMMemorandum Findings of Fact and Opinion RAUM, Judge: The Commissioner determined a deficiency in the amount of $195.54 in petitioners' 1961 income tax. The sole question is whether $750 allegedly expended by petitioner John Lezdey in attending night law school was properly deducted by him. 1 A stipulation of facts filed by the parties is incorporated herein by reference. Petitioner gradudated from Rutgers University in June 1953 with a B. S. degree in chemistry. He was hired as a chemist for Olin Mathieson Chemical Corporation in December 1953 and has been continuously in its employ since that time except for military leave from June 1954 to March 1956. In September 1958, while still employed as a chemist, petitioner entered Brooklyn Law School, and was graduated with an LL. B. degree in June 1962. He was admitted to the practice of law in New York258 in March 1963. Petitioner did not claim any deductions in respect of expenses for legal education during the years prior to 1961 when he was a chemist. In January 1961, however, petitioner's work at Olin Mathieson was changed from that of a chemist to that of a "Patent Agent Foreign", and he claimed the legal education expenses incurred in 1961 as a deduction for that year. We heard evidence that legal training was helpful to one working as a "Patent Agent Foreign", and if petitioner's purpose in going to law school was merely, or primarily, or even to a substantial degree, to improve his skills as a "Patent Agent Foreign", the expenses for legal education would undoubtedly be deductible. However, we cannot find that such was his purpose. When petitioner commenced law school in 1958 he obviously had no such purpose in mind, and the evidence further shows that after he attained his LL. B. he was admitted to the bar and became a "Patent Attorney" for Olin Mathieson, a position which, on the record, appears to be superior to that of a "Patent Agent Foreign". We hold that petitioner has failed to overcome the presumptive correctness of the Commissioner's determination. We cannot*259 find that petitioner's purpose in going to law school in 1961 was to improve his skills as a "Patent Agent Foreign". Rather, the record strongly suggests that petitioner was merely continuing a course of study undertaken by him several years earlier which ultimately led to his obtaining an LL. B. degree, admission to the bar, and becoming a "Patent Attorney". Education expenses thus incurred are not deductible. Decision will be entered for the respondent. Footnotes1. In a "stipulation" filed after the trial by petitioner and signed only by petitioner, it is stated that the tuition was $483.50, the cost of books was $100 and that the "excess of $166.50 is hereby waived".↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620657/	ESTATE OF PHILIPINA SCHAUB, MARGARETHA WEBER, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MARGARETHA WEBER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JOHN BOTTJER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HENRY R. B. BOWDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Schaub v. CommissionerDocket Nos. 89661, 89662, 89663, 89666.United States Board of Tax Appeals40 B.T.A. 486; 1939 BTA LEXIS 845; August 22, 1939, Promulgated 845 ESTATE - INCOME - SALE BY EXECUTORS OF RESIDUARY ESTATE LEFT TO NAMED BENEFICIARIES. - Where executors sold real estate in accordance with directions in the will, the gain is taxable income of the estate, even though the real estate was a part of the residuary estate which was devised and bequeathed to children of the testator. Thomas M. Wilkins, Esq., for the petitioner. Conway Kitchen, Esq., for the respondent. MURDOCK 487 OPINION. MURDOCK: The Commissioner determined a deficiency of $6,560 in the income tax of the estate of Philipina Schaub for the calendar year 1933 (Docket No. 89661), and he determined that the other three petitioners are liable for that deficiency as transferees. The deficiency results from including $52,480 in the income of the estate as a capital gain from a sale of real estate. The facts are found in accordance with the stipulation of the parties. Philipina Schaub died in 1923. She owned at that time a farm of 8 1/2 acres in Queens, New York. Her will provided in part as follows: THIRD: ALL the rest residue and remainder, of all of my real and personal property of what nature and kind and wheresoever situated846 I Give, devise and bequeath unto my children as above named, to be divided unto them equally, share and share alike, and should any of my said children die, leaving lawful issue, their share or shares, are to be divided as follows: to wit: I direct that the said issue, are only to receive Three Quarters of their parent's share into my estate, and the balance of One Quarter Share thereof, to be given unto the husbands of my said daughters, if then surviving. FOURTH: I direct my executors, as hereinafter named, to sell and convey all my real property of what nature and kind, at a public or a private sale, and empower them to give a proper deed or deeds of conveyance for the same, and out of the proceeds thereof to divide the same unto my said legatees as above named, as by this will directed. The farm was a part of the residuary estate. The decedent was survived by three children, Margaretha Weber, John Bottjer, and Jeanette Bowden. The latter died on February 23, 1925, and her husband succeeded to all of her rights in the residuary estate of her mother. The executors of the estate of Philipina Schaub, acting under the power granted to them in paragraph "FOURTH" of the will, 847 sold the farm for $100,000 and conveyed it to the purchaser on November 15, 1929. They received $25,000 of the purchase price in cash and immediately distributed it to the three beneficiaries. The balance of the purchase price was evidenced by a bond and mortgage for $75,000. The bond and mortgage were paid in full on July 17, 1933. The executors immediately distributed the $75,000, less $5,136.42 claimed as deductible expense of the estate, to the three beneficiaries. The executors thereafter had no property of the estate. An information return on form 1041 was filed on behalf of the estate for 1929, showing a profit of $69,973.33 from the sale of the farm and reporting one-fourth of that profit as income for 1929. 488 The return also showed that all of the net income was distributed to the three beneficiaries, $5,720.59 going to each. An information return on form 1041 was filed on behalf of the estate for 1933, reporting the other three-fourths of the profit as income for 1933 and showing that all of the net income was distributed to the three beneficiaries, $16,789.53 going to each. Bowden reported all of his share of the profit from the sale of the farm848 on his return for 1933. The other two beneficiaries reported on their returns for 1933 the distributions of net income of the estate received by them in that year, and later filed claims for refunds of the tax paid on that income. The Commissioner has determined that the $52,480 was taxable income of the estate for 1933 and has not allowed any deduction for distributions to the beneficiaries. The petitioners concede that the gain would be taxable to the estate if there had been some necessity for the executors to have title to the farm. But they contend that the executors never had title, title vested in the children immediately upon the death of their mother, title passed to the purchaser from the children, not from the executors, the latter had only a naked power to sell and distribute the proceeds, taxable gain from a sale can result only to that one who owned the property, and, consequently, the gain in question was that of the beneficiaries and not of the estate. No authority directly in point is cited for the conclusion reached. The respondent points out that the executors were directed to sell the real estate and distribute the proceeds and they did exactly as849 they were directed. He concedes that the beneficiaries could have elected to take the real estate. But they did not do so. He concludes that the gain is taxable to the estate. Section 161(a) of the Revenue Act of 1932, like its predecessors, imposes a tax upon "the income of estates", including "income received by estates of deceased persons during the period of administration or settlement of the estate." The wording of this will is not exactly like that in any other case which has been brought to our attention. It does "direct" the executors to sell. They made the sale and conveyed the title. The beneficiaries did not convey anything. It does not appear that under the laws of New York no title vested in the executors or that title passed to the purchaser from the residuary legatees. The distribution of the money was in exact compliance with the will. The sale was made "during the period of administration or settlement of the estate" by the fiduciaries in accordance with the directions given them in the will. The income, under such circumstances, is income of the estate within the meaning of section 161(a). 850 ; 489 ; . The petitioners contend, in the alternative, that in any event the estate is entitled to a deduction for the distribution of its income. The right to such a deduction depends upon whether there is any provision in section 162 authorizing it. Those provisions have been interpreted as allowing a deduction to the estate only in case the income may properly be included in the taxable income of the beneficiary. See , and cases there cited. Here the entire amount receivable by the beneficiaries ($100,000 less expenses) came to them, not as income, but as a nontaxable "bequest, devise, or inheritance." Sec. 22(b)(3). The estate is not entitled to any deduction for such distributions. The petitioners also contend that the respondent has failed in his burden of showing transferee liability. However, he has shown that these distributions in 1933 left the estate with no property and the taxes unpaid, and the value of851 the distributions exceeded the taxes. No further proof was necessary. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620658/	L. B. REAKIRT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Reakirt v. CommissionerDocket No. 71904.United States Board of Tax Appeals29 B.T.A. 1296; 1934 BTA LEXIS 1395; February 28, 1934, Promulgated 1395 Attorney fees paid by a taxpayer engaged in the real estate and investment business in resisting an illegal attempt by a city to condemn and acquire certain of his property are diductible as ordinary and necessary expenses of such business. J. W. Peck, Esq., for the petitioner. I. Graff, Esq., for the respondent. VAN FOSSAN 1296 OPINION. VAN FOSSAN: In this proceeding petitioner contests a deficiency of $1,875 for the year 1930. The deficiency arose upon respondent's disallowance of a deduction claimed by petitioner on account of a fee of $7,500 paid to lawyers for services rendered in preventing an illegal taking of property by condemnation. Petitioner maintains the payment was either a proper business expense or a loss. The facts were largely stipulated. The petitioner is an individual residing in Cincinnati, Ohio, and is engaged in the business of real estate and investments for his own account. In March 1928 the city of Cincinnati, by its city council, passed an ordinance to appropriate a strip of land 25 feet in width adjacent to the south line of Fifth Street, one of the principal thoroughfares of the city, for the purpose1396 of widening the street. By the same ordinance, the city undertook to condemn additional areas adjacent to this strip by way of "excess condemnation." The petitioner owned a tract at the corner of Fifth and Sycamore Streets, Cincinnati, Ohio, fronting approximately 138 feet on Fifth Street and 149 feet on Sycamore Street, in the central part of the city, valued for taxation at $277,400. During the injunction proceedings hereinafter mentioned and the year 1930 there was a small temporary oil station on this tract near the corner and the remainder of it was for the time being used as a parking lot, although the improvement 1297 of the area by a large building was then in contemplation. The 25-foot strip of petitioner's tract actually being used for street widening constituted about one sixth of the area of the lot, but the city proposed to take the entire lot under its aforesaid ordinance, condemning additional areas adjacent to this strip by way of "escess condemnation." In 1928 the petitioner and two other owners of property fronting on Fifth Street commenced actions in the Federal court to enjoin the city from appropriating and taking property beyond the 25-foot strip1397 and lying within this additional area, upon the grounds that the taking was not in accordance with the applicable provisions of the Constitution and statutes of Ohio and would constitute a deprivation of property without due process of law in violation of the Fourteenth Amendment, it being alleged that the appropriation of the areas was not for a public use, but for the purpose of speculating in real estate. Under the laws of Ohio this question could be raised only by injunction proceedings. Decrees in favor of the petitioner and the other complainants in the said actions for the permanent injunction against the appropriation were entered in the District Court and were affirmed by the Circuit Court of Appeals, 33 Fed.(2d) 242, and by the United States Supreme Court, 281 U.S. 439">281 U.S. 439, the reported decisions thereof being hereby made a part of this stipulation. For the prosecution of said injunction proceedings and for services in said three courts the petitioner incurred attorney fees in the amount of $7,500, which he paid in 1930. The petitioner claimed the attorney fees as a deduction in his income tax return for the year 1930. Respondent's theory1398 is that the fees paid by petitioner for legal services in opposing the attempted taking of his land were capital expenditures and therefore not diductible. We note first that the petitioner was successful in his opposition. He won his case in every court, including the Supreme Court of the United States, and was thus sustained in his position that the condemnation in question was illegal and violative of his constitutional rights. We next note that the litigation was not in defense of title or to perfect petitioner's title. It was to enjoin the taking of the land itself by the exercise of the power of condemnation, a right of sovereignty. Petitioner's title was assumed to be valid and the effectiveness of the condemnation, if successful, would have depended on the validity of petitioner's title. The decision of the Supreme Court perpetually enjoining the condemnation did not add one cent to the value of petitioner's property, nor did it add any rights of title. We are unable to follow respondent in arguing that the expense so incurred was a capital expenditure. 1298 A condemnation is in fact an involuntary sale of property, the price being fixed by the court having1399 jurisdiction. This concept underlies the whole theory of taxation of profit acquired in such proceedings. See sections 112(f) and 113(a)(10) of the Revenue Act of 1928 and comparable sections of other acts. The injunction proceeding was a proper and effective means of resisting an unlawful attempt to compel petitioner to sell part of his property to the city. Petitioner did not contest the condemnation of the 25-foot strip for street widening. What petitioner did resist was the attempt to take additional or excess land not required for the public use. And in this he was sustained. Generally speaking, where one is engaged in business, the necessary expense of maintenance and protection of the property used in the business constitutes a proper deduction from income. It is stipulated that petitioner was "engaged in the business of real estate and investments for his own account." Basic in this business was the ownership, possession, and availability for advantageous development or disposition of the property in question. Being so engaged, it is undoubted that petitioner could have employed a watchman to remain on this very property to prevent unlawful entry or misuse by1400 trespassers. An expenditure for such a purpose would have been an ordinary and necessary expense and allowable as such. Similarly, it would seem that if court action were necessary to oust a trespasser and a lawyer were employed to eject him, the fee paid would be a comparable expense of the business. Such an expense "is directly connected with, or, as otherwise stated (Sarah Backer,1 B.T.A. 214">1 B.T.A. 214, 216), proximately resulted from, his business," Kornhauser v. United States,276 U.S. 145">276 U.S. 145. In Carlos W. Munson,18 B.T.A. 232">18 B.T.A. 232, we held that expenses incurred by employing private detectives to guard farm property where serious labor trouble had occurred were deductible as business expenses of running a farm and trucking business. In Lena G. Hill,8 B.T.A. 1159">8 B.T.A. 1159, we held that attorney fees paid in defending foreclosure suits brought by lienors to obtain payment for material used in improving petitioner's property were deductible as ordinary and necessary expenses of conducting a hotel business. Again, in 1401 Samuel D. Leidesdorf,26 B.T.A. 881">26 B.T.A. 881, we approved the deduction of attorney fees incurred by a man engaged in the real estate business in defending a suit which threatened his full enjoyment of certain stock. In the instant case the condemnation threatcned to deprive petitioner permanently of a valuable business asset. In H. M. Howard,22 B.T.A. 375">22 B.T.A. 375, attorney fees paid in connection with effecting a compromise of litigation, the same growing out of *1299 his business, were held deductible. And in E. L. Bruce Co.,19 B.T.A. 777">19 B.T.A. 777, we approved the allowance of attorney fees incurred as a result of litigation over taxes. Without further citation of authority it is sufficient for the purposes of this opinion to state that in our judgment the expenditure of $7,500 was directly related and incident to petitioner's real estate and investment business. It was an ordinary and necessary expense of such business and was properly deductible in the taxable year. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620659/	GOHR FARMS, INC., ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Gohr Farms, Inc. v. CommissionerDocket Nos. 8711-88; 8712-88; 8713-88United States Tax CourtT.C. Memo 1990-88; 1990 Tax Ct. Memo LEXIS 88; 58 T.C.M. (CCH) 1493; T.C.M. (RIA) 90088; February 26, 1990Bob A. Goldman, for the petitioners. Gordon L. Gidlund, for the respondent. CLAPPMEMORANDUM OPINION CLAPP, Judge: Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows: Gohr Farms, Inc. -- Docket No. 8711-88YearDeficiencysec. 6653(a)(1)sec. 6653(a)(2)sec. 66611984 $ 1,024------1985 1,389------Marvan Gohr and Mary Gohr -- Docket No. 8712YearDeficiencysec. 6653(a)(1)sec. 6653(a)(2)sec. 66611982$ 6,462$ 323$ 1,61619839,3934702,34819847,3583681,84089 Harlan Gohr and Mayvis Gohr -- Docket No. 8713-88YearDeficiencysec. 6653(a)(1)sec. 6653(a)(2)sec. 66611982$ 5,216$ 261$ 1,304198311,1185562,78019848,1674082,042After concessions by both parties, the issues are (1) whether section 46(e)(3) disallows investment credits claimed in 1982 and 1983 by the individual petitioners on certain properties purchased by their partnership and leased to their corporation, and (2) whether petitioners are liable for the additions to tax for negligence under section 6653(a)(1) and (2). All section references are to the Internal Revenue Code of 1954 for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. These consolidated cases were submitted fully stipulated pursuant to Rule 122. When the petitions were filed, the individual petitioners resided in Mountain Lake, Minnesota, and the corporate petitioner had its principal place of business in Mountain Lake, Minnesota. Mary Gohr and Mayvis90 Gohr are petitioners only because they filed joint Federal income tax returns with their husbands. The tax liability of Gohr Farms, Inc. is not at issue. Accordingly, all references to "petitioners" will be to Marvan and Harlan Gohr. Since 1962, petitioners have owned and operated the Gohr Brothers partnership (the partnership). In 1980, petitioners incorporated Gohr Farms, Inc. (the corporation) for estate purposes. In 1982 and 1983, the partnership purchased equipment in the amounts of $ 134,953 and $ 141,867, respectively, which it leased to the corporation. During the first 12 months of the equipment leases, the partnership paid no expenses relating to the equipment that were deductible under section 162. Instead, the lease agreement provided that all such expenses would be paid by the corporation. Under section 46(e)(3), an investment 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 the91 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. The partnership has not claimed that it manufactured or produced the equipment. Sec. 46(e)(3)(A). It is not allowed a credit under section 46(e)(3)(B) because it did not take deductions with respect to the property under section 162 which exceed 15 percent of the rental income produced by the equipment. Petitioners argue, however, that section 46(e)(3) should not apply to them because their leasing arrangement was motivated by estate reasons rather than tax reasons. This argument has been previously considered and rejected by this Court. See ; . As we said in : In drafting section 46(e)(3)(B), 92 Congress could have chosen a rule based upon the benefits and burdens of ownership in light of all the relevant facts and circumstances. * * * But they did not. Instead, Congress decided to impose two hard-and-fast tests * * . In effect, Congress chose a more easily administered approach (which, for taxpayers, provides predictability) and sacrificed some small measure of perfect equity. Not only was this choice at least arguably reasonable, it is not for us in any case to pass upon the wisdom of legislation. Petitioners also cite , and , affg. a Memorandum Opinion of this Court. Loewen did not involve section 46(e)(3) and, thus, is inapplicable. Hokanson disallowed the investment tax credit and, thus, does not help petitioners. Petitioners also argue that they should not be liable for the additions to tax for negligence under section 6653(a)(1) and (2). They argue that they reasonably relied on the claimed experience, expertise, and abilities of a tax preparer to prepare their returns, and that this absolves them from the negligence addition. 93 However, petitioners have not presented any evidence that they relied in good faith upon the tax preparer, nor have they presented any evidence that they provided him with the correct information. We note that petitioners have conceded that the corporation paid many of their personal expenses, and that these payments were not reported on their individual returns but were deducted on the corporate return. We do not think this behavior can or should be blamed entirely on the tax preparer. We hold for respondent on both issues. Decisions will be entered under Rule 155. Footnotes1. Cases of the following petitioners are consolidated herewith: Marvan Gohr and Mary Gohr, docket No. 8712-88 and Harlan Gohr and Mayvis Gohr, docket No. 8713-88.↩. 50 percent of the interest due on the deficiency.↩. 50 percent of the interest due on the deficiency.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620661/	Dennis S. Brown, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentBrown v. CommissionerDocket Nos. 29929-82, 2313-83, 3083-83, 3503-83United States Tax Court85 T.C. 968; 1985 U.S. Tax Ct. LEXIS 6; 85 T.C. No. 57; December 18, 1985, Filed 6 On October 24, 1985, by order of Judge Perry Shields the opinion filed in this case on August 26, 1985, was withdrawn. Revised opinion filed December 18, 1985, appears at 85 T.C. 968">85 T.C. 968. Decisions will be entered under Rule 155. Petitioners claimed deductions for fees and losses allegedly incurred with respect to forward contracts for purchase and sale of Ginnie Maes and Freddie Macs. Held, the forward contracts and related transactions were factual shams and the deductions for fees and losses are disallowed. Held, further, the addition to tax under sec. 6653(a) I.R.C. of 1954 as determined by respondent against one petitioner is sustained, but damages under sec. 6673 are declined. Joseph Wetzel and Russell Sandor, for the petitioners.Ralph C. Jones and Joyce Britt, for the respondent. Shields, Judge. Sterrett, Simpson, Goffe, Chabot, Nims, Parker, Whitaker, Korner, Hamblen, Cohen, Clapp, Jacobs, Wright, Parr, and Williams, JJ., agree with this opinion. Wilbur, J., concurs in the result only. Swift and Gerber, JJ., did not 9 participate in the consideration of this case. SHIELDS968 Respondent determined deficiencies in petitioners' Federal income tax as follows: 969 Additions to taxPetitioner 2YearDeficiencysec. 6653(a) 3Brown1979$ 49,562.50Sochin19799,402.00198025,535.00198118,288.00Morgan19772,283.00$ 114.001979104,022.005,217.351980194,141.5510,141.55Leinbach1979205,181.691980263,728.311981218,036.46After concessions, the issues remaining for decision are: (1) Whether petitioners realized deductible losses under section10 165(c)(2) on forward contracts as claimed on their income tax returns for 1979, 1980, and/or 1981; (2) whether the fees paid by petitioners with respect to such contracts are deductible; (3) whether petitioners, Ellison C. Morgan and Linda Morgan, are liable for additions to tax under section 6653(a); and (4) whether any of the petitioners are liable for damages under section 6673.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulations and exhibits associated therewith are incorporated herein by reference.All of the petitioners resided in Oregon at the time their petitions were filed, and all of them filed income tax returns for 1979, 1980, and 1981 with the Internal Revenue Service Center at Ogden, Utah. On the returns, petitioners claimed to have suffered losses in the following amounts from the cancellation of forward contracts for the purchase or sale of certain mortgage certificates: 970 PetitionerYearLoss claimedBrown1979$ 106,160Sochin197920,621198048,054198138,785Morgan1979224,4161980390,614Leinbach1979394,6761980482,2451981401,412All of the above losses allegedly 4 occurred11 with respect to activities promoted by Gregory Government Securities, Inc., and Gregory Investment & Management, Inc. Over 1,400 other cases now pending before this Court have been identified as involving similar issues and factual situations. Upon learning of the number of such cases, the Chief Judge assigned all of them to this division of the Court. With the assistance of respondent and his counsel, and most of the 1,400 petitioners and their counsel, these four cases were selected as being generally representative with respect to the issues common to all the cases. 5 An order was then entered consolidating these four cases and setting them for trial of the common issues while all activity in the other cases was suspended pending the decision herein.12 Gregory Government Securities, Inc. (GGS), and Gregory Investment & Management, Inc. (GIM) were incorporated in 1979 by William H. Gregory under the laws of the State of Oregon. At all times material to these cases, all of the stock outstanding in both corporations was owned by Mr. Gregory and his wife, and their corporate activities were conducted under his general supervision and control. Prior to 1979, Mr. Gregory had been the tax partner and a specialist in accounting for wood products with Arthur Andersen & Co., an international accounting firm. He was also the chairman of the firm's steering committee on tax shelters. He left Arthur 971 Andersen in July of 1979 in order to establish GGS and GIM. Shortly after its organization, GGS was registered with the Oregon Department of Commerce as a broker-dealer in securities. The registration continued through the balance of 1979 and throughout 1980 and 1981. No such registration was required of GIM in Oregon. Neither corporation was required to be registered as a broker-dealer under the Securities Exchange Act of 1934.The promotion undertaken in 1979 by Mr. Gregory was purportedly to offer to "a limited number of knowledgeable, 13 sophisticated investors, * * * who understand both the economic and tax ramifications of the transactions," investments in forward contracts to purchase or to sell certificates issued by Government National Mortgage Association and Federal Home Loan Mortgage Corporation. These certificates are exempt from federal registration under the Securities Act of 1933. His program contemplated that GIM would serve as a financial adviser to the prospective investors, and GGS, as a registered broker-dealer, would serve as either a seller or a buyer on every transaction entered into with the investors.Government National Mortgage Association (GNMA) is a corporation wholly owned by the Government through the Department of Housing and Urban Development. From time to time, GNMA issues registered certificates which represent undivided interests in a specified pool of mortgages guaranteed by GNMA, as well as by the Veterans' Administration, the Federal Housing Administration, or the Farmers Home Administration. These certificates are referred to in the market as "Ginnie Maes."The Federal Home Loan Mortgage Corporation (FHLMC) is a corporation whose capital stock is owned by the Federal Home Loan14 Bank Board and whose directors are appointed by the President with the advice and consent of the Senate. The directors of the Federal Home Loan Bank Board act as the directors of FHLMC.FHLMC also sells mortgage certificates which are known as participation certificates and which are referred to in the market as "Freddie Macs." Each of these certificates represents an undivided fractional interest in a pool of conventional (non-VA and non-FHA) mortgages.972 Each prospective investor, 6 including petitioners herein, was given a disclosure memorandum by GIM in which the investment strategy developed by Mr. Gregory was described as follows:Gregory Investment assists investors in profiting from changes in yields on U.S. Government securities. The investor provides us with his forecast of interest rates. We recommend a portfolio of U.S. Government securities that we believe will result in a gain, if the investor's forecast is correct.The investment usually involves the purchase and sale of securities under arrangements that delay the actual delivery of the security for several months. This type of arrangement is referred to as a forward contract.A forward contract is a bilateral15 executory agreement pursuant to which one party agrees to deliver a designated amount of an item at a certain price and time to another party, who agrees to acquire such item at such price and time. The forward contract does not require delivery until the settlement date designated in the contract. A forward contract is similar in concept to a futures contract. However, a futures contract is consummated through a board of trade or an exchange and contains standardized terms and conditions. The securities purchases and sales through forward contracts are limited to obligations of, or obligations guaranteed by, the United States Government, and securities issued by or guaranteed by United States Government corporations or agencies; e.g., Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC). The customer is required by the contract to make delivery to, or take delivery from, the dealer of the security specified in the forward contract at settlement date.It is contemplated that a customer will enter into several forward contracts with the dealer, some of which will require the customer to make forward delivery to the dealer of securities, 16 while others will require the customer to take forward delivery from the dealer of securities. The forward contracts entered into by a particular customer will reflect a market strategy and interest rate forecast and could result in substantial gain or loss to the customer, depending on the volume of transactions and whether interest rate movement is in accordance with, or adverse to, his expectations.The investment risk is diminished by the simultaneous purchase and sale of a forward contract. This purchase and sale is called a spread. The profit and loss potential of a spread results from the purchase of securities and the sale of securities with different coupon interest rates.A change in interest rates affects the price of a low-coupon security a greater percentage than a high-coupon security. However, the low-coupon 973 security costs less, so even though its price varies at a greater percentage rate, the total change in price is less.The usual investment strategy to profit from rising interest rates is to purchase low-coupon and sell high-coupon securities. An opposite strategy would be used for a projected decline in interest rates. For example --Assume17 a 9% current yield to maturity on a security paying interest semiannually and maturing in ten years. The investor forecasts interest rates to rise to 10%. This spread results in a profit:PriceCoupon9-Percent10-PercentProfitrateFace valueyieldyield(loss)Purchase (long)8%$ 1,000,000$ 935,000$ 875,400$ (59,600)Sell (short)9 1,000,0001,000,000937,70062,300 2,700 The profit would be reduced by transaction costs.* * * In the event a customer desires to be released from obligations under a particular forward contract, the customer may attempt to arrange for the cancellation of the obligations under the contract prior to settlement date. If the dealer agrees to cancel the contract, it will charge or credit the customer's account with an amount equal to the profit or loss that the customer is entitled to receive. In consideration for the release of the customer from his obligation to perform the contract the customer will also pay a fee to the dealer for risk and administrative costs created by the cancellation of the contract.Alternatively, if the customer does not desire to be released from the obligations18 under a particular forward contract (original contract), but wants to eliminate the risk created by such contract, he may enter into a forward contract bearing the position opposite that of the original contract. The customer may request that the dealer offset the newly acquired contract against the original contract or he may keep both positions open and either offset at a later date or close out the position in some other manner.The tax and economic results of various types of transactions are summarized below. The federal income tax results should be discussed with your tax advisor and you should not rely on the chart. The results could be challenged for various reasons by the Internal Revenue Service, as explained in the tax aspects section of this memorandum. 974 TRANSACTIONFEDERAL INCOME TAXECONOMIC RESULTSRESULTSDelivery of securitiesLong position: noneGain or loss isuntil securities are sold.realized.Additional marginmay be requiredShort position: short-termbecause of increasedcapital gain or lossrisk unless a spread isre-established or allpositions are closed.Sale or assignmentLong-term capital gain orloss on contracts held over1 year. Short-term 1 yearor less.CancellationOrdinary gain or loss.Offset or pair-off ofShort-term capital gainidentical contractor loss on all shortpositions and on all longpositions held for 1 yearor less on date of shortsale.Opposing purchase orNoneEstablishes no risksale of securitiessituation locking inidentical to opengain or loss for laterpositionsrealization.Opposing purchase orNoneEstablishes spreadsale of securitieswith potential fordifferent from opengain or loss.positions19 The memorandum stated that the forward contracts were not listed on any security or commodity exchange; that each contract was between the investor as one party and GGS as the other; that the investor could not sell or assign his interest in any contract without the consent of GGS; that if the investor wished to be released from the obligations of a particular forward contract before its settlement date, he had the right to request that GGS cancel the contract; and that if GGS agreed to do so, the investor's account would be credited by GGS with an amount equal to any profit the investor was entitled20 to receive or charged with any loss he had suffered on the contract plus a fee for the "risk and administrative costs created by the cancellation of the contract."The memorandum also stated that each investor was required to have on deposit with GGS a sufficient amount to cover his investment risk which amount would vary with the size of the portfolio and the risk involved but the initial deposit would be a minimum of $ 10,000 or 0.125 percent of the face value of the portfolio, whichever was greater. An advisory fee of 0.001 percent per month was to be paid out of the deposit with GGS to GIM. In addition, an origination fee of 0.04 percent of the contract's face value was payable on the trade date, and the 975 fee for the cancellation of a contract was stated to be 0.02 percent of the face value on the cancellation date. GGS could also include a markup or a discount on any security covered by a contract.Potential investors were warned by the disclosure memorandum that they could lose all of their deposit in a relatively short period of time and that in order to achieve a profit, the market would have to move in the direction forecast and by an amount that covered all fees21 plus or minus any markup or discount.GIM's disclosure memorandum contained 14 pages, 4 of which were devoted to the tax treatment that Mr. Gregory thought an investor could expect as a result of entering into a transaction with GGS and GIM. Briefly, the transaction would proceed as follows: (1) The investor would make his deposit and furnish GIM with an interest rate forecast for the next 3, 12, and 15 months. (2) Using the interest forecast GIM, acting as an investment adviser, would prepare a portfolio of forward contracts on Ginnie Maes and Freddie Macs in the face amount required by the deposit and which, if the investor's prediction proved to be correct, would supposedly result in a profit. (3) Each of the forward contracts was entered into by the investor with GGS. In each case, the original portfolio for an investor constituted a spread or straddle since 50 percent of the contracts were long positions (contracts to purchase securities) and 50 percent were short positions (contracts to deliver securities). (4) As time passed and it became apparent which leg of the straddle would result in a loss, 7 that leg would be canceled and the gain in the other leg of the straddle22 would be locked in by entering into an offsetting or opposing contract to purchase or sell until such time as the investor wished to realize his gain (presumably after it became a long-term capital gain).According to GIM's memorandum, the tax result of the above transaction would be an ordinary loss for the investor in the year of the cancellation of the loss contracts and a long-term capital gain in the year the gain was realized by the sale or assignment of the gain contracts. The memorandum, however, did contain the following caveat:976 Due to the tax deferral and conversion of tax characteristics (i.e., capital versus ordinary) involved in the transactions described in this memorandum, the Service may take a strong stance contrary to the opinions expressed herein. Additional legislative action or Service rulings or regulations could also be23 enacted or issued negating any tax benefits that would otherwise be available to the investor as discussed in this memorandum. Further, if a court should feel that tax deferral or conversion is involved, it might be inclined to hold in favor of the Service, even though the opinions expressed in this memorandum are technically correct. The investor should review the tax treatment of the transactions discussed in this memorandum with his tax advisor and rely only upon the advice of his own tax advisor. The opinions expressed herein are only for purposes of providing information and analysis to the investor and his tax advisor.Attached to the disclosure memorandum is a copy of the Service's Rev. Rul. 77-185, 1 C.B. 48">1977-1 C.B. 48, 50. This ruling holds that "Neither a short-term capital loss created to minimize the tax consequences of an unrelated short-term capital gain through a series of transactions in silver futures contracts, which result in no real economic loss, nor the related out-of-pocket expenses incurred in connection with creating the loss are deductible under section 165(a) of the Code."In spite of the caveat, prospective investors24 were advised that with a minimum deposit of $ 10,000 they could obtain forward contracts with GGS having a total face value of $ 8 million. They were also advised that for the minimum deposit, one or the other of the long or short positions (depending on the direction of the movement in the interest rate) would result in an ordinary loss in the approximate amount of 10 times the deposit or $ 100,000.Each investor was required to sign a client or customer agreement which provided, among other things, that whenever GGS "considered it necessary for [its] protection," GGS could liquidate any open position or cancel any order through public or private action with or without notice to the investor; and in the event of death or incapacity of an investor, GGS could take any step it deemed appropriate to cancel or complete any open position. A power of attorney was also obtained from every investor. Under the power of attorney, GGS was authorized to follow the investment instructions of GIM in every respect, and GIM was authorized to act for the investor and perform in his behalf any act which he could perform in person. The power of 977 investor "[ratified] and [confirmed] any 25 and all transactions with [GGS] heretofore or hereafter made by [GIM] or for [his] account."Even though GGS was a party to each of the forward contracts entered into by petitioners and had the right to include a markup or discount in any transaction, Mr. Gregory and David Solberg, the vice president and later president of GGS, admitted that neither GGS nor GIM made any profit from the contracts. Instead, their profits were generated from the advisory, origination, cancellation, and other fees.GGS was required by the deputy corporation commissioner for the State of Oregon to establish and maintain a hedging program in publicly traded Ginnie Maes to insure its performance on forward contracts. GGS supposedly satisfied this requirement by hedging its net exposure on the total of its forward contracts by an offset with publicly traded Ginnie Maes. 826 Under the client agreement, GGS had the authority to determine any price required under the contracts including cancellation prices. In order to arrive at a price, GGS purportedly used an elaborate formula consisting of approximately 20 steps. The first step was the receipt of a quotation in the open market for the then-current 8-percent Ginnie Maes. This price was then converted to a yield stated as a percentage which was used in computing a comparable value for the security being priced. The formula contained several other adjustments to be made in arriving at a price for a contract. Surprisingly enough, these included a step which allowed GGS to make any adjustment it felt was appropriate. At trial, Mr. Gregory admitted that on more than one occasion price concessions had been made to an investor if he felt that the investor's pricing expectations would be "disappointed" by adhering too strictly to market quotations or pricing formulas.978 Following generally the procedure outlined in GIM's disclosure memorandum, petitioners and all other investors in the program made their respective deposits and furnished their interest forecasts to GIM and, in return, received documents27 which indicated their entry into forward contracts with GGS to purchase and sell Ginnie Maes and Freddie Macs. The documents included copies of the interest forecasts, forward contracts, powers of attorney, and client agreements referred to in the memorandum. The documents consisted of standard preprinted forms provided by GIM, and no negotiation or alterations by the investors was permitted as to their terms except with respect to the interest forecasts. The forms were executed by the investors or were executed for them by GIM pursuant to the powers of attorney. For the most part, investors in the Gregory program first became aware of the terms of their contracts when they received the copies from GGS.The interest rate forecasts made by petitioners for 1979 were as follows:BrownSochinMorganLeinbachDate of forecast10/03/7909/18/7909/28/7910/03/79Current rate10.910.58610.810.9153 Monthsup 40up 50up 40up 4012 Monthsdown 100down 90down 100up 10015 Monthsdown 150down 100down 150down 100For illustration purposes, Brown's forecast which was made on October 3, 1979, was to the effect that the 10.9-percent rate at which 8-percent28 Ginnie Maes were then trading on the Chicago Board of Trade would increase in 3 months by 40 basis points (0.04 percent), decrease in 12 months by 100 basis points (0.1 percent), and decrease in 15 months by 150 basis points (0.15 percent). Each of the other forecasts can be interpreted in a similar manner.Each petitioner gave his 1979 forecast to GIM together with his 1979 deposit and, shortly thereafter, was furnished by GGS with a portfolio containing the forward contracts recommended by GIM, which according to GIM and GGS, would generate for petitioner a tax deduction of approximately $ 10 for each $ 1 of his deposit plus a gain if petitioner's interest forecast proved to be accurate.Brown's account number with GGS was 135 and, according to the records of GGS, a transcript of the activity in the account 979 with respect to the 1979 investment is as shown in the table on page 980.The above transcript of Brown's account purportedly indicates that in return for his $ 10,000 deposit the initial portfolio recommended by GIM for him contained forward contracts 1 to 7 (all dated October 4, 1979) of which the first three represented agreements by Brown to buy Ginnie Maes from29 GGS having a total value of $ 4 million, and the last four of which represented agreements by Brown to sell to GGS Freddie Macs having a total value of $ 4 million. Six days later, on October 10, 1979, the contracts to buy Ginnie Maes (1 to 3) were canceled by GGS at an ordinary loss for Brown of $ 100,160 9 and the $ 4 million in Freddie Macs included in the remaining sell contracts (4 to 7) were offset by contract number 8 to buy Freddie Macs from GGS in the amount of $ 4 million. On October 26, 1979, Brown's position in the buy and sell contracts of 4 to 8 were locked down by the contracts of 9 to 13.On January 22, 1981, both the contracts to buy and the contracts to sell Freddie Macs (4 to 13) were disposed of at a net long-term capital gain to Brown of $ 106,382 by an assignment to RST Investment Co. (RST), a partnership. 30 RST was an investor with GGS and GIM and its members were business associates of Mr. Gregory. The assignment was executed for Brown by GIM under his power of attorney.Sochin was a one-sixth participant in GGS's account number 112 which was in the name of Harsh Associates. GGS's transcript of the activity in the account with respect to the 1979 investment is as shown in table on page 981.The transcript of the Harsh Associates account, in which Sochin was a one-sixth participant, purportedly indicates that for a deposit of $ 12,000 Harsh Associates received an initial portfolio containing forward contracts 1 to 7 (all dated September 18, 1979) of which the first three represented agreements by Harsh to buy from GGS Ginnie Maes having a total value of $ 4,800,000 and the last four represented agreements by Harsh to sell to GGS Freddie Macs having a total value of $ 4,800,000. Sixteen days later, on October 4, 1979, the contracts to buy Ginnie Maes were canceled and the contracts to sell $ 4,800,000 in Freddie Macs as represented by contracts 4 to 7 were offset 980 1979DENNIS S. BROWNGregory Government Securities Account Number 135ContractDSBTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice1Buy2.0GNMA10/04/797.5 3/10/8178.4642Buy1.0GNMA10/04/798.253/01/8182.5463Buy1.0GNMA10/04/799.0 3/30/8184.9434Sell1.0FHLMC10/04/798.753/15/8184.0255Sell1.0FHLMC10/04/799.0 4/01/8184.4436Sell1.0FHLMC10/04/799.252/15/8185.4167Sell1.0FHLMC10/04/799.5 3/01/8186.3658Buy4.0FHLMC10/10/798.0 4/15/8178.5009Sell4.0FHLMC10/26/798.0 5/15/8174.997410Buy1.0FHLMC10/26/798.754/15/8177.863311Buy1.0FHLMC10/26/799.0 5/01/8178.304212Buy1.0FHLMC10/26/799.253/15/8179.247213Buy1.0FHLMC10/26/799.5 4/01/8180.185731 1979DENNIS S. BROWNGregory Government Securities Account Number 135ContractDSBDispositionDispositionnumberbuy/selldatepriceGain/(loss)1BuyC 10/10/7976.003 ($ 49,220)2BuyC 10/10/7980.010 (25,360)3BuyC 10/10/7982.385 (25,580)($ 100,160)4SellA 1/22/8176.757272,678 5SellA 1/22/8177.196972,461 6SellA 1/22/8178.142572,735 7SellA 1/22/8179.084172,809 8BuyA 1/22/8173.8769(184,924)9SellA 1/22/8173.876944,820 10BuyA 1/22/8176.7572(11,061)11BuyA 1/22/8177.1969(11,073)12BuyA 1/22/8178.1425(11,047)13BuyA 1/22/8179.0841(11,016)A net gain=106,382 C + A net, net gain6,222 Fees(6,100)Net profit to client122 981 1979HARSH ASSOCIATES(James E. Sochin (1/6))Gregory Government Securities Account Number 112ContractJESTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice1Buy2.4GNMA9/18/797.5 3/10/8180.515 2Buy1.2GNMA9/18/798.253/01/8185.231 3Buy1.2GNMA9/18/799.0 3/30/8187.047 4Sell1.2FHLMC9/18/798.753/15/8186.140 5Sell1.2FHLMC9/18/799.0 4/01/8186.547 6Sell1.2FHLMC9/18/799.252/15/8187.531 7Sell1.2FHLMC9/18/799.5 3/01/8186.513 8Buy4.8FHLMC10/04/798.0 4/15/8180.563 9Buy1.2FHLMC10/23/798.754/15/8176.704 10Buy1.2FHLMC10/23/799.0 5/01/8177.149911Buy1.2FHLMC10/23/799.253/15/8178.087 12Buy1.2FHLMC10/23/799.5 4/01/8179.019313Sell4.8FHLMC10/23/798.0 5/15/8173.865532 1979HARSH ASSOCIATES(James E. Sochin (1/6))Gregory Government Securities Account Number 112ContractJESDispositionDispositionGain/(loss)numberbuy/selldateprice(JES share)1BuyC 10/04/7978.056 ($ 9,836)2BuyC 10/04/7982.662 (5,138)3BuyC 10/04/7984.494 (5,106)($ 20,080)4SellA 12/17/8076.484919,302 5SellA 12/17/8076.929119,236 6SellA 12/17/8077.874119,314 7SellA 12/17/8078.814919,396 8BuyA 12/17/8073.6124(55,605)9BuyA 12/17/8076.4889(430)10BuyA 12/17/8076.9291(442)11BuyA 12/17/8077.8741(426)12BuyA 12/17/8078.8149(409)13SellA 12/17/8073.61242,025 A net gain=21,961 C + A net, net gain1,881 Fees(1,420)Net profit to client461 982 by a contract to buy from GGS Freddie Macs in the amount of $ 4,800,000. On October 23, 1979, Harsh Associates' positions in the buy and sell contracts 4 to 8 were locked down by contract numbers 9 to 13. For his proportionate deposit of $ 2,000 Sochin claimed an ordinary loss from the October 4 cancellation33 in the amount of $ 20,080. 10On February 12, 1981, both the contracts to buy and the contracts to sell Freddie Macs (4 to 13) were purportedly disposed of at a net long-term capital gain to Sochin of $ 21,961 by an assignment to RST. The assignment was executed for Sochin and the other members of Harsh Associates by GIM under its power of attorney.Morgan was one of six participants in GGS's account number 127. His interest in the account, however, was 31.43 percent. The account was in the name of RMC Associates. The transcript of account number 127 reflects the activity shown in the table on page 983 with respect to the 1979 investment.The transcript of RMC Associates' account purportedly indicates that for their $ 70,000 deposit they received an initial portfolio containing forward contracts 1 to 7 (all dated September 28, 34 1979), of which the first three represented agreements by them to buy from GGS Ginnie Maes having a total value of $ 28 million, and the last four represented agreements by them to sell to GGS Freddie Macs having a total value of $ 28 million. Eleven days later, on October 9, 1979, the contracts to buy Ginnie Maes were canceled by GGS and the $ 28 million in Freddie Macs which were included in sell contracts 4 to 7 were offset by contract 8 to buy from GGS Freddie Macs having a total value of $ 28 million. On October 22, 1979, RMC Associates' position in contracts 4 to 8 to buy and sell Freddie Macs was locked down by contracts 9 to 13. For his proportionate deposit of $ 22,000, Morgan claimed an ordinary loss from the October 9 cancellation in the amount of $ 219,340. 11On February 12, 1981, both the contracts to buy and the35 contracts to sell the Freddie Macs (4 to 13) were all purportedly disposed of at a net long-term capital gain to Morgan of $ 234,732 by an assignment to RST. The assignment was 983 1979RMC ASSOCIATES(Ellison C. Morgan (31.43 percent))Gregory Government Securities Account Number 127ContractECMTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice1Buy14.0GNMA9/28/797.5 3/10/8179.169 2Buy7.0GNMA9/28/798.253/01/8183.281 3Buy7.0GNMA9/28/799.0 3/30/8186.678 4Sell7.0FHLMC9/28/798.753/15/8184.763 5Sell7.0FHLMC9/28/799.0 4/01/8185.178 6Sell7.0FHLMC9/28/799.252/15/8186.156 7Sell7.0FHLMC9/28/799.5 3/01/8187.125 8Buy28.0FHLMC10/09/798.0 4/15/8179.219 9Buy7.0FHLMC10/22/798.754/15/8178.280410Buy7.0FHLMC10/22/799.0 5/01/8178.720511Buy7.0FHLMC10/22/799.253/15/8179.665812Buy7.0FHLMC10/22/799.5 4/01/8180.606513Sell28.0FHLMC10/22/798.0 5/15/8175.39921979RMC ASSOCIATES(Ellison C. Morgan (31.43 percent))Gregory Government Securities Account Number 127ContractECMDispositionDispositionGain/(loss)numberbuy/selldateprice(ECM share)1BuyC 10/09/7976.729($ 107,360)2BuyC 10/09/7980.744 (55,814)3BuyC 10/09/7983.125 (56,166)($ 219,340)4SellA 2/12/8172.6893265,621 5SellA 2/12/8173.1436264,757 6SellA 2/12/8174.0681265,934 7SellA 2/12/8174.9890266,992 8BuyA 2/12/8169.9127(818,954)9BuyA 2/12/8172.6893(123,004)10BuyA 2/12/8173.1436(122,692)11BuyA 2/12/8174.0681(123,149)12BuyA 2/12/8174.3830(123,585)13SellA 2/12/8169.9127482,812 A net gain=234,812 C + A net, net gain15,392 Fees(11,031)Net profit to client4,361 36 984 executed for Morgan and the other members of RMC Associates by GIM under his power of attorney.Leinbach's account number with GGS was 137 and the transcript of the activity in his account with respect to the 1979 investment is as shown in the table on page 985.The transcript of Leinbach's account purportedly indicates that for his deposit of $ 20,000 he received an initial portfolio containing forward contracts 1 to 7 (all dated October 4, 1979), of which the first three represented agreements by him to buy from GGS Ginnie Maes having a total value of $ 8 million, and the last four represented agreements by him to sell to GGS Freddie Macs having a total value of $ 8 million. Fifteen days later, on October 19, 1979, the contracts to buy Ginnie Maes were canceled by GGS at an ordinary loss for Leinbach of $ 389,876 12 and the contracts to sell Freddie Macs were offset by contract number 8 to buy from GGS Freddie Macs in the total amount of $ 8 million. On October 26, 1979, his position in the Freddie Macs were locked down by agreements to sell and to buy Freddie Macs in the amount of $ 8 million. On January 27, 1981, all of the Freddie Mac contracts were disposed of37 at a net long-term capital gain to Leinbach of $ 403,148 by assignment to RST. The assignment was executed for Leinbach by GIM under his power of attorney.Brown did not participate in the program after 1979, and Morgan did not participate in the program after 1980. Transcripts of Sochin's and Leinbach's accounts for the years 1980 and 1981 as well as a transcript of Morgan's account for 1980 are set out in the tables on pages 986-992.The deposits made by Brown, Sochin (through Harsh Associates), Morgan (through RMC Associates), and Leinbach during 1979 were refunded to them before the end of 1979. The first 49 participants in the Gregory program generally were accorded the same treatment as these petitioners. In other words, in spite of any inconsistency in their interest forecasts, these first participants each received a 38 portfolio of contracts (many of which contained the same contracts as the portfolios received by other participants); shortly after receipt, the loss leg of each of their contract portfolios was canceled, generating the putative losses in issue; their deposits were refunded in 985 1979JAMES N. LEINBACH AND MARY ALICE LEINBACHGregory Government Securities Account Number 137ContractJNLTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice1Buy4.0GNMA10/04/797.5 3/10/8178.464 2Buy2.0GNMA10/04/798.253/01/8182.546 3Buy2.0GNMA10/04/799.0 3/30/8184.943 4Sell2.0FHLMC10/04/798.753/15/8184.025 5Sell2.0FHLMC10/04/799.0 4/01/8184.443 6Sell2.0FHLMC10/04/799.252/15/8185.416 7Sell2.0FHLMC10/04/799.5 3/01/8186.365 8Buy8.0FHLMC10/19/798.0 4/15/8176.12029Sell8.0FHLMC10/26/798.0 5/15/8174.997410Buy2.0FHLMC10/26/798.754/15/8177.863311Buy2.0FHLMC10/26/799.0 5/01/8178.304212Buy2.0FHLMC10/26/799.253/15/8179.247213Buy2.0FHLMC10/26/799.5 4/01/8180.185739 1979JAMES N. LEINBACH AND MARY ALICE LEINBACHGregory Government Securities Account Number 137ContractJNLDispositionDispositionnumberbuy/selldatepriceGain/(loss)1BuyC 10/19/7973.6881($ 191,036)2BuyC 10/19/7977.5936(99,040)3BuyC 10/19/7979.9534(99,792)($ 389,876)4SellA 1/27/8176.9008142,484 5SellA 1/27/8177.3399142,062 6SellA 1/27/8178.2864142,592 7SellA 1/27/8179.2286142,728 8BuyA 1/27/8174.0168(168,272)9SellA 1/27/8174.016878,448 10BuyA 1/27/8176.9008(19,250)11BuyA 1/27/8177.3399(19,286)12BuyA 1/27/8178.2864(19,216)13BuyA 1/27/8179.2286(19,142)A net gain=403,148 C + A net, net gain13,272 Fees(12,660)Net profit to client612 986 1980JAMES E. SOCHINGregory Government Securities Account Numbers 475 and 476ContractJESTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice14Buy8.0GNMA6/17/809.253/15/8291.872315Sell8.0FHLMC6/17/808.004/15/8285.246216Sell8.0FHLMC6/20/809.252/15/8291.703717Sell4.0FHLMC6/20/8010.004/01/8295.278118Sell4.0FHLMC6/20/8010.254/01/8296.592119Buy4.0GNMA6/20/8010.503/01/8299.466320Buy4.0GNMA6/20/8011.253/01/82103.385521Buy4.0GNMA6/23/8010.755/01/8299.466422Buy4.0GNMA6/23/8011.005/01/82100.762623Buy4.0FHLMC6/27/8010.003/01/8291.006524Buy4.0FHLMC6/27/8010.253/04/8292.282725Sell4.0GNMA6/27/8010.754/01/8296.328926Sell4.0GNMA6/27/8011.004/01/8297.598640 1980JAMES E. SOCHINGregory Government Securities AccountNumbers 475 and 476ContractJESDispositionDispositionGain/(loss)numberbuy/selldateprice(JES share)14BuyA 1/26/8267.7112($ 193,289)15SellC 6/20/8086.5457(10,396)16SellA 1/26/8266.2112203,940 17SellA 1/26/8269.1602104,472 18SellA 1/26/8270.2305105,446 19BuyC 6/23/8098.2301(4,945)20BuyC 6/23/80102.1184(5,068)21BuyA 1/26/8273.8699(102,386)22BuyA 1/26/8274.9386(103,296)23BuyA 1/26/8269.1915(87,260)24BuyA 1/26/8278.2618(88,084)25SellA 1/26/8273.901189,711 26SellA 1/26/8274.969890,515 987 1980JAMES K. SOCHINGregory Government Securities Account Numbers 475 and 476ContractJESTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice27Buy 4.8GNMA6/18/809.253/15/8291.118228Sell4.8FHLMC6/18/808.004/15/8284.510429Buy 4.8GNMA6/25/808.005/15/8284.985030Sell2.4FHLMC6/25/8010.004/01/8292.594631Sell2.4FHLMC6/25/8010.254/01/8293.885132Buy 2.4GNMA6/25/8010.503/01/8296.736033Buy 2.4GNMA6/25/8011.253/01/82100.586634Sell2.4FHLMC6/26/8010.502/01/8296.111335Sell2.4FHLMC6/26/8011.252/01/8299.971436Sell4.8FHLMC6/26/8010.754/10/8296.838137Buy 4.8GNMA6/26/8011.503/10/82102.252538Buy 4.8GNMA6/27/8010.755/10/8296.141839Sell4.8FHLMC6/27/8011.004/20/8296.414440Buy 4.8GNMA6/27/8011.753/20/82101.778241Buy 4.8GNMA6/30/8011.005/20/8296.272542Sell4.8FHLMC6/30/8011.752/20/8299.608241 1980JAMES K. SOCHINGregory Government Securities Account Numbers 475 and 476ContractJESModifiedModifiedDispositionDispositionGain/(loss)numberbuy/sellsettlesettledateprice(JES share)dateprice27Buy N/A N/A C 6/25/8090.5797($ 5,385)28Sell8/15/8384.7710A 1/26/8259.4013253,696 29Buy 9/15/8385.2768A 1/26/8260.4325(248,443)30SellN/A N/A C 6/26/8092.9634(1,844)31SellN/A N/A C 6/26/8094.2571(1,860)32Buy 7/01/8396.9953A 1/26/8272.2121(123,916)33Buy 7/01/83100.8563A 1/26/8275.9531(124,516)34Sell6/01/8396.3394A 1/26/8271.1809125,792 35Sell6/01/83100.2099A 1/26/8274.9219126,440 36Sell8/10/8397.1323A 1/26/8271.9106252,216 37Buy N/A N/A C 6/27/80100.5140(17,385)38Buy 9/10/8396.4672A 1/26/8272.9418(235,254)39Sell8/20/8396.7120A 1/26/8273.1434235,685 40Buy 7/20/83102.0553A 1/26/8278.4774(234,779)41Buy 9/20/8396.6013A 1/26/8274.1746(224,267)42Sell6/20/8399.8541A 1/26/8277.4462224,079 A net gain=45,502 C + A net(1,381)Fees(3,092)Net to client(4,473)42 988 1981JAMES E. SOCHINGregory Government Securities Account Number 1293ContractJESTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice43Sell2.5 FHLMC3/31/818.254/01/8372.167044Sell2.5 FHLMC3/31/818.504/01/8373.107645Buy 2.5 GNMA3/31/819.003/01/8376.028446Buy 2.5 GNMA3/31/8110.503/01/8382.532947Buy 2.5 FHLMC4/02/818.255/01/8372.240748Buy 2.5 FHLMC4/02/818.505/01/8373.178749Buy 2.5 FHLMC4/08/819.003/01/8373.206450Buy 2.5 FHLMC4/08/819.253/01/8374.124151Sell2.5 GNMA4/08/819.504/01/8375.569552Sell2.5 GNMA4/08/8110.504/01/8380.151653Sell2.5 GNMA4/09/817.503/10/8368.240154Sell1.25GNMA4/09/818.253/20/8371.957755Sell1.25GNMA4/09/819.003/30/8374.277756Buy 1.25FHLMC4/09/818.753/15/8373.289857Buy 1.25FHLMC4/09/819.004/05/8373.746558Buy 1.25FHLMC4/09/819.252/15/8374.667259Buy 1.25FHLMC4/09/819.503/01/8375.584360Buy 2.5 GNMA4/10/817.504/10/8367.749461Buy 1.25GNMA4/10/818.254/20/8371.428962Buy 1.25GNMA4/10/819.004/30/8373.740063Buy 5.0 FHLMC4/10/818.004/08/8369.018464Sell5.0 GNMA4/10/819.253/08/8374.154965Sell5.0 FHLMC4/13/818.002/08/8369.353643 1981JAMES E. SOCHINGregory Government Securities Account Number 1293ContractJESDispositionDispositionGain/(loss)numberbuy/selldateprice(JES share)43SellA 1/28/8378.2089($ 48,335)44SellA 1/28/8379.4524(50,758)45Buy C 4/02/8175.5986(3,438)46Buy C 4/02/8182.0815(3,611)47Buy A 1/28/8378.708951,746 48Buy A 1/28/8379.952454,189 49Buy P 4/09/8173.60153,161 50Buy P 4/09/8174.52143,179 51SellP 4/09/8175.9691(3,197)52SellP 4/09/8180.5668(3,322)53SellA 1/28/8375.5144(58,194)54SellA 1/28/8379.2401(29,130)55SellA 1/28/8383.0259(34,993)56Buy C 4/10/8172.2486(4,165)57Buy C 4/10/8172.7088(4,151)58Buy C 4/10/8173.6237(4,174)59Buy C 4/10/8174.5350(4,197)60Buy A 1/28/8376.014466,120 61Buy A 1/28/8379.740133,245 62Buy A 1/28/8383.525939,143 63Buy A 1/28/8377.4660135,162 64SellC 4/13/8175.0152(13,768)65SellA 1/28/8376.9660(121,798)A net gain=$ 36,397 C + A + P net(1,283)Fees(2,739)Net to client(4,022)44 989 1980JAMES N. LEINBACH AND MARY ALICE LEINBACHGregory Government Securities Account Number 137ContractJNLTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice14Sell12.0FHLMC6/19/808.0 4/15/8285.776315Buy 12.0GNMA6/19/809.253/15/8292.415416Buy 12.0GNMA6/25/808.0 5/15/8285.485017Sell6.0FHLMC6/25/8010.0 4/01/8292.594618Sell6.0FHLMC6/25/8010.254/01/8293.885119Buy 6.0GNMA6/25/8010.503/01/8296.736020Buy 6.0GNMA6/25/8011.253/01/82100.586621Sell6.0FHLMC6/26/809.502/01/8290.760222Sell6.0FHLMC6/26/8010.752/01/8297.242323Sell6.0GNMA6/27/8010.504/01/8295.622524Sell6.0GNMA6/27/8011.254/01/8299.445625Buy 6.0FHLMC6/27/809.503/01/8288.995226Buy 6.0FHLMC6/27/8010.753/01/8295.399427Buy 1.2GNMA12/12/8011.252/01/8286.50431980JAMES N. LEINBACH AND MARY ALICE LEINBACHGregory Government Securities Account Number 137ContractJNLDispositionDispositionnumberbuy/selldatepriceGain/(loss)14SellA 1/25/8262.0353$ 2,848,920 15Buy C 6/25/8090.5797(220,284)16Buy A 1/25/8263.5353(2,633,964)17SellC 6/26/8093.2964(42,108)18SellC 6/26/8094.5931(42,480)19Buy A 1/25/8273.1644(1,414,296)20Buy C 12/11/8086.4730(169,363)A 1/25/8276.3791(1,161,960)21SellA 1/25/8267.37181,403,304 22SellA 1/25/8272.73681,470,330 23SellA 1/25/8273.13311,349,364 24SellA 1/25/8276.34781,385,868 25BuyA 1/25/8267.3406(1,299,276)26BuyA 1/25/8272.7056(1,361,628)27BuyA 1/25/8276.4103(121,128)A net gain=$ 465,534 C + A net(8,701)Fees(20,380)Net to client(29,081 45 990 1981JAMES N. LEINBACH AND MARY ALICE LEINBACHGregory Government Securities Account Number 137ContractJNLTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice28Sell8.0FHLMC3/18/818.254/01/8374.937029Sell8.0FHLMC3/18/818.504/01/8375.893730Buy 8.0GNMA3/18/819.003/01/8378.819831Buy 8.0GNMA3/18/8110.503/01/8385.463032Buy 8.0FHLMC3/20/818.255/01/8374.226933Buy 8.0FHLMC3/20/818.505/01/8375.176534Buy 8.0GNMA3/26/817.503/10/8369.320235Buy 4.0GNMA3/26/818.253/20/8373.060136Buy 4.0GNMA3/26/819.003/30/8375.385037Sell4.0FHLMC3/26/818.753/15/8373.399238Sell4.0FHLMC3/26/819.004/05/8373.853839Sell4.0FHLMC3/26/819.252/15/8374.777940Sell4.0FHLMC3/26/819.503/01/8375.698441Sell8.0GNMA3/30/817.504/10/8369.229042Sell4.0GNMA3/30/818.254/20/8372.984643Sell4.0GNMA3/30/819.004/30/8375.313044Buy 8.0GNMA3/30/819.503/01/8377.628545Buy 8.0GNMA3/30/8110.503/01/8382.271646Sell8.0FHLMC3/30/819.004/01/8374.248447Sell8.0FHLMC3/30/819.254/01/8375.174748Buy 8.0FHLMC4/08/819.003/01/8373.206449Buy 8.0FHLMC4/08/819.253/01/8374.124150Sell8.0GNMA4/08/819.504/01/8375.569551Sell8.0GNMA4/08/8110.504/01/8380.151652Sell16.0GNMA4/10/819.253/08/8374.154953Buy 16.0FHLMC4/10/818.004/08/8369.018454Buy 16.0GNMA4/13/819.252/04/8373.863455Buy 8.0FHLMC4/13/819.003/01/8371.921856Buy 8.0FHLMC4/13/819.253/01/8372.832257Sell8.0GNMA4/13/819.504/01/8374.270458Sell8.0GNMA4/13/8110.504/01/8378.801346 1981JAMES N. LEINBACH AND MARY ALICE LEINBACHGregory Government Securities Account Number 137ContractJNLDispositionDispositionnumberbuy/selldatepriceGain/(loss)28SellA 1/07/8379.1865($ 339,960)29SellA 1/07/8380.4400(363,704)30Buy C 3/20/8177.6006(97,536)31Buy C 3/20/8184.1835(102,360)32Buy A 1/07/8379.6865436,768 33Buy A 1/07/8388.9400461,080 34Buy A 1/07/8376.9090607,104 35Buy A 1/07/8380.7177306,304 36Buy A 1/07/8384.5343365,972 37SellC 3/30/8173.8287(17,180)38SellC 3/30/8174.2818(17,120)39SellC 3/30/8175.2082(17,212)40SellC 3/30/8176.1311(17,308)41SellA 1/07/8376.4090(574,400)42SellA 1/07/8380.2177(289,324)43SellA 1/07/8384.0343(348,852)44Buy P 4/02/8177.4455(14,640)45Buy P 4/02/8182.0815($ 15,208)46SellP 4/02/8174.067414,480 47SellP 4/02/8174.992614,568 48Buy P 4/09/8173.601531,608 49Buy P 4/09/8174.521431,784 50SellP 4/09/8175.5691(31,968)51SellP 4/09/8180.5668(33,216)52SellA 1/07/8385.0065(1,736,256)53Buy C 4/13/8168.2503(122,896)54Buy A 1/07/8385.50651,862,896 55Buy P 4/14/8173.3502114,272 56Buy P 4/14/8174.2687114,920 57SellP 4/14/8175.7149(115,560)58SellP 4/14/8180.3027(120,112)A net gain=$ 387,628C + A + P net(13,056)Fees(28,660)Net to client(41,716)47 992 1980ELLISON C. MORGANGregory Government Securities Account Number 127ContractECMTradeSettleSettlenumberbuy/sellAmountTypedatePercentdateprice14Sell15.0FHLMC6/17/808.004/15/8285.562515Buy 15.0GNMA6/17/809.253/15/8292.196416Sell15.0FHLMC6/20/809.252/15/8291.703717Sell7.5FHLMC6/20/8010.004/01/8295.278118Sell7.5FHLMC6/20/8010.254/01/8296.592119Buy 7.5GNMA6/20/8010.503/01/8299.466320Buy 7.5GNMA6/20/8011.253/01/82103.385521Buy 7.5GNMA6/23/8010.755/01/8299.127322Buy 7.5GNMA6/23/8011.005/01/82100.420623BuY 7.5GNMA6/27/8010.003/01/8292.373124Buy 7.5GNMA6/27/8010.253/01/8293.652225Sell7.5FHLMC6/27/8010.754/01/8295.641826Sell7.5FHLMC6/27/8011.004/01/8296.91441980ELLISON C. MORGANGregory Government Securities Account Number 127ContractECMDispositionDispositionGain/(loss)numberbuy/selldateprice(ECM share)14SellC 6/20/8086.5457($ 147,480)15Buy A 2/08/8265.2136(4,047,420)16SellA 2/08/8263.71364,198,515 17SellA 2/08/8266.94392,125,065 18SellA 2/08/8268.14942,133,202 19Buy C 6/23/8097.8938(117,937)20Buy C 6/23/80101.7737(120,885)21Buy A 2/08/8272.0709(2,029,230)22Buy A 2/08/8273.2864(2,035,065)23Buy A 2/08/8268.0064(1,827,502)24Buy A 2/08/8269.2119(1,833,022)25SellA 2/08/8271.07091,842,817 26SellA 2/08/8272.28641,847,100 A net gain=$ 374,460 C + A net(11,842)Fees(13,900)Net to client(25,742)48 993 full; their gain legs (which were locked in) were carried on GGS' books for a period generally exceeding 16 months; and then their gain legs were assigned, which generated a credit to each participant's account that was set off against the loss (debit) generated by the earlier cancellation. Those participants who followed with GGS accounts numbered 150 and after were accorded the same treatment as the first participants except that they did not receive refunds of their deposits. 13 The refunds given by Gregory to the first 49 participants obviously served as some inducement to others to participate in his program.All assignments made during 1980 and through November 1981 were to RST, a partnership whose members, Campbell Richardson, Stephen Shepard, and David Tangvald, were associates of Gregory. The assignments made thereafter were to Northwest Investment Group, Inc. (NIG), a Nevada corporation of which Patricia Buescher, a niece of 49 Mr. Gregory and an employee of GGS, was the principal stockholder and officer. Lyle Adams, another employee of GGS, was also an officer of NIG. GGS mailed the assignment documents to NIG at a mail drop established by NIG in Nevada; the documents were forwarded from there to Adams at his Portland residence.GGS paid RST and NIG $ 100 for each assignment without regard to the amount of the contract. The assignment fee in each case was charged to the participant's account. The contracts were subsequently reassigned by RST and NIG to GGS at the same price as that used in the original assignment by the participant. As a result, neither RST nor NIG realized any income from the acquisition or the disposition of the contracts. In this connection, their income was limited to the $ 100 fees paid by GGS and charged to the participants. Furthermore, both the assignments to RST and NIG, as well as the reassignments by them to GGS, were handled by offsetting accounting entries of receivables and payables. In other words, other than the assignment fees for $ 100, no funds were exchanged with respect to the contracts at any time between the participants and RST or NIG on the original assignment50 or between RST or NIG and GGS on the reassignments.994 After the reassignment of an investor's contracts by RST or NIG to GGS, the payable due from the investor as a result of the cancellation of his loss position was due to GGS. At the same time, the receivable in approximately the same amount due the investor as a result of the assignment of his gain position was due from GGS. At this point, the circle was completed and neither the investor, nor his assignee on the gain position (RST or NIG), nor GGS had realized any actual gain or loss on the contracts. The relatively minor net profits or net losses reflected by some of the transcripts of its accounts with petitioners were generated by GGS through "adjustments" to the cancellation prices and/or the assignment prices or, at times, by the failure of GGS to charge full transaction fees in accordance with the client agreements.No Ginnie Maes or Freddie Macs were ever bought or sold with respect to any of the forward contracts to buy or sell such securities executed by GGS as one party, and executed by or for petitioners Brown, Sochin, Morgan, or Leinbach as the other party. In fact, the record does not contain any evidence51 that any Ginnie Maes or any Freddie Macs were ever bought, sold, accepted, or delivered under any forward contract executed by GGS with any investor during the years 1979, 1980, and 1981. 14 Instead, all loss positions were canceled before settlement dates and all gain positions were assigned to RST or NIG and reassigned to GGS before such dates. Apparently GGS also never had any inventory of either Ginnie Maes or Freddie Macs because, as Gregory testified, if GGS had ever been called upon for delivery it would have had to go into the market and try to make the necessary purchase.In at least two instances, a Ginnie Mae described in and covered by one of the alleged forward contracts involved in this case was a rate (11.25 percent and 11.75 percent) at which no Ginnie Mae had ever been issued up to the date of trial.The use of a cancellation to close, dispose of, or settle a 52 forward contract is not a common practice by dealers in such contracts. For the most part, cancellations are used by such dealers only to correct errors.Petitioner Dennis S. Brown is the sole stockholder and principal officer of an employment agency which he started in 995 1968. Prior to his investment in Gregory Government Securities, he had speculated in interest-rate futures offered by Merrill Lynch. He learned about Mr. Gregory from his accountant in October of 1979, and shortly thereafter attended a meeting with Mr. Gregory with his accountant and several other clients of his accountant.On or about October 4, 1979, Mr. Brown deposited $ 10,000 with GGS. The deposit was refunded to him before the end of 1979. He was advised that before the end of 1979 he had realized an ordinary loss from GGS in the amount of $ 106,160 which he deducted on his 1979 return. He understood that in 1981 he had a long-term capital gain from the assignment of the remainder of his portfolio with GGS in the amount of $ 106,382 which he reported on his 1981 income tax return.In 1979, 1980, and 1981, petitioner James E. Sochin was employed by Harsh Investment Corp. as a vice president in charge53 of its hotel operations division. He first heard about Mr. Gregory through Harold Schnitzer, who was the owner of Harsh Investment Corp. Through a meeting arranged by Mr. Schnitzer, Mr. Sochin attended a conference with Mr. Gregory in which he explained the portfolio structure and how interest rate movements affected security prices. After this meeting and on or about September 18, 1979, Mr. Sochin contributed $ 2,000 toward the total $ 12,000 deposited with GGS by Harsh Associates; Sochin and the other Harsh Associates received full refunds of their deposits before the end of 1979. He was later advised that he had an ordinary loss in 1979 of $ 20,621 which he reported on his 1979 income tax return. In 1980, he was advised that he had an ordinary loss on his GGS transactions in the amount of $ 48,054 and a long-term capital gain in the amount of $ 21,142, both of which he reported on his 1980 return. In 1981, he deducted an ordinary loss in the amount of $ 38,785 and reported a long-term capital gain in the amount of $ 44,804 from his GGS transactions.At the time of trial, Ellison C. Morgan was 47 years of age. During 1979, 1980, and 1981, he was the president of Resource 54 Management Consultants which designs and markets executive compensation plans, places loans for savings and loan associations, and through a separate company, designs and markets life insurance products through about 50 distributors. From about 1971 through about 1982, he invested regularly 996 and extensively in futures contracts. For example, during this period he bought, sold, and otherwise dealt in futures contracts in sugar, cattle, hopps, copper, corn, wheat, Deutsche marks, Swiss francs, bean oil, Canadian dollars, gold, treasury bills, and treasury bond. He had also dealt in Ginnie Maes and Freddie Macs.Mr. Morgan first met Mr. Gregory while he was a partner with Arthur Andersen. They first met professionally when Mr. Gregory did some estate and financial planning for some of Mr. Morgan's clients and partners. Some time later in 1979, Mr. Morgan met on several different occasions with Mr. Gregory in order to learn about the promotion known as Gregory Government Securities. During these conversations and later conversations which he had with his own attorney, Mr. Morgan was made to understand that there was no guarantee against losses in case an investment was made55 in the program, and there was no guarantee of any gains. He did understand that an investment would result in a tax writeoff during the first year of approximately 10 to 1. He also understood that his initial deposit would be returned during the first year.Mr. Morgan understood that he would simply furnish Mr. Gregory with an interest forecast and that Mr. Gregory would handle all of the necessary transactions through his two corporations. He was later advised that the transactions resulted in an ordinary loss during 1979 in the amount of $ 224,416, which he claimed on his 1979 income tax return. He also claimed a deduction for investment advice in the amount of $ 357. His deposit was also refunded to him before the end of 1979. In 1980, he was advised that he had an ordinary loss from his GGS transactions in the amount of $ 390,614 which he deducted on his 1980 return. On his 1981 income tax return, he reported a long-term capital gain from GGS transactions in the amount of $ 234,518, which he understood was the final result of his 1979 portfolio. He was later advised that he had a long-term capital gain in 1982 from his 1980 portfolio, but he did not report the 1982 gain56 because respondent in the meantime had audited his earlier returns and had disallowed the losses claimed therein.Petitioner James N. Leinbach is a professional engineer, having received a composite degree in civil, electrical, and 997 mechanical engineering from the University of Portland in 1951. Upon receipt of his engineering degree, he went to work for a construction firm by the name of Slate-Hall as an assistant engineer. In 1961 he became a partner, and by 1979 he owned 50 percent of the firm which was then known as the Fred H. Slate Co. The company is primarily engaged in the construction of highways, but builds some dams. Prior to 1979, Mr. Leinbach had made personal investments in bonds, common stocks, and preferred stocks. Some of his investments were exempt from State income tax.In or about September of 1979, Mr. Leinbach learned of the GGS program. Shortly thereafter, he and his accountant and his partner attended a meeting with Mr. Gregory. As a result of the meeting, Mr. Leinbach understood that the program involved mortgages secured by the Government and he also understood that there were a number of advantages including the possibility of a profit and57 a considerable tax loss in the first year.In 1979, he made a deposit of $ 20,000 with GGS. The deposit was refunded to him before the end of the year. On his income tax return for 1979, Mr. Leinbach reported income in the amount of $ 427,681 from his partnership and deducted a loss in the amount of $ 394,376 on his GGS transactions. On his 1980 income tax return, Mr. Leinbach reported income from the partnership and other sources of $ 536,507 and deducted an ordinary loss from GGS transactions in the amount of $ 482,245. On his income tax return for 1981, Mr. Leinbach reported a long-term capital gain from the GGS transactions in the amount of $ 401,464 and an ordinary loss from the same transactions in the amount of $ 401,412. On his 1982 tax return, Mr. Leinbach reported a long-term capital gain from GGS transactions in the amount of $ 461,444. 1558 OPINION1. Losses on Forward ContractsThe central issue in these cases is whether the losses claimed by petitioners are bona fide or whether they are based 998 upon an elaborate sham. Respondent contends that the losses were generated in form without any substance, that the underlying transactions were fictitious, and that such transactions existed only within the GGS computer. On the other hand, petitioners contend that the losses were genuine and were the result of bona fide transactions entered into for profit under section 165(c)(2) and are clearly allowable under section 108 of the Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 680, or the standard laid down in Smith v. Commissioner, 78 T.C. 350 (1982).Section 165(a) allows a deduction for a loss sustained during the taxable year that is not compensated for by insurance or otherwise. In the case of individuals, however, the deduction is limited to losses incurred in a trade or business, in a transaction entered into for profit, or as the result of a casualty or theft. Sec. 165(c). In any event, to be deductible, the claimed loss must be the result of a bona fide transaction, and59 substance, not mere form, shall be the determining factor. Sec. 1.165-1(b), Income Tax Regs. See Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935).Respondent's determination that the underlying transactions are not bona fide is presumptively correct; and petitioners have the burden of proof. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934); Rule 142(a).A careful review of the voluminous record leads us to the inescapable conclusion that petitioners have failed to establish that the transactions leading to their alleged losses were bona fide. In fact, from the record as a whole, we are satisfied that petitioners have failed to establish that the entire program from which the losses allegedly arose did not exist solely to provide tax benefits for its investors.All of the forward contracts promoted by Mr. Gregory were between GGS, as one party, and one petitioner or some other participant, as the other party. Furthermore, each petitioner as well as all other participants executed a power of attorney which authorized GGS and/or GIM to execute60 and perform any act for the investor with respect to the contracts that GGS and GIM deemed expedient and at a price determined by GGS and adjusted for any reason which GGS considered appropriate. In addition, an ultimate profit obviously could be, and at times 999 was to a nominal extent, manipulated by GGS merely by foregoing a part of the fees cited in the disclosure memorandum or by utilizing its pricing formula.These cases are analogous to, if not factually indistinguishable from, the situation recently considered by us in Julien v. Commissioner, 82 T.C. 492 (1984). In Julien v. Commissioner, supra, we disallowed interest deductions on alleged indebtedness incurred to purchase silver bullion in a series of purported cash and carry silver straddles. Having found that the taxpayers never actually purchased any silver nor incurred any real indebtedness, we concluded that the underlying transaction was a factual sham and served no economic purpose beyond generating a tax deduction for interest. Commenting on the lack of risk due to the fixed nature of the straddles involved in Julien, we stated at page 508:61 It seems self-evident that, in any commodity straddle, a legitimate investor must have some potential of making money as a result of various market forces and, by the same token, be [at] risk of losing money. One commentator has said that "A commodity straddle is held in the expectation of profiting from a change in the 'spread' or 'premium', the difference in price between two futures 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 R. Dailey, "Commodity Straddles in Retrospect: Federal Income Tax Considerations," 47 Brooklyn L. Rev. 321 (Winter, 1981). Presumably, fluctuations would also occur in a case where the investor holds silver bullion against a forward contract, if the end result were not, as here, prearranged.In Falsetti v. Commissioner, 85 T.C. 332">85 T.C. 332 (1985), we found that an alleged sale was a "sham in substance" which we defined as being "the expedient of drawing up papers to characterize transactions contrary to objective economic62 realities and which have no economic significance beyond expected tax benefits."The facts before us are also somewhat similar to those described in United States v. Winograd, 656 F.2d 279">656 F.2d 279, 281 (7th Cir. 1981), affirming defendant's conviction under section 7206(2) of conspiring to impair the collection of income taxes by claiming losses on tax straddles in futures contracts in Mexican pesos which were not entered into through bona fide trades or open bids on an established market but instead were prearranged, uncompetitive trades between various employees 1000 of one of the principals involved. See also United States v. Turkish, 623 F.2d 769 (2d Cir. 1980); United States v. Siegel, 472 F. Supp. 440">472 F. Supp. 440 (N.D. Ill. 1979). The conclusion that the disputed transactions in the cases before us are not bona fide is even more appropriate in view of our finding that GGS was not only a party to each of the forward contracts but also in most instances executed, canceled, and assigned the contracts under powers of attorney for the other parties. Furthermore, the contracts were executed, canceled, 63 and assigned at prices determined solely by GGS, and the only third parties to any of the transactions (RST and NIG) were closely associated with Mr. Gregory through business or otherwise.We conclude, therefore, that the losses claimed by petitioners are not allowable because the disputed transactions constituted factual shams which were inspired, designed, and executed by Mr. Gregory and the two corporations controlled by him for the sole purpose of attempting to achieve tax losses for their investors. 16This conclusion is not altered by our decision in Smith v. Commissioner, supra, or by section 108 of the Tax Reform Act of 1984, because they do not apply to alleged straddles which are in fact fake or fictitious. Miller v. Commissioner, 84 T.C. 827">84 T.C. 827 (1985); Forseth v. Commissioner, 85 T.C. 127">85 T.C. 127 (1985);64 Magin v. Commissioner, T.C. Memo 1985-304">T.C. Memo. 1985-304.2. Fees Paid With Respect to Forward ContractsFees paid by petitioners to GGS were paid so that they could participate in Gregory's program. Inasmuch as we have found that the program was operated solely to provide tax deductions for its participants, the fees constituted payments to purchase such deductions and as such are, at best, personal expenditures which are not deductible under section 162 or section 212. Zmuda v. Commissioner, 79 T.C. 714">79 T.C. 714 (1982), affd. 731 F.2d 1417">731 F.2d 1417 (9th Cir. 1984); Houchins v. Commissioner, 79 T.C. 570">79 T.C. 570 (1982). See also Falsetti v. Commissioner, 85 T.C. 332">85 T.C. 332 (1985).1001 3. Additions to Tax Under Section 6653(a)Respondent determined that an addition to tax is due from petitioners Ellison C. and Linda Morgan for negligence under section 6653(a). In view of our finding hereinbefore that the underlying transactions were in fact shams, and in view of our subsequent finding that petitioner Ellison C. Morgan knew or should have known at the time that they65 were shams, it is apparent that he ignored applicable law and regulations in the preparation of his returns. Consequently, respondent's determination that additions to tax are due from Ellison C. Morgan under section 6653(a) is sustained.4. Damages Under Section 6673Finally, we turn to respondent's request that damages be imposed against petitioners in each of these cases under section 6673. With respect to this issue and from the record as a whole, we are satisfied that, in spite of their protestations to the contrary, petitioners Dennis S. Brown, James E. Sochin, Ellison C. Morgan, and James N. Leinbach were mature, well-educated, and well-read individuals who were sufficiently knowledgeable and sophisticated with respect to business and tax matters to have known, and actually did know, at the time the disputed transactions were entered into, that the transactions were "too good" to be real and therefore were shams. However, transactions involving forward contracts and especially forward contracts entered into with respect to Ginnie Maes and Freddie Macs are extremely complicated and, during the years under consideration, were relatively new. Furthermore, from the time66 the petitions were filed in these cases up to and after the date of trial, the law with respect to tax straddles was uncertain. See Miller v. Commissioner, 827">84 T.C. 827 (1985); Forseth v. Commissioner, 85 T.C. 127">85 T.C. 127 (1985); and Julien v. Commissioner, 82 T.C. 492 (1984). Consequently, we are reluctant to conclude that petitioners were also aware that tax claims stemming from their transactions with Gregory and his associates might constitute a basis for the imposition of damages under section 6673, although the Supreme Court had held for many years that claims based upon unreal and sham transactions were not recognizable for tax purposes. See Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935); 1002 Higgins v. Smith, 308 U.S. 473">308 U.S. 473 (1940); and Knetsch v. Commissioner, 364 U.S. 361 (1960), affg. 272 F.2d 200">272 F.2d 200 (9th Cir. 1959). We hereby serve notice, however, that henceforth we will have no such reluctance with respect to petitioners who file petitions or maintain positions based upon67 transactions which they knew or reasonably should have known to be factual shams.We feel that such action is warranted because Congress is concerned with the substantial increase in the number of petitions pending before the Tax Court and especially those petitions based upon frivolous or groundless claims. The concern of Congress in this connection is apparent from the Conference report on the consideration of section 6621(d)(4) dealing with increased interest on substantial underpayments attributable to tax motivated transactions. There it is stated:The conferees note that a number of the provisions of recent legislation have been designed, in whole or in part, to deal with the Tax Court backlog. Examples of these provisions are the increased damages assessable for instituting or maintaining Tax Court proceedings primarily for delay or that are frivolous or groundless (sec. 6673), the adjustment of interest rates (sec. 6621), the valuation overstatement and substantial understatement penalties (secs. 6659 and 6661), and the tax straddle rules (secs. 1092 and 1256). * The conferees believe that, with this amendment, the Congress has given the Tax Court sufficient tools to68 manage its docket, and that the responsibility for effectively managing that docket and reducing the backlog now lies with the Tax Court. The positive response that the Court has made to several recent GAO recommendations is encouraging and the conferees expect the Court to implement swiftly these and other appropriate management initiatives. The conferees also note favorably the steps the Court has begun to take in consolidating similar tax shelter cases and dispensing with lengthy opinions in routine tax protester cases. The Court should take further action in these two areas, as well as to assert, without hesitancy in appropriate instances, the penalties that the Congress has provided.[H. Rept. 98-861 (Conf.) (1984), 1984-3 C.B. (Vol. 2) 1, 239.]Our own concern for the continuing increase in the number of petitions based upon frivolous or groundless claims has been clearly expressed in such opinions as Sydnes v. Commissioner, 74 T.C. 864">74 T.C. 864, 872 (1980), where we stated:While in the past we have been reluctant to impose damages in cases involving persons other than those who were merely protesting the Federal tax laws, 69 we think the imposition of damages in the circumstances here is fully warranted. Moreover, since the statute does not restrict us to those 1003 cases in which a party has requested us to impose damages, we think we should do so, on our own motion, where the facts and circumstances so dictate.Here, the Court and respondent have been required to consider the same issue twice after it had already been decided by this Court and affirmed by the Court of Appeals. Petitioners with more genuine controversies have been delayed while we considered these cases involving the same issue. In these circumstances, the petitioner, an accountant with some knowledge of the Federal tax laws, cannot and has not shown that he, in good faith, has a colorable claim to challenge the Commissioner's determination. Indeed, he knew when he filed the present case with this Court that he had no reasonable expectation of receiving a favorable decision. No reasonably prudent person could have expected this Court to reverse itself in this situation.In Oneal v. Commissioner, 84 T.C. 1235">84 T.C. 1235, 1243-1244 (1985), we warned such petitioners as follows:We have frequently found 70 that cases based upon meritless contentions and stale arguments are burdensome both on this Court and upon society as a whole. See Abrams v. Commissioner, 82 T.C. 403 (1984). The time spent upon this case has delayed other cases of merit which could have provided new precedents to the tax system. Petitioners' brief, much like their abusive tax shelter "investment," was merely a prepackaged, pro forma presentation.Upon review of this record, we find that petitioners' positions are frivolous and groundless and that this proceeding was instituted and maintained primarily for delay. We admonish other petitioners and their counsel not to maintain frivolous proceedings before this Court or to maintain them primarily for delay.Again, in Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403, 411-412 (1984), 17 we summed up the situation in the following manner:The Court of Appeals for the Ninth Circuit has, in a summary and decisive manner, awarded double costs in several tax protester cases on its own motion. On July 7, 1982, in Edwards v. Commissioner, 680 F.2d 1268">680 F.2d 1268, 1271 (9th Cir. 1982), affg. per curiam 71 an unreported decision of this Court, the Court said --"Meritless appeals of this nature are becoming increasingly burdensome on the federal court system. We find this appeal frivolous. Fed. R. App. P. 38, and accordingly award double costs to appellee [the Commissioner of Internal Revenue]. * * * [Citations omitted; emphasis added in 82 T.C.]"Accord McCoy v. Commissioner, 696 F.2d 1234">696 F.2d 1234 (9th Cir. 1983), affg. 76 T.C. 1027">76 T.C. 1027 (1981); Barmakian v. Commissioner, 698 F.2d 1228">698 F.2d 1228 (9th Cir. 1982), affg. 1004 without published opinion an unreported order and decision of this Court; Martindale v. Commissioner, 692 F.2d 764">692 F.2d 764 (9th Cir. 1982), affg. without published opinion an unreported order and decision of this Court.It is now certain that all Courts will no longer tolerate the filing of frivolous appeals. On June 13, 1983, the Supreme Court, for the first time, invoked the provisions of its rule 49.2, which the Court adopted in 1980, and ordered an appellant to pay damages for bringing a frivolous appeal. In Tatum, Elmo C. v. Regents of Nebraska-Lincoln72 (No. 82-6145), the Court issued the following order: "The motion of respondents for damages is granted and damages are awarded to respondents in the amount of $ 500.00 pursuant to Supreme Court Rule 49.2."The direction of this nation's highest court is crystal clear -- that no court should permit frivolous or groundless appeals, not only in discrimination suits but in any other area of litigation, including Federal income taxation. The language of amended section 6673 is equally clear.[Fn. refs. omitted.]Finally, in Elliott v. Commissioner, 84 T.C. 227">84 T.C. 227, 248 (1985), we stated that "At some point, the arguments in these highly leveraged tax avoidance (or evasion) schemes must be regarded as 'frivolous or groundless,' [under] section 6673." 1873 Even though the positions maintained by petitioners in these cases may be frivolous and groundless, we decline to impose damages as provided by section 6673 against these petitioners because prior to the publication of this opinion they were not aware that we would consider doing so in factual situations such as theirs. This is not to be construed, however, as any indication that specific notice is required before damages are imposed in a future case because, as held in Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403 (1984), in a proper case we can and will impose such damages even on our own motion.Decisions will be entered under Rule 155. Footnotes1. Cases of James E. Sochin, docket No. 2313-83; Ellison C. Morgan and Linda Morgan, docket No. 3083-83; and James N. Leinbach and Mary Alice Leinbach, docket No. 3503-83, were consolidated herewith for trial, briefing, and opinion.↩2. Since Linda Morgan and Mary Alice Leinbach are petitioners solely because they filed joint returns with their husbands, the word "petitioners" as used hereinafter will refer only to the male petitioners unless otherwise indicated.↩3. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue. All rule references are to the Tax Court Rules of Practice and Procedure.↩4. The use in our findings of such words and phrases as loss, gain, forward contract, cancellation, assignment, spread, straddle, short position, long position, transactions and similar words and phrases are for convenience only and are not to be construed as a determination of the nature of any act or thing.↩5. The additional loss issue raised by petitioner Morgan in his amended pleading filed Apr. 19, 1984, was not considered herein because these proceedings deal only with the issues common to all petitioners. The additional issue will be considered in a later proceeding.↩6. At trial and on brief, petitioners contended that evidence of transactions between Mr. Gregory, GGS, or GIM and any investor other than petitioners is not relevant to the issues under consideration and therefore should not be admitted. After due consideration, we affirm the temporary decision made at the trial that such evidence is admissible in order to determine whether the transactions with petitioners are bona fide.↩7. Everything else being equal, any significant change either up or down in the prevailing interest rate would result in a gain in one leg and a loss in the other.↩8. GIM's disclosure memorandum contains the following provision on the risk of non-performance:"Government Securities' [GGS's] ability to perform its obligation on settlement date will depend on the financial condition of Government Securities. Government Securities attempts to limit its economic risk by hedging its forward contract positions with either offsetting sales to or purchases from other customers. To the extent that Government Securities may have an imbalance between its long and its short positions (i.e., its net exposure), it will attempt to minimize that risk with offsetting purchases or sales of GNMA securities or GNMA futures contracts."↩9. The record does not contain an explanation for the difference between this figure and the figures used on the return and the statutory notice, both of which reflect a loss of $ 106,160.↩10. The record does not contain an explanation for the difference between this figure and the figures used on the return and the statutory notice, both of which reflect a loss of $ 20,621.↩11. The record does not contain an explanation for the difference between this figure and the figures used on the return and the statutory notice, both of which reflect a loss of $ 224,416.↩12. The record does not contain an explanation for the difference between this figure and the figures used on the return and the statutory notice, both of which reflect a loss of $ 394,676.↩13. In or about November of 1979, full refunds of deposits ceased.↩14. There is some evidence that a single such transaction was entered into with respect to litigation pending in another court after 1981.↩15. An amended return was filed for 1981 and 1982 as a protective claim for refund of the reported gain because the Commissioner on audit disallowed the GGS losses previously reported.↩16. In view of our finding with respect to the sham issue, we need not consider the other contentions advanced by respondent with respect to the losses.↩17. See also Stafford v. Commissioner, T.C. Memo. 1983-650, and Vickers v. Commissioner, T.C. Memo. 1983-429↩.18. See also Snyder v. Commissioner, T.C. Memo. 1985-9, where we concluded, "it is apparent from the overall record * * that petitioner was a party to an abusive tax shelter. This type of arrangement disparages good tax planning and denigrates both the Congressional purpose inherent in the credits and deductions which we here disallow and our national tax system. Petitioner knew, or reasonably should have known, this when he agreed to participate in this specious stratagem of tax illusion. Petitioner, and those like him, who exchange small cash amounts for large tax deductions because of pie-in-the-sky nonrecourse transactions arranged to jack up basis without underlying economic substance or entrepreneurial risk may become subject to consequences unanticipated by the parties. See Barnard v. Commissioner, 731 F.2d 230">731 F.2d 230 (4th Cir. 1984), affg. Fox v. Commissioner, 80 T.C. 972↩ (1983)."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620662/	George R. Kemon, et al., * Petitioners, v. Commissioner of Internal Revenue, RespondentKemon v. CommissionerDocket Nos. 20265, 20266, 20267, 20268, 20269, 20270, 20271United States Tax Court16 T.C. 1026; 1951 U.S. Tax Ct. LEXIS 199; May 14, 1951, Promulgated 199 Decisions will be entered under Rule 50. The partnership of which petitioners were members was a trader as to securities held by it for more than 6 months. Such securities were not held primarily for sale to customers in the ordinary course of trade or business. The gain on their sale or exchange is taxable at capital gains rates pursuant to section 117 (b) of the Internal Revenue Code. Fred L. Rosenbloom, Esq., and Thomas P. Glassmoyer, Esq., for the petitioners.William H. Best, Jr., Esq., for the respondent. Arundell, Judge. ARUNDELL1027 Respondent has determined deficiencies in petitioners' income tax as follows:Dkt.Petitioner19431944No.20265George R. Kemon$ 2,478.45$ 3,139.0120266William Lilley, Jr9,987.5715,349.8320267Est. of Howard J. Comber, dec'd901.46None20268Henry C. Welsh, Jr3,661.464,890.7820269Anna K. HerrmanNone259.0020270Thomas David CallNone430.1220271Alfred D. WellsNone124.01200 The deficiencies arise from respondent's determination that securities sold during the years in question by Lilley & Co., a partnership, of which the petitioners were members, were not capital assets and the gain upon their sale is taxable as ordinary income instead of as capital gain, as contended by petitioners.FINDINGS OF FACT.Income tax returns were filed with the collector of internal revenue for the first district of New Jersey in Camden, New Jersey, by petitioner George R. Kemon for the years 1942 through 1944, and with the collector of internal revenue for the first district of Pennsylvania in Philadelphia, Pennsylvania, by Howard J. Comber, deceased, for the years 1942 and 1943, and by the remaining petitioners for the years 1942 through 1944.During the years 1942 through 1944, petitioners Kemon, Lilley, Jr., Welsh, Jr., and Comber, now deceased, were partners in the firm of Lilley & Co., a partnership with its principal office in Philadelphia and with a branch in New York City. Petitioners Herrman, Call, and Wells were also partners in the firm during the year 1944. Lilley & Co. is the successor of Lilley, Blizzard & Co., a firm organized in Philadelphia in 1922.During201 the taxable years in question, the principal activity of Lilley & Co. was the buying and selling of unlisted securities for its own account. During these years the firm also did a small amount of brokerage business. During each of the years 1942, 1943, and 1944, Lilley & Co. completed approximately 7,000 or 8,000 transactions per annum.During the years in question, Lilley & Co. realized net gain from sales or exchanges of securities which had been purchased for its own account as follows: 1028 Securities heldSecurities heldYearfor more thanfor six monthsTotal gainssix monthsor less1942$ 42,300.86$ 79,340.93$ 121,641.79194334,622.26121,541.65156,163.91194458,289.64134,281.71192,571.35Gross commissions from transactions in which the firm acted as brokers during the year totaled:1942$ 7,775.89194313,229.56194414,742.27During the years 1942, 1943, and 1944, Lilley & Co. realized additional income from the following sources:Source of income194219431944Interest on corporation bonds$ 3,399.20$ 4,370.29$ 9,289.29Interest on tax-free covenant bonds uponwhich a Federal tax was paid at source 5,718.762,245.10737.00Dividends2,666.154,926.815,331.49202 In its partnership return for the year 1942, Lilley & Co. reported no capital gains or losses. The total income reported consisted of "Bond Trading Profit," "Stock Trading Profit," "Commissions," interest, dividends, and fees. In its partnership return for the year 1943, Lilley & Co. reported gains from the sale or exchange of capital assets.Lilley & Co.'s activity in buying and selling securities for its own account has always been confined largely to low-priced, unmarketable securities of real estate corporations. Most of the bonds purchased were in default and most of the stocks were paying no dividends. In many cases the issuing corporation was in the hands of a creditors' committee or was involved in reorganization or receivership proceedings. Most of the securities were speculative, unrated by leading statistical services, and lacked such qualities as safety, income, and marketability.Lilley & Co.'s activity in buying and selling securities for its own account was conducted almost exclusively by telephone, telegraph, and teletype. Some of the securities were bought from bondholders of corporations involved in reorganization or receivership proceedings and some were sold203 to professional real estate operators or syndicates. Most of them, however, were bought from and sold to registered broker-dealers or security houses.The purposes for which the firm purchased securities were usually one of the following three: First, securities were purchased for immediate or simultaneous resale at a profit. This occurred when a broker-dealer offered the firm securities at a price below that for which the firm had an offer to buy from another broker-dealer. Second, 1029 securities, usually bonds, were purchased for the anticipated profit to be realized upon the liquidation of the issuing corporation. Such transactions occurred where the firm obtained information with respect to a defaulted security indicating that the actual value of the security was in excess of the prevailing market price and that a liquidation of the corporation appeared probable. Third, the firm accumulated securities of a corporation, usually one having real estate as its principal assets, in financial difficulties, in order to obtain a holding sufficiently large to enable the firm to force a reorganization of the corporation and ultimately gain control thereof. Sometimes, instead204 of reorganizing the firm the partnership would sell the holdings it had accumulated to a real estate syndicate or a professional dealer in real estate.In cases where Lilley & Co. determined to accumulate a certain security either for purposes of holding until the liquidation of the company or for the purpose of gaining control of the corporation, it normally would not sell any of the securities being accumulated even if an offer that would result in a profit was received. However, even after having embarked upon a course of accumulation, Lilley & Co. would sometimes sell the particular securities if events proved that its original analysis of their potential value was incorrect or if an opportunity to invest in a more attractive security presented itself. Lilley & Co. also occasionally sold some of the securities which it was accumulating in order to create a market. This occurred when Lilley & Co., upon inquiry from a broker, not identified as a buyer or a seller, was forced to state both bid and offering prices in order to disguise its real interest.Lilley & Co. as a general rule always bought securities in small lots. With the exception of sales of securities which had been205 purchased with a view to immediate resale at a profit, the securities which the company bought and sold for its own account were always sold in a large lot, frequently in one transaction.Of the sales of securities purchased by Lilley & Co. for its own account and held for 6 months or less, 44.93 per cent of the sales in 1943 and 41.65 per cent of the sales in 1944 were made on the same day on which the securities were purchased. Of such sales, 61.63 per cent in 1943 and 65.98 per cent in 1944 were made within the first 7 days after the securities were purchased.In 1942 and 1943, Lilley & Co. disposed of the following securities to the partners of the firm pro rata at market price:1942244shares of Southern Transportation Co. Preferred1,584shares of Southern Transportation Co. Common194shares of Pine & 48th Street Corp. Voting Trust Certificates1943$ 58,600Oakwood Manor Corp., Gen. 2d Mtge, 5% bonds of 19521030 This transaction was recorded by Lilley & Co. on its books and reported in its partnership returns for the years 1942 and 1943 as a transaction resulting in gain equal to the difference between the cost of the securities disposed206 of and the price received for them by the partnership. The gains so reported were as follows:1942244 shares of Southern Transportation Preferred $ 1,418.371,584 shares of Southern Transportation Common2,285.45194 shares of Pine & 48th Street Corp., V. T. C 279.34Total $ 3,983.161943$ 58,600 Oakwood Manor Corp., Gen. 2d Mtge, 5%, 1952$ 9,964.49During the years 1942 to 1944, Lilley & Co. engaged in no underwriting of securities nor did it participate in any securities syndicate operations.During the years 1942 to 1944, Lilley & Co. did not maintain a board room, employ any salesmen, solicitors or customers' men, or carry any margin accounts.All securities purchased and sold by Lilley & Co. for its own account are recorded in a ledger entitled "Investments and Trading Accounts -- Lilley and Company." There is no other ledger in which security transactions are recorded. The general ledger contains an account for the recording of commissions.Lilley & Co. has always maintained its books of account and prepared its income tax returns on a cash receipts and disbursements basis. In its books of account and on its income tax returns, Lilley & Co.207 has always computed its gain or loss on the sale of a security by determining the difference between the cost and the sale price. Lilley & Co. never used inventories in determining its net income for income tax purposes, and the value of its securities on hand at the close of any year has never entered into the determination of it taxable net income.Lilley & Co. was, and still is, a subscriber to the National Daily Quotation Service, a daily publication containing listings by brokers, dealers, traders and security houses throughout the United States of bid and offering prices of unlisted securities. Lilley & Co. used this service principally as a means of obtaining securities which it desired to purchase. Its own listings of bids on the average outnumbered its own listings of offerings by about 12 to 1.Lilley & Co. was listed in a directory known as "The Security Dealers of North America," which contains the name, address, and nature of 1031 the business of approximately 2,500 firms in North America. Lilley & Co. was described in this directory as "Brokers & Traders for Own Account in Public Utility, Industrial & Real Estate Securities."Lilley & Co. seldom advertised 208 in newspapers. During the years 1942 to 1944, it ran advertisements on approximately six occasions in local Philadelphia newspapers. Lilley & Co. also carried an advertisement in the "Commercial and Financial Chronicle" to which the firm was a subscriber. The purport of all of these advertisements was that Lilley & Co. could furnish accurate market information on unlisted securities, particularly real estate bonds. In none of the advertisements did Lilley & Co. offer any stock for sale or represent itself as holding a stock of securities on hand for sale.Lilley & Co. occasionally mailed to brokers and dealers or to lists of bondholders or stockholders postal cards stating that a particular security would be "bought, sold, quoted." The purpose of the mailings was to obtain offers of the securities, but at the same time disguise the firm's real interest.Lilley & Co. also occasionally sent out to brokers, dealers, and security houses circulars containing a description of certain securities in which Lilley & Co. desired to stimulate trading in the hope of being able to acquire certain securities in which it had an interest. Frequently, Lilley & Co. did not own any securities of 209 the issues referred to in the circular. On one occasion during the years in issue, Lilley & Co. sent out to security brokers and dealers a brochure describing 30 large apartment houses and hotels in New York City. At the time this was mailed, Lilley & Co. owned some of the securities of only three of the properties described in the brochure.The legend on the door of Lilley & Co.'s office in the Packard Building, Philadelphia, Pennsylvania, states: "Lilley & Co., Members of the Philadelphia Stock Exchange."Lilley & Co. is a member of the Philadelphia Stock Exchange and is registered with and licensed by the Pennsylvania Securities Commission. The registration certificate states that Lilley & Co. has been registered as a "Dealer in Securities."In partnership returns of income for years prior to 1943, the partnership inserted the words "Dealers in Stocks and Bonds" next to the printed phrase "Business or Profession." In 1943 and 1944, upon advice of counsel, the words "investment securities" were inserted instead.Voting trust certificates of the Crestshire Corporation which were sold by Lilley & Co. on June 20, 1944, for $ 11,516.72 were acquired on December 13, 1943, at a cost210 of $ 8,931.33. Lilley & Co. erroneously reported the long term capital gain on this sale as a short term capital gain in its 1944 Federal income tax return.1032 During the years 1942 through 1944, Lilley & Co. was a trader as to those securities which it bought for its own account and sold after having held them for more than 6 months. These securities were held for speculation or investment; they were not held primarily for sale to customers in the ordinary course of the firm's business. These securities were capital assets.OPINION.The respondent has determined that securities disposed of by Lilley & Co. during the years in question were not capital assets within the definition of section 117 (a) (1) of the Internal Revenue Code and, therefore, the gain upon their sale or exchange is taxable as ordinary income pursuant to section 22 of the Code. The relevant portion of section 117 (a) (1) defines "capital assets" as "property held by the taxpayer (whether or not connected with his trade or business), but does not include * * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * ." In support of his determination, 211 the respondent argues that Lilley & Co. was a "dealer" holding the securities primarily for sale to customers in the ordinary course of business.Whether or not securities are held primarily for sale to customers in the ordinary course of business is a question of fact, Stern Brothers & Co., 16 T. C. 295, in which the crucial phrase is "to customers." This phrase and the word "ordinary" were added to the definition of capital assets by Senate Amendment No. 66 in the Revenue Act of 1934 so that a speculator trading on his own account could not claim the securities he sold were other than capital assets. The theory of the amendment was that those who sell securities on an exchange have no "customers" and for that reason the property held by such taxpayers is not within the above quoted exclusionary clause. O. L. Burnett, 40 B. T. A. 605, 118 F. 2d 659; Thomas E. Wood, 16 T.C. 213">16 T. C. 213.In determining whether a seller of securities sells to "customers," the merchant analogy has been employed. Schafer v. Helvering, 299 U.S. 171">299 U.S. 171; Van Suetendael v. Commissioner, 152 F. 2d 654,212 affirming a Memorandum Opinion of this Court (Sept. 25, 1944); Leach Corp. v. Blacklidge, 23 F. Supp. 622">23 F. Supp. 622; Warren Co. v. United States, 53 F. Supp. 578">53 F. Supp. 578; Regulations 111, sec. 29.22 (c)-5. Those who sell "to customers" are comparable to a merchant in that they purchase their stock in trade, in this case securities, with the expectation of reselling at a profit, not because of a rise in value during the interval of time between purchase and resale, but merely because they have or hope to find a market of buyers who will purchase from them at a price in excess of their cost. This excess 1033 or mark-up represents remuneration for their labors as a middle man bringing together buyer and seller, and performing the usual services of retailer or wholesaler of goods. Cf. Schafer v. Helvering, supra;Securities-Allied Corp. v. Commissioner, 95 F. 2d 384, certiorari denied, 305 U.S. 617">305 U.S. 617, affirming 36 B. T. A. 168; Commissioner v. Charavay, 79 F.2d 406">79 F. 2d 406, affirming213 29 B. T. A. 1255. Such sellers are known as "dealers."Contrasted to "dealers" are those sellers of securities who perform no such merchandising functions and whose status as to the source of supply is not significantly different from that of those to whom they sell. That is, the securities are as easily accessible to one as the other and the seller performs no services that need be compensated for by a mark-up of the price of the securities he sells. The sellers depend upon such circumstances as a rise in value or an advantageous purchase to enable them to sell at a price in excess of cost. Such sellers are known as "traders."The securities sold by Lilley & Co. were held for widely varying lengths of time. Some were sold on the day of purchase; others were held for periods in excess of 3 years. We need not determine whether those held for not more than 6 months were capital assets. It may well be that as to them, the firm's status was that of a dealer holding securities primarily for sale to customers, but since the gains on their sale were reported in full and the losses were not in excess of these gains, the correctness of the asserted deficiency214 in nowise depends upon whether or not the securities were capital assets. Furthermore, the fact that the firm's status as to these securities was that of either a dealer or trader does not require a determination that the firm occupied the same status as to the remaining securities. Carl Marks & Co., 12 T. C. 1196. See I. T. 3891, 1948-1 C. B. 69.But whatever the firm's status may be as to the securities held for not more than 6 months, the evidence taken as a whole clearly establishes that as to the remaining securities the firm was a trader holding them primarily for speculation or investment. Specific evidence has been submitted to show that a considerable number of the securities held for more than 6 months were accumulated as part of a program to force a reorganization and gain control of the issuing corporation, or for the realization of a gain when the issuing company redeemed them or issued liquidating dividends. Furthermore, as to these securities, it was the firm's practice to buy in small lots and dispose of them in large blocks. It did not acquire them "to create a stock of securities to take care of future215 buying orders in excess of selling orders," Schafer v. Helvering, supra, or always sell to a class of persons different than those from whom it bought. Cf. Van Suetendael v. Commissioner, supra.It frequently refused to sell these securities which it was accumulating despite the fact that the bid price would have 1034 resulted in a profit. The activity of Lilley & Co. with regard to the securities in question conformed to the customary activity of a trader in securities rather than that of a dealer holding securities primarily for sale to customers.Respondent has stressed other phases of the firm's activity in support of his argument that the firm is a dealer in securities. He points out that the firm has two regular places of business, is licensed by the State of Pennsylvania as a "dealer," advertises itself as a "dealer," transacts a large volume of business, and subscribes to certain services commonly used by brokers and dealers. These are all significant facts which weigh against petitioners' contention that the firm was a trader. But they are no more conclusive than are other facts which weigh just216 as heavily in favor of petitioners' contention, such as the fact that the firm had no salesmen, no "customers' men," no customers' accounts, no board room, and has never advertised itself or held itself out to the public as having on hand securities for sale.After weighing all such factors and analyzing the activity previously referred to, we are of the opinion that Lilley & Co.'s status as to those securities held for more than 6 months was that of a trader holding them for speculation or investment. Therefore, those securities are capital assets and the gain upon their sale or exchange is taxable at capital gains rates.Respondent relies on such cases as Edmund S. Twining, 32 B. T. A. 600, affd. on other points, 83 F. 2d 954, certiorari denied, 299 U.S. 578">299 U.S. 578; Stokes v. Rothensies, 61 F. Supp. 444">61 F. Supp. 444, affd., 154 F. 2d 1022, and Helvering v. Fried, 299 U.S. 175">299 U.S. 175. These cases, as well as United States v. Chinook Investment Co., 136 F. 2d 984, held that the taxpayer in question217 was a dealer in securities. But since they resolved merely a question of fact, and contained significant evidence that is not present in the instant case, they do not support the conclusion respondent seeks here.On brief the petitioners argued that no income was realized either by Lilley & Co. or the individual partners upon the disposition of securities to the partners in the years 1942 and 1943. The partnership disposed of these securities pro rata to the partners at market price. This issue was not raised by the pleadings, nor suggested by anything contained therein or in the opening statement of counsel. Under these circumstances, the issue is not before us and may not be considered. Jamieson Associates, Inc., 37 B. T. A. 92.In the partnership income tax return for 1944, Lilley & Co. erroneously included the long term capital gain of $ 2,585.39 on the sale of 470 7/100ths voting trust certificates of Crestshire Corporation as a short term capital gain. The parties may make proper adjustment of this error in the computation under Rule 50.Decisions will be entered under Rule 50. Footnotes*. Proceedings of the following petitioners are consolidated herewith: William Lilley, Jr., Estate of Howard J. Comber, Deceased, Katherine R. Comber, Executrix, Henry C. Welch, Jr., Anna K. Herrman, Thomas David Call and Alfred D. Wells.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620663/	CHARLES G. GOLDSMITH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGoldsmith v. CommissionerDocket No. 20787-83.United States Tax CourtT.C. Memo 1986-227; 1986 Tax Ct. Memo LEXIS 379; 51 T.C.M. (CCH) 1128; T.C.M. (RIA) 86227; June 5, 1986. 379 Held: Petitioner did not own more than 50 percent in value of the stock of a foreign corporation and, therefore, was not taxable on its income under section 551 et seq.Held further, petitioner did not divert to his own account $178,000 of income of a corporation of which he was chief executive officer. William A. Carey, for the petitioner. Sharon C. Armuelles, for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined deficiencies in petitioner's Federal income taxes for the calendar years 1975 and 1977 in the amounts of $1,052,741 and $86,544, respectively. All issues for the year 1977 having been settled between the parties, we must determine whether or not petitioner is taxable for the year 1975 on $1,384,407 of foreign personal holding company income and whether petitioner omitted an additional $178,000 of taxable income from his 1975 Federal income tax return. Explanation of IssuesThe issues in this case arose during petitioner's tenure as Chief Executive Officer (CEO) of Intercontinental Diversified Corp. (ICD), a Panamanian corporation formed in 1970. More precisely, it is respondent's contention that Zodiac Shareholdings, 380 Inc. (Zodiac), also a Panamanian corporation and the successor by change of name to Groves Development Co. Inc. (Development Co.) was, during the year 1975, wholly owned by petitioner individually and for his own benefit, making it a foreign personal holding company under section 552. 1 Respondent further contends that in 1975 petitioner caused ICD to purchase from Zodiac shares of The Grand Bahama Development Company, Limited (Devco), a Bahamian corporation, for a grossly inflated price. The alleged gain on this transaction is the principal element of the foreign personal holding company income. The omitted income of $178,000 is comprised of three items: $94,000 transferred from ICD to Castle Bank & Trust Limited (Castle), a bank based in Nassau, Bahamas; $75,000, also transferred from ICD to Castle and thereafter to Zodiac; and, $9,000 of ICD funds transferred to petitioner. FINDINGS OF FACT Some of the facts have been stipulated and they are so found. At the time the petition in this case was filed, petitioner was a resident of Palm Beach, Florida. Background Information381 In 1955, Wallace Groves (Groves) caused The Grand Bahama Port Authority, Limited (Port), a Bahamian corporation, to be organized to construct a deep water harbor and to develop land primarily for industrial purposes, in the area of Freeport on Grand Bahama Island pursuant to an agreement with the Bahamian Government, authorized by an Act of the Governor, the Legislative Counsel, and the Assembly of the Bahama Islands. Fifty percent of the stock of Port was owned indirectly by Groves' wife, 2382 25 percent by Sir Charles Hayward (Sir Charles) of London, England, and the remainder by a group of investors. Groves was CEO and Sir Charles was Chairman of the Board of Port. Petitioner, during the period 1958 through 1968, was a director of Port and President of a subsidiary of Port. Devco was organized in 1961 as a 50-percent owned subsidiary of Port to promote residential development in the Freeport area. In 1968 92.5 percent of the outstanding stock of Port was acquired by Benquet Consolidated, Inc. (Benquet), a Philippine corporation, in exchange for shares of Benquet stock. The remaining 7.5 percent was owned by the Bahamian Government. Groves continued as CEO of Port. Conflict developed between Groves and the Hayward family, including Jack A. Hayward (Hayward), the son of Sir Charles. As a result of irregularities committed by Groves in 1970, he was forced to resign as CEO and Director of Port, but he installed in his place a management team selected by him. Again controversy developed between the Hayward interests and Groves. Edward St. George (St. George), an English barrister and formerly Chief Magistrate and thereafter Solicitor General of the Bahamas, was the legal advisor to the Hayward Family and was involved in their running battle with Groves. When the new management was ousted, St. George was instrumental in selecting petitioner as the compromise CEO for ICD, effective in January 1972. 3In the meantime, a plan of reorganization of Benquet had been developed pursuant 383 to which all of its assets located outside of the Philippines, principally the common stock of Port, were to be transferred to ICD with the shares of ICD then to be exchanged share-for-share for shares of Benquet so that such of the shareholders of Benquet as wished to do so could become shareholders of ICD rather than Benquet. In effect this resulted in creation of two publicly held corporations, one holding Philippine assets and the other non-Philippine assets. The purpose of the reorganization was to allow shares of Benquet and ICD to be exchanged so that 60 percent or more of Benquet's share ownership would end up in the hands of Philippine citizens. It was expected that the Groves-Hayward interests would own the controlling interest in ICD. This plan was consummated in 1974 at which time ICD became operational. Groves, through Mrs. Groves, became the largest shareholder of ICD with approximately 34 percent of its outstanding stock. Sir Charles was the second largest shareholder. A significant factor contributing to the continuing and bitter controversy between Groves and the Hayward family (and their counselor St. George) was the prediliction of Groves to run Port and its 384 subsidiaries autocratically. As the controlling shareholder he apparently felt little responsibility to Sir Charles, the largest minority shareholder. The acquisition by Benquet appears to have had little impact on Groves' control and management of Port. However, the Haywards and St. George expected that petitioner would serve the interests of all shareholders and would in effect exclude Groves from any substantial influence on future management of ICD. This did not, in fact, happen, but acting in reliance on their understandings with petitioner the Haywards and St. George paid little attention to the operations of ICD from 1972 until late in 1975. 1972 through 1975During the period 1972 through 1975, from the standpoint of the Hayward interest, petitioner had the authority to and was in fact expected to be managing ICD in his discretion. However, Groves continued to occupy the CEO's suite in what had been Port's office and became the ICD headquarters. Petitioner occupied the office adjacent to the CEO suite, allocated to the President of ICD. Contrary to his understanding with St. George and the Haywards, petitioner consulted constantly with Groves and especially during the 385 first part of this period, left much of management to the remaining officers, spending much time in New York City attending to his other business activities. Consequently the other officers were free to consult frequently with Groves. During this entire period, not major business action was carried out by ICD without Groves' knowledge and approval (implicit or explicit). A constant business consideration at this time was the need to maintain friendly relations with the then government of the Bahamas, the Progressive Liberal Party (PLP), as well as the minority Free National Movement Party (FNM). The latter had been in control of the Government and, at least in 1972 and 1973, was actively trying to return to control. Contributions to political parties are legal in the Bahamas 4 and ICD and its predecessors for many years made a practice of contributing to the FNM Party, both while it was the governing party and after its ouster by the PLP. Petitioner was aware of the ICD's policy of making political contributions and was also aware that the amount of such contributions and the person or party to which made needed to be kept confidential. This was difficult since a representative 386 of the Government was a director of ICD. Petitioner considered that he was "the point man" for political activity in the Bahamas on behalf of ICD and its subsidiaries, an important activity in view of the election anticipated during 1973. Accordingly, petitioner in consultation with Groves concluded that a slush fund should be set up in an off-the-books bank account to be used for political contributions. A some point, although whether before or after 1972 is unclear, a procedure 387 had been initiated by Port or ICD and the subsidiaries for securing cash for political contribution purposes without reflecting that use on ICD's books. The procedure involved having suppliers submit false invoices for services. On payment of the invoices the suppliers would remit the funds back to ICD or as it directed. This procedure appears to have been suggested by Miami, Florida counsel for ICD, a former member of which, Mary Jane Melrose, was serving as Vice President, General Counsel, and Director of ICD. The officers of ICD, including Donald C. de la Rue, Vice President-Finance and, of course, petitioner, were involved in this procedure, which was also known to Groves, Hayward, and St. George. Among others, St. George and his Freeport office assisted by submitting false invoices as did other respected Bahamian counsel. Since there was no income tax in the Bahamas, this practice did not affect adversely obligations owed to the Bahamian Government and appears to have been viewed as both legal and ethical. 5388 In addition to this practice, from time to time ICD cash was physically transported from the United States to the Bahamas without reporting the facts to the appropriate agency of the United States in violation of U.S. currency laws. At least some of this cash was delivered to petitioner. Groves, with the assistance of Thomas Rozak, 6 made available to petitioner an inactive Pamanamian company, Development Co., as the vehicle for the holding of ICD funds in an off-the-books bank account. The officers and Board of Directors of Development Co. were Groves, Mrs. Groves, and Rozak. The stock of Development Co. was in the form of "bearer" shares, possession of which reflected ownership. According to the minutes of Development Co., Mrs. Groves was the possessor of the bearer shares which reflected Groves' practice and was consistent with the holding of stockholder and director meetings at the Groves' residence. In any event, the shares were subject to 389 the control of Groves. Development Co. maintained its bank account in the Royal Bank of Canada in Montreal (Royal Bank), the same bank in which ICD maintained its principal bank account. Until the early part of 1975, the sole signatories on the bank account were the two Groves and Rozak. Groves had requested that Development Co.'s name be changed and, effective on August 21, 1973, the name became Zodiac Shareholdings, Inc. (Zodiac). In April 1975, Rozak resigned as Director and Secretary/Treasurer of Zodiac and Peter Aston, an individual then acting as bookkeeper for petitioner, was appointed Director and Secretary/Treasurer and also became a signatory on the bank account. Petitioner never had signature authority over any bank account of Development Co. or its successor Zodiac. At least through April 15, 1975, Mrs. Groves continued as the holder and therefore the legal owner of the bearer shares. There is no evidence of the holding of shareholder or director meetings subsequent to April 15, 1975. 7390 At a point in time unknown an effort was made to reissue the Development Co. bearer shares in Zodiac's name. The certificate appears to have been filled out but it was not signed by the officers--Groves or Mrs. Groves and Rozak or Aston--at least until after petitioner's resignation as CEO of ICD in February 1976. There is no evidence as to the ultimate disposition of the Development Co. share certificates held by Mrs. Groves. During the period April 15, 1975, until after petitioner's resignation, the physical location of the Development Co. certificates is unclear. 8391 In early 1972, ICD initiated a program to purchase the minority interests outstanding in Devco. This program continued until all of the shares not owned by ICD, including those of petitioner, had been acquired. In May 1973, with the knowledge and approval of Groves, petitioner made a written offer to Development Co. to sell it petitioner's shares of Devco stock for an aggregate price of $650,000 or $3.25 per share. The terms of the offer called for an installment sale with the initial payment of 392 $125,000 being due immediately and the balance to be paid in five equal yearly installments of $105,000 each with interest. It was at the time intended both by petitioner and by Groves that ICD would ultimately become the owner of petitioner's Devco stock and ICD funds were used to pay the purchase price. A Nassau attorney, Geoffrey Johnstone, was designated as escrow agent to hold the shares of Devco stock pending payment in full of purchase price. The first installment was paid on May 23, 1973, with a check payable to petitioner drawn by Development Co. on its Royal Bank account. This check was signed by Groves and Rozak. Funds for this purpose were derived from $117,000 paid by ICD to Johnstone and deposited to the Development Co.'s bank account at petitioner's direction. The sum of $33,000 was also deposited in that bank account. On ICD's books the $117,000 was recorded as an expenditure for the purchase of Devco stock. Another deposit was made in August 1973 to the Development Co. account by Johnstone using ICD funds. Petitioner reported gain on the installment sale of his Devco stock on his 1973 Federal income tax return. During this 1972-1976 period, using the false invoice 393 procedure, substantial ICD funds were transferred to the Development Co.-Zodiac bank account. Funds so deposited were, by and large, invested and reinvested in certificates of deposit issued by the Royal Bank to the extent not expended. Similarly, funds were transferred to Castle in this indirect route. 9 In June 1974, Zodiac issued its check, signed by Rozak, in the amount of $575,875 to petitioner representing the balance due on the installment sale of Devco stock plus accrued interest. The use of fictitious invoices to generate political contribution funds on an ad hoc basis was found to be a cumbersome method. It also required that the monies disbursed be treated as expenses for financial accounting purposes. It was recognized that if funds could be generated through 394 the purchase of an investment asset the expenditure would be recorded in ICD's investment account, thus having no adverse affect on net earnings. By September 1975, the only outstanding Devco stock not owned by ICD was the block of shares formerly owned by petitioner which had been paid for by Development Co.-Zodiac using ICD funds but which may still have been held in the name of Johnstone as nominee. Petitioner, with Groves knowledge and approval, 10395 caused ICD to purchase this stock for $10 a share, far in excess of the average per share cost of the minority shares acquired by ICD and, of course, substantially in excess of the $650,000 paid to petitioner for his stock. Two million dollars in ICD funds was channeled through Johnstone to Zodiac in payment of the purchase price, reflecting an apparent book profit to Zodiac of $1,350,000. Payment to Zodiac was handled by de la Rue. It is this book profit, together with some $35,000 of interest earned by Zodiac, which respondent has determined to be foreign personal holding company income taxable to petitioner in the year 1975. By the end of 1975, Zodiac had on hand almost $3,000,000. 11January - February 1976St. George returned to the Bahamas in December 1975 for personal reasons. Various bits and pieces of information which came to him somewhat haphazardly made him suspicious that there may have been an improper diversion of ICD funds which ostensively had been intended for political contributions. In a discussion with Johnstone, St. George became convinced 396 that a large sum of money, which he estimated to approximate $3,000,000, had been diverted by petitioner to Zodiac and accumulated instead of being immediately used for political contribution purposes and/or to acquire Devco stock. Hayward immediately came to Freeport at St. George's request to participate in the resolution of this problem. St. George discussed this matter both with Groves and with petitioner. 12 St. George and Hayward initially suspected that the funds in Zodiac represented another effort by Groves at misappropriation with the assistance of petitioner, but accepted Groves' disclaimer of knowledge of the diversion of ICD funds. When petitioner was confronted by St. George in early February, petitioner admitted that approximately $3,000,000 of ICD funds had been deposited in the Zodiac bank account. Without permitting petitioner to make a full explanation, St. George insisted that all Zodiac documents should be turned over to him and the funds returned to ICD control. St. George represented to petitioner that, if St. George obtained the Zodiac books and records and Zodiac funds in the amount of $3,000,000 and if petitioner resigned, he and Hayward would take no 397 action against petitioner, although he was then convinced that petitioner had intended to misappropriate these ICD funds. By February 19, 1976, St. George's demands were met. In the meantime, Groves undertook to persuade petitioner to document for Groves' benefit that Groves had had no knowledge of the transfer of ICD funds into Zodiac account and that Zodiac had been owned and controlled by petitioner since 1973. Accordingly, several documents were prepared and exchanged between petitioner and Groves during February 1976 (the February Documents), several of which were back dated to 1973. Rozak was an active participant in his capacity as Groves' assistant in the drafting and exchange of these Groves-petitioner documents. Discussing them in the order of their purported dates, a note handwritten by petitioner and dated April 1, 1973, was given to Groves. In this note petitioner purported to request that Mr. and Mrs. Groves transfer to him the shares, sharebook, and corporate papers of Development Co. Petitioner acknowledged in the note that the name "Groves" would 398 be eliminated from the corporate name and that the resignations of both Groves and Rozak as officers and directors would be acknowledged and accepted. 13 The language of the note was prepared by Groves and/or Rozak and presented to petitioner by one or the other of those individuals. The next of the backdated February Documents dated May 15, 1973 purports to reflect an agreement between Mrs. Groves and petitioner "as agent" for the sale by Mrs. Groves of the Development Co. stock with an acknowledgment of the transfer to petitioner of the share 399 certificate, the corporate seal, and corporate records. Petitioner's signature purports to have been witnessed by Groves. A document dated February 18, 1976, and apparently delivered to petitioner on or about that date, from the two Groves make formal demand for acceptance of their resignations as officers and directors of Zodiac. This document purports to recite that the alleged acquisition of the stock of Development Co. by petitioner took place in March or April 1973. The document also reflects the fact, which Groves could not deny, that Groves participated in the installment sale of petitioner's Devco stock to Development Co. Petitioner made one handwritten change in the text reflecting his insistence in February 1976 that ownership of the Zodiac stock was acquired in a fiduciary capacity as an agent for an undisclosed principal. Petitioner also endorsed on the document a statement that there were "other transactions in the company" but that the facts that were recited were correct. These February Documents are simply incorrect to the extent that they purport to reflect an actual purchase in 1973 by petitioner for his own account of the Development Co. stock and a delivery 400 to petitioner of the share certificates. Creation of these documents was instigated by Groves in his effort to stave off further controversy with the Hayward interests and St. George. Petitioner acceded to Groves' insistence since it did not appear to make any difference to him and might leave less controversy between the ICD shareholder groups. We are satisfied that in February 1976, no one anticipated that a $1 million tax liability would be asserted against petitioner based largely on these February Documents. On February 19, 1976, at the conclusion of the February confrontations, St. George did receive the Zodiac corporate file, 14 but as we have found no share certificate had been issued in the name of Zodiac. We are also satisfied that the share certificates in the name of Development Co. were not with the Zodiac papers or otherwise delivered to St. George. It is thus unlikely that the Development Co. certificates were among the corporate papers in the ICD headquarters. In any event bearer share certificates for the Development Co.-Zodiac corporation were never in petitioner's personal custody. If such shares were in fact at any time after petitioner became CEO constructively 401 in petitioner's possession, it would have been in his capacity as CEO of ICD and for the benefit of ICD. On February 19, 1976, petitioner executed two affidavits, one of which purports to exonerate the Groves and Rozak from any knowledge or responsibility for Zodiac and releases each of them from any liability. The second recites that an aggregate of $3,000,000 has been held in suspense and is in the account of Zodiac and that petitioner delivered all of the issued and outstanding shares of Zodiac to St. George and to de la Rue. Although the source and purpose of these two affidavits is not entirely clear, both are acknowledged by an attorney formerly in the law office of St. George in Freeport. They appear to be based, at best, on an incorrect understanding of the facts and on some generalized concerns of counsel. To the extent that these affidavits are inconsistent with the facts we have found, they, like the other items comprising the February Documents, must be ignored. Petitioner 402 at the request of St. George telephoned the Royal Bank to request a transfer of the funds in the Zodiac account to a special account set up by St. George for this purpose. The Royal Bank refused to act, however, until that request was confirmed in writing by an individual authorized to withdraw funds from the account. Either Rozak or Aston handled this function. The funds in the Zodiac account, amounting to slightly less than $3,000,000, were transferred to ICD's control. Thereafter, ICD accepted the transfer of petitioner's lease on the apartment in Freeport used as his residence to make up the deficit in the bank account so that ICD would recover the $3,000,000 demanded by St. George. Subsequent EventsAt some point, presumably in 1974 when ICD became operational, its stock was listed on the New York Stock Exchange as a publicly-held company. As such it was subject to the rules and regulations of the SEC. At no point prior to February 1976 did the periodic filings with the SEC reflect the payment of political contributions, the use of false invoices to accumulate funds, and the build up of a slush fund in the Zodiac account. On the advice of counsel, ICD reported to the SEC 403 in 1976 or 1977 facts with respect to the accumulation of the slush fund in the Zodiac account, petitioner's participation therein, his termination as CEO, and the making of political contributions. An investigation was commenced by the SEC of questionable payments and other matters which ultimately led to court orders in 1978 enjoining ICD and petitioner from violating the law in the future. SEC employees were authorized to take testimony and a number of interrogations 15 took place in the United States and in the Bahamas. Many documents were examined by the SEC employees. However, no published report of the investigation was made or filed. On advice of his counsel, petitioner declined to cooperate with or be interrogated by the SEC examiner. In connection with termination of the SEC investigation, ICD created an audit committee (Audit Committee) which continued to investigate facts and trace funds in order to ascertain, among other items, whether or not any monies were actually misappropriated by petitioner and whether any bribes had been paid to petitioner. Petitioner refused to be interviewed by Roger C. Minahan, a United States attorney, who had assisted St. George in February 404 1976 and was appointed as Chairman of the Audit Committee. In addition, a stockholder's derivative action was filed on behalf of ICD and its shareholders in the name of Chris Pappas in the United States District Court for the Southern District of New York (77 CIV 6165 (RD)). A number of depositions were taken during the course of that law suit, but again petitioner declined to be deposed. That lawsuit ultimately was settled by payment of fees for the attorneys for Mr. Pappas, apparently following the purchase by the Haywards and St. George of sufficient shares of outstanding ICD stock for the company to be delisted by the New York Stock Exchange as a publicly-held corporation. The details of this suit are sketchy in this record and are immaterial to the issues before us except as they impact upon the 405 numerous documents sought to be introduced into the record by respondent over the hearsay and other objections of petitioner, which objections were disposed of in 86 T.C. No. , (1986). Suffice it to say that no definitive findings of fact were made by the SEC, the Audit Committee, or in the Pappas proceeding. $178,000 Unreported IncomeIn the statutory notice respondent determined that petitioner received, in 1975, $119,000 from Devco and $59,000 from Freeport Commercial and Industrial Limited (FC&I), another subsidiary of Port, which monies petitioner failed to include in income. The $119,000 item from Devco is composed of $44,000 paid to St. George on May 30, 1975, in settlement of a fictitious invoice of like amount from Devco. By check dated June 3, 1975, St. George's office paid Castle $44,000, the funds being received by Castle on June 13, 1975. In addition, $75,000 was paid by ICD to Johnstone by check dated March 21, 1975. This sum was, thereafter, transferred by Johnstone to Castle by check. Ultimately, the $75,000 with other funds was transferred by Castle to Zodiac. The $59,000 is composed of $50,000 paid to St. George by FC&I by check dated May 16, 1975, which 406 funds were thereafter transferred by St. Georges' office to Castle by check on June 3, 1975. An additional $17,000 was paid to St. George by FC&I by check dated May 2, 1975. Of this sum $8,000 was paid by St. George in settlement of an unrelated claim and $9,000 was paid to petitioner in a form of a check payable to cash dated May 14, 1975. Petitioner used this $9,000 to pay expenses of ICD, incurred to acquire shares of Devco in small lots from unrelated shareholders. A portion of these funds deposited with Castle was used for political contributions, for various unrelated transactions, and the balance was transferred by Castle to Zodiac's account in the Royal Bank. None of the $178,000 which respondent determined was unreported income, was misappropriated by petitioner or used in any way for his personal benefit. ULTIMATE FINDINGS OF FACT Petitioner in his individual capacity never became the legal or beneficial owner or holder of the shares of Development Co.-Zodiac. During petitioner's tenure as CEO of Port and thereafter of ICD, petitioner did not misappropriate to his own use and benefit any funds of Port, ICD, or any of the subsidiaries of either corporation. To the extent 407 that petitioner exercised control over Zodiac and the funds deposited in and withdrawn from its Royal Bank bank account, petitioner was acting in his capacity as CEO of ICD and for the benefit of Port and, thereafter, ICD. OPINION Credibility of WitnessesThis is essentially a fact case and our findings of fact foretell the result. However, the parties, and especially respondent, are entitled an understanding of the basis for our factual conclusions. Petitioner's case rests almost entirely upon the credibility of his witnesses, i.e., petitioner himself and St. George. Respondent's case, on the other hand, depends largely upon the February Documents and upon hearsay statements to SEC investigators, to members of the Audit Committee and in depositions taken in the Pappas litigation, most of which we have excluded from evidence, in large measure, because of our conclusions as to their unreliability. Respondent also urges us to take note of the apparent violations of United States laws such as the failures to make required disclosures in SEC filings, especially as to the accumulation of the slush fund in Zodiac and the payments of political contributions as well as probable violations 408 of certain U.S. currency laws to which petitioner was a party. To the extent that petitioner was not currently aware that such violations were occurring, he was at least indirectly responsible in his capacity as CEO and, hence, captain of the ICD ship. Respondent fails to realize, however, that business standards in the Bahamas during the time period relevant to this case were not the same as in the post-Watergate era in the United States. Moreover, the disclosures during the post-Watergate era of similar malfeasance by executives of many United States corporations doing business abroad was not necessarily, or even frequently, accompanied by misappropriation of corporate funds by the executives concerned. Neither did the practice of paying foreign politicians for business necessarily imply that corporate executives were unreliable when testifying under oath. Generalizations cannot be made. Further there is no particular significance in this case in the fact that petitioner may have directed ICD business to a personal friend. 16 His participation in the use of false invoices in order to generate funds which could be used for political contributions in the Bahamas without disclosure 409 of that purpose on ICD's books is similarly beside the point. While by no means condoning the violations of United States laws and regulations by several of the executives of ICD, including petitioner, we do not consider these facts to have blackened the character of petitioner so as to make untrustworthy his testimony before us. During the trial we were fully aware of respondent's contentions and we have made our own judgments as to the credibility of the witnesses. We found petitioner to be sincere, forthright, and a thoroughly reliable witness. St. George is an English barrister of note, who has served his country's Government in a number of important capacities. He voluntarily came to Florida to testify in this case at some personal inconvenience to himself. There can be no doubt either as to his veracity or his motives. 17 Respondent characterizes the St. George SEC interrogation as more accurate than his testimony in this proceeding and it was, of course, closer in point of time 410 to the critical events, particularly those in January and February 1976. However, we find the inconsistencies between his testimony before the SEC and before us fully explained. We also find convincing St. George's own judgment of himself. He testified: I have no business interests, no business affiliations. My only reason for coming here is as I have said, that I think perhaps I judged him [petitioner] a little harshly initially, and I felt that I then had a moral duty to come and say what I really thought. Finally, we have the fact that Groves knew about the purchase by Zodiac of petitioner's Devco stock with ICD funds and then its resale to ICD. As the owner of approximately 35 percent of the ICD stock, it is inconceivable that Groves would have permitted this accumulation of ICD funds in Zodiac if that company was, in fact, owned and controlled by petitioner individually. On the other hand, with Mrs. Groves as the sole shareholder and the Groves, Rozak, and Aston as the only persons authorized to withdraw funds from the Zodiac bank account, it is fully understandable 411 that Groves would have concurred in these (as well as other) transactions involving Zodiac. As to the ultimate motives of Groves, we need not speculate. Comment is appropriate with respect to the procedure used by petitioner to accumulate the slush fund in Zodiac as it relates to respondent's view of his motivation. As we have found, many individuals associated with ICD knew petitioner was depositing large sums in Zodiac, including Groves, Rozak, Ms. Melrose, Johnstone, and probably Aston. D. C. de la Rue participated in the transfer of $2,000,000 to Zodiac. While petitioner probably could have caused funds to be withdrawn and delivered to him for unsupervised use, that would have required the cooperation of Groves, Mrs. Groves, Rozak, or after April 1975, Aston. Such indirect control of Zodiac funds is hardly consistent with an intention on the part of petitioner, allegedly conceived in 1973, of using Zodiac to store funds misappropriated by him, unless all signators on Zodiac account were co-conspirators with petitioner. Foreign Personal Holding Company Income IssueThe principal element in the 1975 deficiency in this case arises out of the treatment by respondent of Zodiac412 as a foreign personal holding company solely owned by petitioner. Insofar as relevant, sections 551 and 552 provide as follows: SEC. 551(a) General Rule.--The undistributed foreign personal holding company income of a foreign personal holding company shall be included in the gross income of the citizens or residents of the United States, * * * who are shareholders is such foreign personal holding company * * * in the manner and to the extent set forth in this part. SEC. 552(a) General Rule.--for purposes of this subtitle, the term "foreign personal holding company" means any foreign corporation if-- * * * (2) Stock Ownership Requirement.--At any time during the taxable years more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals who are citizens or residents of the United States, hereinafter called "United States group". The rules for determining foreign personal holding company income under section 551 are somewhat complex and have been substantially ignored by the parties in this case. The statutory notice treats the $2,000,000 reported sale of Devco stock by Zodiac to ICD as a capital transaction, allowing 413 Zodiac a basis equivalent to its cost, the sum of $650,000 paid to petitioner. The gain of $1,350,000 plus the interest income earned by Zodiac is determined to constitute foreign personal holding company income taxable to petitioner in his individual 1975 calendar year. 18 The entire controversy with respect to the foreign personal holding company issue relates to whether or not petitioner was, in fact, the sole shareholder of Zodiac. 19In the determination of stock ownership for this purpose, we may look to the rules for determination of ownership in domestic personal holding companies under section 544. Section 1.552-3(a), Income Tax Regs.414 In Estate of Miller v. Commissioner,43 T.C. 760">43 T.C. 760, 766 (1965) we said "[w]e think there must actually be controlling U.S. shareholders of the foreign corporation before the foreign personal holding company statutes can have any effect." We must, therefore, determine whether or not petitioner was the controlling "U.S. shareholder." And in this context, the inquiry is whether or not petitioner was the controlling shareholder for his own account, and not as an agent or fiduciary for ICD. It is appropriate to recall at this point that Development Co. was a Panamanian corporation, the shares of which are described as "bearer" shares. Although the significance of that terminology would, we presume, be in the first instance a matter of Panamanian and/or Bahamian corporate law, neither party has discussed the applicable law. Instead the parties seem to have accepted the fact that bearer shares are simply transferable by delivery and the holder of a certificate of bearer shares is presumed to be the owner. In this respect the bearer shares appear to be somewhat similar to shares of United States corporations issued in street names. See 11 Fletcher, Cyclopedia of the Law of Private Corporations, 415 sec. 5091, p. 59 n. 18 (Perm. ed. 1978 rev.); 1 Christy, The Transfer of Stock, sec. 22, p. 3:1 and sec. 56, p. 7:15 (5th ed. 1975). It is undisputed that Development Co. was organized at the instance of Groves in 1969 and that the bearer shares were held, and thus owned, by one or the other of the two Groves. We are satisfied that the copies of the corporate minutes which have been received in evidence are copies of the genuine minutes and that they correctly reflect in material respects the facts relevant to this case, 20416 although with some obvious but unimportant errors. For example, at the May 31, 1973 meeting, the new name of the corporation is shown as Zodiac Shareholdings, Ltd., rather than Zodiac Shareholdings, Inc. The minutes of the Board meeting on the same day recite that Mrs. Groves contributed $150,000 for additional stock whereas, in fact, the funds came from ICD. There are two copies of minutes of the annual meeting on February 17, 1975, both signed, which differ in that one set omits reference to certificate No. 2 for 900 shares. Finally, the minutes of the last recorded shareholders' meeting held on April 15, 1975, uses the name Groves Development Co., Inc. rather than Zodiac Shareholdings, Inc. These inaccuracies reflect, we conclude, sloppy work on the part of Rozak and his available secretarial staff. They do not serve to case doubt on the basis representations contained in the minutes as to possession and ownership of the bearer shares. Respondent argues, as to the copies of the minutes, that they are inadmissible and further that after May 1973 only "nominee" meetings were held as a convenience to petitioner. We simply do not believe that Rozak would have prepared minutes reflecting Mrs. Groves as the shareholder or that she and Groves would have approved and 417 she would have signed minutes reflecting such fact, if, in fact, the shares had actually been transferred to petitioner. That the officers and directors might have continued to serve as a convenience to petitioner is at least possible; that Mrs. Groves would, for no reason, have allowed herself to be shown as the shareholder is beyond belief. The record fully supports our finding that through April 15, 1975, Mrs. Groves was treated as the holder of the bearer certificates. 21418 Whether between the two Groves, Mrs. Groves or Mr. Groves was the beneficial owner, we need not determine. We have also found that the Groves remained as Directors and the President and Vice President, respectively, through the date of petitioner's resignation as CEO of ICD. When Aston was substituted for Rozak as Corporate Secretary and Director on April 15, 1975, Mrs. Groves continued to be treated as the owner of the bearer shares. We are satisfied that the shares of the Development Co. stock were owned legally and beneficially by one or the other of the two Groves. Although the name of the company had been changed on the public registry of Panama from Groves Development Company, Inc. to Zodiac Shareholdings Inc. effective August 21, 1973, up to the time of petitioner's resignation from ICD in February 1976, there was no outstanding share certificate issued in the name of Zodiac to anyone. However, we decline to believe that the ownership of Zodiac was in a vacuum by reason of the absence of a certificate in its name evidencing its shares. In the absence of evidence as to Panamanian or Bahamian corporate law to the contrary, we have to be guided by general principles of corporate law. We thus assume that 419 the certificates No. 1 for 100 shares and 2 for 900 shares of Development Co. stock remained outstanding and continued to evidence the ownership of such numbers of shares (bearer or otherwise) in Zodiac. Ignoring the fact recitals in the February Documents as to possession, as we have concluded we should, we are left with no evidence as to the actual whereabouts of the bearer shares subsequent to the April 15, 1975 joint shareholder-directors meeting of Zodiac. Rozak in his Pappas deposition did his best to convey the impression that when he delivered the Development Co.-Zodiac corporate documents to petitioner (if in fact he did so), the bearer shares were contained therein. However, he was forced to state that he then (in July 1978) had no recollection of actually seeing the bearer shares in petitioner's position. That, of course, is consistent with the fact that Mrs. Groves had theretofore retained physical custody of them, as the minutes recite, all of which confirms petitioner's testimony that petitioner never received the share certificates. We conclude that petitioner never had personal custody of the Development Co.-Zodiac bearer certificates. 22420 We are further convinced that petitioner's only contact with Development Co. or Zodiac was in his capacity as CEO of ICD. Petitioner did effectively control the Zodiac bank account in the Royal Bank in the sense that as CEO of ICD he was able to cause funds to be deposited in and withdrawn from it. And this bank account appears to be the only business activity Zodiac carried on during this period. That brings us to the legal question of whether or not the connection which petitioner admittedly had with Zodiac as CEO, but without either personal possession or control of the bearer share certificates, is sufficient to cause him to be characterized in his individual capacity as the sole member of the "United States group" of shareholders. Turning to section 544, stock owned directly or indirectly by or for a corporation is treated as being owned proportionately by its shareholders. If the Development Co.-Zodiac bearer shares were in fact being 421 held by Groves or Mrs. Groves for the benefit of ICD, as we believe, or even by petitioner as CEO of ICD, petitioner as a minority shareholder of ICD, would be treated as a minority shareholder of Zodiac. Respondent does not and on the facts cannot argue that the 50-percent test is so met or that in this fashion 100 percent of Zodiac's 1975 income is taxable to petitioner. Were we to construe the facts, including inferences from inadmissible documents, most favorably to respondent, we can do no more than find that petitioner controlled Zodiac for the benefit of ICD. The funds in the Zodiac bank account were at all times intended to be used for ICD's benefit. Zodiac had no claim to such funds and the paper gain which respondent seeks to treat as income to petitioner arose out of a simulated transaction. Zodiac's only income in 1975 was its $35,000 interest income which also belonged to ICD since the invested funds belonged to ICD. The paper gain of $1,350,000 was ICD's not Zodiac's. But even if on some theory petitioner were estopped to deny that Zodiac realized this gain, it still would not be taxable to petitioner. With the February Documents entitled to little credence, petitioner's 422 credible testimony corroborated by St. George, by documents and by logical inferences, and nothing to the contrary except inadmissible, unreliable hearsay, we hold for petitioner on the foreign personal holding company issue. $178,000 Unreported Income IssueOur fact findings are again sufficient to dispose of this issue. Petitioner did not use or appropriate for personal purposes any element of this sum of money. Therefore, we find for petitioner on this issue. By reason of the stipulated deficiency for the year 1977, An Appropriate order will be entered.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.↩2. Although Mrs. Groves was an inactive participant in business affairs, it apparently was Groves' custom to cause her to hold title to securities. We conclude that, from a practical standpoint, beneficial ownership was in the Groves' family unit.3. We assume that petitioner actually took office as CEO of Port which apparently continued to run the business until ICD became operational in 1974.↩4. Although the making of political contributions by ICD in the Bahamas plays a major role in this case, neither petitioner nor respondent has supplied us with acceptable evidence that such contributions were, during the period involved, legal under Bahamian law. There are also at least inferences in the record that contributions to individual politicians as distinguished from those to political parties were, at best, somewhat delicate if not illegal. However, everyone involved in this case, the parties and the nonparty witnesses, have operated on the assumption that contributions to political parties in the Bahamas were legal and we accordingly accept that as a correct characterization of Bahamian law.↩5. It is not our function to judge the propriety of this practice or its legality under United States standards, not withstanding the fact that ICD was listed on the New York Stock Exchange. As such, it was required to file reports with the Securities and Exchange Commission (SEC), many of which may have been false or misleading because the fact of the making of political contributions was not revealed.6. Rozak acted as Groves' personal assistant for many years. He also served during this period as director and secretary of ICD. ↩7. Counsel have not undertaken to discuss on brief the effect of the lack of further meetings. Presumably that did not alter the authority of the officers and directors to continue to act for and in Zodiac's name.8. St. George testified consistently before us and in his SEC interrogation that he did not receive share certificates for Zodiac shares in February 1976 when he received other Zodiac corporate papers. Before us he explained that the problem was with counsel in Panama in connection with the corporate name change. Before the SEC he stated that the Development Co. certificate "had been handed back for reissue." Presumably action for reissuance of the certificate or certificates in the name of Zodiac should have been commenced in 1973 or shortly thereafter in connection with the name change handled by Rozak. Resolution of this fact issue would have been helpful but it is not critical to the case. We also note that neither party has seen fit to brief the question of ownership of a Panamanian corporation with bearer shares where the share certificate is in process of being reissued. Neither are we advised whether this corporation could then issue only bearer shares or whether that status depends on a legend on the certificate or otherwise. Thus, it is unclear whether after the effective date of the name change, Zodiac in fact had only bearer shares outstanding.9. During a portion of this period, another Groves Panamanian corporation, Atlanta Bahamas Company, also with a bank account in the Royal Bank, was used as a depository for certain ICD funds, which ultimately were transferred to Zodiac. These facts are significant only insofar as they reflect Rozak's participation in Zodiac long after, according to his testimony, he ceased to have any knowledge of Zodiac's activities.↩10. We are constrained to conclude that Rozak was fully aware of transactions such as this in spite of his denials during his SEC interrogation. We are also impressed with St. George's testimony that Johnstone would not have participated in the diversion of large amounts of ICD funds to Zodiac without the knowledge that Groves concurred in the plan. 11. Although there is no evidence on this point, we do not believe Groves would have permitted petitioner's Devco stock to be purchased by Development Co.-Zodiac with ICD funds without some logical reason. The obvious inference is that the plan to sell the stock to ICD, at an inflated price, was devised in 1973. Moreover, Groves certainly would not have permitted ICD to pay $10 per share to Zodiac for petitioner's former stock unless he had had some control over the ultimate disbursement of the $2,000,000.↩12. It is unclear whether the matter was first discussed with Groves or petitioner, but that discrepancy is immaterial.↩13. The copy of the handwritten note received in evidence is totally illegible. A typed document identical with the handwritten note except that the typed document shows as a signature the word "Gerry" before which appears the symbol "/s/" implying that this typed document is a copy of the handwritten note was also received as a stipulated exhibit. We accept petitioner's testimony that the typed version was presented to him with a request that he copy it in long hand, which he did. The critical fact is that the document was prepared at Groves' request and back dated in an effort to get Groves "off the hook" with the St. George-Hayward faction.↩14. St. George testified that Rozak left the February 19, 1976, meeting, and returned with the Zodiac corporate file which he delivered to petitioner. Petitioner then delivered the file to St. George.↩15. We have used the word "interrogation" for lack of a better description. Witnesses were sworn and were allowed to have counsel present but little or no interrogation was permitted by such counsel and none by other parties or their counsel. The proceeding was essentially one for fact finding but in several instances the SEC examiner urged witnesses to speculate, repeat hearsay, etc.↩16. Respondent contends that ICD funds were diverted to Angela Howard, a friend of petitioner. At various times she did work for Port or ICD or one of the subsidiaries for which she received payments.↩17. Minahan is a thoroughly credible witness although his testimony contributes little to the resolution of this case.↩18. There is no evidence as to the accounting year of Zodiac, the patties apparently assuming that it was the calendar year, so that its entire income for the year 1975 would be includible in petitioner's 1975 income. ↩19. Respondent on brief argues that Zodiac should have no basis in the Devco stock and therefore the gain on the sale of the stock in 1975 should be $2,000,000 rather than $1,350,000. Respondent's argument, made for the first time on brief, simply comes too late. Aero Rental v. Commissioner,64 T.C. 331">64 T.C. 331, 338↩ (1975). It is also immaterial.20. Respondent objected to receipt in evidence of the minutes, because among other grounds, the corporate secretary Rozak is alleged to have stated that actual meetings as reflected in the minutes were not held but that the minutes were simply passed around for signature. Respondent's counsel apparently does not realize that that is a common practice among corporate secretaries and corporate lawyers in closely held United States corporations and the practice does not invalidate the corporate action reflected in the minutes or cast doubt on recitals therein as to stock ownership.21. In the copy of the Listing Application to the New York Stock Exchange, Inc. filed by ICD, dated December 28, 1973 (Exhibit GH), Mrs. Groves is shown as sole shareholder of Groves Securities Co., Inc. which held the Port shares and then Benquet shares owned by the Groves. She is also shown as indirectly owning Devco shares, apparently the shares purchased by Zodiac from petitioner. While the minutes of Development Co.-Zodiac can be interpreted to reflect that Rozak may have had actual custody of the shares, his testimony in the Pappas↩ litigation was very specific to the effect that Mrs. Groves personally brought the share certificate to the meetings. (See Exhibit 164, pp. 21-23).22. If petitioner had possession of the Atlantic Bahamas bearer's certificate, it was constructively and for the benefit of ICD on the assumption that the Atlantic Bahamas corporate papers were delivered by Rozak to Aston as successor Corporate Secretary for Zodiac. See n. 9.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620664/	Beverly J. Hill v. Commissioner.Hill v. CommissionerDocket No. 3601-65.United States Tax CourtT.C. Memo 1967-249; 1967 Tax Ct. Memo LEXIS 12; 26 T.C.M. (CCH) 1287; T.C.M. (RIA) 67249; December 15, 1967Beverly J. Hill, pro se, Arcadia, Calif. Martin R. Simon, for the respondent. FEATHERSTONMemorandum Findings of Fact and Opinion FEATHERSTON, Judge: Respondent, by statutory notice dated March 24, 1965, determined deficiencies in Federal income tax of the petitioner and her former husband, Robert D. Hill, as follows: Additionto TaxYearDeficiency1 sec. 6654(a) 1961$1,165.0619622,038.44$78.1619634,318.5513 Respondent has stipulated to the allowance of additional specific deductions, described below, and an investment credit not taken by petitioner for the taxable year 1963. The remaining issues for decision are: Whether petitioner realized $525 in capital gain income representing 50 percent of the total gain on the sale of a racehorse, which she failed to report in 1962, the year of sale. Whether petitioner is entitled to deduct all or any part of the horse training expenses claimed in her returns for the years 1962 and 1963. Whether petitioner understated income on her returns for the years 1961, 1962, and 1963 on account of excessive deductions for travel and soliciting expenses. Whether petitioner is entitled to deduct in 1963 as office supplies expense an amount in excess of the $8,235.46 allowed. The total amount of such expenses claimed in 1963 is $28,235.46. Whether depreciation on an automobile was correctly computed. Whether petitioner is subject to an addition to the tax for the year 1962 of $78.16, as provided by section 6654. Some of the facts have been stipulated by the parties14 and the stipulation of facts and exhibits attached thereto are incorporated herein by this reference. The petitioner is an individual whose legal residence was in Arcadia, California, during the years 1961, 1962, and 1963, and at the time of filing of the petition. She and her former husband, Robert D. Hill, filed joint Federal income tax returns for the years 1961, 1962, and 1963, on a cash method of accounting basis with the district director of internal revenue, Los Angeles, California. Robert D. Hill filed no petition in the Tax Court in regard to the joint notice of deficiencies in income taxes mailed to him and petitioner on March 24, 1965 for the years 1961, 1962, and 1963, and, pursuant thereto, assessment was entered against him on August 6, 1965. The assessment remains unpaid. 2Respondent has stipulated15 to the allowance of additional specific deductions not taken on the 1963 returns as follows: Contributions$104.00State Sales Tax195.00Gas Tax104.00Auto Licenses105.00State Income Tax168.50$676.00Respondent has further stipulated that petitioner is entitled to an additional deduction for depreciation in the amount of $161.81 on certain purchases of office furniture: February 26, 1963$ 143.94March 22, 19632,579.46December 21, 1963114.40Further, it is agreed that petitioner is entitled to an investment credit for the calendar year 1963 in the amount of $1,280.93. Robert D. Hill was engaged in the collection business for several years with offices located in Arcadia, California. In 1963, he acquired a number of Las Vegas casinos and hotels as clients for whom he collected bad checks and this expanded his business substantially. In addition, he and the petitioner engaged in the racing of horses as a business. In about 1964, he disappeared and has not been located since that time. All of his business records also disappeared or were destroyed with the result that they apparently were not available for the respondent's16 audit and the petitioner was able to introduce no records to support the tax returns with respect to the horse racing and collection business transactions placed in dispute by the statutory notice. 1. Horse Racing Business Issues From 1958 to 1964 the petitioner and her former husband, Robert D. Hill, owned and raced horses. Over this period they owned or had fractional interests in 11 different horses, each of which ran in about 20 races. Petitioner devoted a substantial part of her time to traveling and arranging participation in races in California and Mexico. Petitioner and her husband boarded the horses at a nearby ranch and employed trainers, paying them wages plus a percentage of the winnings. Respondent does not question that these racing activities constituted a business except for the year 1963. (a) Capital Gains. Respondent determined that the petitioner's 1962 income tax return omitted capital gain income of $525 realized under Code section 1231 when a racehorse was claimed for $3,000. 3 Petitioner does not contest the fact that a horse was claimed in 1962, but contends that the claimed horse was one only partially owned by her and her husband. Petitioner had no17 records as to the horse racing business. Her former husband made all the financial arrangements for purchasing horses and she had no direct knowledge as to the costs of the horses. Her former husband kept all the records and prepared the returns, and petitioner's testimony was given from a hazy recollection. From the testimony and the 1961 and 1962 income tax returns we find that petitioner and her husband in these years had a one-third interest in two horses, and owned outright one horse which had a remaining cost basis of $1,950 at the end of 1961. At the end of 1962, according to the 1962 income tax return, petitioner had a one-third interest in only one horse, which was one of the horses partly owned at the end of 1961. By the end of 1962, the petitioner's husband had sold their interest18 in the other partly-owned horse. As to the third horse, the one which was wholly owned and which had a remaining cost basis of $1,950, we find that it was the one which was claimed from petitioner at $3,000. The 1962 income tax return does not report this $1,050 long term capital gain. On the record, we must sustain the respondent as to this issue. (b) Training Expenses. The second issue is whether petitioner is entitled to deduct all or any part of training expenses claimed in her 1962 and 1963 returns. Respondent disallowed $1,904.04 of claimed 1962 training expenses of $6,986.50 for lack of substantiation, and disallowed all the 1963 expenses of $534.00 on the ground that petitioner was no longer engaged in the horse racing business in 1963. At trial, petitioner was unable to offer any evidence to substantiate training expenses in excess of the amount allowed for 1962. Although she testified that she had two horses in 1962, and that the "going rate" for horse training was $14 per day, she had no idea how long the horses were in training for that year. Thus, we must sustain respondent's determination as to the 1962 expenses. Respondent contends that petitioner was no longer19 in the racing business in 1963. So far as the record indicates, the only changed circumstance from 1962 to 1963 was that the horse owned in 1963 did not race during that year. Respondent, by allowing deductions for substantial training expenses in 1962, has, in effect, conceded that petitioner was engaged in the business of racing horses for that year. Petitioner testified, and we believe, that the horse was entered in a race in 1963 although it did not run. Nothing in the record indicates that the racing activity, concededly a business in prior years, became a social activity or hobby in 1963. We find that petitioner was still in the horse racing business in 1963, and is entitled to the claimed deduction of $534 for training expenses. 2. Collection Business Issues Petitioner knew even less about her former husband's collection business than the horse racing business. In her words, "I ran the home and he ran the office." And, as noted above, we are without benefit of any business records to assist in resolving the issues. 420 (a) Travel and Soliciting Expenses. Respondent has disallowed travel and soliciting expenses of $2,486.97 for 1961, $3,229.00 for 1962 and $1,250.27 for 1963 compared with $4,236.97 claimed for 1961, $5,106.23 for 1962, and $1,541.14 for 1963. The only explanation given in the notice of deficiency was lack of substantiation. At trial, petitioner was able to testify only generally as to alleged business trips made by her former husband. She knew nothing precisely as to his expenses. On this record we are unable to find that petitioner is entitled to deductions greater than those allowed by respondent. Cf. Karl R. Martin, 44 T.C. 731">44 T.C. 731, 734 (1965). (b) Office Supplies. It is uncontested that the collection business operated by petitioner's former husband increased substantially in 1963. Petitioner testified, and we have found, that this increase came from the acquisition of collection accounts from certain hotels and casinos in Las Vegas. In 1963 petitioner reported expenses of $28,235.46 for "office supplies." Respondent disallowed $20,000 of this amount. It is apparent from petitioner's testimony at trial that many of the items she believes were included under "office21 supplies" were in fact equipment which should have been capitalized rather than expensed. Respondent has allowed additional depreciation for those items petitioner was able to substantiate, and allowed an amount slightly greater than the average amount deducted for office supplies in the two previous years. While we agree in principle with respondent's determination, we find that the amount allowed for office supplies and expense for 1963 should be increased. It is clear from petitioner's tax returns for 1961-1963 that expenses attributable to the collection business increased substantially in 1963. The following table taken from information contained in the petitioner's income tax returns shows a comparison of the major expenses, the gross receipts and the disputed office expense. 196119621963Telephone$ 12,397.58$ 11,956.63$ 15,279.63Salaries106,034.29100,913.32131,373.84Sales Expense6,186.167,982.4310,818.53Gross Receipts212,041.38212,731.08240,026.56Office Expense6,881.677,811.17 Thus, while the deductions for salaries, telephones and sales expense, allowed by the respondent, increased from 28 to 35 percent22 in 1963, and the gross receipts increased 13 percent, the increases allowed by respondent for office supplies (8,235.46) is only approximately 5 percent. The facts of record call for application of the rule of Cohan v. Commissioner, 39 F. 2d 540 (C.A. 2, 1930), and it is on the basis of that decision that we have found that petitioner is entitled to a deduction of $10,154.52, an increase of 30 percent over the 1962 expenses allowed. (c) Depreciation on Automobile. Petitioner's husband purchased an automobile in 1960 for $4,679.86, and claimed depreciation based on a four-year useful life under the declining balance method in the following amounts: Adjusted BasisAmountAmountYearon ReturnClaimedAllowed1960$4,679.86$1,559.96$1,559.9619613,119.901,559.95219.9019621,559.95779.98 Respondent disallowed the claimed depreciation on the ground that it would depreciate the asset below its reasonable salvage value. See section 1.167(b)-2(a), Income Tax Regs.; Hertz Corp. v. United States, 364 U.S. 122">364 U.S. 122 (1960). Petitioner offered no evidence to show that the salvage value was23 different from that determined by respondent. The burden was on petitioner to show error in respondent's determination, and, since she failed to do so, we must sustain the respondent's determination. Joseph W. Brown, 40 T.C. 861">40 T.C. 861, 868-869 (1963). 3. Addition to Tax Respondent has determined that petitioner is liable for an addition to the tax for the year 1962 under section 6654(a), 5 for failure to pay her estimated tax. Petitioner offered no evidence to the contrary, and petitioner's tax return for 1962 clearly bears out the respondent's determination that estimated tax payments were owing. Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended.↩2. The fact that this assessment has already been made against her former husband does not deprive the petitioner of the right to file a separate petition in this Court for redetermination of the deficiencies. See Marie Dolan, 44 T.C. 420">44 T.C. 420 (1965); Eva M. Manton, 11 T.C. 831">11 T.C. 831 (1948); Nadine I. Davenport, 48 T.C. No. 89">48 T.C. No. 89↩ (1967).3. A "claiming race" is one where all the horses are entered with a sales price put on them. See Jacobs v. Joseph, 282 App. Div. 622, 126 N.Y.S. 2d 274↩ (Sup. Ct., 1st Dept. 1953). Petitioner testified that a prospective purchaser must signify his intent to purchase prior to the running of the race, and is obligated to pay the claiming price regardless of the outcome of the race.4. The administrative settlement process is obviously more conducive to a just disposition of such factual issues, particularly where a taxpayer like this one neither participated substantially in the management of the businesses in which the disputed transactions arose nor had access to the business records on such transactions. But the parties were unable to reach a complete agreement. We have no alternative but to apply the law to the facts established by the trial record.↩5. SEC. 6654. FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME TAX. (a) Addition to the Tax. - In the case of any underpayment of estimated tax by an individual, * * there shall be added to the tax under chapter 1 for the taxable year an amount determined at the rate of 6 percent per annum upon the amount of the underpayment (determined under subsection (b)) for the period of the underpayment (determined under subsection (c)).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620666/	John A. Cupler II and Margaret D. Cupler, Petitioners v. Commissioner of Internal Revenue, RespondentCupler v. CommissionerDocket No. 4743-73United States Tax Court64 T.C. 946; 1975 U.S. Tax Ct. LEXIS 78; August 26, 1975, Filed 78 Decision will be entered under Rule 155. Petitioner John A. Cupler II developed two items of specialized medical equipment, which he then donated to charitable organizations. Held, one donation was made in 1967 and the other in 1969. Held, further, that the fair market value of the 1967 donation is $ 10,000 and that of the 1969 donation is $ 15,000. Frank S. Deming and J. Shane Creamer, for the petitioners.Alan E. Cobb, for the respondent. Tannenwald, Judge. TANNENWALD946 Respondent determined the following deficiencies in petitioners' Federal income taxes:YearDeficiency1965$ 53,487.95196666,853.00196747,837.171968$ 105,248.90196949,920.08197066,128.92Several issues have been disposed of by stipulation. Those remaining are:947 (1) Did petitioner make a charitable contribution of medical equipment to the University of Maryland in 1967, and if so, what was its value?(2) Did petitioner make a charitable contribution of medical equipment to St. Barnabas Hospital in 1969 and, if so, what was its value?(3) What was the value of the building stone which petitioner contributed to Emanuel Episcopal Church in 1965?FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioners are husband and wife. Their returns were filed with the District Director of Internal Revenue, Baltimore, Md. On the date the petition was filed, petitioners resided in La Vale, Md. Mrs. Cupler is a petitioner only because she79 filed joint Federal income tax returns with her husband for the years 1965 through 1970. Mr. Cupler is referred to herein as petitioner.1. Medical EquipmentPetitioner is a highly successful engineer and inventor in the field of precision drilling equipment. He is the president of the National Jet Cos., which manufacture and market small and microscopic precision drills and related equipment, primarily for the diesel engine industry. Petitioner has produced at least 50 patents on inventions in this field since he entered the business in 1937. He is not, however, in the business of inventing or manufacturing medical equipment of any kind.Cataract MachineAt some time during 1965 or early 1966, petitioner's father was hospitalized at the University of Maryland Hospital with an eye ailment. At that time, petitioner met Dr. Alfred A. Meisels, an ophthalmologist who was treating his father and was on the staff of the hospital. Dr. Meisels discussed with petitioner the former's dissatisfaction with the prevailing surgical method of removing cataracts. That method required a 180 o incision around the iris of the eye and the removal of the diseased lens. Dr. Meisels wanted80 to develop a procedure whereby the sheath of the lens would be penetrated, its cataractous contents removed, and the sheath refilled with pure silicone. Ideally, such a 948 procedure, besides minimizing the risks of the operation itself, would result in the restoration of normal vision by avoiding the impairment necessarily resulting from the complete removal of the lens. At the time petitioner was first contacted, he was informed that the University could not afford to pay for the development of the machine which would enable this procedure to be performed. Petitioner replied that payment would not be necessary.Petitioner decided to try to develop such a machine. Several problems had to be solved in the design of the machine. Necessary operations included penetration of the eye without damage; mastication and removal of the gelatinous and fibrous contents of the lens; flushing out the lens sheath; and injection of silicone. It was necessary for petitioner to spend considerable time acquiring the background knowledge essential to the project.Petitioner experimented with attempting to extract the contents of gelatine capsules. In the summer of 1966, Dr. Meisels and a81 colleague from the hospital staff, Dr. Stanley Schocket, visited petitioner and discussed the development of the device with him.An early version of the machine proved unsuccessful in penetrating the eye of a rabbit without damage. Petitioner solved this problem by cutting the bevel off a hypodermic needle and tapering the tip of the needle down from the outside to the inside. This "cookie cutter" effect, in connection with a low-speed drill passed down the center of the needle, permitted the operator to augur a hole through the tissue of the eyeball without damage, creating a wound so small that it was self-closing. Two needles could be inserted in the lens in this manner facilitating the replacement of the lens material with silicone.Petitioner delivered the machine to Drs. Meisels and Schocket in February 1967. At that time, he had not satisfactorily solved the problem of removing the gelatinous and fibrous materials from within the lens sheath. This difficulty was subsequently resolved by the development of a "tricep" tool, consisting of three wires with grasping feet. The tricep tool was inserted into the lens through the hollow needle and rotated, chopping the lens contents82 which were then removed by suction. Its grasping feet helped to withdraw lens fibers when the tool was retracted through the needle.949 Petitioner spent a substantial number of hours preparing himself and developing the cataract machine prior to February 1967. It has been returned to him on occasion for reworking since that time. The machine has never been used clinically for its intended purpose. It has been used in repairing an obstructed tearduct and in research. Another machine of the same design was later donated to the Washington Hospital Center, where it has had some clinical use in removing substances imbedded in the vitreous of the eye.Petitioner incurred out-of-pocket expenses of at least $ 7,158.53 in developing the cataract machine, which respondent has allowed as a charitable deduction.Petitioner first applied for a patent in his name on the cataract machine in 1972. No patent has been issued. No rights in the invention, other than ownership of the particular machine donated in 1967, have ever been transferred to the University of Maryland, although petitioner intended to transfer the patent rights to the University of Maryland when the patent issued. 83 In 1967, the machine was unique in the sense that no other device had been developed for the same purpose. The cataract machine is similar to a device known as the roto-extractor, also referred to as the Kemp or Douvas machine. This machine required 5 years and over $ 100,000 to develop, and was first marketed in 1972 at a price of $ 7,000. It sold for $ 9,000 in 1974. About 45 roto-extractors were in use in the United States at the time of the trial of this case, and have been used to remove cataracts as well as to remove blood from the vitreous cavity. The principal differences between the two machines are in the size of the tip of the instrument -- the roto-extractor, which requires an incision in the eye, has a tip approximately 3 times as large as that of petitioner's machine -- and in petitioner's use of millisecond timers to control pressure and suction. The millisecond timers were not a part of the machine donated to the University in 1967.Petitioner did not deal with any representative of the University other than Drs. Meisels and Schocket regarding this machine. On occasion, Raymond W. Colton, petitioner's patent attorney, acted as intermediary between him and the84 doctors.On February 13, 1967, the doctors wrote petitioner a letter of thanks for his contribution, on University stationery. Drs. Meisels and Schocket believed they were acting on behalf of the 950 University in soliciting and accepting the gift. They did not know that University policy required formal administration acceptance. During the time period in question, it occasionally happened that persons accepted gifts on behalf of the University without such formal acceptance.The cataract machine was not listed on the cumulative property inventory maintained by the University's Department of Ophthalmology, where it was physically located at all times after its donation. That inventory was prepared by the University on the basis of documents rather than physical inspection.Dr. Meisels left the University's employ some time prior to the trial of this case. The cataract machine remained at the University.One of petitioner's expert witnesses based his valuation of the cataract machine on the cost of several projects claimed to be comparable, allegedly ranging from $ 100,000-plus to $ 1 million-plus. Petitioner's other expert witness valued the machine in terms of similar85 costs, ranging from $ 70,000 to $ 250,000, and in terms of his estimate of what it would cost for development of such a machine as follows:(1) Preprototype stage$ 62,000(2) Development of a prototype54,500(3) Production of working model28,000Total144,500Heart-Lung MachineFrom 1963 to 1970, Dr. Jacob Zimmerman was a member of the medical staff of St. Barnabas Hospital for Chronic Diseases, New York, N.Y. During that time (and thereafter), he conducted research in cardiac anatomy under various Government grants. His research included investigation of the relationship between the heart and lungs in the development of the embryo. He wanted to develop a tool for use in his research that could remove and transplant the developing lung buds of 3-day-old chicken embryos.In 1966, Dr. Zimmerman consulted petitioner, who had been recommended as a person who might be able to assist in the development of such a machine. It was necessary for petitioner to spend considerable time acquiring the background knowledge essential for the project. Petitioner spent a substantial number of 951 hours over a period of 3 years in so preparing himself and in developing86 a tool that would perform the necessary operations. By 1969, he had invented a machine using the "cookie cutter" concept with a low RPM drill of absolute measurable concentricity, capable of penetrating the egg albumin without curdling it or causing the displacement of the embryo, passing without damage between blood vessels with a clearance of two-and-one-half thousandths of an inch at an angle varying within a range of 180 o in the horizontal and 190 degrees in the vertical directions, and excising the lung bud by means of suction and slow rotation of the cookie-cutter needle. Besides developing the actual tool -- referred to herein as a heart-lung machine -- he devised delicate control mechanisms and a system of micromanipulators for holding the embryo in place while the operation was performed. The optics for the heart-lung machine were those designed for use generally on microdrilling equipment. The machine was delivered to Dr. Zimmerman in 1969.Before receiving the heart-lung machine, Dr. Zimmerman working alone had succeeded in this operation at most once out of 500 trials. Using petitioner's machine, he or a technician assistant could accomplish the operation in one 87 out of every two attempts.Petitioner incurred out-of-pocket expenses of at least $ 4,479.84 in developing the heart-lung machine. 1No patent application has ever been filed with respect to the machine.Petitioner did not deal with any representative of St. Barnabas other than Dr. Zimmerman regarding this machine. A version of the machine was used by Dr. Zimmerman at the hospital as early as 1966, but this was not the machine which petitioner claims to have donated in 1969.Dr. Zimmerman was referred to petitioner by an employee of the Hirschmann Corp., who indicated to petitioner that it was the hospital which sought to acquire the machine. Dr. Zimmerman wrote letters to petitioner and to Hirschmann Corp. on hospital stationery.952 The hospital administration was not officially informed88 of the donation of the machine in 1969. Dr. Zimmerman's superiors knew of the machine and considered it hospital property.Dr. Zimmerman began his research under a grant from the National Institutes of Health. In 1968, that grant terminated and he was transferred to the hospital payroll. He sought renewal of his grant, which was denied for the last time in 1970. In 1970, Dr. Zimmerman moved to Israel, where he joined the staff of the University of Tel Aviv. Before leaving St. Barnabas, he asked and received the permission of the hospital administration to take the heart-lung machine with him.Dr. Zimmerman was the only person doing the sort of research for which the machine was designed. Only he and a technician at St. Barnabas were trained to operate it. Since 1970, the machine has remained in Israel.On November 29, 1972, at the request of petitioner's counsel, St. Barnabas wrote petitioner a letter acknowledging that the heart-lung machine was received in 1969 and that Dr. Zimmerman was permitted to take it with him to Israel in 1970. Dr. Zimmerman wrote a similar letter to petitioner on March 31, 1970. During 1969, no official record of the donation was made in the hospital89 files.Petitioner's expert witness valued the heart-lung machine in terms of his estimate of what it would cost for development of such a machine, as follows:(1) Preprototype stage$ 80,640(2) Development of a prototype36,350(3) Production of working model33,000Total149,9902. Building StoneIn May 1965, petitioner purchased a quantity of building stone for $ 646. The stone was being removed from a 19th century mansion in Cumberland, Md. It had originally been cut from local quarries which were no longer in operation in 1965. Because of its origin, the stone was of particular value for the repair or enlargement of buildings in Cumberland constructed of stone from the same quarries. It consisted of several types of individual stones, which varied in value according to their size, the manner in which they were cut and shaped, and their condition.953 The Emanuel Episcopal Church in Cumberland sought to acquire the stone from the contractor responsible for razing the mansion but learned that it had already been sold to petitioner. The church wanted the stone for the construction of an addition to its existing structure, which had been built with90 the same type of local material. On request, petitioner agreed to donate the stone to the church and did so in June 1965.After acquiring the stone and up to the time of trial, the church stored it for future use. Some of it was kept in the parking lot of a local brewery, where it was eventually covered with cinders to reduce danger of pilferage and damage. In addition to the purchase price, petitioner incurred out-of-pocket expenses of $ 2,525.51 in implementing his donation to the church through the removal and transportation of the stone.ULTIMATE FINDINGS OF FACTPetitioner donated a cataract machine to the University of Maryland in 1967 having a fair market value of $ 10,000 at that time.Petitioner donated a heart-lung machine to St. Barnabas Hospital in 1969 having a fair market value of $ 15,000 at that time.Petitioner donated stone to the Emanuel Episcopal Church in 1965 having a fair market value of $ 12,000 at that time and incurred $ 2,525.51 out-of-pocket expenses in implementing that donation.OPINIONBefore proceeding to the principal problem in this case -- namely, valuation of two pieces of specialized medical equipment -- we will dispose of some subsidiary matters. 91 At the trial, respondent raised, by way of amended answer, the issues whether petitioner made a donation of the cataract machine to the University of Maryland and a gift of the heart-lung machine to St. Barnabas Hospital. 2 Under such circumstances, the burden of proof was on the respondent. Estate of Floyd Falese, 58 T.C. 895">58 T.C. 895, 899 (1972). At the conclusion of the trial, the Court ruled that respondent had not carried his burden and that consequently petitioner had donated the cataract machine to the University in 954 1967 and the heart-lung machine to St. Barnabas in 1969. We have carefully reviewed the record herein and find no reason to change that ruling. Our findings of fact reflect our adherence to our prior ruling.The Court 92 also ruled at the trial that the value of the stone donated to the Emanuel Episcopal Church in 1965 was $ 12,000. Here, too, we have carefully reviewed the record and, as our findings of fact show, we have concluded that we should adhere to that ruling. Accordingly, petitioner is entitled to a deduction in that amount for the taxable year 1965 plus out-of-pocket expenses related to the making of that donation in the amount of $ 2,525.51. 3The testimony of several witnesses and the nature of his achievements demonstrate that petitioner is an extraordinarily gifted and dedicated engineer. 4 There is no doubt that, in designing, building, and giving away the two pieces of equipment, he has made a significant contribution to medical knowledge. Our function, however, is to make a determination93 within a narrower frame of reference, namely, the "fair market value" of the contributed property.As a threshold question to that determination, we will dispose of respondent's contention that, beyond his out-of-pocket expenses, petitioner's contributions consisted only of services for which, according to respondent's regulations (see sec. 1.170-2(a)(2), Income Tax Regs.), a deduction is not allowable. Compare John R. Holmes, 57 T.C. 430">57 T.C. 430 (1971). Whatever may be the merit of respondent's contention in another context (see Rudick & Gray, "Bounty Twice Blessed: Tax Consequences of Gifts of Property or in Trust for Charity," 16 Tax L. Rev. 273">16 Tax L. Rev. 273, 287 (1961)), we think it has no application in this case. We are satisfied that, although there may have been an understanding that the tangible fruits of petitioner's efforts would be given to the charitable donees, neither of such donees at any time had any kind of94 enforceable rights in respect thereof. Cf. John R. Holmes, 57 T.C. at 437 n.6. Compare Roland Chilton, 40 T.C. 552">40 T.C. 552 (1963). We think it clear that the services which petitioner performed coalesced in the resultant property interests. Cf. William H. Mauldin, 60 T.C. 749">60 T.C. 749 (1973); Bernard Goss, 59 T.C. 594">59 T.C. 594 (1973); 955 John R. Holmes, supra, and cases collected therein at 57 T.C. 437">57 T.C. 437 n.5. 5 As our subsequent analysis will show, however (see pp. 957-958 infra), a substantial portion of such services should not be taken into account in determining the amount of the contributions which petitioner is entitled to deduct.95 The value of a charitable contribution is a question of fact. Maurice Jarre, 64 T.C. 183">64 T.C. 183 (1975). The legal standard defining fair market value is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." See William H. Mauldin, 60 T.C. at 758; sec. 1.170-1(c)(1), Income Tax Regs. That standard is singularly unhelpful here. Indeed, the parties themselves recognized this in that they produced no evidence of "fair market value" as articulated by the foregoing definition. Nevertheless, we recognize that "absence of market price is no barrier to valuation." 6 See Guggenheim v. Rasquin, 312 U.S. 254">312 U.S. 254, 258 (1941). Nor does uniqueness constitute a barrier. See Publicker v. Commissioner, 206 F. 2d 250, 253 (3d Cir. 1953). Indeed, the use to which donated property will be put is an element in determining value. See Guggenheim v. Rasquin, 312 U.S. at 257. This would appear especially to be96 the case where medical research equipment is involved. Cost has been accepted as an element of value (see Guggenheim v. Rasquin, 312 U.S. at 258; Publicker v. Commissioner, 206 F. 2d at 254), including cost of reproduction. See Clinton Cotton Mills v. Commissioner, 78 F. 2d 292, 295 (4th Cir. 1935), reversing and remanding 28 B.T.A. 1312">28 B.T.A. 1312 (1933). In short, "All relevant facts and elements of value * * shall be considered." See sec. 25.2512-1, Gift Tax Regs.; Publicker v. Commissioner, 206 F. 2d at 254. 797 Preliminary to our analysis of the evidence as to value, we address ourselves to petitioners' contention that, since they produced testimony of two experts and respondent produced none, they have made a prima facie case in respect of the value of 956 the two machines, which respondent has not rebutted, and consequently are entitled to a decision in their favor. We reject this position. Clearly, we are not required to accept expert opinion testimony as gospel. See Dayton Power & Light Co. v. Public Utilities Commission, 292 U.S. 290">292 U.S. 290, 298-300 (1934); Williams' Estate v. Commissioner, 217">256 F. 2d 217, 219 (9th Cir. 1958); Clinton Cotton Mills v. Commissioner, supra;Wyoming Investment Co. v. Commissioner, 70 F.2d 191">70 F. 2d 191, 193 (10th Cir. 1934), remanding on other grounds a Memorandum Opinion of the Board of Tax Appeals; Gloyd v. Commissioner, 649">63 F. 2d 649, 650 (8th Cir. 1933); Keystone Wood Products Co., 19 B.T.A. 1116">19 B.T.A. 1116, 1121 (1930), affd. 66 F. 2d 258 (2d Cir. 1933). 8 We are98 entitled to evaluate their testimony in light of the entire record and use our own judgment. This is precisely what we will now do and, as our analysis will reveal, serious doubts exist as to the efficacy of the expert testimony herein.All of petitioners' experts provided 6-figure estimates of value; but, in each case, the valuation was based largely on the estimated cost of researching and developing machines, like the ones donated and bringing them to market. Put another way, they estimated the cost of retracing petitioner's steps to produce the machines. Petitioners then sought to corroborate the testimony of their experts99 by evidence of the time and effort spent by Mr. Cupler and a monetary evaluation thereof in developing the donated machines. There are several gaps in this approach.First, adopting such an approach would require us to conclude that petitioner actually donated all he acquired by the development process to which those costs are ascribed. There is testimony that the market values of medical inventions depend largely on development cost; but the "invention" which can be sold for a figure adequate to recoup that entire cost has both tangible and intangible elements. The most valuable features of an invention are the rights acquired by the inventor -- usually embodied in a patent -- to control the use of the knowledge he has produced. A single instance of that invention, such as the prototypes developed by petitioner, may derive its value from those 957 intangibles but ordinarily will be worth less than they are. Although petitioner has applied for a patent on the cataract machine, 9 his testimony shows that his main purposes were two: to solve challenging technical problems and to contribute to the advance of medical science. Such a contribution, while laudable, is not100 the sort for which Congress has seen fit to allow a charitable deduction; section 170 applies only to gifts made in property to qualified organizations. 10 The record simply does not support petitioners' argument that all of the rights in the inventions represented by the machines were vested in the donees. At most, the record indicates what petitioner intended to do in the future; there is no evidence of any present transfer of such rights by way of an assignment or otherwise. Compare Roland Chilton, supra.Even if this intention could somehow be enforced by the donee, it does not satisfy the statutory requirement that payment be made "within the taxable year." Sec. 170(a). See Lewis C. Christensen, 40 T.C. 563">40 T.C. 563, 574 (1963). Furthermore, the failure to take steps at the time to patent the rights in the inventions casts considerable doubt on the relevance of petitioners' evidence as to the value of the physical equipment actually contributed. Even a patentable invention is of considerably diminished value without the legal protection which a patent affords the inventor's rights. Wagner v. Commissioner, 63 F. 2d 859 (9th Cir. 1933).101 Second, we note that, in respect of both machines, petitioner spent a considerable amount of time preparing himself by way of background study and in a trial-and-error process of development. Clearly, such elements should not be included in determining the value of the machines themselves. Preliminary sketches or discarded paintings do not affect the value of the painting finally produced by an artist; nor do earlier rewritten materials become part of the value of the final manuscript of an author. 11 In light of the foregoing, we think that much, if not all, of the value in the appraisals of the experts relating to the preprototype and development of prototype stages should not be taken into account.102 Third, there is a question as to the value placed by petitioner on his own time. The number of hours spent in developing the machines is based upon pure estimates and constitutes, even if 958 petitioner's prodigious capacity to work is taken into account, a large portion of his time in light of the fact that he was heavily engaged as a business executive. Moreover, the $ 500-per-day value placed on petitioner's time is dubious. Cf. Bernard Goss, 594">59 T.C. at 597. Petitioner testified that this was what he asked for as compensation as a consultant when he was away from the plant; in respect of the machines involved herein, he did much of his work at the plant and at his nearby home. 12Fourth, the testimony of both of petitioners' experts103 was based almost entirely upon reproduction costs; we do not consider their general statements that a prospective purchaser would pay the equivalent of such cost to acquire the machines in and of itself determinative of value. Moreover, it is of some significance that one of petitioners' experts never saw the machines for which he furnished appraisals.Fifth, in respect of the cataract machine, we have evidence of the price at which the comparable Douvas machine sold in later years. Petitioners' own witness, Dr. Schocket, testified that the two machines were "quite similar." It is true that petitioner's invention preceded the appearance of the Douvas device by a few years, but that does not mean that we should ignore such evidence. See Estate of David Smith, 57 T.C. 650">57 T.C. 650, 659 n. 8 (1972), affd. 510 F. 2d 479 (2d Cir. 1975). While petitioner stresses the alleged technical superiority of his invention, Dr. Schocket was unable to say it was better than Douvas'. The Douvas machine has achieved widespread clinical use, while petitioner's has been applied to its intended purpose for the most part only in research. Moreover, it104 appears that the amount spent in developing the Douvas machine is comparable to the hypothetical cost derived by petitioners' experts. Further, we note that there were many difficulties attendant on the use of the machine at the time of the donation and that neither the tricep tool, an important part of the machine, nor the millisecond timers were included. 13There is less concrete evidence of value regarding the heart-lung machine. It was suitable only for use in Dr. Zimmerman's research on chick embryos; no comparable device existed and no 959 one else was engaged in similar research. The fact that Dr. Zimmerman solicited the development of, and was satisfied with, the machine is evidence of value. Maurice Jarre, supra;William H. Mauldin, supra;Estate of David Smith, supra.14 Furthermore, the heart-lung machine*105 was considerably more complex than the cataract machine and required correspondingly more effort (and hypothetical cost) to produce. We also find it significant that this machine was by far the more successful of the two in terms of application to its intended use.Based upon the foregoing considerations, as well as our evaluation of the testimony and the record as a whole, we have concluded, as our ultimate findings of fact show, that the fair market value of the cataract machine at the time it was donated to the University of Maryland Hospital in 1967 was $ 10,000 and of the heart-lung machine at the time it was donated to St. Barnabas Hospital in 1969 was $ 15,000, both amounts inclusive of petitioner's out-of-pocket expenses.Decision will be entered under Rule 155. Footnotes1. Although many of these expenses were incurred prior to 1969, respondent concedes that such amount is allowable as a charitable deduction in 1969 if the Court finds that a gift of the machine was made to the hospital in 1969.↩2. Respondent concedes that the University and St. Barnabas are qualified charitable organizations. See sec. 170(c)(1) and (2)↩. All references herein are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue.3. Respondent concedes that the out-of-pocket expenses are allowable as a deduction in addition to the value of the stone. Petitioners' and respondent's experts testified that the stone was worth $ 26,334 and $ 8,468, respectively.↩4. Petitioner described himself as a "mad scientist."↩5. See also Robert H. Orchard, T.C. Memo. 1975-31. Compare also Maurice Jarre, 64 T.C. 183">64 T.C. 183↩ (1975). We also reject, as without merit, respondent's attempt to limit the "coalescence cases" to those donors who are engaged in a trade or business of producing the donated property.6. Nor is the presence of a limited market. Publicker v. Commissioner, 206 F. 2d 250, 254 (3d Cir. 1953); Maurice Jarre, supra;Estate of David Smith, 57 T.C. 650">57 T.C. 650 (1972), affd. 510 F. 2d 479 (2d Cir. 1975); Brandon Barringer, T.C. Memo. 1972-234↩.7. We recognize that sec. 1.170-1(c), Income Tax Regs.↩, does not contain this language, but it is obviously implicit in the definition of fair market value.8. Charles J. Kuderna, T.C. Memo. 1965-143↩, relied upon by petitioners, is not in point. While we stated that, under circumstances comparable to those herein, the taxpayer had established a prima facie case through his expert witnesses, our decision was based on the conclusion that the fair market value of the property had been "established to our satisfaction."9. No patent has been applied for in respect of the heart-lung machine.↩10. See William Fox, T.C. Memo. 1965-195↩.11. Indeed, such sketches and rewritten material may have an independent value.↩12. The $ 500-per-day value is to be contrasted with the testimony of one expert that a full-time director of a project to produce a heart-lung machine would be paid $ 36,350 a year, and that the time of other personnel would cost $ 32 per day.↩13. The evidence merely shows that the tricep tool was delivered to petitioner's patent attorney in 1967.↩14. See also Brandon Barringer, supra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620667/	111 West 16 Street Owners, Inc., Alan Silverman, Tax Matters Person, Petitioner v. Commissioner of Internal Revenue, Respondent111 West 16 Street Owners, Inc. v. CommissionerDocket No. 12318-87United States Tax Court90 T.C. 1243; 1988 U.S. Tax Ct. LEXIS 80; 90 T.C. No. 80; June 23, 198880 Petitioner's motion to dismiss for lack of jurisdiction will be denied. P, tax matters person for an S corporation having three shareholders in 1983, moved to dismiss this case for lack of jurisdiction. P argues that for 1983, an S corporation having 10 or fewer shareholders is excepted as a "small S corporation" from the application of the S corporation audit and litigation procedures because R failed to promulgate modifying regulations. Held, setting the number of qualifying shareholders for the small S corporation exception at greater than one should be left to R's administrative discretion. Held, further, the statute requires only that single shareholder S corporations be excepted. Blanco Investments & Land, Ltd. v. Commissioner, 89 T.C. 1169 (1987), followed. Held, further, P has not shown that applying the unified S corporation procedures would be futile or useless and, consequently, there are no grounds for concluding that R abused his discretion in applying those procedures to this case. Geoffrey J. O'Connor, for the petitioner.Henry S. Schneiderman, for the respondent. Williams, Judge. WILLIAMS1244 OPINION81 This case is before the Court on petitioner's motion to dismiss for lack of jurisdiction. The Commissioner determined adjustments to 111 West 16 Street Owners, Inc.'s (Owners) S corporation return for its 1983 taxable year as set forth in a Notice of Final S Corporation Administrative Adjustment.Petitioner's position is that Owners was not subject to the S corporation audit and litigation procedures (secs. 6241 et seq. 1), in 1983 because it was a small S corporation having only three shareholders. Respondent argues that in 1983 there was no exception from the S corporation audit and litigation procedures for S corporations having three shareholders.The relevant facts are not in dispute. Petitioner Alan Silverman is the tax matters person of Owners, a corporation having its principal place of business at New York, New York, at the time the petition was filed. 82 Owners' election to be taxed as a subchapter S corporation was in effect for the year at issue. In 1983 Owners had three shareholders.On March 4, 1987, respondent mailed a Notice of Final S Corporation Administrative Adjustment to petitioner. Petitioner timely filed a petition with this Court seeking readjustment of respondent's determinations. On February 1245 1, 1988, petitioner filed his motion to dismiss for lack of jurisdiction on the ground that Owners was exempt from the S corporation audit and litigation procedures as a small S corporation. On March 8, 1988, respondent filed his notice of objection. We held a hearing on petitioner's motion in New York City on April 11, 1988.Petitioner urges us to reconsider and reject the rationale of . Petitioner believes that we properly read section 6244 to mandate an exception from the S corporation audit and litigation procedures for small S corporations, but that we erroneously concluded that the statute did not require a strict adherence to the small partnership exception. Petitioner argues that the small S corporation 83 exception must apply to S corporations having 10 or fewer shareholders. If the statute so provided, we would lack jurisdiction in this case. .Respondent now agrees with our reasoning in Blanco. He concedes that the statute mandates an exception for small S corporations and further agrees that, as administrator, he is responsible for setting the qualifying number of shareholders for the exception at a number greater than one. Blanco presented the issue of the applicability of the small S corporation exception for a corporation having a single shareholder. In this case, respondent asks us to decide finally that the small S exception cannot be applied, in the absence of regulations, to S corporations having more than one shareholder.At the outset, we note that the issue here, though having great administrative significance, is limited to S corporations having a due date for their tax returns before January 30, 1987. Respondent's temporary regulations, providing an exception for S corporations with five or fewer shareholders, apply to S corporations the due date of the returns for which are on or after January 30, 1987. Sec. 301.6241-1T(c)(2)(i), 84 Temporary Proced. & Admin. Regs., (Jan. 30, 1987); . In Blanco, we stated that:If we were to set the number of shareholders an S corporation may have and still qualify for a small S corporation exception, we would be 1246 acting as the tax administrator. That is not our position, and we will not usurp it. * * * [; fn. ref. omitted.]Setting the qualifying number of shareholders for the small S corporation exception is an administrative function because the significance of the choice is purely an administrative one. Respondent has a choice to apply mutually exclusive statutory procedures -- S corporation audit and litigation procedures (secs. 6241 et seq.), or deficiency procedures (secs. 6211 et seq.) -- in the Federal income tax audit and any subsequent litigation between the Government and taxpayers. The procedural rights and duties of the Government and of taxpayers that flow from that choice differ significantly and have materially different consequences. Cf. 85 (summary of distinction between deficiency procedures and partnership procedures). The choice does not, however, affect the nature of the substantive law governing taxpayers' transactions. Such a choice is, therefore, best made by the person charged with administering the statute, i.e., the Commissioner.Nevertheless, as we discussed in Blanco, leaving the choice with the administrator does not permit him to make whatever choice he desires. . For example, respondent probably could not set the qualifying number of shareholders at greater than 10 without abusing his discretion (), and as we held in Blanco, and as respondent now agrees, the statute minimally requires an exception for a single shareholder S corporation. .Petitioner argues that we were wrong in Blanco to defer to the administrator's discretion. He argues that the statute plainly refers to the partnership audit and litigation procedures' exception for small partnerships which sets the qualifying number of partners for the small partnership exception at 10 or fewer. 286 Petitioner agrees that respondent may decrease the qualifying number but only by formally exercising his discretion, i.e., by issuing regulations to 1247 modify the number. In the absence of any administrative action, petitioner argues, the statute sets the number at 10. There is superficial appeal to petitioner's argument, but we do not believe the statute is as plainly written as he suggests.As we discussed in Blanco, the partnership audit and litigation provisions were, in general, grafted onto the subchapter S audit and litigation provisions. 87 Nevertheless, there are considerable differences between partnerships and subchapter S corporations, not the least of which is the number of permissible equity owners. If S corporations having 10 or fewer shareholders were excepted from the procedural rules, 90 percent of all S corporations would be excepted. We will not impute to Congress an intent to achieve this remarkable effect without supporting legislative history.We believe that Congress sought to extend the unified proceeding to more than 10 percent of all S corporations and left the determination of the actual percentage of S corporations to which the procedural rules would apply to the best judgment of respondent. The chief purpose of a unified proceeding is to ensure consistent results for all S corporation shareholders and for the Government. So long as an S corporation has more than one shareholder, a unified proceeding would appear to have merit.In Blanco, we stated that the absence of administrative action did not nullify the statute. . We also believe that the lack of regulations prior to 1987 does not leave a vacuum that we must fill. A principled decision can88 be made that a unified proceeding has merit on the rationale that applying the S corporation audit and litigation procedures in those cases involving more than one shareholder advances and achieves the statute's purpose of consistent tax treatment for shareholders and the Government. If the statute's purpose is advanced and achieved, no small S corporation exception under the situation herein is required. Petitioner certainly has not suggested that a unified proceeding in this case would be futile or useless. Absent such a showing we cannot conclude that respondent abused his discretion in refusing to except Owners from the 1248 application of the S corporation audit and litigation procedures.Petitioner's motion to dismiss for lack of jurisdiction will be denied. Footnotes1. All section references are to the Internal Revenue Code of 1954 as in effect for the year in issue unless otherwise specified.↩2. Petitioner notes that he is adopting the Government's now-rejected position that if an exception applies to the small S corporation audit and litigation procedures, the qualifying number must be set at 10. See . Respondent made the argument in Blanco↩ as a reductio ad absurdum argument. We rejected it and here reaffirm our prior rationale for doing so.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620668/	Missisquoi Corporation v. Commissioner.Missisquoi Corp. v. CommissionerDocket No. 688.United States Tax Court1943 Tax Ct. Memo LEXIS 68; 2 T.C.M. (CCH) 957; T.C.M. (RIA) 43469; October 26, 194368 1. Excessive depreciation taken in prior net loss years may not be restored to unrecovered cost basis in computing depreciation for the current tax year. Virginian Hotel Corp. of Lynchburg v. Helvering, 319 U.S. 523">319 U.S. 523. 2. An absolute right to receive interest gives rise to an accrual of income notwithstanding the fact that payment of the interest is not to be made until another obligation is satisfied by the debtor. M. L. Sears, Esq., for the respondent. ARUNDELLMemorandum Opinion ARUNDELL, Judge: This proceeding was initiated to test the correctness of the respondent's determination of a deficiency in income tax for the calendar year 1939 in the sum of $6,102.88. The petitioner is a corporation organized under the laws of Vermont and having its principal place of business in that state. Its tax return was filed with the Collector of Internal Revenue for the district of Vermont. Two issues are raised by the pleadings: (1) the disallowance of depreciation on certain machinery and buildings and (2) the inclusion in taxable income of $605.50 which petitioner claims was not properly accruable as interest on a note payable to it by a subsidiary. The facts69 have been stipulated and we shall discuss them only in so far as may be necessary to a decision of the legal questions raised. The first question has to do with the application of the so-called tax benefit theory in determining unrecovered cost basis for the purpose of the depreciation allowance. There is no dispute as to the original cost basis, the amount of depreciation heretofore charged, the extent of the tax benefit derived in prior year, or the new rates to be applied. The parties have stipulated that if petitioner is entitled to add back into unrecovered cost the amount of excessive depreciation claimed as deductions on its returns on prior years to the extent that no tax benefit was derived from such excessive deductions, then the excessive depreciation claimed for 1939 is in the amount of $13,015.20. And if this may not be done the excessive depreciation claimed for 1939 is in the sum of $26,812.30, which is the amount disallowed by the Commissioner in the notice of deficiency. The question raised has been decided adversely to petitioner's contention by the Supreme Court of the United States in ,70 and a motion for rehearing of that case was denied by the Supreme Court on October 11, 1943. It was the pendency of this latter motion at the time the instant case was submitted which made settlement out of court impractical. Upon authority of the cited case respondent's determination on this issue is sustained. The second question arises under the following circumstances. Prior to October 20, 1939, petitioner's wholly owned subsidiary, the Fonda Container Company, Inc., hereafter called Fonda, was indebted to petitioner in the amount of $51,900 for merchandise. Fonda wished to obtain a mortgage loan from a bank and the Reconstruction Finance Corporation, hereinafter called the RFC. As a condition of granting a loan the RFC required that Fonda's debt to petitioner be represented by a 5-year promissory note and that petitioner agree in writing not to "charge or receive any payment of interest or principal on said note of $51,900 as long as said RFC mortgage should remain unpaid." The note was executed and reads as follows: $51,900 October 20, 1939 Five years after date we promise to pay to the order of MISSISQUOI CORPORATION Fifty-one thousand nine hundred Dollars at First Citizens71 Bank and Trust Company of Utica Value received with interest at 6% FONDA CONTAINER COMPANY, INC. By H. J. Wallace, Vice-President. Pursuant to Agreement date October 20, 1939, between Fonda Container Company, Inc., Missisquoi Corporation, First Citizens Bank and Trust Company of Utica and Reconstruction Finance Corporation, no action may be taken to collect, assert or enforce payment of the principal or interest hereof, except as provided therein, and all rights hereby represented shall be in all respects subject to the terms and conditions of said Agreement. FONDA CONTAINER COMPANY, INC. By H. J. Wallace, Vice-President MISSISQUOI CORPORATION By Walter B. Sheehan, Secretary and Treasurer The standby agreement that was executed by Fonda (the borrower) and petitioner (the standby creditor) contains the following paragraph: Borrower will not make, and Stanby Creditor will not charge or receive, any payment of future interest on the claim during the operation of this Agreement. Petitioner did in fact accrue on its books interest in the amount of $605.50 covering the period from October 20, 1939 to December 31, 1939, and a year later it reversed this entry. The question presented72 is whether interest on the obligation, notwithstanding the standby agreement, was income to petitioner on the accrual basis. Counsel for petitioner was not present at the time the case was submitted and no brief has been filed in petitioner's behalf. So far as we are advised there is no contention that the liability to pay interest is in any wise contingent, other than the fact that its payment must await the prior liquidation of the R.F.C. loan, and no suggestion is advanced that the interest will not eventually be paid. As the obligation was absolute, see ; ; and , and there is nothing to indicate that it is or will be uncollectible; it is our opinion that the item is properly accruable and constitutes income to the petitioner for the year 1939. The fact that interest is not presently collectible is of no importance where one is reporting on an accrual basis. Income that is earned must be accrued without regard to whether payment73 has been made or is presently due. . It follows that the Commissioner's determination must be approved. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620669/	LANGLEY COLLYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Collyer v. CommissionerDocket No. 81239.United States Board of Tax Appeals38 B.T.A. 106; 1938 BTA LEXIS 913; July 19, 1938, Promulgated 913 1. Held following Carrano v. Commissioner, 70 Fed.(2d) 319, and Income Syndicate, Inc.,37 B.T.A. 926">37 B.T.A. 926, that petitioner is entitled to deduct the amount of certain benefit payments from condemnation awards in computing income. 2. Where proceeds of a condemnation award were in part used to pay assessments for benefits attributable to other and unrelated projects completed some years prior, such payments are not deductible in determining income from the award. John R. McMullen, Esq., for the petitioner. Rudy P. Hertzog, Esq., for the respondent. VAN FOSSAN 107 This proceeding was brought to redetermine a deficiency in petitioner's income tax for the year 1931 in the sum of $5,168.66, plus additions thereto of $1,292.17 for delinquency in filing, and $258.43 for negligence. The issue is as to what amount of an award received by petitioner from the city of New York in certain condemnation proceedings should be included in his income; or, more specifically, whether certain benefit assessments should be offset against the award. In a second issue petitioner seeks to set off against the award on the914 condemnation proceeding other assessments for sewer improvements completed some years before the award was paid. FINDINGS OF FACT. Petitioner, a resident of New York, in 1931 received an award of $59,058 plus interest of $8,743 from the city of New York by reason of certain condemnation proceedings under which property located on Merrick Road, Jamaica, New York City, was taken. Petitioner did not report any of this award as income. Title to the property taken in condemnation vested in the city December 1, 1928, by virtue of a resolution of the board of estimate adopted November 1, 1928. The final decree settling the claims of the parties was entered February 3, 1931, and payment was made thereon by warrants dated March 20, 1931. Against the above mentioned award, $5,746 was offset by the comptroller of the city of New York to pay an assessment against the remaining property because of the resulting improvement. This was pursuant to authority granted in section 988, chapter 606, Laws of New York, 1915. A $2,397.70 benefit assessment arising out of the same project was paid a few days later. Petitioner had only $130.85 to his bank credit before the receipt of the915 condemnation payments. The $2,397.70 benefit assessment was paid by him out of the money received on the award. Another assessment, amounting to $9,024.58, for a different project, known as the Horstman Avenue Sewer, was entered December 11 and 12, 1929, the assessment bills apparently indicating that the assessment was against the very property taken in the Merrick Boulevard condemnation, but it was stated by petitioner's counsel and apparently conceded by counsel for respondent that the assessments were against the remaining property, excluding that taken on condemnation. The assessment was for work that was completed in or prior to 1928. Payment for this assessment was made April 6, 1931, a few days after the receipt of the Merrick Boulevard award from the city and was made by endorsing an award warrant 108 of $7,537.60, plus payment of the difference. This cash payment likewise was made out of the money received on the award. Another assessment of $5,136.71 was entered May 28, 1935, for yet another project, known as the 114th Avenue, Borough of Queens, Sewer, the situation as to the property assessed being the same as in the case of the Horstman Avenue sewer. 916 This assessment was also for work that was completed in 1928. Later a reduction of about $887 was made on this assessment and the reduced assessment was paid in August 1935. Prior to the condemnation proceeding, petitioner held the entire property here involved by virtue of a deed acknowledged November 18, 1912, given him by his father, Herman L. Collyer. By the pleadings, respondent admits, and we therefore find, that petitioner's father, in 1913, delivered the above mentioned deed to petitioner in trust for his blind brother, Homer Collyer, and for himself. On receipt of the award money equal division of the same was made in various bank accounts maintained by petitioner personally and by petitioner in trust for his brother. OPINION. VAN FOSSAN: The notice of deficiency treated the interest of $8,743.04 received from the city on the award money as income, made an allowance of $2,015 for legal fees, and treated the difference between the principal of the award and a March 1, 1913, value of $12,000 for the property as income. Petitioner, by this proceeding, assails respondent's refusal to deduct the above mentioned assessments. 917 The rule now seems well established that where owners are permitted to offset the award to them against the benefits assessed against them, the net amount received, and not the gross award, is the basis for computing gain or loss on the transaction. , reversing ; , reversing ; , reversing ; and , reversing B.T.A. memorandum opinion; ; ; . Respondent concedes that the sum of $5,746 should be deducted from the award under the Carrano case, supra. He urges, however, that the established rule goes no further than to permit the offset of $5,746 retained by the comptroller of the city of New York. Petitioner's contention, as above indicated, is that there also should918 be set off against the gross award, (1) the balance of the benefit assessment on the same Merrick Boulevard project which amounted to $2,397.70 and was paid about 10 days subsequent to the collection 109 of the award; (2) the special assessment of $9,024.58 on account of the Horstman Avenue sewer; and (3) the special assessment of $5,136.70 on account of the 114th Avenue sewer. As we understand it, the rationale of , seems well expressed in the following quotation: * * Although the assessment was not an added cost until paid it became cost at the moment when it was set off against the award. Receipt and payment were simultaneous; it is as false to say that an award was paid before it was expended, as that it was expended before it was paid. * * * [Italics ours.] However, the above cited decisions of the Ninth Circuit Court of Appeals, and subsequent decisions of this Board in line with those decisions, have somewhat broadened the rule, which is stated in the most recent Board opinion in 919 , as follows: The rule of the above cases, which this Board followed in ; ; and , is that the condemnation of land for public purposes and the levying of special assessments covering the cost thereof are one transaction and the result should be treated as an entirety, i.e., the award should be reduced by the amount of the assessment. If the condemnation and assessment must be regarded as one transaction the fact that the payment of the assessment by the petitioner was postponed is immaterial. Petitioner attempts to support his contention, that all the enumerated assessments should be deducted from the award, by the opinion of the Ninth Circuit Court of Appeals in In that case there was involved in part an assessment made in a year later than the award, and the court, with no discussion of this additional factor, held that case to be squarely within the rule set down in 920 , and followed in Cf. , and cases therein cited. The rule of the Central & Pacific Improvement Corporation case and the subsequent cases is sufficiently broad to permit petitioner to offset the balance of the benefit assessment on the Merrick Boulevard project, and this should be done. The assessments for the Horstman Avenue and 114th Avenue sewers, however, are not deductible from the award in computing income therefrom. In the Central & Pacific Improvement Corporation case, supra, on which petitioner relies, the subsequent assessment was a part of, and definitely related to, the project for which property was taken and the award made; and the assessment was against the remaining property. In the present case the sewer assessments were made for work completed prior to the vesting of title in the city and for entirely different projects. These assessments were sums due and payable irrespective 110 of the Merrick Boulevard project and the award paid petitioner thereon. No property was taken in connection921 with the sewer installations. The relationship is merely coincidental. The mere fact that petitioner was without funds save for the money received from the condemnation award and apparently paid all of the benefit assessments in question out of such funds is not controlling. Nor are the facts that the Horstman Avenue sewer assessment was paid on April 6, 1931, shortly after the receipt of the award money from the city, and was paid in substantial part by the endorsement of the award warrant for $7,536.60, important. It is our view that this type of benefit assessment subsequently paid by petitioner, being an assessment on a project not related to the condemnation award, may not be deducted from the award money received. Although the assessment, under the charter of the City of Greater New York, becomes a lien on the property (section 985), it "was not an added cost until paid." Payment on account of the two projects in question was not simultaneous with the payment of the award. The Horstman Avenue assessment was paid "a few days" after the receipt of the Merrick Boulevard award (March 1931) and the 114th Avenue assessment922 was not paid until August 1935. It is recognized that there may seem to be an inequity in the present situation. However, we believe it to be more seeming than real. If, as contended by petitioner and apparently conceded by respondent, the assessments were against the remaining property, not including that taken on condemnation, petitioner's contention must be denied because the sewer projects are not shown to be related to the Merrick Boulevard project and the assessments therefor were not paid until after the award. In so far as the assessments increase petitioner's basis on such remaining property, petitioner will get the advantage thereof on disposition of such remaining property. The valuation of the property in question on March 1, 1913, was made an issue by the pleadings, but petitioner introduced no proof on this issue and the value determined therefor must stand. No serious challenge is made by petitioner of the penalties proposed for negligence and late filing and these additional amounts are sustained. Petitioner suggests that part of the award money was consequential or severance damages to the remaining property, and that the proceeds from the condemnation923 constituted damages, which as such were not taxable. We can not sustain this contention. Although petitioner introduced testimony to the effect that the condemnation proceeding was considered a damage proceeding by the court, there is no evidence showing a breakdown of the total 111 award or proving what portion could be considered severance damage. . It should be also noted that the New York law interchangeably terms the proceeding as one for ascertaining compensation (sec. 1001) and an award for damages (sec. 1004). See also , which case includes severance damages in determining the total amount awarded. , was a case arising, as does the instant case, under New York law. It was there held that no consequential or severance damages were awarded by the local court. Respondent admits, and we have found as a fact, that the property in question was held by petitioner on behalf of himself and his brother, each owning one-half. Consequent adjustment should be made therefor in the computation under Rule 50. Respondent, in his brief, 924 urges that if this Board finds that the property in question was trust property, one-half of which was held by petitioner in trust for his brother, certain other adjustments should be made relative to petitioner's deductions as head of a family and as the support of his "indigent" brother. As related above, respondent, by the pleadings, admitted this status for the property. Respondent has not set up a plea in his answer for alternative relief and, on the state of the record, we are not in a position to make the adjustments requested by him. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620671/	Estate of W. R. Burt Trusts No. 27 and 27A, Second National Bank & Trust Company of Saginaw, Trustee, Petitioner, v. Commissioner of Internal Revenue, RespondentBurt v. CommissionerDocket No. 19473United States Tax Court12 T.C. 675; 1949 U.S. Tax Ct. LEXIS 217; April 29, 1949, Promulgated 217 Decision will be entered for the respondent. Decedent created a testamentary trust, directing the trustee to pay annually specified amounts to named beneficiaries for life, and to use principal if income should be insufficient. In 1942 and 1943 the trust received taxable and tax-exempt income, the amount of each type being in excess of the specified payments. The trustee made the payments to the surviving beneficiaries, and, in computing net income, deducted the full amount of them. The Commissioner disallowed deduction of a percentage of the aggregate payments equal to the percentage of tax-exempt income in the trust's total income available for distribution.(1) An amount distributable to a beneficiary from trust income which comprises taxable and tax-exempt income, held, properly deemed to comprise taxable and tax-exempt income in the same proportions as the total trust income available for distribution.(2) That part of an amount of trust income distributable to a beneficiary which is deemed tax-exempt, held, not deductible by the trust under section 162 (b), Internal Revenue Code. J. Cornelius Rathborne, 37 B. T. A. 607; affd., 103 Fed. (2d) 301,218 followed.(3) An amount payable annually by a trust to a beneficiary, either from trust income or principal, held, qualified as a distribution from trust income, when trust income is sufficient, by virtue of section 162 (d) (1), and deductible from trust income under section 162 (b).(4) An amount distributed to a beneficiary by a trust, which is deemed a distribution of trust income by virtue of section 162 (d) (1), held, to comprise taxable and tax-exempt income in the same proportions as the total trust income available for distribution, and the part deemed tax-exempt is not deductible under section 162 (b). Frank W. Coolidge, Esq., and John C. Evans, Esq., for the petitioner.220 A. J. Friedman, Esq., for the respondent. Johnson, Judge. JOHNSON 675 OPINION.The Commissioner determined a deficiency of $ 5,745.93 in petitioner's income tax for 1942 and a deficiency of $ 8,046.13 in its income and victory tax for 1943, in part by disallowing as a deduction a percentage of amounts distributed to beneficiaries pursuant to decedent's will equal to the tax-exempt percentage of total trust income available for distribution. Petitioner contends that the full amounts paid to the beneficiaries are deductible under section 162 (d) (1), which is applicable to its distributions, because the definition of distributable income incorporated in it is so worded as to exclude any consideration of the tax-exempt income of the trust in arriving at the deductions allowable.676 This proceeding was submitted upon a stipulation and exhibits, which we hereby incorporate as findings of fact, and from which it appears that:Wellington R. Burt, a resident of Saginaw, Michigan, died on March 2, 1919, leaving a will which was admitted to probate in the Probate Court of Saginaw. He named the Second National Bank & Trust Co. of Saginaw executor of his estate and trustee221 of a trust created by the will. On May 24, 1922, the bank was appointed testamentary trustee and it has since been in possession of the assets of the trust, petitioner herein.By the second article of the will the trustee was directed to pay specified annual amounts to each of some 35 persons for life. In 1942 the trustee paid an aggregate of $ 19,380.22 to the 14 then surviving, and in 1943 an aggregate of $ 17,848.73 to the 13 surviving in that year. Article 14 of the will provided that if income should not be sufficient to make all such payments, a sum should be taken from principal of the estate so that all payments be made in full. But, as trust income available for distribution was $ 209,412.16 in 1942 and $ 173,839.67 in 1943, no invasion of principal was necessary.The trust's net income available for distribution comprised nontaxable interest on state, county, and city bonds, ordinary taxable income, and partially taxable U. S. interest as follows:1942Per cent1943Per centNontaxable income$ 174,880.7683.5$ 128,091.3473.68Taxable income4,251.092. 22,412.6313.47Partially taxable income30,280.3114.522,335.7012.85Total209,412.16100. 173,839.67100. 222 The net income before deduction of amounts distributable to beneficiaries was $ 50,946.12 in 1942 and $ 40,535.50 in 1943. The net income for 1942 comprised nondistributable capital gain of $ 16,414.72. All tax-exempt income was, of course, excluded in computing net income for each year.On petitioner's income tax returns for 1942 and 1943 the trustee deducted the full amounts distributed to the beneficiaries in arriving at the trust net incomes subject to tax. The Commissioner reduced these deductions to $ 3,197.86 and $ 4,697.78, by elimination of $ 16,183.06 and $ 13,150.95. The eliminations represent 83.5 per cent and 73.68 per cent, respectively, of the total distribution to beneficiaries made in each year, or a part of the distribution proportionate to the tax-exempt part of petitioner's total income available for distribution.On March 15, 1943, the trustee filed for petitioner with the collector of internal revenue for the district of Michigan a 1942 income tax return, showing a tax due of $ 14,047.05, which was paid in 1943. On 677 March 15, 1944, the trustee filed a 1943 return, showing a tax due of $ 7,773.07, which was paid in 1944. A claim for refund, based223 on grounds unrelated to the issue here presented, was filed for the 1942 tax paid, on October 25, 1945, and for the 1943 tax paid, on January 30, 1947.On petitioner's income tax returns for 1942 and 1943 the trustee deducted the full amount of income distributed to the several beneficiaries under the terms of decedent's will. In bequeathing these annual payments, decedent implicitly contemplated the use of trust income to the extent available by directing that, if income should not be adequate, a sufficient sum should be taken from principal so that all payments might be made in full. In fact, however, the trust's income available for distribution was greatly in excess of all payments required, and consequently the trustee did not have to invade corpus.By section 162 (b), Internal Revenue Code, 1 the amount of income currently to be distributed to a beneficiary is allowed as a deduction in computing the net income of the estate or trust, but the amount deducted must be included in the beneficiary's income. Similar provisions appeared in section 219 (b) (2), Revenue Act of 1924, and subsequent revenue acts. But in Burnet v. Whitehouse, 233 U.S. 148">233 U.S. 148,224 the Supreme Court held that a bequeathed annuity payable at all events and without reference to the existence or absence of income was a bequest not taxable to the recipient, although in fact income of the testamentary trust was used to pay it. And consistently the Court held in Helvering v. Pardee, 290 U.S. 365">290 U.S. 365, that the payment of such a bequest was not deductible by the trust because the charge was upon the estate as a whole and the payment made was not a distribution of income, but the discharge of a gift or legacy. As decedent subjected trust principal to payment of the annuities here in controversy if necessary, petitioner was not entitled to deduct those payments by virtue of section 162 (b), under the holdings of the cited decisions.225 Because those holdings resulted in the payment of tax on such distributions by a trust and thereby provided a means of tax avoidance for some beneficiaries and worked a hardship on others, Senate Report No. 1631, p. 70, 77th Cong., 2d sess., Congress enacted section 111, Revenue Act of 1942, as a corrective remedy, effective for taxable 678 years beginning after December 31, 1941. Sec. 111 (e), Revenue Act of 1942. Addressing itself first to the beneficiary's exemption from tax on the distribution, the Committee took note in the cited report that gifts, bequests, devises, and inheritances in general were excluded from gross income by section 22 (b) (3) and that under existing law as construed in Burnet v. Whitehouse, supra, a bequest of fixed recurrent payments was so excluded.* * * Although such amounts are not dependent solely upon income as the source of payment, they may be, and frequently are, by direction under the terms of the gift or bequest, paid in whole or in part out of income. [S. Report No. 1631, supra, p. 70.]To make the beneficiary taxable on these amounts if the trust had income for their payment, Congress amended226 section 22 (b) (3) of the code by section 111 (a) of the 1942 Act, and in providing that the income from gifts, bequests, devises, and inheritances not be excluded from gross income, it added: * * For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property.Correspondingly, by section 111 (b) of the 1942 Act Congress added a new subsection, (d), to section 162 of the code, to classify as a distribution of trust income for tax purposes the payment of a bequeathed annuity chargeable against the estate as a whole, provided the trust had income available. This new subsection purports to prescribe "Rules for Application of Subsection (b) and (c)" of section 162, and includes one which relates specifically to:(1) Amounts distributable out of income or corpus. -- In cases where the amount paid, credited, or to be distributed can be paid, credited, or distributed out of other than income, the amount227 paid, credited, or to be distributed * * during the taxable year of the estate or trust shall be considered as income of the estate or trust which is paid, credited, or to be distributed, if the aggregate of such amounts so paid, credited, or to be distributed does not exceed the distributable income of the estate or trust for its taxable year. * * * For the purposes of this paragraph "distributable income" means either (A) the net income of the estate or trust computed with the deductions allowed under subsections (b) and (c) in cases to which this paragraph does not apply, or (B) the income of the estate or trust minus the deductions provided in subsections (b) and (c) in cases to which this paragraph does not apply, whichever is greater.By virtue of this new subsection (d) (1) to section 162, petitioner plausibly claims the right to a deduction on account of amounts which the trustee paid to the beneficiaries in 1942 and 1943. Respondent is in agreement that some deduction is allowable, and that petitioner had ample income from which to make the full payments that it seeks to deduct. But respondent contends that, since 83.5 per cent of the 679 trust's total income available228 for distribution in 1942 and 73.68 per cent thereof so available in 1943 consisted of tax-exempt interest on state, county, and city bonds, a like percentage of the amounts distributed must be deemed tax-exempt interest. As a consequence, he argues, the taxable income of the trust was not reduced by the tax-exempt percentages of the distributions, and in his determination of deficiencies he scaled down the amount of the distribution allowable as deductions by eliminating amounts equal to the percentages deemed tax-exempt.Such a proration of taxable and tax-exempt income to distributions made by trustees has been judicially sustained for the purpose of limiting the deduction of amounts distributable only from trust income under the provisions of section 162 (b) before enactment of section 162 (d). Estate of Richard E. Traiser, 41 B. T. A. 228; J. Cornelius Rathborne, 37 B. T. A. 607; affd. (C. C. A., 5th Cir.), 103 Fed. (2d) 301, and 109 Fed. (2d) 1020; Georgie W. Rathborne, 37 B. T. A. 936. A like conclusion was reached in Grey v. Commissioner (C. C. A., 7th Cir.), 118 Fed. (2d) 153,229 where tax exemption in the trust income was based on the charitable character of some beneficiaries. And in Anita Quinby Stewart, 9 T. C. 195, application of the principle in respect of distributions made in 1943 was recognized as proper for an assignee of a part of a beneficiary's share of income.The foregoing decisions fully sustain respondent's determinations unless the specific provisions of the new subsection, (d) (1), prescribe a different rule for the type of distribution to which it relates. Petitioner argues that a different rule is specifically prescribed. While under its theory the trustee is deemed to have distributed only taxable income (which was also in excess of the aggregate distributions), leaving all tax-exempt income in the trust, it is argued that (d) (1), "for the purposes of this paragraph" defines "distributable income" as either the "net income" of the trust computed with the deductions allowed by (b) and (c), or "income" less such deductions, whichever is greater. Petitioner takes "net income" as the applicable figure, and points out that tax-exempt income is excluded by definition from gross income, section 22 (b), and, 230 as a corollary, from net income as defined in section 21. Hence, it is concluded, "distributable income" means taxable income in subsection (d) (1), regardless of what it means in subsection (b), and the full amounts of the annuities in controversy must be considered as distributions from taxable income, for, in the words of the brief, subsection (d) (1) "clearly excludes any consideration of tax-exempt income in arriving at the amount of the deduction allowed."We perceive no basis for such a conclusion. Contrary to petitioner's argument, subsection (d) (1) does not allow "a separate, 680 independent deduction expressly provided for estates and trusts only." It provides merely that amounts which can be paid, credited, or distributed out of other than income by a trustee "shall be considered as income of the estate or trust which is paid, credited, or to be distributed." Being so considered, the amounts qualify as allowable deductions under section 162 (b), and, being allowable under that subsection, must be deemed taxable and tax-exempt income according to the method of ratable allocation approved for trust income deductible under that subsection. J. Cornelius Rathborne, supra,231 and the other cases above cited.The definition of "distributable income" in (d) (1), on which petitioner's contention rests, is designed to provide a maximum limit on the amounts deductible; not to characterize the amounts paid, credited, or to be distributed "which shall be considered as income." The definition on its face introduces an artificial concept, since it is in the alternative, and we agree with petitioner's view that it "clearly excludes any consideration of tax-exempt income," but only for the purpose of fixing a maximum. Being excluded from gross income, tax-exempt income, when distributed, could not logically serve as a deduction or as an element in a figure fixing a maximum for a deduction. But, in the computation sequence contemplated by section 162, petitioner's distributions, qualifying as trust income by virtue of (d) (1), are reduced to their ratable content of taxable income by virtue of the judicial construction of (b), excluding tax-exempt income, and it is against these reduced amounts that the "distributable income" defined in (d) (1) provides a maximum limitation.The legislative history of subsection 162 (d) indicates very clearly that Congress' intent232 was to make uniform the tax incidence of distributions made by a trustee from trust income, regardless of whether the distributions were payable from income only or could be paid from either income or principal. This conscious intent is manifest from the simultaneous change in section 22 (b) (3) to permit inclusion in the recipient's income of a distribution chargeable against the estate or trust as a whole, and from Congress' failure in (d) (1) to make any provision for the trust's deduction of the type of distribution to which it relates or for the recipient's inclusion of the amount deducted in his income. Such a deduction and inclusion are, however, required by subsection (b), and as petitioner's distributions, qualifying as trust income under (d) (1), are deductible solely by virtue of (b), they must be deemed to comprise the same percentage of tax-exempt income as the total trust income available for distribution under the judicial construction of (b). The determinations are sustained.Decision will be entered for the respondent. Footnotes1. SEC. 162. NET INCOME. * * *(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, "income which is to be distributed currently" includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir or beneficiary. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620673/	Beatrice H. Albert, Petitioner, v. Commissioner of Internal Revenue, RespondentAlbert v. CommissionerDocket No. 25546United States Tax Court15 T.C. 350; 1950 U.S. Tax Ct. LEXIS 78; September 29, 1950, Promulgated 78 Decision will be entered for the respondent. Petitioner, in the taxable year 1945, was an employee of the Chemical Warfare Service of the War Department with her regular post of duty in Lowell, Massachusetts. She resided in Gloucester, Massachusetts, with her husband and minor son. During the year she incurred certain expenses for room rent and meals while serving at her post of duty and incurred certain travel expenses in traveling between her home in Gloucester to her post of duty in Lowell. In Beatrice H. Albert, 13 T. C. 129, we held on facts the same as here that similar expenses for the year 1944 were not deductible. Held, the case of Beatrice H. Albert, supra, is res judicata in the present proceeding. Held, further, that even if it be assumed that the first proceeding is not res judicata, nevertheless, such expenditures are not deductible under the rule of stare decisis for the same reasons stated in Beatrice H. Albert, supra.Louis Albert, Esq., for the petitioner.James R. McGowan, Esq., for the respondent. Black, Judge. BLACK 350 The Commissioner has determined a deficiency in petitioner's income79 tax for the year 1945 of $ 306.78. The deficiency results from the disallowance by the Commissioner of $ 841.56 claimed by petitioner on her income tax return for traveling and living expenses while away from home and $ 7 claimed by petitioner as a deduction for cigarette tax.Petitioner in her assignments of error contests the first adjustment of the Commissioner to the extent of $ 796.56 and concedes that $ 45 which she claimed as deductions for traveling and living expenses was properly disallowed by the Commissioner. She does not contest the correctness of the Commissioner's disallowance of $ 7 cigarette tax.Respondent denies that he erred as alleged by petitioner and also pleads affirmatively that our decision in Beatrice H. Albert, 13 T. C. 129, is res judicata because the issue decided in that proceeding is precisely the same as is involved here, except as to the taxable year, and that the material facts in both cases are the same.FINDINGS OF FACT.Most of the facts in this proceeding are stipulated and are adopted as stipulated and they are incorporated herein by reference.The petitioner is a married woman who resides with her husband and80 minor son in the city of Gloucester, Massachusetts. The return for the period here involved was filed with the collector of internal revenue for the district of Massachusetts.In the calendar year 1945, the petitioner was employed by the Chemical Warfare Service of the War Department and was hired 351 to work for the duration of the war and for 6 months thereafter. She was married and had a son then 10 years old. In the taxable year the petitioner resided with her husband and son in a home maintained by the husband in the city of Gloucester, Massachusetts. The husband was a lawyer and supported the family as economic head of the household. At petitioner's request the War Department, in a letter dated August 9, 1948, furnished petitioner with the following information concerning her civilian service with the Chemical Warfare Service, War Department:An examination of your personnel folder reveals the following personnel actions:War Service Indefinite Appointment, 12 August 1942, Junior Inspector, SP-3, $ 1,440 per annum, Chemical Warfare Service at Large, Boston, Massachusetts;Promotion, 16 November 1942, Assistant Inspector, SP-4, $ 1,620 per annum;Promotion, 16 July81 1943, Inspector, SP-5, $ 1,800 per annum;Promotion, 1 April 1944, Administrative Inspector, CAF-5, $ 2,000 per annum;Promotion, 1 July 1944, Administrative Inspector, CAF-6, $ 2,300 per annum;Periodic Pay Increase, 1 July 1945, $ 2,670 per annum;Separation (reduction in force), 31 December 1945.Records show that you were appointed for training at the Boston Chemical Warfare Training School, Fall River, Massachusetts, and later for duty anywhere in New England. WD Form 43, Individual Earnings Record, indicates that your duty station during 1943, 1944, and 1945 was the Hub Hosiery Mills, Lowell, Massachusetts.Petitioner's duty station, beginning October 1943 and until the end of 1945, was the Hub Hosiery Mills, Lowell, Massachusetts. She had formerly been at West Hanover National Fireworks in West Hanover, Massachusetts. The transfer from there to Hub Hosiery Mills, Lowell, Massachusetts, was made by a telephone call, pursuant to which she went to Boston and then to Lowell. A written order for the transfer was furnished by the employer to the petitioner. The petitioner's railway fare for this transfer was paid by the Government and she was also given a per diem allowance 82 to cover the transfer.The Hub Hosiery Mills was manufacturing gas masks, and the petitioner's duties at its plant during the taxable year were to see that all of the terms of the contracts under which the gas masks were being manufactured were followed and that all equipment and material necessary was on hand to keep the plant in constant production. She had as many as eight employees working under her. The petitioner had to be on duty at 7 o'clock in the morning for 6 days of the week.The petitioner for 21 weeks during the taxable year had a room at the Y. W. C. A. in Lowell at a total cost of $ 87.30. She had meals in Lowell on 122 days during that year at a total cost of $ 366. She expended during that year $ 64.26 in train fares between Gloucester and Lowell when she went to Gloucester over week ends to be with her husband and son. She drove her car back and forth daily between 352 Gloucester and Lowell during 31 weeks of that year at a total cost of $ 279. The total of the above is $ 796.56.The distance by road between Boston and Lowell is about 47 miles. Neither is a suburb of the other nor of any other city. The only train service between Gloucester and Lowell83 is by way of Boston, and the schedule is such that it would have been impossible for the petitioner to have commuted daily between Gloucester and Lowell. The petitioner was able to commute daily by the use of her automobile only during the summer months when the days were longer and the weather better than in winter.The head of personnel in the Boston Office of the Chemical Warfare Procurement District of Boston warned the petitioner that she might be transferred upon short notice and advised her not to make leases or other commitments which would inconvenience her transfer from one station to another.In paragraph numbered 10 of the stipulation it is provided that:10. The Court may take judicial notice of the entire record in the prior proceeding entitled Beatrice H. Albert v. Commissioner of Internal Revenue, Docket No. 19152, 13 T. C. #16, in which the Court entered its decision on August 1, 1949, as if such record had been introduced and received in this proceeding.From the foregoing facts we make the following ultimate findings of fact:The material facts of petitioner's claim to travel deductions for 1945 as disclosed by this record are the same84 as the material facts of petitioner's claim to travel deductions for 1944 as disclosed by the record in Beatrice H. Albert, supra.Petitioner's expenses in traveling between Gloucester, where she resided, and Lowell, where she worked, were commuting expenses.Petitioner's expenses while staying at Lowell were personal living expenses while at her only post of duty.OPINION.The questions which we have to decide in this proceeding may be stated as follows:1. Does the doctrine of "collateral estoppel" apply to petitioner's claim to a deduction for the calendar year 1945 for room and meals in Lowell, Massachusetts, while away from her personal residence at Gloucester, Massachusetts, and for travel between these two cities, when a Tax Court decision has denied petitioner's claim to a deduction for similar expenses for the calendar year 1944 on evidence which is essentially the same as we have here?2. Is the petitioner entitled to a deduction of $ 796.56 for the calendar year 1945 for room and meals in Lowell, Massachusetts, while 353 away from her personal residence at Gloucester, Massachusetts, and for travel between these two cities?The issue of res judicata or estoppel85 by judgment is raised affirmatively by respondent in his answer and it has been stipulated that we may take judicial notice of the entire record in the former proceeding as if such record had been introduced in evidence and received in this proceeding.Both parties in arguing this question of res judicata rely upon the Supreme Court's decision in Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591. We think that case supports the Commissioner. In that case, among other things, the Supreme Court said:* * * 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. * * ** * * Of course, where a question of fact essential86 to the judgment is actually litigated and determined in the first tax proceeding, the parties are bound by that determination in a subsequent proceeding even though the cause of action is different. * * In the instant case, although the cause of action is different from that involved in Beatrice H. Albert, supra, because here the taxable year is 1945 whereas in the former proceeding the taxable year is 1944, yet the material facts which have been proved in each of the proceedings are the same. It is true that in our findings of fact in the former proceeding we had a finding which stated: "The record does not show whether or not the petitioner's husband was engaged in any trade or business during 1944." In the instant case we have made a finding from the evidence that: "The husband was a lawyer and supported the family as economic head of the household." Petitioner in her brief argues strongly that the evidence she has supplied in the instant case which enables us to make the foregoing finding is a substantial difference from that which we had before us in Beatrice H. Albert, supra, and, therefore, res judicata does not apply.We do not agree that the difference is at all87 material to the issue which is involved in the present proceeding and which was also involved in the former proceeding and was there decided against petitioner. Whether petitioner's husband was employed in 1945 and supporting the household has no bearing on whether petitioner is entitled to the deductions which she here claims. We, therefore, think res judicata is applicable and we so hold.354 However, even if we should decide that res judicata is not applicable our decision on the merits would be that petitioner is not entitled to the deductions which she claims. The reasons given by us in Beatrice H. Albert, supra, as to why the deductions there claimed were not allowable are equally applicable here and we need not repeat what we said there. Petitioner strongly contends that because she has proved in the instant case that her husband was employed in 1945 and the family home was at Gloucester, Massachusetts, this gives her the right to take the deductions which she claims. Petitioner, in arguing this point in her brief and in speaking of our decision in the former proceeding, among other things, says: * * It is almost inescapable that had it appeared that the husband88 was gainfully employed in 1944 the decision would have favored the petitioner. The record in the first case shows that the counsel for the petitioner was named Louis Albert but the marital relationship did not occur to the Court as an inferrable [sic] fact or, if it did, as a fact indicating that the husband was gainfully employed in 1944.As we have already stated in discussing the issue of res judicata, we do not think it is at all material that petitioner's husband was employed in 1945 and living in Gloucester. Nothing that we said in our opinion in the first proceeding indicated that our decision was influenced by the fact that the record in that proceeding did not show whether or not the petitioner's husband was engaged in any trade or business during 1944. Petitioner's argument that our decision was influenced by such fact, we think, is made under a misapprehension.In the recent case of Andrews v. Commissioner, 179 Fed. (2d) 502, affirming a memorandum opinion of our Court, the Fourth Circuit held that a taxpayer was not entitled to deduct rent, meals, and other miscellaneous expenses while employed in Washington, D. C., on an indefinite89 "war service" appointment, a period during which he maintained his family in the home occupied by them during his previous employment in Boston, Massachusetts. It is true that in the Andrews case the taxpayer was the husband and, therefore, the head of the household, whereas the taxpayer here is the wife and not the head of the household, but we are unable to see where that makes any difference in deciding the issue which we have here to decide. There are some cases involving other questions where such a difference in the facts might be important, but not here.Therefore, even if we should assume that res judicata is not applicable and that our decision should be on the merits, we hold that petitioner is not entitled to the deductions which she claims.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620674/	WALTER L. CLARK AND ELIZABETH E. CLARK, ET AL., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent 1Clark v. Comm'rDocket Nos. 4640-81, 5015-81, 5016-81, 5186-81, 7244-81, 8232-81, 9975-81. United States Tax CourtT.C. Memo 1983-460; 1983 Tax Ct. Memo LEXIS 328; 46 T.C.M. (CCH) 964; T.C.M. (RIA) 83460; August 8, 1983. 328 Held, the employment of petitioners, who are construction workers, at the site of a nuclear plant was indefinite, rather than temporary. Accordingly, deductions for transportation expenses and away from home traveling expenses under section 162(a)(2) are denied. Ford P. Mitchell, for the petitioners. Cynthia M. Odle-Schlechty, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: In these consolidated cases respondent determined the following Federal income tax deficiencies: Income TaxDocket No.PetitionersYearDeficiency4640-81Walter L. Clark1977$947.00and Elizabeth E.1978875.00Clark1979720.005015-81Henry P. Snyder1979567.615016-81Michael A. Moody1979671.00and Jessie S.Moody5186-81Paul W. Burnette1978697.00and Pauline1979728.00Burnette7244-81William H. Elliott, Sr.19771,359.33and Barbara C.19781,378.66Elliott8232-81Joe D. Dunlap1978476.00and KatherineDunlap9975-81Ronald E. Pelfrey1977468.00and Anna S.1979900.58Pelfrey329 The petitioners in the first docket and the last five dockets are husband and wife, the wives being petitioners solely by reason of having filed a joint return; therefore the term petitioner(s) will hereafter refer only to petitioner husband(s), and to the remaining petitioner in docket No. 5015-81. The sole issue for decision is whether petitioners' employment at a construction site was temporary rather than indefinite, so that petitioners Clark, Snyder, Moody, Burnette, Dunlap, and Pelfrey may deduct the cost of transportation between their respective residences and their job site under section 162 2 and petitioner Elliott may deduct transportation and travel expenses under section 162. 3330 FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. All petitioners filed Federal income tax returns for the years in issue with the Internal Revenue Service Center, Memphis, Tennessee. All petitioners resided in Tennessee at the time of filing their petitioners herein. Sometime in 1972, work commenced in Spring City, Tennessee, 4 on the construction of the Watts Bar Nuclear Plant (hereinafter sometimes referred to as Watts Bar) by the Tennessee Valley Authority (TVA). It requires a minimum of 10 years, and may require as long as 15 years, to build a nuclear plant like Watts Bar. As of February 2, 1982, the date of trial, construction of the plant was continuing. Each of the petitioners has been employed at the plant site during the periods indicated below: ClarkMay 14, 1975 - April 19, 1976May 4, 1976 - April 18, 1977May 3, 1977 - April 17, 1978May 3, 1978 - Date of TrialSnyderJune 30, 1975 - June 11, 1976June 29, 1976 - December 9, 1976December 13, 1976 - November 23, 1977December 13, 1977 - Date of TrialMoodyMay 10, 1977 - April 24, 1978May 10, 1978 - Date of trialBurnetteFebruary 7, 1973 - February 5, 1974February 20, 1974 - February 5, 1975March 5, 1975 - February 17, 1976March 3, 1976 - February 15, 1977March 2, 1977 - February 14, 1978March 1, 1978 - Date of TrialElliottMarch 30, 1976 - March 11, 1977March 29, 1977 - March 9, 1978March 28, 1978 - August 11, 1980DunlapJuly 13, 1976 - June 24, 1977July 12, 1977 - June 26, 1978July 17, 1978 - Date of TrialPelfreyApril 4, 1977 - July 27, 1977August 1, 1977 - July 13, 1978July 28, 1978 - Date of Trial331 Throughout their respective periods of employment at Watts Bar listed above, petitioners Clark, Burnette, Elliott, and Dunlap, were employed as a painter, a carpenter, a steamfitter, and an unclassified laborer, respectively. Petitioner Snyder was employed as an unclassified laborer until December 9, 1976, when he became a steamfitter. Petitioner Moody was employed as an electrician apprentice until August 7, 1981, when he became an electrician. Petitioner Pelfrey was employed as a laborer until August 1, 1977, when he became a steamfitter apprentice. As of the date of trial, petitioner Clark had been a resident of Rockwood, Tennessee, for 22 years and had owned his residence there for the same length of time. Petitioner Clark raised cattle during 1977, 1978, and 1979 on a farm he owns in Rockwood. His wife's parents have been residents of Rockwood for their entire lives. The Clarks' residence is approximately 32 miles from Watts Bar. During 1977, 1978, and 1979, petitioner Clark drove his automobile to and from work each day. Petitioner Snyder had been a resident of Athens, Tennessee, for approximately332 25 years as of the date of trial. During 1979, his family lived in Athens. Petitioner Snyder's residence in 1979 was approximately 30 miles from Watts Bar. During 1979, petitioner Snyder drove his automobile to and from work each day. As of the date of trial, petitioner Moody had been a resident of Lenoir City, Tennessee, for 15 years and his parents resided there. He attended high school for three years in Lenoir City and considers Lenoir City to be his home town. His wife was born in Lenoir City and his wife and children lived there with him in 1979. Petitioner Moody's residence in Lenoir City is approximately 45 miles from Watts Bar. During 1979, petitioner Moody drove his automobile to and from work each day. As of the date of trial, petitioner Burnette had been a resident of Kingston, Tennessee, for 55 years and had owned his residence there for 36 years. Since 1976, petitioner Pauline Burnette had been employed at the City & County Bank of Roane County, Kingston, Tennessee. Petitioner Burnette's residence was approximately 28 miles from Watts Bar. During 1978 and 1979, petitioner Burnette drove his automobile to and from work each day. Petitioner Elliott333 has been a resident of the same area of Tennessee for his entire life. He has several children. Two of petitioner Elliott's children were in high school in Clinton, Tennessee, when he began working at Watts Bar. In 1976, the Elliotts lived in Clinton, Tennessee. After petitioner Elliott began working at Watts Bar, the Elliotts bought a double wide trailer and some land by a lake near Oak Ridge, Tennessee. They permanently located the trailer on the land and were residing there as of the date of trial. At trial petitioner Elliot stated that he hoped to reside there for the rest of his life.Since 1960 petitioner Barbara C. Elliott has been employed as a registered nurse at the Oak Ridge Hospital, Oak Ridge, Tennessee. When he began working at Watts Bar, petitioner Elliott bought a 31-foot travel trailer and set it up near the construction site. During 1977 and 1978, he lived in the trailer during the work week and went to Clinton on weekends to be with his family. For quite a while, petitioner Elliott worked 7 days a week at Watts Bar and was on the third shift. The Elliotts' residence in Clinton was approximately 45 miles from Watts Bar. Petitioner Elliott's employment at334 Watts Bar Terminated, at his request, on August 11, 1980, when he left to look for work closer to his family's residence. Petitioner Dunlap's parents have been residents of Oliver Springs, Tennessee, for approximately 65 years. Petitioner Dunlap has resided in Oliver Springs since his birth. Since 1974, petitioner Katherine M. Dunlap has been employed at the Oak Ridge National Laboratory, Oak Ridge. Oak Ridge is between 3-1/2 and 4 miles from Oliver Springs. Petitioner Dunlap's residence is approximately 50 miles from Watts Bar. During 1978, petitioner Dunlap drove his automobile to and from work each day. In February or March 1977, approximately one or two months before petitioner Pelfrey became employed at Watts Bar, the Pelfreys acquired a house in Rockwood, Tennessee. Since they had just acquired the house, they did not wish to sell it and move to Spring City when petitioner Pelfrey became employed at Watts Bar. As of the date of trial, the Pelfreys had resided in Rockwood approximately 4-1/2 years. The Pelfreys' residence in Rockwood was approximately 30 miles from Watts Bar During 1978 and 1979, petitioner Pelfrey drove his automobile to and from work each day. 335 The TVA hires construction workers through the local unions. The TVA tells the local unions how many employees are needed for a construction project and the local unions then assign the number of employees requested to the project. The local unions in Chattanooga, Tennessee, had jurisdiction over the construction jobs at Watts Bar. During the years 1975 through 1978, the Chattanooga locals were unable to supply all the steamfitters and electricians needed for work at Watts Bar. The union agents of the steamfitters' and electricians' locals in Chattanooga, therefore, occasionally had to recruit qualified individuals from other areas. If there are rumors that members of the locals having jurisdiction over the jobs at a construction site are to be laid off, those locals having jurisdiction may ask employees who are not affiliated with them to resign from their jobs, so as to permit members of the locals having jurisdiction to retain their jobs. The employees who are asked to resign may do so voluntarily, as a courtesy, but are under no obligation to resign. Petitioners Clark, Snyder, Moody, Dunlap, and Pelfrey have been affiliated with the local unions for their respective336 crafts in Chattanooga during their employment by the TVA at Watts Bar. Petitioner Burnette was affiliated with Carpenters Local 50, Knoxville, Tennessee, until sometime between March 5, 1975, and March 3, 1976, when he became affiliated with Carpenters Local 74, Chattanooga, Tennessee. Petitioner Elliott was affiliated with Steamfitters Local 102, Knoxville, Tennessee, while he was employed at Watts Bar. Petitioner Elliott has been affiliated with Knoxville Local 102 for approximately 30 years and, unlike some of the other petitioners herein, did not wish to change his affiliation to the Chattanooga local during his employment at Watts Bar. From 1974 through October 1978 the type of appointment that was in effect for all construction workers at Watts Bar was a "trades and labor temporary construction hourly" appointment not to extend beyond 11 months and 29 days from the first day of the appointment (hereinafter referred to as 11-29 appointment). Pursuant to the 11-29 appointments, TVA specified a date not beyond 11 months and 29 days from the inception of each construction worker's employment as the date of the termination of his employment. The 11-29 appointments, however, 337 did not guarantee the construction workers that they would be employed a specific amount of time. The length of each construction worker's employment depended entirely on the TVA's need for workers in his particular craft. By hiring construction workers on a temporary basis, that is for a period of less than one year, TVA was able to lay them off at any given time and thereby temporarily decrease the number of its employees. TVA is an agency of the United States Government and at times was required by the Office of Management and Budget (hereinafter referred to as OMB) or a presidential directive to comply with certain employment ceilings. TVA officials were of the view that construction workers hired under 11-29 appointments who were laid off on a date when OMB or a presidential directive required a count of the number of TVA employees could be excluded from the count. While the 11-29 appointments were in effect, each temporary construction worker's employment was terminated on its stated termination date for a period of appoximately 10 days. After that brief termination period, the employee generally was reemployed. The probability of reemployment depended upon the employee's338 craft. For example, from 1975 through October 1978, the chances of reemployment were at least 80 percent for steamfitters, at least 50 percent for unclassified laborers, carpenters, and electricians, and approximately 50 percent for painters. 5All petitioners were employed at Watts Bar under 11-29 appointments until October 1978. 6 Each of the petitioners was consistently reemployed within a few days after the termination of each of his 11-29 appointments. In October 1978 the provision for termination within 11 months and 29 days was deleted from the appointments of hourly construction workers at Watts Bar and other construction sites. Petitioners Clark, Snyder, Moody, Burnette, Elliott, and Pelfrey339 each received a copy of a document, TVA Form 9880, entitled "Employee Status and Information Record," bearing an issuance date of 78 10 18 and informing him of the change in his appointment. TVA deleted the termination provision from employment agreements in October 1978 because (1) it had found that the cost of terminating and then reemploying workers was exorbitant and (2) it was laying off more employees than it was recruiting at that time. From 1974 to 1979, the total number of construction workers employed by TVA had increased from approximately 7,000 to approximately 20,000. As of February 2, 1982, the date of trial, a total of somewhat over 13,000 construction workers were employed by TVA. The number of construction workers employed by TVA at Watts Bar had slowly increased from 1972 through 1975 and then increased rapidly until 1979, when there were aproximately 3,100 construction workers employed by TVA at Watts Bar. From 1979 through February 2, 1982, there was "some slackening" of the number of construction workers employed by TVA at Watts Bar. For the years in issue, respondent disallowed deductions claimed by petitioners Clark, Snyder, Moody, Burnette, Dunlap, and340 Pelfrey for the cost of transportation to and from work in the following amounts: PetitionerYearAmountClark1977$3,162.0019782,983.0019793,310.00Snyder19792,174.00Moody19793,165.40Burnette19782,380.0019792,590.00Dunlap19783,728.00Pelfrey19782,754.0019793,263.00Respondent disallowed deductions claimed by petitioner Elliott for travel and transportation expenses in the amounts of $4,068 and $3,735.30 for the years 1977 and 1978, respectively. OPINION Section 162(a)(2) allows a taxpayer to deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, including traveling expenses while away from home in the pursuit of a trade or business. This Court has long held that as a general rule the term "home," as used in section 162, means the vicinity of the taxpayer's principal place of employment and not where his or her personal residence is situated. Mitchell v. Commissioner,74 T.C. 578">74 T.C. 578, 581 (1980); Kroll v. Commissioner,49 T.C. 557">49 T.C. 557, 561-562 (1968). An exception to this general rule is provided, however, 341 when a taxpayer's employment away from his residence is temporary rather than indefinite or permanent in duration. Commissioner v. Peurifoy,358 U.S. 59">358 U.S. 59 (1958); Kroll v. Commissioner,supra at 562. If the employment is considered temporary, the taxpayer may be permitted to deduct his traveling expenses, including the cost of transportation to and from work. See Norwood v. Commissioner,66 T.C. 467">66 T.C. 467, 469 (1976) and footnote 3, supra.Temporary employment has generally been defined as a type which can be expected to terminate within a short period of time. Norwood v. Commissioner,supra at 469; Cockrell v. Commissioner,38 T.C. 470">38 T.C. 470, 479 (1962), affd. 321 F.2d 504">321 F.2d 504 (8th Cir. 1963). However, even if it is known that the employment will terminate at some future date, the employment is not temporary if it is expected to last for a substantial or indefinite period of time. Jones v. Commissioner,54 T.C. 734">54 T.C. 734 (1970), affd. 444 F.2d 508">444 F.2d 508 (5th Cir. 1971); Cockrell v. Commissioner,supra.Employment which orginally is temporary may342 subsequently become indefinite because of changed circumstances or the passage of time. Norwood v. Commissioner,supra;Kroll v. Commissioner,supra.The burden of proving that his employment was temporary rests on the taxpayer. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.In support of their position that their employment at Watts Bar was temporary, petitioners primarily rely on the fact that until October 1978 they were employed by TVA pursuant to temporary appointments not to extend beyond 11 months and 29 days. Petitioners further assert that although the provision for termination within 11 months and 29 days was deleted from their appointments in October 1978, they could foresee employment for only a short period of time thereafter since the demand for construction workers was decreasing in 1979. Based on the record in this case, we conclude that petitioners have not established that their employment at the Watts Bar construction site was temporary rather than indefinite. There is nothing in the record to indicate that any of the petitioners was told that his343 work at the Watts Bar project would last for only a short time. The termination provision initially contained in each of the petitioners' work appointments did not indicate that their work would actually be terminated. A TVA official testified to the effect that the chances of reemployment were at least 80 percent for steamfitters, at least 50 percent for unclassified laborers, carpenters, and electricians, and approximately 50 percent for painters, and we have so found. Even though petitioners may have had no assurance of how long their respective jobs would last, that fact is not determinative of whether their employment was temporary. McCallister v. Commissioner,70 T.C. 505">70 T.C. 505, 510 (1978). The absence of permanence does not require a finding that petitioners' jobs were temporary. Garlock v. Commissioner,34 T.C. 611">34 T.C. 611, 616 (1960). 7344 That petitioners' prior work records and their ability to pass physical examinations affected their chances of reemployment by TVA at Watts Bar are of no moment. Any individual's employment may be discontinued if his work is not satisfactory or if he is physically incapable of performing his assigned duties. Those contingencies do not cause a taxpayer's employment to be termed temporary. Petitioners' contention that the chances of reemployment by TVA at Watts Bar for any individual employee was much less than the 50 to 80 percent figures cited by the TVA official because each employee had to be approved by the local union for his craft before he had a chance of being reemployed does not justify extensive discussion, inasmuch as the record fails to show how probable the possibility of a union disapproving any workers was. 8345 The few brief interruptions in petitioners' work at the termination of their successive 11-29 appointments are not enough to transmute what was indefinite employment into separate periods of temporary employment. Blatnick v. Commissioner,56 T.C. 1344">56 T.C. 1344, 1348 (1971) (holding that short interruptions of work at a particular site do not, standing alone, cause a taxpayer's employment which would otherwise be indefinite to become temporary). 9Although a diminution in the TVA's demand for construction workers was one reason that the termination provision was removed from petitioners' respective employment agreements in October 1978, that fact does not mean that petitioners' jobs could be expected to last for only a short period of time. It appears from the record that the TVA's demand for construction workers declined beginning in 1979 primarily as a result of its deferring the constuction of units at its Phipps346 Bend, Hartsville, and Yellow Creek nuclear plant sites. The record indicates that there was "some slackening" of the number of construction workers needed at Watts Bar from 1979 through February 2, 1982. Yet, we are unable to conclude that any of petitioners' jobs could be expected to terminate within a short period of time on account of that slackening. Before the first year in issue in their respective cases, petitioner Clark, Snyder, Moody, Burnette, Elliott, and Dunlap had been continuously employed, except for brief interruptions, at Watts Bar for 19, 42, 19, 58, 9, and 17 months, respectively. As of the date of trial of the instant cases, petitioner Pelfrey had been continuously employed, except for brief interruptions, at Watts Bar for approximately 58 months. The substantial actual duration of the employment of each of the petitioners at Watts Bar is an additional reason for concluding that their employment was "indeterminate in fact as it develop[ed]". Norwood v. Commissioner,supra, at 471; Commissioner v. Peurifoy,254 F.2d 483">254 F.2d 483, 486 (4th Cir. 1957), revg. 27 T.C. 149">27 T.C. 149 (1956), affd. per curiam 358 U.S. 59">358 U.S. 59 (1958).347 Petitioners cite and rely upon Markey v. Commissioner,490 F.2d 1249">490 F.2d 1249 (6th Cir. 1974) for the proposition that the criterion used by the Sixth Circuit, to which the present cases are appealable, to determine whether travel expenses are deductible is whether it is reasonable for the taxpayer to move his home to the job site. In Markey the taxpayer had two places of trade or business which were geographically distant from one another. The Sixth Circuit held that to determine which of the two locations was the taxpayer's home for purposes of section 162(a)(2) the proper test was an objective one: We hold, therefore, that when a taxpayer has two places of business or employment at a considerable distance from one another, his designation of one as his abode, if different from the place where he spends more of his time, engages in greater business activity, and derives a greater proportion of his income, is not dispositive of the question which location is his home for the purpose of deducting traveling expenses. [490 F.2d at 1255.] Implicit in the Sixth Circuit's opinion in Markey is that, for purposes of section 162(a)(2), the home of a348 taxpayer who has two places of business is the location of one of his businesses. 10The Sixth Circuit has, in effect, adopted the same test as this Court to determine whether a taxpayer is entitled to deduct expenses incurred in traveling between his personal residence and the sole location where he is engaged in a trade or business. Specifically, the Sixth Circuit held in Ham v. United States,408 F.2d 671">408 F.2d 671 (6th Cir. 1969) that if a taxpayer's employment at a particular place is for an indefinite duration, his maintenance of his personal residence at a location other than the place of his employment is not required by the exigencies of his trade or business, but instead is motivated by personal reasons. 11Petitioners identify the deferral or shelving by TVA of the Watts Bar project349 as an event they could "foresee" that would result in the termination of their employment.They ask us to use judicial notice to find that, shortly after the trial of the instant cases, TVA announced that there would be a slowdown at the Watts Bar project and that construction workers would be laid off at the project. See United States v. An Easement and Right-of-way, etc.,246 F. Supp. 263">246 F. Supp. 263, 269 (W.D. Ky. 1965). Petitioners have introduced no evidence to establish that the deferral or shelving of the Watts Bar project by TVA was a foreseeable occurrence during the years in issue. Rather, the only evidence regarding the foreseeability of a deferral of the Watts Bar project directly contradicts petitioners' position: the TVA official testified at trial that "no consideration" had been given by TVA to deferral of the Watts Bar project. Petitioners finally argue that their work was temporary because it is common knowledge in the construction industry that workers are employed only so long as they are needed by the TVA and that the number of workers needed varies from day to day.Although that may well be true, 12 it does not show that petitioners' employment was350 temporary, rather than indefinite in duration. As we stated earlier, for employment to be considered temporary, it must be expected to terminate within a short period. Norwood v. Commissioner,supra at 469. Petitioners, in maintaining that their costs of transportation to and from work are deductible under section 162(a), also allege that housing was not available around or near the Watts Bar construction site. It appears from the record before us that a limited amount of low quality housing, rather than no housing whatsoever, 351 was available in the vicinity of the Watts Bar project. 13 Even assuming, however, that the evidence before us established that the Watts Bar construction site is located in an area where housing is unavailable, we would conclude that the costs of petitioners' daily round trip expenditures are nondeductible. Coombs v. Commissioner,608 F.2d 1269">608 F.2d 1269, 1276 (9th Cir. 1979); Sanders v. Commissioner,439 F.2d 296">439 F.2d 296, 299 (9th Cir. 1971) and cases there discussed. 14In accordance with the foregoing, we sustain respondent's disallowance of petitioners' deductions for transportation expenses and away from home traveling expenses under section 162(a)(2). Decisions will be entered for respondent.Footnotes1. Cases of the following petitioners are consolidated herewith: Henry P. Snyder, docket No. 5015-81; Michael A. Moody and Jessie S. Moody, docket No. 5016-81; Paul W. Burnette and Pauline Burnette, docket No. 5186-81; William H. Elliott, Sr. and Barbara C. Elliott, docket No. 7244-81; Joe D. Dunlap and Katherine Dunlap, docket No. 8232-81; Ronald E. Pelfrey and Anna S. Pelfrey, docket No. 9975-81.↩2. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue. ↩3. On brief, respondent has stated that the only issue for decision is whether petitioners' employment was temporary or indefinite. Respondent's counsel has specifically conceded that if the Court finds that the employment of petitioners Clark, Snyder, Moody, Burnette, Dunlap, and Pelfrey was temporary, then those petitioners should be entitled to the deductions they claimed for transportation expenses under section 162(a) even though this Court has held that the expenses of driving to and from work are nonductible commuting expenses whether or not the taxpayer's employment was temporary. See McCallister v. Commissioner,70 T.C. 505">70 T.C. 505↩, 503 (1978).4. In 1982, Spring City had a population of approximately 2,300.↩5. Whether a construction worker was reemployed depended upon (1) the immediate needs of TVA, (2) his work record, (3) his ability to pass a physicial examination, and (4) the decision of the union with which he was affiliated.↩6. Petitioner Burnette worked for a short while in 1973 under a "trade and labor temporary construction hourly" appointment "not to extend past 30 days from date of appointment." His appointment was thereafter changed to an 11-29 appointment.↩7. For other cases involving factual situations substantially similar to petitioners' circumstances, see Groover v. CommissionerT.C. Memo 1982-329">T.C. Memo. 1982-329, on appeal (11th Cir., Sept. 17, 1982); Vermillion v. Commissioner,T.C. Memo. 1982-192; and Brown v. Commissioner,T.C. Memo. 1982-189↩.8. Petitioners point out that if a construction worker employed at Watts Bar was not a member of a local having jurisdiction over jobs for his craft at Watts Bar, the length of his employment at Watts Bar was "affected by the fact that * * * [he] had to step aside in favor of a" member of the local with jurisdiction in the event of layoffs. This alleged fact is of no help whatsoever to petitioners Clark, Snyder, Moody, Dunlap, and Pelfrey, who were affiliated with locals for their respective crafts in Chattanooga, which had jurisdiction over the jobs at Watts Bar, during their employment by TVA at the construction site. It likewise is of no help to petitioner Burnette, inasmuch as he became affiliated with the Chattanooga local for his craft before the years in issue in docket No. 5186-81. As for petitioner Elliott, who was affiliated with a local in Knowville while he was employed at Watts Bar, there is nothing in the record indicating that his affiliation with the Knoxville local increased the likelihood of his being laid off in a short time. We further note that qualified workers in petitioner Elliott's craft were in short supply in the vicinity of Watts Bar during 1975 through 1978, so that qualified individuals from other areas occasionally were recruited.↩9. We note that, in the cases of petitioners Snyder and Moody, the fact that petitioners were employed under 11-29 appointments until October 1978 is totally without significance since respondent's determinations for their 1979 year only are in issue.↩10. Branscomb v. Commissioner,T.C. Memo. 1981-97↩.11. Although the record indicates that petitioner Clark raised cattle during 1977, 1978, and 1979 on a farm he owns in Rockwood, petitioner Clark has neither presented sufficient evidence to establish nor argued that Rockwood should be considered his tax home because of his cattle-raising activities.↩12. Other courts have recognized that work in the construction industry is, by its very nature, impermanent. See, e.g., Commissioner v. Peurifoy,254 F.2d 483">254 F.2d 483, 486 (4th Cir. 1957), affd. 358 U.S. 59">358 U.S. 59 (1958). Nevertheless, the courts have continued to apply the same standards to construction workers' employment as to other workers' employment, judging each separate employment on its own facts to determine whether it is temporary or indefinite. Kasun v. United States,671 F. 2d 1059, 1062 (7th Cir. 1982); Frederick v. United States,603 F.2d 1292">603 F.2d 1292, 1296↩ (8th Cir. 1979).13. The only evidence in the record concerning the availability of housing in Spring City is petitioner Snyder's testimony that as far as he knew there were no rental properties or homes to buy, petitioner Pelfrey's testimony that there "weren't very many" houses available, and petitioner Moody's testimony that the housing which was available "was below standards." ↩14. See Deblock v. Commissioner,T.C. Memo. 1980-277↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620675/	ALMA WILHELMINA PETERSEN, INCOMPETENT, ROY R. PETERSEN, GUARDIAN OF THE PERSON AND ESTATE OF ALMA WILHELMINA PETERSEN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPetersen v. CommissionerDocket No. 24640-93United States Tax CourtT.C. Memo 1995-212; 1995 Tax Ct. Memo LEXIS 213; 69 T.C.M. (CCH) 2613; May 17, 1995, Filed 213 Decision will be entered for respondent except as to the additions to tax under sections 6651(a)(1) and 6653(a). For petitioner: Roy R. Petersen, Guardian. For respondent: Franklin R. Hise. KORNERKORNERMEMORANDUM OPINION KORNER, Judge: Respondent determined deficiencies in and additions to the Federal income tax of Alma Wilhelmina Petersen for the years and in the amounts as follows: Additions to Tax Under Section6653(a)(2)/DateDeficiency6651(a)(1)6653(a)(1)/(a)(1)(A)(a)(1)(B)6654(a)1983$ 502 $ 126 $ 25 --19842,179545109 --198697424449 $ 46 198722,6515,6631,133 1,22319885,3451,285267--329 50 percent of the interest due on the deficiency for tax years 1983, 1984, 1986 and 1987.All statutory references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted. Petitioner Alma Wilhelmina Petersen was a resident of Kyle, Texas, at the time the petition herein was filed. She did not file income tax returns for the years 1983, 1984, 1986, 1987, and 1988. 214 After the petition herein was filed, apparently because of petitioner's declining mental and physical health, Roy R. Petersen, her son, was appointed as guardian of her person and estate by the appropriate Texas court, and appears for petitioner herein. Rule 60(c) and (d). In investigating petitioner's tax affairs for the years in question, in the absence of returns or any records from petitioner, respondent attempted to establish the sources and amounts of petitioner's income by using files maintained by respondent concerning payors of income of various types to petitioner. Respondent also attempted to check this information by sending inquiries to the various sources from whom respondent had information that income of some sort had been paid to petitioner. Some of the sources contacted by respondent replied, furnishing pertinent information. Some did not reply, and still others were unable to give complete information because the necessary records maintained by such paying organizations had been lost or destroyed after the lapse of time. Nevertheless, based on the information in respondent's files and the information obtained from various paying sources, respondent constructed215 a statutory notice of deficiency, in which petitioner was specifically informed of the type and amounts of income from various sources which respondent determined petitioner had received from named entities in the years here in question. Such income, in varying amounts for each year as specified in the statutory notice of deficiency, covered dividends, interest, annuity income, capital gains and losses, rents and royalties, income from stocks and bonds, and, for the years 1987 and 1988, the taxable amount of petitioner's Social Security benefits. At trial herein, respondent put in evidence the testimony of selected custodians of records of various specified income paying entities, identifying the records that they had provided pursuant to respondent's inquiries, and further exhibits were admitted showing the responses obtained by respondent from other lines of inquiry which she had made to third-party payors concerning petitioner's income. Such evidence and such exhibits were admitted herein, not for the purpose of showing truth of the contents thereof, but simply to show the basis for respondent's determination. Such information included records of payment of various types of216 income to petitioner by disbursing organizations (e.g., interest and dividends), records of receipts by financial and brokerage institutions in which petitioner maintained accounts, and the like. Such records identified petitioner by name, Social Security number, and her then correct address. After the allowance of certain exemptions and deductions, respondent computed a net amount of tax owing from petitioner for the years in question, to which respondent added proposed additions to tax under section 6651(a)(1) (for failure to file a return); under section 6653(a) (for negligence on the part of petitioner); and under section 6654(a) (for failure to make the necessary payments of estimated tax during the taxable year). During the investigatory stages of this case leading up to the issuance of respondent's statutory notice, petitioner provided no information to respondent concerning her income and allowable deductions for the years in question. Petitioner's briefs herein are not easy to follow. They are rambling, discursive, cover a number of alleged facts not in this record, and discuss potential claims that petitioner may have against the Federal Government in connection with217 other matters totally unrelated to the present case. What does clearly appear, however, is petitioner's view that decision herein should be entered in her favor because respondent has failed to prove that petitioner had any income during the period in question as to which she needed to pay any income tax. This raises the question as to who has the burden of proof in this proceeding. Ordinarily, except in the case of fraud or other issues in which the burden of proof is placed upon respondent, Rule 142, petitioner has the burden of proof as to the determinations that respondent makes in the notice of deficiency. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rockwell v. Commissioner, 512 F.2d 882 (9th Cir. 1975), affg. T.C. Memo 1972-133">T.C. Memo. 1972-133. In this connection, the Tax Court will not ordinarily look behind a statutory notice to examine it for the motives or methods which were used by respondent in arriving at the determination of the deficiency. Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324 (1974); Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403 (1984).218 One exception, at least, exists to this general rule: where the Commissioner's statutory notice shows no connection between the taxpayer and the additional income which is determined, or any other rational basis for the Commissioner's determination. Helvering v. Taylor, 293 U.S. 507 (1935); Weimerskirch v. Commissioner, 596 F.2d 358">596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672">67 T.C. 672 (1977). In such a case, however, the burden of ultimate persuasion does not shift; even if the statutory notice is held to be arbitrarily and unreasonably issued, the burden of going forward with the evidence may shift, but not the ultimate burden of proof, which remains with the taxpayer. Kluger v. Commissioner, 91 T.C. 969">91 T.C. 969, 976-977 (1988); Kluger v. Commissioner, 83 T.C. 309">83 T.C. 309, 310 n. 1 (1984). On the other hand, where the Commissioner uses a rational method to determine the taxpayer's income, and where no adequate records are present, the Commissioner's method will be presumptively correct, and the taxpayer will have the burden to prove the Commissioner's determinations219 wrong. Denison v. Commissioner, 689 F.2d 771">689 F.2d 771 (8th Cir. 1982), revg. T.C. Memo. 1981-738. Except in unusual cases, the rule of presumptive correctness of the Commissioner's determination and the resulting burden of proof upon the taxpayer is a rule of long standing. Avery v. Commissioner, 122 F.2d 6">122 F.2d 6 (5th Cir. 1927), affg. 5 B.T.A. 872">5 B.T.A. 872 (1926). The rule does not change because in issuing the statutory notice, the Commissioner did not have access to the taxpayer's records. Where the taxpayer fails or refuses to make the necessary records available to her, the Commissioner's determination of deficiency will not be deemed to be arbitrary and capricious, and the burden of proof will not shift from the taxpayer. Doyal v. Commissioner, 616 F.2d 1191 (10th Cir. 1980), affg. T.C. Memo 1978-307">T.C. Memo. 1978-307; Lysek v. Commissioner, T.C. Memo. 1975-293, affd. on another issue 583 F.2d 1088">583 F.2d 1088 (9th Cir. 1978); Figueiredo v. Commissioner, 54 T.C. 1508 (1970),220 affd. in an unpublished order (9th Cir. March 14, 1973); Estate of Mason v. Commissioner, 64 T.C. 651">64 T.C. 651 (1975), affd. 566 F.2d 2">566 F.2d 2 (6th Cir. 1977). This case does not present the situation facing the Court in Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991), affg. in part and revg. in part T.C. Memo. 1990-68, where the Commissioner's determination was based on a single third-party information form of doubtful veracity. Here, the links of petitioner to unreported income were from a number of independent sources, with respect to numerous items, and were not unreasonable, nor were they erroneous on their face. We think it clear, then, that petitioner had the burden of proof to show that respondent's determinations in the statutory notice here were erroneous. What did petitioner do to discharge this burden? At trial herein, petitioner, who was represented by her son and guardian, reluctantly entered into a bare bones stipulation of facts, covering such matters as the fact that he had been appointed petitioner's guardian, that the statutory notice herein was the authentic221 document that had been issued, and his responses to interrogatories, request for the production for documents, and request for admission, which respondent had made as part of the pretrial preparation process. These stipulated documents reveal that petitioner had provided no information whatever to respondent, but rather denied that any information or records existed from which such information could be obtained, and further denied all requests for admission made by respondent which would have led to the discovery of evidence herein. Finally, petitioner's representative at trial refused to testify, and attempted to call no other witnesses in petitioner's behalf. Faced with this "stonewall" approach by petitioner, we must hold that petitioner has totally failed in her required burden of proof to show any error on the part of respondent in the determination of deficiency herein. To this extent, respondent must be sustained. We turn now to respondent's proposed additions to tax in this case. Section 6651(a) imposes an addition to tax on the taxpayer for failing to file a return or pay a tax "unless it is shown that such failure is due to reasonable cause and not due to willful neglect". 222 Section 6653(a) imposes an addition to tax for the taxpayer's negligence or disregard of rules or regulations, defining the term "negligence" so as to include "any failure to make a reasonable attempt to comply with the provisions of this title, and the term 'disregard' includes any careless, reckless, or intentional disregard". Finally, section 6654(a) imposes additions to tax for the taxpayer's failure to make periodic estimated payments of tax as required. With respect to each one of these additions to tax, the burden of proof is on the taxpayer to demonstrate that they should not be applied, Estate of DiRezza v. Commissioner, 78 T.C. 19 (1982) (as to section 6651(a)); Bixby v. Commissioner, 58 T.C. 757 (1972) (as to section 6653(a)); Grosshandler v. Commissioner, 75 T.C. 1 (1,980) (as to section 6654). The record in this case is rather unsatisfactory, but we conclude that, for a taxpayer of the age and in the condition of this petitioner, it would not be proper to impose the additions to tax that are specified in sections 6651(a) and 6653(a), and they are accordingly disapproved. 223 Cf. Huszagh v. D'Amico, 846 F. Supp. 1352 (N.D. Ill. 1994). As to the additions to tax under section 6654(a), however, no relief is available in this case unless the Secretary has determined a waiver of the additions pursuant to section 6654(e)(3), and no such determinations have been made here. These additions to tax must therefore be sustained. Estate of Ruben v. Commissioner, 33 T.C. 1071 (1960). Decision will be entered for respondent except as to the additions to tax under sections 6651(a)(1) and 6653(a).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620677/	Franklin McCullough v. Commissioner.Franklin McCullough v. CommissionerDocket No. 23677.United States Tax Court1950 Tax Ct. Memo LEXIS 5; 9 T.C.M. (CCH) 1169; T.C.M. (RIA) 50316; December 28, 19505 Petitioner not entitled to claimed dependency credits during year 1945. Harry B. Kirtland, Esq., 421-424 Gardner Bldg., Toledo 4, O., for the petitioner. Cyrus A. Neuman, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion This proceeding was initiated to test the correctness of the respondent's determination of a deficiency in income tax in the amount of $626 for the taxable year 1945. The question involved is whether petitioner furnished the chief support for his children so as to entitle him to the six dependency credits claimed on his return. Respondent determined that he did not furnish such support, thus placing on the petitioner the burden of proving his right to the dependency credits sought by him. Findings of Fact Petitioner is a resident of Toledo, Ohio, 6 and was divorced from his wife in November, 1945. In 1934 petitioner purchased a farm in Putnam County, Ohio, where he and his wife and family lived until 1938. Thereafter petitioner did not live on the farm or with his family from 1938 through 1945. He contributed no direct support to his wife and children during that period except in 1945, on order of the court in connection with the divorce proceedings, he paid $50 during the month of November and another $50 during the month of December, 1945. During the year 1945, petitioner did not pay the taxes, interest, and insurance on the farm, nor did he pay for any feed or supplies or for anything else in connection with carrying on or operating the farm, nor did he render any services in connection with the operation of the farm. The farm was operated during the taxable year by petitioner's wife with the help of her children, and the wife's income tax return for the year 1945 disclosed that she suffered a loss in the amount of $22 from carrying on her farming activities. Petitioner was not around the farm during the year 1945. He had no conversation with neighbors or relatives about the operation of the farm and he knew nothing directly7 or indirectly about the manner in which the farm was being operated during the taxable year. On the occasion of petitioner's divorce in 1945, the court awarded the farm and equipment thereon to his wife. One of petitioner's children, Kenneth, had income during the year 1945 in the amount of $779, which sum Kenneth separately returned for income tax purposes. Petitioner's wife during the taxable year worked for wages and earned during that period $1,483.61. The petitioner did not furnish more than one-half of the support of his children or of any one of them during the taxable year 1945. Opinion ARUNDELL, Judge: On the record as made in this case we have no hesitancy in concluding that petitioner did not furnish more than one-half of the support for his children, as is required by section 25 of the Internal Revenue Code to entitle him to the dependency credits. The whole burden of petitioner's argument is that he had title to a farm on which his family lived and that they must have received their chief support from the farm. Certainly he never helped to work the farm during the year 1945, and apparently he did nothing about helping either on the farm or8 otherwise since 1938. The first contribution, we find, came in November, 1945, on direct order of the divorce court. At the conclusion of the hearing this Court held that petitioner did not sustain his burden of establishing that he had furnished more than one-half of the support of his children or of any one of them. 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/4620678/	VERNON AND DORA PRAIRIE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPrairie v. CommissionerDocket No. 38800-84.United States Tax CourtT.C. Memo 1985-155; 1985 Tax Ct. Memo LEXIS 476; 49 T.C.M. (CCH) 1098; T.C.M. (RIA) 85155; April 1, 1985. Vernon and Dora Prairie, pro se. Gordon L. Gidlund and Phyllis W. Greenblum for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Chief Judge: Respondent's Motion to Dismiss for Failure to State a Claim on Which Relief Can be Granted was assigned to Special Trial Judge Francis J. Cantrel for hearing, consideration and ruling thereon. 1 After a review of the record, we agree with and adopt his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: This case is before the Court on respondent's Motion to Dismiss for Failure to State a Claim on Which Relief Can be Granted, which was filed477 pursuant to Rule 40 2 on January 7, 1985. Respondent, in his notice of deficiency issued to petitioners on October 31, 1984, determined deficiencies in petitioners' Federal income tax and additions to the tax for taxable calendar years 1981 and 1982 in the following respective amounts: Additions to Tax, I.R.C. 1954 3YearsIncome TaxSection 6653(a)Section 6653(a)(2)1981$19,809.00$990.0050% of the interestdue on $19,809.00198229,237.001,462.0050% of the interestdue on $29,237.00The adjustments to income as determined by respondent in his deficiency notice are: 19811982Interest Income 4$28,846.00 $34,636.00 Farm Rental Income: Grain Sold In Minnesota51,608.00 75,702.00 Grain Sold in Illinois19,907.00 19,284.00 Agriculture SubsidyPayment654.00 706.00 Cash Rent600.00 600.00 Farm Rental Expenses: Repairs-Illinois(343.00)Repairs-Minnesota(794.00)Fertilizer - Illinois(5,574.00)(9,142.00)Fertilizer - Minnesota(13,374.00)(16,869.00)Real Estate Tax-Illinois(3,905.00)(1.440.00)Real Estate Tax-Minnesota(9,551.00)(9,344.00)Insurance(556.00)(769.00)Depreciation(3,944.00)(4,692.00)Spray(469.00)Exemptions(4,000.00)(4,000.00)$60,242.00 $83,535.00 478 Petitioners' legal residence on the date they filed their timely petition was R.F.D. 3, Box 164, Marshall, Minnesota. They filed joint 1981 and 1982 Federal income tax returns with the Internal Revenue Service. Rule 34(b) provides in pertinent part that the petition in a deficiency action 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" and "clear and concise lettered statements of the facts on which petitioner bases the assignments of error". [Emphasis added.] Petitioners timely filed a "petition" on November 13, 1984, in which they assert-- I Vernon Prairie am almost 80 and a invalid, my wife is over 70. We do not farm we live in the farm building. We have land we rent out. We share in the income and expenses. We do not do our taxes we send them in to the I.R.S. They figure479 them for us. We go by what they say. We were told they have 60 days to bill us from the time we file. We put in all our income and not quite all our expenses. We enter $3,000 more interest then we have in case we should of missed some. We own 800 acres of land in Yellow Medicen County that was stolen from us in a bank robbery. We want to deed this land to you and the state of Minn to cover any taxes we may owe. I was told by a I.R.S. agent we could do this. My attorney Donal L. Maland of Montevideo has the papers and will draw the deeds as soon as requested. We note on the letter it states there is a deficiency up ward, but on the forms it does not state there is a deficiency. Once I sent you papers such as these and you could not prepare a case because the notice of deficiency was not complete. I have the papers to show we entered all our income. [Reproduced literally.] Respondent then filed the motion herein under consideration. On January 25, 1985 the Court served the following order on petitioners-- * * For cause, it is ORDERED that petitioners shall on or before February 26, 1985, file with the Court a proper amended petition in which they set480 forth with specificity each error they allege respondent has committed in the determination of the deficiency and a statement of the facts in support thereof. It is further ORDERED that respondent's motion to dismiss for failure to state a claim upon which relief can be granted is held in abeyance pending receipt of the above amended petition. An "amended petition" was "lodged" on February 1, 1985, which recites in pertinent part as follows: No notice of deficiency received. I bought 1,200 acres of land in the depression for about $50. a acre. It was all taken away from me by lawyers and a judge and my brother and sisters in 57 by a bank robbery. I appeared before a state judge, and he told me if I could produce the deeds I would be in the clear. I have the deeds now. I am almost 80 and a diabetic I can not go to st Paul. If you can have a small claims court handled it have it in Marshall, Minn. [Reproduced literally.] 5481 After reviewing the "amended petition" the Court calendared respondent's motion for hearing at Washington, D.C. on March 6, 1985. While neither petitioner appeared when the case was called on March 6, they did file a statement under Rule 50(c). The matters contained in that statement are generally incomprehensible and bear no relevance to any of respondent's determinations. 6482 In our view the "facts" recited in the "petition" and "amended petition" simply are not facts as mandated by our rules of practice but, rather, are mere conclusions. In short, no justiciable facts appear anywhere in this record respecting respondent's determinations for interest income, farm rental income, farm rental expenses, exemptions and the negligence additions to the tax. On the other hand, some of the statements appear to confirm some of respondent's determinations. On the precise matter we are called upon here to decide, the Court of Appeals for the Eighth Circuit has spoken more than once. In 1979 that Court said-- * * Because (1) petitioner failed clearly and concisely to state the facts on which he bases the assigned error, (2) his statements were not of underlying specific facts but were instead mere conclusions * * * the Tax Court correctly held petitioner had failed to state a claim upon which relief could be granted. * * ." [See Nyhus v. Commissioner,594 F.2d 1213">594 F.2d 1213, 1215 (8th Cir. 1979), affg. per curiam an order of dismissal and decision of this Court.] Still later, on November 2, 1984, that Court stated-- * * Here, 483 however, Scherping had a burden to plead sufficient facts to call into question the Commissioner's deficiency determination. His broad conclusory allegations did not satisfy that burden, for there are simply no facts pleaded to support the claims of error. The Tax Court was justified in dismissing his petition. [See Scherping v. Commissioner,747 F.2d 478">747 F.2d 478, 480 (8th Cir. 1984), affg. per curiam an order of dismissal and decision of this Court.] Finally, on January 25, 1985 that Court concluded-- * * Upon review of May's amended petition, we find no allegations of fact which could give rise to a valid claim; rather, the complaint merely contains conclusory assertions attacking the constitutionality of the Internal Revenue Code and its application to the taxpayer. Tax protest cases like this one raise no genuine controversy; the underlying legal issues have long been settled. See, e.g., Abrams, 82 T.C. at 406-07 (citing cases rejecting similar arguments). Because May's petition raised no justiciable claims, the Tax Court properly dismissed the petition for failure to state a claim. [May v. Commissioner,752 F.2d 1301">752 F.2d 1301, 1304 (8th Cir. 1985),*484 affg. an order of dismissal and decision of this Court.] 7On the record before us, we conclude that petitioners have failed to state a claim upon which relief can be granted. Therefore, we must and do grant respondent's motion. An appropriate order of dismissal and decision will be entered.Footnotes1. This case was assigned pursuant to sec. 7456(c) and (d)(4), Internal Revenue Code of 1954↩, as amended, and Delegation Order No. 8 of this Court, 81 T.C. XXV (1983).2. All Rule references are to the Tax Court Rules of Practice and Procedure.↩3. All section references are to the Internal Revenue Code of 1954, as amended.↩4. The interest income was received by petitioners in 1981 and 1982 from five different banks. Respondent has attached a schedule to his deficiency notice naming each bank from which interest was received and the specific amount thereof.↩5. That document will be filed as of February 1, 1985. See Derksen v. Commissioner, 84 T.C. (filed on March 7, 1985, Slip. op. p. 5↩-6), where no responsive pleading was filed and where we considered a petition and an amended petition in granting a motion such as is now before the Court.6. At different times petitioners transmitted a plethora of documents to the Court. Those documents were returned to petitioners by the Court as unresponsive and not material to the present proceedings. Notwithstanding, petitioners have resubmitted them to the Court. We have reviewed them and find that none of them, either in part or whole, constitute a proper amended pleading upon which a claim may be based. Nonetheless, we have received them as Court's Exhibit I in the event petitioners appeal this case. Petitioners are no strangers to this Court. They have been here before. In that case, which involved the taxable years 1966 and 1967, petitioners (for the third time) failed to appear for trial and their case was dismissed for lack of prosecution. Petitioners appealed and the Court of Appeals in affirming our decision had this to say in footnote 3 of their opinion-- 3. Appellant [Mr. Prairie] in letters to this Court makes numerous other claims which are completely unsupported, i.e., he alleges that he has a tax claim against the Government for $831,814 which was not invalidated by the Tax Court decision. We note too that various other claims were made in the Tax Court by letters and news clippings which were utterly devoid of support. These claims are frivolous and do not merit discussion here. [See Prairie v. Commissioner,469 F.2d 1085">469 F.2d 1085, 1086 n. 3 (8th Cir. 1972).] The foregoing language, by the same Court to which an appeal of this case lies, is equally applicable here where the record bears a remarkable likeness to Mr. Prairie's earlier case.↩7. See also, Guidry v. Commissioner,729 F.2d 1457">729 F.2d 1457 (5th Cir. 1984), affg. without published opinion an order of dismissal and decision of this Court, and Wellman v. Commissioner,T.C. Memo. 1985-97↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620681/	TIBOR I. SZKIRCSAK and E. MARIE SZKIRCSAK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSzkircsak v. CommissionerDocket No. 9813-77.United States Tax CourtT.C. Memo 1980-129; 1980 Tax Ct. Memo LEXIS 457; 40 T.C.M. (CCH) 208; T.C.M. (RIA) 80129; April 21, 1980, Filed 457 Held, petitioners are entitled to deduct gambling losses in amount determined by the Court. Tibor I. Szkircsak and E. Marie Szkircsak, pro se. Brad S. Ostroff, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: Respondent determined a deficiency of $2,884.57 in petitioners' Federal incofme tax for 1975. Due to concessions, the sole issue for decision is whether petitioners have substantiated gambling losses equal to or in excess of their winnings from gambling during the taxable year. 458 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioners Tibor I. (Tibor) and E. Marie (Marie) Szkircsak are husband and wife who, at the time of the filing of the petition herein, resided in Phoenix, Ariz. Petitioners timely filed their joint Federal income tax return for the taxable year 1975. During 1975 Marie was employed as a telephone operator for Mountain Bell Telephone. Marie was paid bi-monthly and received $6,896.45 as wages during the taxable year in issue. During 1975 Tibor operated as a sole proprietorship a business entitled "Tibor Signs." Based on petitioners' concessions of the schedule C adjustments made by respondent in the statutory notice of deficiency, Tibor Signs operated at a loss of $304.25 during the taxable year in issue. During the taxable year, petitioners attended on a weekly basis various dog tracks in the Phoenix area. The number of nights they would spend at the track per week varied between two and five. When petitioners went to the track they usually attended only the last two races. It459 was during the last two races that the track offered a high-odds betting proposal named the "Big Q." Petitioners confined their wagers solely to the Big Q, and did not bet on individual races.During 1975 petitioners won $13,967.80 on two Big Q bets. In March petitioners won a Big Q of approximately $13,220 and later in the year petitioners won another Big Q for the balance of the winnings. Other than the above, petitioners won no other wagers at the dog tracks during the taxable year in issue. On three separate occasions during 1975--March 28-30, April 19-21, and June 13-18--petitioners traveled to Las Vegas to gamble at the casinos. All three trips were unsuccessful, and petitioners sustained losses on each occasion. On their 1975 Federal income tax return, petitioners reported $13,967.80 as gambling winnings. This amount represented winnings from the two Big Q's for which the racetracks issued Informational Returns (Form 1099). On the same return, petitioners deducted $13,967.80 of a $15,645 gambling loss claimed to have been sustained during that taxable year.Petitioners kept a daily record of their profits and losses from betting at the dog tracks. In their racing program, 460 they would enter the amount bet on each race and indicate whether they won or lost. Upon returning home from the track, Marie would net the losses against the profits (if any), and enter the net amount on a daily summary sheet. At the end of each month, petitioners would total their daily profit or loss and enter the total net gain or loss for the month on a summary sheet. After entering this monthly recapitulation, petitioners destroyed the racing programs and daily statements. Petitioners did not calculate their losses in Las Vegas on a daily basis. Upon returning to Pheonix from each of their Las Vegas excursions, Marie would enter the amount of the gambling losses sustained during that trip on the monthly summary with their racetrack losses. The amount entered was arrived at by adding the amounts of checks cashed in Las Vegas to the amount of cash with which they started, and subtracting therefrom any cash they had upon their return. At trial petitioners introduced into evidence a handwritten copy 1 of their monthly summary sheet for 1975. This copy was made in early 1976 and is summarized as follows: 461 DatePlaceLossJan. 1975Greyhound Park$ 560Feb. 1975None listed340Mar. 1975None listed1,200Mar. 28-30,1975Las Vegas3,100April 1975Apache Park2,025April 19-211975Las Vegas4,000May 1975Apache Park300June 1975Apache Park500June 13-18,1975Las Vegas2,150July 1975Black Canyon Park450Aug. 1975None listed175Sept. 1975Black Canyon Park280Oct. 1975None listed500Dec. 1975None listed65According to this statement, petitioners sustained a loss of $6,395 and $9,250 from gambling at dog tracks and Las Vegas, respectively, during 1975.A total of 10 checks were cashed by petitioners immediately before of during their trips to Las Vegas. Of these checks, which totaled $4,475, five were made payable to cash and five to Able Check Cashing Co. The checks made payable to cash were negotiated in Arizona, while the checks made payable to Able Check Cashing Co. were negotiated in Las Vegas. On April 22, 1975, upon returning home from one of their trips of Las Vegas, petitioners cashed a check for $500.On June 18, 1975, also immediately after returning home from Las Vegas, petitioners borrowed462 $775.27 from the Dial Finance Co. In the statutory notice of deficiency dated June 30, 1977, respondent disallowed in full the gambling loss claimed, the stated reason being, "[petitioners] have not shown that losses were sustained." There was no determination that petitioners had realized unreported gross gambling winnings.ULTIMATE FINDING OF FACT Petitioners sustained losses from gambling in the amount of $5,840 during 1975. OPINION The only question for our determination is whether petitioners are entitled to a deduction for gambling losses. On their 1975 Federal income tax return, petitioners reported gambling winnings from racetracks in the amount of $13,967.80 and offsetting losses in a like amount. Respondent contends that no deduction for gambling losses is allowable as petitioners have not established that losses were in fact sustained.Section 165(d) allows a deduction for losses from wagering transactions to the extent of gains therefrom. Petitioners have the burden of proving that their alleged losses were in fact sustained; the issue is one of fact to be decided on the basis of the evidence adduced and the weight given thereto. Schooler v. Commissioner, 68 T.C. 867 (1977);463 Green v. Commissioner, 66 T.C. 538 (1976); Showell v. Commissioner, 23 T.C. 495">23 T.C. 495 (1954), remanded 238 F. 2d 148 (9th Cir. 1956). Marie was the sole witness on behalf of petitioners. A handwritten copy of a monthly summary sheet reflecting net losses per month taken from daily records which were subsequently discarded was introduced as evidence to substantiate the amount of their losses. Petitioners were unable to produce other records, such as the daily summaries and unredeemed betting tickets, on which they claim their monthly summary was based. Additionally, 10 checks cashed by petitioners immediately before and during gambling trips to Las Vegas were introduced into evidence. To begin, we believe considerably more documentation is needed to adequately substantiate gambling losses than that introduced in evidence.The monthly summary sheet, explained by Marie's testimony, is of some help, but it does not reflect the time, place, or amount of any specific gambling loss. Secondly, we have serious doubts regarding the accuracy of the summary. While petitioners have stated that their monthly totals accurately reflected net losses464 by the month, we do not believe this is the case. In March petitioners won approximately $13,200 on the Big Q, yet their summary indicates a loss of $1,200 for that month. If their records are to be believed, this would indicate that petitioners sustained $14,400 in losses for that month at the racetrack. This is not consistent with Marie's testimony and furthermore, with the exception of one other month, petitioners' losses from racetrack gambling never exceeded $600 in any one month. Finally, this document is merely a summary of taxpayers' records made after the year in issue. The original records upon which this summary was based were destroyed by the taxpayers and, therefore, it is impossible for either respondent or this Court to verify any amounts listed therein. At best, this summary is little more than a noncontemporaneous, unsworn statement by the taxpayers as to the amount of their losses, and, as such, is entitled to little evidentiary weight. We also do not find that the cancelled checks conclusively establish the amount of petitioner's gambling losses at Las Vegas. Although we are certain that some of the funds so obtained went for gambling, the face amount465 on the checks give us no clue as to that amount, because personal expenditures to and from Las Vegas and while there must be presumed. While there is no ironclad rule to establish conclusively losses from gambling, we believe, absent mitigating circumstances, taxpayers should at least offer a fairly contemporaneous record of their wagering transactions. See, for example, Green v. Commissioner, supra.2 A mere summary of losses prepared at the end of the year, rather than during the normal course of a taxpayer's business and unsupported by records of original entry, is inadequate for tax purposes. Showell v. Commissioner, supra; Stein v. Commissioner, 322 F. 2d 78 (5th Cir. 1963), affg. a Memorandum Opinion of this Court. We do not believe that asking for contemporaneous records imposes too great a hardship on petitioners or others gamblers similarly situated. Section 6001 imposes a duty on every taxpayer to keep sufficient records verifying all matters required to be shown on the return. The records submitted in this case fall far short of meeting466 this requirement. Although we do not find petitioners' records adequate to determine the amount of the gambling loss, we are convinced that a loss in excess of that allowed by respondent was in fact sustained during the taxable year. Marie testified in a forthright and candid manner, and we have a good deal of confidence in her credibility. Her testimony is corroborated by the fact that large amounts of checks were cashed immediately before and during their trips to Las Vegas.This evidence, together with the fact that on return from Las Vegas petitioners obtained loans or cashed additional checks for funds, patently suggests that their gambling excursions met with little success. Based on the testimony and the other evidence from the record, this Court is competent to determine the amount of the loss under the approximation rule laid down in Cohan v. Commissioner, 39 F. 2d 540 (2d Cir. 1930); see also Showell v. Commissioner, supra; Drews v. Commissioner, 25 T.C. 1354">25 T.C. 1354 (1956). Petitioners offered no evidence as to the average amount bet on each race.Although we can only approximate, we believe this amount to be in the neighborhood467 of $15. Based on an average attendance of 3 times weekly, we find that petitioners incurred losses of $2,340 from racetrack gambling during the taxable year. Additionally, we find that petitioners sustained a loss of $3,500 from gambling in Las Vegas during 1975.We reach this conclusion by deducting $975, as being for personal expenditures, both during and after their Las Vegas trips, from the face amount of the cancelled checks that petitioners introduced into evidence. Respondent additionally argues that petitioners have not established that their losses from gambling did not exceed their unreported gambling winnings for the taxable year. Respondent challenges the adequacy of proof because Marie admitted that while playing "craps" in Las Vegas there were occasions when she won certain individual rolls of the dice. From this respondent concludes that petitioners had unreported gambling winnings and, therefore, cannot prevail. He relies on Donovan v. Commissioner, 359 F. 2d 64 (1st Cir. 1966), affg. a Memorandum Opinion of this Court, and Schooler v. Commissioner, supra.In Donovan and Schooler, the gambling loss deductions were468 disallowed in full because there were admittedly additional unreported winnings and no convincing proof that the losses from gambling exceeded the unreported gains. The rule of Cohan was held inapplicable since there was no basis for estimating whether the taxpayer's losses exceeded the unreported gains. See also Zooloomian v. Commissioner, 417 F. 2d 1337 (1st Cir. 1969), affg. a Memorandum Opinion of this Court. In distinction, here respondent has allowed no gambling losses unless it can be shown that petitioners had unreported gambling income against which losses were netted. There is little evidence in the record relating to unreported gains, and we believe this paucity of evidence may be due to respondent's failure to specifically inform petitioners by statutory notice, or otherwise, that he was relying on this argument as a basis for his disallowance of the claimed gambling losses. The only evidence bearing on this issue is the testimony of Marie. Marie repeatedly stated that the only winnings from gambling consisted of the two Big Q wagers which were reported on the return. As stated before, we believe Marie was candid and forthright. Her testimony469 is credible in light of the fact that the record indicates that the only racing wagers made during the taxable year were on the high-odds Big Q wagers. Therefore, it is not inconceivable that petitioners would have only two wins to show for numerous wagers. Respondent points to a statement by Marie which indicates that she occasionally won wagers on individual rolls of the dice at Las Vegas as conclusively showing that there were unreported gambling winnings. We believe this conclusion far fetched. Although we recognize that there is a duty to report gambling winnings even if there is a net loss, McClanahan v. United States, 292 F. 2d 630 (5th Cir. 1961), we believe respondent carries this rule too far, for it is impractical to record each separate roll of the dice or spin of the wheel. Since Marie has testified that she always incurred a loss upon leaving the table, we do not believe, as respondent suggests, that her statement is tantamount to an admission that there was unreported gambling income. (Cf. Green v. Commissioner, supra at 548; the difference between daily wins and losses constitutes gross income.) Had respondent offered evidence470 such as an increase in petitioners' net worth or unexplained bank deposits to support his argument that petitioners had additional unreported gambling winnings, we would expect petitioners to offer evidence corroborating their own testimony that they had no unreported gambling winnings. However, here respondent's argument is based entirely on Marie's testimony that she occasionally had a winning roll of the dice, which she adequately explained did not make her a winner on those particular days. It is always difficult to prove a negative, see Schildhaus v. Commissioner, T.C. Memo 1969-283">T.C. Memo. 1969-283, and it would be almost impossible for petitioners to prove conclusively that they had no unreported gambling income at Las Vegas except through their own testimony. Furthermore, they were not adequately advised by respondent in advance of the trial that he would rely on this argument. Under the circumstances, and since Marie's testimony on this subject was uncontroverted, consistent, and believable, we find that petitioners realized no additional income from gambling in 1975. Therefore, Schooler and Donovan are distinguishable and pose no bar to our application of the*471 Cohan rule. Decision will be entered under Rule 155. Footnotes1. The original monthly summary was not introduced into evidence. Petitioners did not bring the original to the trial as it "was ragged."↩2. See also Greenfeld v. Commissioner, T.C. Memo. 1966-83↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620682/	FLORENCE CATALANOTTO, INDIVIDUALLY AND AS EXECUTRIX OF THE ESTATE OF THOMAS J. CATALANOTTO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCatalanotto v. CommissionerDocket No. 10182-79.United States Tax CourtT.C. Memo 1984-215; 1984 Tax Ct. Memo LEXIS 453; 47 T.C.M. (CCH) 1665; T.C.M. (RIA) 84215; April 25, 1984. Michael S. Fawer,Matthew H. Greenbaum,Chris M. Evans, and Herbert V.454 Larson, Jr., for the petitioners. H. Karl Zeswitz, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined deficiencies in and additions to the Federal income taxes of petitioner and her deceased husband as follows: Addition to TaxYearDeficiencySec. 6653(b), I.R.C. 19541972$ 4,967.10$2,483.55197310,751.205,375.60The issues for decision are: (1) Whether respondent properly determined, pursuant to the net worth plus personal expenditures method of income reconstruction, that petitioner and her deceased husband underreported their taxable income by $19,690.71 for 1972 and by $35,975.29 for 1973; and (2) Whether, if we find that such income was underreported, any part of the resultant underpayment of taxes for either 1972 or 1973 was due to fraud on the part of Thomas J. Catalanotto, petitioner's deceased husband. FINDINGS OF FACT At the time they filed their petition in this case, petitioners were Thomas J. Catalanotto and Florence Catalanotto; they maintained their legal residence in New Orleans, Louisiana. Thomas J. Catalanotto died on January 15, 1983; 455 his estate succeeds him as a petitioner in this case. For the sake of simplicity, however, we shall hereinafter refer to Thomas J. Catalanotto as petitioner; Florence Catalanotto is a petitioner herein only by virtue of having filed joint returns with her deceased husband. During 1972 and 1973, the years at issue, petitioner owned and operated a bar, the Golden Coin Lounge (Golden Coin), located at 3655 18th Street, Metairie, Louisiana. The bar is located in an area known as "Fat City." Petitioner opened the Golden Coin for business beginning in 1968; however, he had been involved in the bar business since the late 1940's as the owner-operator of the following bars in the New Orleans area: Bar NameAddressYears of OperationThe Hot SpotSouth Rampart1947 - 1950Green RoomOrleans Avenue1950 - 1952Tony's Green RoomSt. Peters1952 - 1958Tony's Green RoomNorth Galvez1958 - 1968In addition to his business at the Golden Coin, petitioner also owned and received rental income during 1972 and 1973 from the following properties: 3655 18th Street, Metairie, Louisiana: downstairs portion used for restaurant purposes; upstairs portion used as apartments; 456 6409-11 Marshall Foch Street, New Orleans, Louisiana: residential duplex; 400 North Galvez Street, New Orleans, Louisiana: use unspecified. 1. Operation of the Golden CoinThe Golden Coin was a bar at which only drinks, no food, were served.It was run by petitioner as a strictly cash operation in that customers were allowed to pay for their drinks with cash only. Petitioner employed bartenders and waitresses to help him operate the bar; however, petitioner alone controlled all business aspects of the Golden Coin, such as ordering supplies and paying the bills. Petitioner was described by several former employees of the Golden Coin as an astute, strict businessman who "ran a tight ship." At the end of each of the Golden Coin's two nightly shifts, at 8:00 p.m. and again at closing at 4:00 a.m., petitioner rang out the cash register. After ringing out the cash register, petitioner took the cash drawer, along with the cash register tapes and guest receipt tickets which itemized the type and amount of drink sales made during each shift, into his office/storeroom at the Golden Coin. There, alone and with the office door closed, petitioner balanced the cash drawer and totalled457 the cash receipts for each shift, requiring the bartender to make up any cash shortages that he discovered. Petitioner took the daily cash receipts from the Golden Coin to his home and put them in a drawer in his bedroom. Every Monday, he would determine how much he needed to pay his business expenses for the week and only that amount did petitioner deposit into his business checking account at the Bank of Louisiana, the only account into which he deposited business receipts from the Golden Coin. With respect to personal expenses, each Sunday, petitioner removed $140 from the Golden Coin cash register and gave it to his wife for household expenses. Likewise, petitioner removed $10 each Sunday from the register for his son's allowance, and $25 for his own personal use.2. Petitioner's Bookkeeping System and Income Tax Return PreparationFor bookkeeping purposes, petitioner maintained what is referred to as a "bag account" which was the bookkeeping system set up for him by Roy Bourgeois (Bourgeois), whose firm, Accurate Accounting Service, Inc. (Accurate Accounting), was retained by petitioner to prepare his Federal income tax returns. Pursuant to this system, petitioner458 entered a sum purporting to be the Golden Coin's daily gross cash receipts onto the appropriate space on a recap sheet which was numbered 1 through 30 or 31 and reflected cash receipt totals for each day of each month. At the end of each month, petitioner would bring to Accurate Accounting the monthly recap sheet along with an envelope containing invoices and receipts for all of his business expenses incurred during the month. Based solely on this information supplied by petitioner, i.e., the monthly recap sheets prepared by petitioner and the expense receipts placed in the envelope by petitioner, employees of Accurate Accounting prepared petitioner's Federal income tax returns for the years at issue. After the income tax returns were prepared by Accurate Accounting, petitioner reviewed the returns along with his wife; they signed the returns and mailed the returns themselves. Petitioner was specifically instructed by his accountant, Bourgeois, to retain his cash register tapes in order to substantiate his business receipts. After making the daily cash receipt entries onto the recap sheet, however, petitioner did not retain any documentation of daily lounge sales; rather, 459 petitioner disposed of the cash register tapes and guest receipt tickets. The discarded tapes and receipts were ultimately removed from the premises of the Golden Coin in the trash. For the year 1972, petitioner pleaded guilty to the criminal charge of willfully failing to keep records, specifically "cash register tapes", in violation of section 7203. 1For the years at issue, 1972 and 1973, petitioner and his wife timely filed joint Federal income tax returns in which they reported taxable income of $4,550.52 for 1972 and $1,053.38 for 1973. These returns were prepared by Kieren "Buddy" Bloecher (Bloecher), an employee of Accurate Accounting, based on the information supplied solely by petitioner. 3. Examination of Petitioner's 1972 and 1973 Federal Income Tax ReturnsIn April 1975, Revenue Agent Gerald Pierce (Pierce) was assigned to examine petitioner's Federal income tax returns for 1972 and 1973. Before contacting petitioner, Pierce prepared a rough preliminary analysis460 of petitioner's income tax returns for the years at issue which indicated that petitioner "was having more money going out than coming in." At his first meeting on April 17, 1975 with petitioner and Bourgeois, petitioner's accountant, Pierce perpared an interview worksheet in which he compiled general information about the taxpayer. Petitioner described for Pierce his bookkeeping method, listed his bank accounts, identified various properties which he owned and the mortgages on those properties. Pierce asked petitioner how much cash he had on hand at the beginning of 1972 including "money in your pocket, in your cash register and also in your home or anyplace." Petitioner responded that he had $3,000 cash on hand; that he tried to maintain a $3,000 balance for the business. 2 Petitioner also informed Pierce that he had no nontaxable sources of income for the years at issue such as inheritances, gifts, or social security benefits. At this first meeting, Pierce reconciled petitioner's 1972 and 1973 income tax returns with his books and found no discrepancies. 461 After his first meeting with petitioner, Pierce prepared a rough bank deposit schedule reflecting deposits made by petitioner into his checking accounts at the Bank of Louisiana and the National American Bank. The rough analysis showed that petitioner's total bank deposits exceeded what petitioner had reported on his returns as receipts from the Golden Coin and his rental property. When Pierce asked petitioner for an explanation of this discrepancy at his second meeting with petitioner on May 9, 1975, petitioner gave no oral response and offered no explanation. On July 9, 1975, Pierce met again with petitioner and presented him with a more refined and expanded bank deposit analysis which for 1972 showed deposits in excess of $15,900 over gross receipt figures reported by petitioner on his 1972 return. Petitioner once again offered no response or comment to Pierce's request for an explanation of this discrepancy. Pierce asked petitioner at this meeting whether he had available to him cash from other years which he may have deposited during the years at issue. Petitioner informed Pierce that he had a safe at home where he would have kept this money; there was no written record462 of how much money was in the safe; that he was the only one ever to count the money; neither his wife nor his children were aware of how much money was in the safe; and he could not remember how much money there would have been in the safe at any given time. Pierce also questioned petitioner again with respect to petitioner's cash on hand at the beginning of 1972. Petitioner informed Pierce that he had $2,000 cash on hand, but later on during the meeting, petitioner increased that figure to $10,000. Upon referral by Pierce, petitioner's case was evaluated and accepted by the Criminal Investigation Division of the Internal Revenue Service (IRS). The investigation of petitioner's 1972, 1973 and 1974 taxable years was assigned to Special Agent Kelly Daigle (Daigle). On October 23, 1975, Daigle interviewed petitioner and they discussed, among other things relevant to his business and financial affairs during the years under investigation, petitioner's safe. Daigle asked petitioner how much money was in the safe; however, petitioner, on advice of his attorney, would not say how much money was in the safe at that, or any other, time. At the same meeting, Daigle also questioned463 petitioner with respect to depreciation deductions which had been taken on certain restaurant equipment purchased in 1972, held for only a few days, and then sold. Daigle asked petitioner why depreciation was taken on the equipment for both 1972 and 1973 after it had been sold. Petitioner informed Daigle that he had failed to inform his accountant, Bourgeois, about the sale of the equipment. On November 13, 1975, at the request of petitioner's attorney, Daigle met with petitioner and his family at petitioner's home in order to observe petitioner's style of living and to inspect the safe which petitioner kept in his house. Daigle asked petitioner questions with respect to the year-end balances contained in the safe. Petitioner informed Daigle that he had no idea what the year-end balances were and that he couldn't venture a guess as to what they might have been; he explained that it was his habit to put money into the safe without counting it. Daigle "repeatedly asked questions trying to nail down a year-end balance of cash available." In response, petitioner "repeatedly stated that he didn't count the money and that the couldn't say what the year-end balances were." Petitioner464 later told Daigle at this same meeting that on April 6, 1972, he opened the safe, counted the money and discovered that there was between $40,000 and $44,000 in the safe. He stated that he did so in the presence of his son, Thomas J. Catalanotto, Jr. (Thomas Jr.), who was born in 1958 and was then 14 years old, and his son knew the combination of the safe. He stated that he withdrew $19,000 from the safe, placed the money in a brown paper bag, and opened a passbook savings account at the Homestead Savings Association. 3 Further, he stated that he had begun saving money approximately 15 years prior to the time of the interview, since 1961, when he sold certain property on St. Peters Street, and the first time he had ever withdrawn money from the safe was on April 6, 1972.From that date on, he had never put any money back into the safe; he always withdrew funds. With respect to the source465 of his savings, petitioner told Daigle that it was money he had saved from his business over the years. Daigle informed petitioner that, based on the income reported on his tax returns since 1954 and a tentative anaysis of funds available to save prepared by Pierce, he didn't think petitioner could have saved that much money over the years. Petitioner, however, at this point, insisted that he had begun saving money from his business since 1954 when he bought the safe. 44. Reconstruction of Petitioner's IncomeBecause of both the discrepancy found by Pierce between income reported by petitioner on his 1972 and 1973 tax returns and bank deposits which exceeded those amounts, and petitioner's failure to provide substantiation of his gross receipts for the Golden Coin, respondent reconstructed petitioner's income using the net worth plus personal expenditures method (net worth method). Based on this reconstruction, 466 respondent determined that petitioner underreported his taxable income by $19,690.71 for 1972 and by $35,975.29 for 1973. Respondent's net worth computation is as follows: Net Worth ComputationTaxable Years Ended December 31, 1972 and December 31, 1973 Assets12/31/7112/31/7212/31/73Cash on hand$ 3,633.80$ 3,000.00$ 3,000.00 Cash in banks25,239.2127,179.9638,901.05 Loans receivable500.00 Merchandise inventory500.00500.001,500.00 Furniture & Fixtures18,124.9627,899.6930,194.47 Real estate246,857.29278,040.14278,040.14 Total Assets$294,355.26$336,619.79$352,135.66 LiabilitiesNotes payable$ 6,701.64$ 3,033.53 Mortgages payable105,024.72122,611.30115,916.49 Reserve for depreciation42,448.9750,904.9259,459.06 Total Labilities$147,473.69$180,217.86$178,409.08 Net Worth - ending$146,881.57$156,401.93$173,726.58 Net Worth - beginning146,881.57156,401.93 Increase in New Worth$ 9,520.36$ 17,324.65 Adjustments to Net Worth(Personal expenditures)21,432.2724,617.18 Adjusted Gross Income asCorrected$ 30,952.63$ 41,941.83 Less: Deductions6,711.407,019.92 Taxable Income as Corrected$ 24,241.23$ 34,921.91 Taxable Income per Return4,550.52(1,053.38)Understatement of$ 19,690.71$ 35,975.29 Taxable Income467 5. Financial History of PetitionerIn response to petitioner's contention that the excess bank deposits made during the years at issue came from savings derived from former years' business income, respondent prepared an 18-year analysis, covering the years 1954 - 1971, of funds which would have been available for petitioner to save. This analysis, set forth below, showed a deficit of $73,087.08 between funds available for petitioner to save and founds expended by petitioner during the 18-year period. Funds Available to SaveAvailable Funds1954-1971Reported net income, plus depreciation(1954-1971)$ 201,193.29 Federal tax refund44.97 Savings withdrawals (1954-1971)7,649.55 Loan proceeds available (1958)2,926.54 Asset sale - 1513 St. Peter (1961)8,528.87 Total Available$ 220,343.22 Use of Funds1954-1971 Federal tax & self-employment (1954-1971)$ 21,606.03 Mortgage repayments (1954-1971)98,029.64 Saving deposits (1954-1971)50,925.00 Loan repayment - Bank of Louisiana24,120.00 Loan repayment - TAC Amusement7,735.00 Furniture & Fixtures (business)(1954-1971)35,827.54 Capital improvements (1954-1971)587.09 Personal living expenses (1954-1971)40,600.00 Purchase - 1513 St. Peter (1956)8,500.00 Downpayment - 6356 Marshall Foch (1967)4,500.00 Downpayment - Pontchartrain Gardens1,000.00 Total Use of Funds$ 293,430.30 Recap: Total Available$ 220,343.22 Less: Total Use(293,430.30)Available to Save$ ( 73,087.08)468 Respondent determined that petitioner held funds in bank accounts, engaged in property transactions beginning in 1956, and was involved in loan transactions geginning in 1953 as set forth in the following schedules: Schedule of Bank AccountsBalanceBalanceBalanceAccounts12/31/7112/31/7212/31/73A. CheckingBank of Louisiana(Acct. #170461)$ 696.28$ 452.60$ 949.29National AmericanBank (Acct. #03-34-416-5)1,056.581,590.761,366.19Subtotal-Checking$ 1,752.86$ 2,043.36$ 2,315.48B. SavingsNational AmericanBank (Acct. #3933, CD)10,000.00National AmericanBank (Acct. #0309954-4)885.33925.62970.32National AmericanBank (Acct. #0311388-0)50.0050.00National AmericanBank (Acct. #0307449-1)1,303.07Jefferson Savings(Acct. # 1-012214)17,170.49Homestead Savings(Acct. # 58-601596)19,874.4621,103.33Homestead Savings(Acct. # 61-1205)4,077.464,286.524,511.92Subtotal-Savings$23,486.35$25,136.60$36,585.57Subtotal-Checking1,752.862,043.362,315.48Subtotal-Cash in Banks$25,239.21$27,179.96$38,901.05Schedule of Property TransactionsItemPurchase DateTotal CostDownpaymentFinanced6409/11 Marshall1953$ 25,000$5,900$ 1,800Foch17,305 11513 St. Peter1956$ 8,500$8,500400 N. Galvez1958$ 80,000$45,200 (Pet'sretained $2,926.54)$ 7,776$30,229 (condem-nation proceeds) 2PontchartrainGardenLot1962$ 2,300$1,000$1,3006356 Marchall1967$ 14,500$4,500$7,735 to $10,000 3Fochreal estatepurchaseHome1972$ 27,720$5,695$23,000Construction3655 18th St.1968$ 35,000$4,270$69,952realestate purchaseBuilding1968$107,556$29,170Furniture and1968$ 15,000$25,000Fixtures$27,664$ 4,000 4469 Schedule of Loan TransactionsYearItemBorrowedAmountDescriptionLoan 13101953$17,305.54Mortgage assumedupon purchase of6409/11 MarshallFoch; repaid withproceeds of Loan4144.Second Mortgage on6409/11 Marsh. Foch19531,800.00Loan 4144195822,050.00Proceeds used tosatisfy Loan 1310;balance applied topurchase of 400N. Galvez.Loan 4145195841,400.00Proceeds for useon purchase of 400 N.Galvez. Repaid withproceeds of Loan4331.Loan 4331195845,200.00Proceeds used tosatisfy Loan 4145.Balance of $2,926.54received bypetitioners. Loanpaid off withproceeds from saleof furniture andfixtures of GreenRoom in 1967.TAC Amusement19677,735.00Stipulation establishedthe amountof the loan, thoughCatalanotto hadstated it was for $10,000.Proceeds used in purchaseof realestate at 6356 MarshallFoch.Bank of La. Loan196825,000.00Proceeds of loan usedtowardspurchase and construction of3655 18th St.Loan 11882196877,000.00Proceeds of loan usedtowards purchaseand construction of 3655 18th St.Mortgage given on 3655 18th St.Loan 11883196830,000.00Proceeds of loan usedtowards purchaseand construction of 3655 18th St.Mortgage given on 400 N. Galvez.Loan 351197223,000.00Proceeds used to financeconstructionof home at 6356 Marshall Foch.Loan 05-110-883919721,500.00Proceeds of this Bankof New Orleansloan used to purchaseair-conditioner.470 Not listed above are several financing arrangements with Credit Thrift; this financing was entered by petitioner in purchase of automobiles. OPINION 1. The DeficienciesThe first issue for consideration is whether petitioner underreported his taxable income by $19,690.71 in 1972 and $35,975.29 in 1973 resulting in the deficiencies in his Federal income tax as determined by respondent using the net worth method of income reconstruction. After careful consideration of the facts of record, we sustain respondent's deficiency determination. 5471 We find, at the outset, that respondent's use of the net worth method in reconstructing petitioner's income was fully justified in the present case. Respondent's agents uncovered substantial disparities between petitioner's reported taxable income for the years at issue and bank deposits made by him during those years for which petitioner gave no satisfactory explanation. Further, even though on examination, petitioner's books and records reflected no inconsistencies with his tax returns for the years at issue, respondent was justified in questioning the reliability of petitioner's books and records. See Lipsitz v. Commissioner,21 T.C. 917">21 T.C. 917, 931 (1954), affd. 220 F.2d 871">220 F.2d 871 (4th Cir. 1955). The Golden Coin was strictly a cash business. It was petitioner himself who entered the Golden Coin's daily gross cash receipts onto the recap sheets with he provided to Accurate Accounting. The gross receipt figures appearing on petitioner's income tax returns were based on these recap sheets prepared by petitioner. Thus, petitioner alone was the source of all information set forth on his Federal income tax returns. Yet, petitioner did not retain the cash472 register tapes and sales receipts generated daily at the Golden Coin, the only documentation which would have substantiated the reliability of the gross cash receipts set forth by petitioner on the recap sheets. See Schwarzkopf v. Commissioner,246 F.2d 731">246 F.2d 731, 734 (3d Cir. 1957), affg. a Memorandum Opinion of this Court. Given the marked discrepancies between bank deposits and reported income found by respondent, and petitioner's admitted failure to retain substantiating evidence, we find that respondent reasonably concluded that petitioner's records did not accurately reflect his income, and, therefore, that respondent was justified in reconstructing petitioner's income using the net worth method. See Merritt v. Commissioner,301 F.2d 484">301 F.2d 484, 486 (5th Cir. 1962), affg. a Memorandum Opinion of this Court. In a case such as this, where the determination of unreported income as well as the existence of fraud necessary to lift the bar of the statute of limitations (Part 2 of this Opinion) depends upon respondent's net worth computation, we must examine the473 validity of respondent's computation in light of the standards set forth by the Supreme Court in Holland v. United States,348 U.S. 121">348 U.S. 121, 129 (1954) and United States v. Massei,355 U.S. 595">355 U.S. 595 (1958). Under those standards, respondent must first establish, with reasonable certainty, an opening net worth. Further, he must establish either that a likely source of unreported income existed, or that he conducted a reasonable investigation of leads to negate the existence of nontaxable sources of income. For the reasons stated below, we conclude that respondent's net worth computation fully complies with the standards of Holland and Massei.A.Opening Net Worth/Cash on HandAs set forth in our Findings of Fact, respondent determined that as of December 31, 1971, petitioner's net worth was $146,881.57, which included cash on hand of $3,633.80. 6 The only item in respondent's net worth computation challenged by petitioner is the amount of petitioner's cash on hand. Petitioner contends that as of December 31, 1971, he kept, in a safe in his bedroom, a cash hoard well in excess of $3,633.80 consisting of money he had saved from his business474 over the years. He maintains that it was this cash which was the source of his excess bank deposits and resultant net worth increase for the years at issue. Thus, contends petitioner, because respondent has grossly understated his cash on hand, respondent has not established petitioner's opening net worth with reasonable certainty. We conclude that petitioner's evidence of the existence and the amount of this alleged cash hoard is wholly deficient and that respondent has convincingly proven, that his determination of petitioner's opening net worth is accurate. At no time has petitioner actually stated an exact amount which he contends was contained in his safe as a cash hoard at the beginning of the net worth computation period. Further, petitioner has not demonstrated any specific use of the cash hoard funds during475 the years at issue, either in purchasing assets or in making bank deposits, which would have affected the net worth computation. At various occasions during both the audit and the criminal investigation covering the years at issue, petitioner informed respondent's agents that he had cash on hand in such widely varying estimated amounts as $3,000, $2,000, $10,000 and between $40,000 and $44,000. Petitioner even stated on one occasion that he kept money in a safe at home, but he never counted it and he had no idea how much money was in the safe. Such contradictory statements by petitioner in no way establish the existence or amount of a substantial cash hoard. Rather, the statements are evidence of an attempt to mislead the investigating agents. Indeed, petitioner's own attempt during the audit period to illustrate the existence of a cash hoard is inconsistent with the facts of record. Petitioner told Revenue Agent Pierce that, on April 6, 1972, he opened his safe, withdrew $19,000 in cash, carried the funds to the Homestead Savings Bank in a brown paper bag and opened an account there. Petitioner did in fact purchase a certificate of deposit from the Homestead Savings Association476 in the amount of $19,000 in April 1972; however, funds in the amount of $17,000 used toward the purchase of this CD were withdrawn by petitioner from his personal bank account at the Jefferson Savings and Loan Association. Only $2,000 of the funds used to purchase the CD was in the form of cash. Here, again, petitioner sought to mislead the investigating agent. Petitioner stresses on brief that during the years at issue, he systematically deposited, in amounts ranging from $500 to $5,000, a total of $43,830 in cash into his bank account at the National American Bank. Petitioner would have us conclude, from the mere fact that such deposits were made, that the source of these deposits could only have been a cash hoard. We are unable to make such a quantum conclusory leap in the absence of any other evidence in the record which would support a finding that the source of such deposits was a cash hoard. The source of such cash deposits could have easily been petitioner's rental receipts or unrecorded cash receipts from his cash business, the Golden Coin, as from a cash hoard.Thus, we do not find such cash deposits persuasive evidence of a cash hoard. To further support his cash477 hoard claim, petitioner places major emphasis on the trial testimony of his son, Thomas, Jr. who testified that in 1968 or 1969, his father told him the combination to the safe in his father's bedroom closet and showed him how to open the safe. On that occasion, Thomas, Jr., claimed that he helped his father court the money in the safe which totalled between $35,000 and $40,000 in various denominations of cash. He further testified that in later years, including 1972 and 1973, the years at issue, he would enter the safe at his father's request and take cash, varying in amounts from $200 to $500, which he would then carry on foot and deposit into his father's checking account at the National American Bank to cover his father's business expenses. We find it difficult to believe that petitioner, described in the testimony as an astute businessman, would have entrusted to a child of 10 or 11 years of age the task of counting $35,000 to $40,000 in cash. Also, given the extensive evidence indicating that petitioner alone handled all aspects of his business, it is inconceivable that he would have allowed a 14-year-old youth to carry, unaccompanied, such large amounts of cash on foot for478 deposit. Further, we find the testimony of Thomas, Jr., itself to be unconvincing. It is internally inconsistent and it is inconsistent with both statements made by petitioner to the revenue agents during the course of the audit and certain other documentary evidence. Thomas, Jr., testified on direct examination that he learned the combination to the safe in 1968 or 1969 when he was 10 or 11 years old. Later, on cross-examination, he stated that he learned the combination when he began working at the Golden Coin when he was 15 or 16 which would have occurred in 1973 or 1974, well past the December 31, 1971 date from which respondent calculated petitioner's opening net worth. On direct examination, Thomas, Jr., stated that he made deposits into his father's account at the National American Bank, and he wasn't aware of any account maintained by his father at the Bank of Louisiana. Later, on cross-examination, however, he stated that he deposited money for his father at "the Bank of Louisiana -- the Bank of New Orleans, National American Bank." These internal inconsistencies alone clearly demonstrate Thomas, Jr.'s lack of credibility. In addition, Thomas, Jr.'s testimony is inconsistent479 with statements made by petitioner himself. Petitioner told Revenue Agent Pierce in 1975 that he was the only one ever to have counted the money contained in the safe and that neither his wife nor his children knew how much money was in the safe. He even stated at that time that he himself did not know how much money was actually in the safe. Although later, petitioner altered his story and stated that in 1972 he opened the safe in the presence of his son and withdrew $19,000 to open a bank account at Homestead Savings Association, petitioner's statements are inconsistent with Thomas, Jr.'s testimony that he helped his father count the money in 1968 or 1969. The documentary evidence points up the inaccuracy of Thomas, Jr.'s testimony as well. Petitioner presented in evidence a schedule of bank deposits made into the two checking accounts maintained by him at the the National American Bank and the Bank of Louisiana. Petitioner stated and both parties agreed that all business expenses were paid through the Bank of Louisiana account. An examination of deposits made into the Bank of Louisiana account corroborates petitioner's statement that he made regular, once-weekly deposits480 into this account to cover business expenses. Thus, Thomas, Jr.'s testimony that he deposited amounts ranging from $200 to $500 into the National American Bank at his father's request to cover business expenses is inconsistent with petitioner's own exhibit. Further, the schedule indicates only two deposits of cash into the National American Bank account during 1972 and 1973 in amounts of $500 or less. We conclude, based on all of the foregoing, that Thomas, Jr.'s testimony is unworthy of belief. In contrast to petitioner's vague and inconsistent claims with respect to a cash hoard, we think the evidence produced by respondent demonstrates that petitioner's cash on hand as of December 31, 1971 was no more than that credited to him by respondent in the net worth computation. During the initial interview, Revenue Agent Pierce asked petitioner how much cash he had in his pocket, in his cash register, and at home. Petitioner's response was that he tried to maintain a $3,000 balance for his business and that he maintained that amount through either the end of 1972 or 1973. This $3,000 figure is also supported by the balance sheet for the Golden Coin maintained by Accurate Accounting481 Service and is more favorable to petitioner than an earlier statement made by petitioner to a bank in connection with a loan that as of December 31, 1967, his cash on hand was $1,200. In the circumstances, we think that respondent acted reasonably in relying on petitioner's initial response with respect to cash on hand at the time of the first interview rather than on statements made at a later time. The later statements were made after petitioner had time to consult with his tax advisors, and he may have learned that he should have given the revenue agent a higher estimate in order to protect himself in the face of a possible criminal fraud charge. This conclusion is borne out by petitioner's later widely inconsistent statements in which he maintained that he had cash on hand in amounts varying anywhere from $2,000 to $44,000. In addition to his reliance on petitioner's own statement with respect to his cash on hand, respondent also compiled substantial affirmative evidence which convincingly refutes petitioner's claim of the existence of a cash hoard. As noted in our Findings of Fact, respondent prepared, based on information supplied by petitioner, an 18-year analysis of482 funds available to save which, in our view, negates the possibility that petitioner was able to save as much as $40,000 by December 31, 1971. Further, the record contains no credible explanation of why petitioner would keep a large cash hoard. The schedule of bank accounts maintained by petitioner and the schedules of property transactions and borrowings engaged in by petitioner show him to have been a person who invested extensively in property and who was not mistrustful of banks. Indeed, he placed substantial sums of money in interest-bearing accounts and borrowed substantial sums at market interest rates to finance his real estate activity. In sum, respondent has, by his affirmative evidence, refuted petitioner's claim of a cash hoard and has demonstrated, clearly and convincingly that petitioner's cash on hand as of December 31, 1971 was not more than the $3,633.80, with which he was credited in respondent's computation. B. Likely Source of Unreported Income/Negation of Non-Taxable Sources of IncomePetitioner also maintains that respondent has failed to present evidence which would support the inference that petitioner's net worth increases are attributable to currently483 taxable income. Petitioner argues that respondent has failed both to demonstrate a likely source of unreported income and to conduct a thorough investigation in order to negate all possible sources of nontaxable income. We note that respondent is not required to do both. In Holland v. United States,348 U.S. 121">348 U.S. 121 (1954), the Supreme Court held that proof of a likely source is required in a net worth case; however, later in United States v. Massei,355 U.S. 595">355 U.S. 595 (1958), the Supreme Court held that if all possible sources of nontaxable income are negated, there is no necessity for proof of a likely source. Thus, respondent must do one or the other. Nonetheless, based on the evidence produced by respondent, we conclude that he has satisfied both of these alternative methods of establishing that the increases in petitioner's net worth are the result of unreported taxable income. Respondent points to the Golden Coin, a cash business controlled exclusively by petitioner, as the likely source of unreported income. Petitioners have attempted to paint the Golden484 Coin as a money-losing operation which could not have produced the amounts of income determined by respondent to have been unreported by petitioner. We do not agree. Nothing, other than unsupported suggestions by petitioner's counsel during cross-examination of several witnesses and on brief and inadmissible declarations by petitioner's accountant, indicates that the Golden Coin was not profitable. 7485 With respect to its profitability, the most that any of the Golden Coin's former employees who testified at trial could say was that it was not a big moneymaker; however, a former bartender testified that the Golden Coin's receipts averaged $100 per shift on weekdays and $500 per shift on weekends. Even assuming the Golden Coin operated on the basis of one shift per night, such receipts would total according to this conservative estimate, some $72,000 annually as opposed to the approximately $39,000 reported by petitioner on each of his returns for 1972 and 1973. 8 Thus, we conclude that the Golden Coin was a likely source of unreported taxable income. We are also satisfied that respondent conducted a thorough investigation to negate all sources of nontaxable income.Respondent identified all loans and mortgages as far back as 1952 and traced the proceeds of these borrowed funds. All unpaid loans were noted as liabilities on the net worth computation. Respondent's agents questioned both petitioner and his wife as to gifts, inheritances, social security486 benefits or any other form of nontaxable income which they might have received. At no time did they identify any such sources. Both denied that they had received any type of nontaxable income. The only lead provided by petitioner was his claim of a cash hoard which respondent's agents thoroughly investigated and convincingly negated as stated in our discussion above. Respondent is not required to go on a "Magellan-like expedition" in exploring sources of nontaxable income. United States v. Hiett,581 F.2d 1199">581 F.2d 1199, 1201 (5th Cir. 1978). We are convinced that his investigation was thorough and that petitioners received no nontaxable income which could have accounted for the increases in net worth. 2. Additions to TaxThe second issue for consideration is whether any part of any underpayment of taxes resulting from petitioner's underreporting of income for 1972 and 1973 was due to fraud. With respect to this issue, respondent bears the burden of proving fraud by clear and487 convincing evidence. Sec. 7454(a); Rule 142(b). Fraud, for purposes of section 6653(b), has been defined as an intentional wrongdoing with the specific intent to evade a tax believed to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Powell v. Grandquist,252 F.2d 56">252 F.2d 56, 60 (9th Cir. 1958); 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 (5th Cir. 1968), affg. a Memorandum Opinion of this Court.After considering all of the evidence, we think it is clear that petitioner has engaged in a course of conduct quite obviously intended to conceal his taxable income and, therefore, he is liable for the additions to tax for fraud for both years at issue. Not only did petitioner grossly understate his taxable income for the 2 years at issue, i.e., we have determined above that his taxable income was more than 5 times that reported on his returns, but he also disposed of the Golden Coin's cash register tapes and guest receipts, the only evidence available which would have substantiated his cash receipts. To destroy the only records that488 would have permitted direct verification of his cash receipts and then to rely upon a pre-existing cash hoard to explain excessive net worth increases would, if accepted, provide a formula for fraud with impunity. 9489 On brief, petitioner claims that he was never instructed to retain the cash register tapes; however, Bourgeois, petitioner's accountant admitted that he instructed petitioner to retain the tapes. Petitioner also contends that he disposed of the tapes routinely because small cash businesses such as the Golden Coin ordinarily do not retain cash register tapes, citing in support of this claim the trial testimony of Buddy Bloecher, an employee of Accurate Accounting who prepared petitioner's tax returns for the years at issue. Bloecher admitted, however, that he had very little experience with bag accounts.We do not find his testimony persuasive with respect to small cash business practice. We find that petitioner's disposal of the tapes and receipts was more than merely routine; we think he disposed of them with the intention of concealing the amount of his cash receipts. Petitioner's plea of guilty to the criminal charge under section 7203 of failure to keep adequate books and records, i.e., the cash register tapes for 1972, is an admission that he did so willfully. His subsequent reliance on the existence of a cash hoard, which was not documented in any way, to explain his net490 worth increases, convinces us that he deliberately destroyed the tapes and receipts in order to conceal his income. Further evidence of petitioner's intent to conceal his income may be found in a series of misleading statements which he made to respondent's agents during the course of the audit and criminal investigation. On April 17, 1975, he stated that he had cash on hand of $3,000. On July 9, 1975, he stated that he had a safe at home, that he was the only one who knew the combination and that he had no idea how much money was in the safe.On the same date, he gave cash on hand figures of $2,000 and then $10,000. On November 13, 1975 petitioner claimed to have had $40,000 - $44,000 in the safe and that on April 6, 1972, he took $19,000 in cash to open a bank account.Not only are such inconsistent statements misleading in and of themselves, as discussed above, petitioner's bank account story has been shown by respondent to be false. Thus, we can only conclude that these statements were intended by petitioner to mislead the investigating agents and to conceal his income from them during the investigation. We think it quite clear that notwithstanding his lack of formal education, 491 petitioner, who had been in the bar business since 1947, who invested in and maintained substantial rental property, was a strict, astute businessman. He alone held tight rein over all aspects of his business affairs. He fully recognized that by conducting a cash business, recording his cash receipts on recap sheets, and then destroying any substantiating evidence, he could conceal large amounts of income. We find that he did in fact do so and, therefore, he is liable for the additions to tax for fraud. 10Based on the foregoing, Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. All "Rules" references are to the Tax Court Rules of Practice and Procedure.↩2. In connection with a loan application, petitioner submitted a net worth statement as of Dec. 31, 1967 to the First Homestead and Savings Association in which he identified cash on hand in the amount of $1,200.↩3. On Apr. 4, 1972, petitioner purchased a $19,000 certificate of deposit (CD) bearing 6-percent interest from the Homestead Savings Association. He purchased the CD with $2,000 cash and $17,000 which he had withdrawn from his savings account at the Jefferson Savings and Loan Association.↩4. In spite of the statement that he had been saving money since 1954, during 1964, petitioner advised the City of New Orleans that because of financial difficulties he was experiencing, he was unable to pay some $440.00 in property taxes due to the City.↩1. The financing for 6409/11 Marshall Foch was in the form of an assumed loan in the amount of $17,305, Loan #1310, and a second mortgage for $1,800. ↩2. Property acquired in 1952 was condemned in 1958; condemnation proceeds, which approximated $32,000, used towards purchase of 400 N. Galvez. ↩3. The parties have stipulated the loan was in the amount of $7,735, however, Thomas Catalanotto had stated the loan was for $10,000. ↩4. Proceeds from sale of Pontchartrain Gardens lot.↩5. Petitioner contends that the 3-year statute of limitations precludes respondent's assessment and collection of the deficiencies he has determined. In view of our holding in this Part and in Part 2 of our opinion, that a part of petitioner's underpayment of tax was due to fraud within the meaning of sec. 6653(b), the fraudulent return exception to the statute of limitations provided in sec. 6501(c)(1) applies so that the tax may be assessed "at any time." Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 227-228↩ (1971). Because of our finding of fraud, we do not consider the effect of sec. 6501(e)(1)(A) on the timeliness of the notice of deficiency.6. Although somewhat in excess of petitioner's statement that he retained $3,000 cash on hand for the business, this figure was used by respondent to take into consideration any undeposited business receipts from the last week of 1971 which petitioner may have been keeping in his bedroom drawer pursuant to his practice of making business deposits each Monday.↩7. Statements made by petitioner's counsel under these circumstances obviously do not constitute evidence. Petitioner contends that recorded statements made by petitioner's accountant, Bourgeois, who is now deceased, in a question and answer session with Special Agent Daigle should be admissible. These statements, concededly hearsay, are not admissible under Rule 804(b)(5) of the Federal Rules of Evidence, the "catch all" exception to the hearsay rule.We so hold because we do not think that Bourgeois' statements, even though made under oath, possess "equivalent circumstantial guarantees of trustworthiness" to the other hearsay exceptions. We agree with respondent that Bourgeois' obvious bias and the lack of any cross-examination opportunity render such statements untrustworthy. See Estate of Temple v. Commissioner,65 T.C. 776">65 T.C. 776, 781↩ (1976). We add that even if Bourgeois' statements, which we have examined with some care and found to be cast only in general terms, were in evidence, they would not alter our findings.8. This figure is reached by multiplying 4 nights by $100 times 52 weeks, and adding 2 nights by $500 times 52 weeks.↩9. The facts here are analogous to Schwarzkopf v. Commissioner,246 F.2d 731">246 F.2d 731, 734 (3d Cir. 1957), affg. a Memorandum Opinion of this Court, where the taxpayer disposed of original records, and the court said: * * * the books involved here contained items of net income with hospital expenses already deducted. The disposal by the taxpayer of bills evidencing these expenses made the computation of their amount impossible, and thus left vague and unreported some unknown amount of income. The taxpayer's practice of cashing checks representing his patients' fees and receiving the money in large denominations rather than depositing the checks themselves made it impossible to test the accuracy of the books from that source. If taxpayer's contention is correct, everyone could keep a set of apparently accurate books, carefully destroy other evidences of the source and amount of income, and defend by an alien rule that the net worth method may not be used in those circumstances--and thus the government could be defrauded with impunity.However, it is when other methods of disclosing income fail that the net worth computation becomes especially important in the collection of revenue.↩10. For the same reasons, the notice of deficiency was timely under sec. 6501(c)(1).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620684/	FRANCIS G. AND RUTH M. HEINLEIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHeinlein v. CommissionerDocket No. 22124-92United States Tax CourtT.C. Memo 1995-272; 1995 Tax Ct. Memo LEXIS 273; 69 T.C.M. (CCH) 2947; June 19, 1995, Filed 273 An order will be issued denying petitioners' motion for leave to file motion to vacate decision. For petitioners: John Leeper. For respondent: Joni D. Larson. COUVILLIONCOUVILLIONMEMORANDUM OPINION COUVILLION, Special Trial Judge: This case was assigned pursuant to section 7443A(b)(3). 1 The Court has before it petitioners' motion, under Rule 162, for leave to file a motion to vacate a stipulated decision entered in this case. In the notice of deficiency, respondent determined a deficiency of $ 3,227 in Federal income tax for petitioners' 1989 tax year. At the time the case was called for trial, the parties filed with the Court a stipulated decision for the full amount of the deficiency in tax. The decision was entered by the Court on May 24, 1993. At the time the petition was filed, petitioners were residents of El 274 Paso, Texas. Following entry of the Court's decision, neither party filed a motion for reconsideration under Rule 161, nor did either party file a notice of appeal. Pursuant to section 7481(a)(1), the decision of the Court became final on August 22, 1993, 90 days after date the decision had been entered. Petitioners' motion for leave to file a motion to vacate the decision was filed on March 10, 1995, in excess of 1 year and 6 months after the decision had become final. Respondent has filed a notice of objection to petitioners' motion for leave to file motion to vacate. The sole issue in the case was whether petitioner Francis G. Heinlein was liable for self-employment taxes under section 1401(a) for certain termination payments petitioner received from State Farm Insurance following his retirement as an agent of State Farm Insurance in 1986. In a case before this Court that involved another retired State Farm Insurance agent, who received similar termination payments, this Court held that the termination payments constituted net earnings from self-employment under section 1402(a) and, therefore, were subject to the tax on self-employment income under section 1401(a). Milligan v. Commissioner, T.C. Memo. 1992-655.275 The decision in that case was entered on November 12, 1992. It was appealed and was reversed on October 25, 1994. Milligan v. Commissioner, 38 F.3d 1094">38 F.3d 1094 (9th Cir. 1994). Because of that reversal, petitioners in this case contend that the stipulated decision in their case was based on a "mutual mistake of law", and, therefore, their motion for leave to file a motion to vacate decision should be granted. Petitioners assert that they agreed to the stipulated decision, conceding the deficiency, based upon this Court's decision in Milligan v. Commissioner, T.C. Memo. 1992-655, and, since the decision in the Milligan case was reversed, the decision in petitioners' case should, likewise, be vacated and, ultimately, reversed as well. The date of a decision of this Court is the date an order specifying the amount of the deficiency is "entered" in the records of the Tax Court, which, in this case, was May 24, 1993. A decision of this Court becomes final upon expiration of the time to file a notice of appeal if no notice of appeal is filed. Sec. 7481(a)(1). Generally, a notice of appeal must be filed within 90 days after276 the decision is entered by this Court. Sec. 7483; Fed. R. App. P. 13(a). A motion to vacate or revise a decision must be filed within 30 days after the decision is entered unless the Tax Court "shall otherwise permit". Rule 162. A motion to vacate a decision, filed more than 30 days after entry of the decision, may be filed only by leave of the Court, usually by the granting of a motion for leave to file the untimely motion to vacate. The granting of such a motion for leave to file a motion to vacate, or the granting of a timely motion to vacate, lies within the sound discretion of this Court. Heim v. Commissioner, 872 F.2d 245">872 F.2d 245, 246 (8th Cir. 1989), affg. an order of this Court; Lentin v. Commissioner, 237 F.2d 5">237 F.2d 5, 6 (7th Cir. 1956). If a motion to vacate has been timely filed, the 90-day period for filing an appeal does not commence until after the motion is adjudicated. Fed. R. App. P. 13(a). Once a decision becomes final, this Court may vacate it only in narrowly circumscribed situations. Helvering v. Northern Coal Co., 293 U.S. 191 (1934). The Court may vacate a final decision277 if that decision is shown to be void, or a legal nullity, for lack of jurisdiction over the subject matter or a party. Billingsley v. Commissioner, 868 F.2d 1081 (9th Cir. 1989); Abeles v. Commissioner, 90 T.C. 103">90 T.C. 103, 105-106 (1988); Brannon's of Shawnee, Inc. v. Commissioner, 71 T.C. 108">71 T.C. 108, 111-112 (1978). The Court may vacate a final decision if there has been a fraud on the Court. Abatti v. Commissioner, 859 F.2d 115">859 F.2d 115 (9th Cir. 1988), affg. 86 T.C. 1319">86 T.C. 1319 (1986); Senate Realty Corp. v. Commissioner, 511 F.2d 929">511 F.2d 929, 931 (2d Cir. 1975); Stickler v. Commissioner, 464 F.2d 368">464 F.2d 368, 370 (3d Cir. 1972). In a case relied on by petitioners, the United States Court of Appeals for the Sixth Circuit has indicated that the Tax Court also has the power in its discretion, in extraordinary circumstances, to vacate and correct a final decision where it is based upon a mutual mistake of fact. See Reo Motors, Inc. v. Commissioner, 219 F.2d 610">219 F.2d 610 (6th Cir. 1955). However, 278 in Harbold v. Commissioner, 51 F.3d 618">51 F.3d 618, 619 (6th Cir. 1995), the Sixth Circuit held that the case of Reo Motors, Inc. v. Commissioner, supra, is no longer binding in that circuit because that case is considered to have been overruled by the Supreme Court in its per curiam affirmance of Lasky v. Commissioner, 352 U.S. 1027 (1957). The decision in this case was entered pursuant to a stipulated settlement. There was no trial; no evidence was adduced; no stipulations were filed in the record, nor does the stipulated decision recite any factual or legal bases upon which the deficiency was agreed to. The compromise and settlement of tax cases is governed by general principles of contract law. Robbins Tire & Rubber Co. v. Commissioner, 52 T.C. 420">52 T.C. 420, 435-436 (1969) supplemented by 53 T.C. 275">53 T.C. 275 (1969); Brink v. Commissioner, 39 T.C. 602">39 T.C. 602, 606 (1962), affd. 328 F.2d 622">328 F.2d 622 (6th Cir. 1964). Where a decision is entered pursuant to a stipulated settlement, the parties normally are held to their279 agreement without regard to whether the decision is correct on the merits. Stamm Intl. Corp. v. Commissioner, 90 T.C. 315">90 T.C. 315, 321-322 (1988); Spector v. Commissioner, 42 T.C. 110">42 T.C. 110 (1964). In their motion for leave to file motion to vacate, petitioners do not claim there was fraud upon the Court in the entry of the stipulated decision in this case, or that the Court lacked jurisdiction to enter it, nor do petitioners claim a mutual mistake of fact. Petitioners contend there was a mutual mistake of "law" because of the reversal by the United States Court of Appeals for the Ninth Circuit of this Court's decision in Milligan v. Commissioner, supra.Petitioners' contention is wide of the mark; the reversal in the Milligan case does not entitle petitioners to relief, even if the view of the Court of Appeals for the Ninth Circuit should gain general acceptance. The long and the short of the matter before us is that the stipulated decision is binding on the parties without regard to whether it is correct on the merits. Stamm International Corp. v. Commissioner, supra; Deel v. Commissioner, T.C. Memo. 1990-545.280 Petitioners have not shown a proper reason to vacate the decision to which they previously agreed. Accordingly, An order will be issued denying petitioners' motion for leave to file motion to vacate decision. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year at issue. All Rule references are to the Tax court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620686/	ESTATE OF LYDIA I. MOORE, BERT R. GRIGGS, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Moore v. CommissionerDocket No. 13327-81.United States Tax CourtT.C. Memo 1987-587; 1987 Tax Ct. Memo LEXIS 576; 54 T.C.M. (CCH) 1167; T.C.M. (RIA) 87587; November 25, 1987. 576 Held: A sum paid out of gross estate assets to settle a will contest is not deductible under section 2053 as an administration expense. Richard A. Childs, for the petitioner. Helen C. T. Smith and Shuford A. Tucker, Jr., for the respondent. WHITAKERMEMORANDUM OPINION WHITAKER, Judge: By notice of deficiency dated March 12, 1981, respondent determined a deficiency in petitioner's estate tax in the amount of $ 8,026.82. The sole issue for decision is whether or not the estate is entitled to deduct from the gross estate as an expense of administration a payment of $ 40,000 made in settlement of a will contest. For convenience our findings of fact and opinion are combined. A preliminary comment on the posture in which we find the case is required. Petitioner was577 originally represented by Arthur Tranakos, an Atlanta, Georgia, attorney who filed the petition in this case. Mr. Tranakos declined to cooperate either with respondent's counsel, with petitioner, or with the Court. On August 30, 1983, respondent filed a request for admissions pursuant to Rule 90. 1 On October 3, 1983, the Clerk for this Court received petitioner's response to the request for admissions. The response was received more than 30 days after the filing of the request for admissions and was therefore delinquent. Moreover Rule 90(c) requires that such a response be served on the opposing party and this was not done. Therefore the response was returned to Mr. Tranakos by the Deputy Clerk of the Court. On December 30, 1985, in anticipation of the trial of this case on the regular calendar commencing on February 10, 1986, respondent filed a motion for an order to show cause why the facts in a proposed stipulation attached to the motion should not be accepted as established for purposes of this case. The facts in the proposed stipulation are identical to the facts set forth in respondent's request for admissions, which facts had already been deemed admitted pursuant to578 Rule 90. On January 7, 1986, this Court entered an order directing each of the parties to file with the Court a response stating whether or not that party was agreeable to the submission of this case under Rule 122 based on the facts deemed admitted. Mr. Tranakos on behalf of petitioner responded by submitting a copy of his prior response to respondent's request for admissions which admitted that the salient facts contained in the request for admissions was correct. Petitioner's only objections to the facts deemed admitted pertained to the residence of the executor at the time the petition was filed and to the statement in paragraph 5 of the deemed admissions that "Under the laws of intestacy of the State of Alabama, C. C. Griggs, Sr., would have inherited the entire estate of the decedent had he been successful in his objection to the will," which statement was characterized as a legal conclusion. On February 18, 1986, Mr. Richard A. Childs of Columbus, Georgia, entered his appearance579 as counsel for petitioner. At the hearing in Birmingham, Alabama, on February 20, 1986, respondent's counsel stated to the Court on behalf of Mr. Childs that he was satisfied with the facts as set out in the request for admissions and requested 45 days within which to brief the case for petitioner. We established briefing dates as requested and suggested that Mr. Childs should file with the Court a written statement of agreement with the deemed admissions. No brief having been filed by Mr. Childs, on August 18, 1986, we wrote him calling his attention to the fact that his brief had not been received. Mr. Childs declined either to file a brief or to acknowledge the Court's letter. We accept the fact that Mr. Childs may have realized on investigation that the law was so clearly against petitioner's position as to make filing of a brief unwarranted. We do not, however, condone his lack of consideration to the Court and to respondent in failing to advise the Court in writing that he did not wish to submit a brief and to confirm that he was satisfied with the facts set out in the deemed admissions. Mr. Childs has had ample opportunity to challenge the facts set out in the deemed580 admissions. Having failed to do so, petitioner is deemed to have conceded those facts to be correct, that there are no other material facts which petitioner wishes the Court to consider, and that petitioner has no objection to this case being disposed of pursuant to Rule 122. At the time the petition was filed, Mr. Bert R. Griggs, Executor, was a resident of the State of Alabama. The decedent died testate on January 7, 1977, and at that time was a resident of Alabama. On January 17, 1977, the executor filed a petition for probate of the will of the decedent. Under the will, the devisees and legatees were Bert Ray Griggs, Lillian Griggs, Render Alwyn Richardson, Ruth Griggs McFerrin, Reverend Roger D. Watkins, Lois Commings, and Bigham Chapel Methodist Church. On February 10, 1977, C. C. Griggs, Sr., brother of the decedent, filed an objection to the probate of the will. Pursuant to Alabama law and practice, the will contest was transferred at the instance of C. C. Griggs, Sr., to the Circuit Court of Russell County, Alabama. A jury trial resulting in a hung jury and the will contest was thereafter settled by a payment from the assets of the estate of the sum of $ 40,000 for581 the account of C. C. Griggs, Sr. This settlement was approved by the Circuit Court on July 11, 1978. Schedule J attached by the Federal estate tax return filed oy behalf of the estate by the executor claims among other administration expense deductions the sum of $ 40,000 paid in settlement of the claim of C. C. Griggs, Sr. Under section 2053, deductions are allowed to an estate for four categories of expenses: (1) funeral expenses of decedent; (2) administration expenses; (3) claims against the estate; and (4) unpaid mortgages of the decedent. A payment to settle the objection to the probate of the will by C. C. Griggs, Sr., does not fit into any one of these four categories of deductions from the gross estate. In , we distinguished between a claim against an estate and a claim to share in the estate, holding that a claim to share in the estate is not deductible from the gross estate. The claim of C. C. Griggs, Sr. in this case was clearly a claim to share in the estate. As such it is not deductible from the gross estate. ; ,*582 affd. . Accordingly, we sustain respondent. Decision will be entered for the respondent.Footnotes1. All Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620688/	Syntron Company v. Commissioner.Syntron Co. v. CommissionerDocket No. 109220.United States Tax Court1943 Tax Ct. Memo LEXIS 437; 1 T.C.M. (CCH) 643; T.C.M. (RIA) 43094; February 22, 1943437 Norman D. Keller, Esq., and A. G. Wallerstedt, C.P.A., for the petitioner. Paul E. Waring, Esq., for the respondent. LEECH Memorandum Findings of Fact and Opinion LEECH, Judge: Respondent has determined deficiencies in income tax for the taxable year January 1 to March 31, 1937 of $279.36 and for the fiscal years ending March 31, 1938 and 1939 of $4,118.20 and $2,071.97, respectively. The error assigned is the disallowance by respondent of deductions taken by petitioner in each year as allowable amortization or depreciation of cost of patent licenses acquired in exchange for the issuance of certain of its capital stock. Findings of Fact Petitioner is a Delaware corporation organized on January 29, 1921, under the name of National Electric Manufacturing Company, this being later changed to Syntron Company. Its business is located in Pittsburgh, Pennsylvania, and its returns for the taxable years here involved were filed with the collector for the Twenty-Third Collection District of Pennsylvania. The circumstances which gave rise to the organization of petitioner were that prior to 1919 two young electric engineers, Carl S. Weyandt and G. E. Hampton, employed by the Westinghouse438 Electric & Manufacturing Company, had been carrying on in their spare time certain experimental work on the invention of a reciprocating electric motor. In that year they interested one A. C. Leslie, a banker, in their work and, as a result, a corporation was formed under the name, Central Electric Tool Company (hereinafter referred to as "Central"). This corporation had an authorized stock issue of 50 shares, of which 25 were issued to Leslie and 12 1/2 to Weyandt and Hampton, each. The latter two persons conveyed to the corporation the patent applications filed by them and were employed by the corporation to carry on the work of developing and perfecting the invention. In the invention on which applications for patents had been filed, the electric reciprocating motor had been applied to an electric hammer or drill. The principle was a solenoid, the coil being magnetized by a current of electricity causing the piston within the coil to move. To cause the movement of the piston back and forth it was necessary to break the current and demagnetize the coil between each movement. This was accomplished with an automatic electric switch or circuit breaker. When the first electric hammer439 of this design was made, however, it developed that though successful from a technical standpoint, in that it operated, it was not practical for the reason that its necessary operation at high speed with the circuit broken 3,600 times per minute caused the switch, which had moving parts, to burn up. Faced with this situation, Weyandt and Hampton continued their experimental work and finally devised an electric valve without moving parts in the use of which the circuit could be broken and the electric impulses synchronized and which was not affected by high speed operation. In the latter part of 1920 a perfected model was constructed embodying this device. At this time there was no other practical reciprocating electric motor devised. Many efforts had been made to perfect one and many patent applications filed but all of the inventions had proved impractical due to the use of an electric switch. The field for the use of such an invention, if perfected, was wide. One of the main power tools to which its use could be applied was an electric drill or hammer. Many rotary electric drills were on the market but their use was limited to boring in metal and wood. The only direct hammer action440 power tools of this character were operated by steam or compressed air and not only required an air compressor or steam generator as an adjunct to operation, but were heavy and cumbersome, whereas the electric hammer or drill could be made light in weight with one moving part and be operated anywhere an ordinary house lighting alternating electric current was available. Such electric drills and hammers could be used by merely changing the drill or hammer point as tampers, cutters and shapers in many lines of industry. The principle of the reciprocating electric motor, moreover, was applicable to numerous other devices such as shapers, conveyors and packers in which vibration is essential to maintain or regulate the flow of or cause the settlement of material. In 1920, one F. T. Bowman, vice president of Blaw-Knox Co. of Pittsburgh, a large manufacturer of machinery, heard of the invention and asked permission to inspect it. Bowman was a graduate engineer and in charge of one of the divisions of Blaw-Knox Co. and a man of large means. He made many trips to the Central shop, studied the device and finally made an offer of $300,000 for the patent rights. This offer was refused by Leslie, 441 Weyandt and Hampton since they desired to form a corporation for the purpose of manufacture. Finally, on January 29, 1921, the petitioner was incorporated with an authorized issue of 6,000 shares of common capital stock. Of this issue, half of the shares were of Class "A" and half of Class "B". The stock of the two classes was identical in all rights of voting, participation in earnings and upon liquidation. The only difference was that Class "A" had a par value of $100 per share, and Class "B" had no par value. On February 11, 1921, an agreement was entered into by petitioner with Central under which the latter conveyed to petitioner the exclusive license to manufacture and sell under the basic patents the applications for which had been assigned to it as heretofore detailed, and any other patents representing improvements thereon which they might acquire. The consideration for this exclusive license was to be the issue to Central of the 3,000 shares of petitioner's authorized Class "B" stock which was to be issued and delivered as the Class "A" stock was sold and issued so that at all times there would be outstanding the same number of shares of each class of stock. Petitioner 442 also agreed to loan Central the sum of $50,000. The first shares of petitioner's Class "A" stock were issued on March 22, 1922. Between that date and May 23, 1928 a total of 2,736 such shares were issued to 107 different purchasers, all of it for cash, at $100 per share. The majority of this stock was sold in 1922 and 1923 and practically all of the remainder before 1927. Among such purchasers, in substantial amounts, were Leslie, Weyandt, Hampton, Bowman and John A. Metz, the latter being the petitioner's attorney who became identified with its active management. On January 17, 1928, petitioner issued to Central 2,820 shares of its Class "B" stock under the provisions of the aforementioned agreement. Between May 29, 1923 and December 1927 assignments were made by Weyandt and Hampton to Central of patents covering the synchronous reciprocating electric motors, the device perfected by them in 1920 while in its employ. Petitioner entered into manufacture of the electric hammer in 1922. The device proved successful and is the same, without basic change, which it manufactures at the present time. Petitioner's gross sales and net income or loss, for the years 1923 to 1942, were as follows: 443 GrossNetNetSalesIncomeLoss1923$101,227.76$10,189.481924255,491.4042,674.011925314,874.48$ 15,146.151926382,120.7020,919.061927332,998.732,446.291928323,196.462,753.471929550,110.4424,697.221930344,191.884,257.941931258,663.379,608.47193270,855.9124,754.551933107,699.12488.561934175,415.748,288.001935191,364.182,614.591936349,295.2114,365.06(3 Mos.)122,060.442,760.881938426,347.801,883.111939388,608.13406.471940488,022.3624,301.741941631,081.9374,960.731942967,715.76131,393.72Following the organization of petitioner, its operations were dominated by Leslie and for some years its management was unwise and extravagant. Although it was doing a substantial manufacturing business, its income was in a large measure wasted through excessive sales and promotion expense. For several years Weyandt and Hampton were separated from the manufacturing and selling activities of petitioner and kept at work perfecting various devices employing the use of the electric motor and these, when perfected, were not put into production but set aside. 444 Leslie, who owned 50 shares of stock in Central, became involved in serious personal financial difficulties. On one occasion in 1926 he came to Metz who was president of Central and advised him that the bank had refused payment on a check for $24,000 issued by him, or by another business he owned and operated, and that it was imperative that he secure this amount in cash at once. He stated that his only available asset to realize upon was his stock in Central. Metz suggested that Bowman be approached and offered some of the stock. Leslie thereupon offered to sell 8 shares of Central stock for $24,000, and Metz went at once to Bowman who immediately accepted the offer and closed the deal on that or the following day. Central never engaged in manufacturing. He merely owned and developed patents. At this time it was inactive, was largely indebted to petitioner and its only assets were its rights to receive Class "B" stock of petitioner under the contract of February 11, 1921 and the legal title to certain patents and patent applications on which an exclusive license had been conveyed to petitioner. The 2,820 shares of petitioner's Class "B" stock issued for an exclusive patent license445 had a fair market value of $100 per share and the patent licenses had a fair market value of not less than $282,000 when acquired. In making its returns for the taxable years here involved petitioner deducted depreciation on its patent licenses acquired in exchange for 2,280 shares of its Class "B" stock on a basis of a cost of $282,000. In determining the contested deficiencies respondent disallowed such deduction. The propriety of that action is the only submitted issue. Opinion Respondent does not question the fact that the patent licenses acquired by petitioner constituted an asset subject to depreciation upon its cost and at the rate used, or that petitioner in fact acquired such licenses in exchange for 2,820 shares of its Class "B" common stock. His contention apparently is that the Class "B" stock had no fair market value when exchanged. We thus have presented the fact question of the stock value. The Class "B" stock and "A" issue were identical except the former had no par value while the latter had a par of $100 per share. As each share of Class "A" stock was sold petitioner was obligated to issue a share of Class "B" stock to Central. It is therefore manifest that whatever446 fair market value the Class "A" stock had, if any, must necessarily be ascribed to the Class "B". All of the Class "A" stock issued was sold for cash at $100 per share. It is recognized that, ordinarily, the best evidence of the fair market value of a stock is the price at which it is sold. ; ; ; . It is true that such value may be less than its sale price when sold to a purchaser who is ignorant of the market. But there is not the slightest indication of such a condition here. The individuals responsible for the organization of petitioner and the sale of its Class "A" stock to the public at $100 per share were buying, for their own accounts, substantial amounts of it at the same figure. One of such persons, Leslie, in 1926, sold to another, Bowman, 8 shares of Central stock for $24,000 when the right to receive petitioner's Class "B" stock under its contract with petitioner was the only447 asset of substantial value that Central had. And the circumstances of that sale clearly indicate that it was essentially a forced sale, made at a time of great emergency, in which the seller would normally be forced to sacrifice a substantial part of the actual value of the security. Respondent points to the fact, disclosed by the evidence, that in 1932 petitioner reacquired from Central 2,100 shares of its Class "B" stock for the cancellation of an indebtedness of $62,484.95 of that company. This is urged as establishing that petitioner's Class "B" stock could not have been worth $100 per share some years earlier. We do not agree. The transaction was between two closely allied corporations. The individuals owning Central were largely interested in petitioner. Moreover, the transaction was long after the initial period of valuation here and at the depths of the financial depression. Respondent argues, however, that the exclusive patent license had no value when acquired and, consequently, no value can be ascribed to the stock exchanged therefor. Assuming the correctness of the premise, that conclusion may not be sound. See .448 Certainly the Class "B" stock would not have been wholly valueless here. It was issued concurrently with Class "A" and would have a value, at least, of half of the consideration paid for the Class "A" or $50 per share. See . We do not think, however, that the license was without value when acquired. Respondent insists that the basic invention by Weyandt and Hampton was not perfected until after the acquisition of the license but the record does not sustain this. The invention had been perfected in 1920 and petitioner's agreement with Central gave it the exclusive right of manufacture and sale. Nor do we consider as establishing an absence of value for the Class "B" stock or the patent rights, the fact that Metz and Weyandt, as officers of petitioner, filed for it under oath with the State of Pennsylvania a "Capital and Corporate Loan Tax Report" for each of the years from 1926 to 1936 in which no actual value for its patents and patent rights was included. We would hardly accept a statement in such reports as establishing a value. . So too, on this449 record, such statements do not prove its absence. The evidence, we think, definitely shows that the patent rights had a large value and demonstrates clearly that the statement of no value in the report was inaccurate. At most, this inaccurate statement may be said to discredit to some extent the testimony as to value by these two officers of petitioner. But the evidence of substantial value of the rights is not by any means confined to their testimony. Two other qualified witnesses expressed the opinion that the exclusive license was worth more than $300,000 in 1921. The invention was original and filled a definite need in the field of power tools. It had no competition in its particular line. The offer of $300,000 by Bowman for the invention is significant. Its circumstances entitle it to considerable weight. Bowman was a graduate engineer and vice president of a large machinery manufacturing company and in charge of one of the divisions of its plant. He was qualified to understand and judge the value of the invention. The offer was made after he had examined and studied the invention in many trips to the Central workshop. He was a man of large means and after his offer was refused450 he invested a substantial amount in petitioner's stock. Cf. . We are convinced from all of the evidence that our finding of value for petitioner's Class "B" stock is amply supported. It follows that petitioner is entitled to the disputed deductions for depreciation. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620692/	Engineers Limited Pipeline Company, Petitioner, v. Commissioner of Internal Revenue, RespondentEngineers, Ltd. Pipeline Co. v. CommissionerDocket No. 3537-62United States Tax Court44 T.C. 226; 1965 U.S. Tax Ct. LEXIS 79; May 28, 1965, Filed 79 Decision will be entered under Rule 50. Held, that the petitioner has not shown error in the Commissioner's reduction in claimed depreciation deductions resulting from adjustments in useful lives and the assignment of salvage values to certain construction equipment in the taxable year ended September 30, 1955. Walter G. Schwartz, for the petitioner.Leo A. McLaughlin, for the respondent. Tietjens, Judge. TIETJENS226 The Commissioner determined a deficiency in income tax for the taxable year ended September 30, 1955, in the amount of $ 59,341.54.227 The petitioner alleges that the Commissioner erred in disallowing depreciation claimed as a deduction in the amount of $ 109,509.95 in the fiscal year in question attributable to "Items of Equipment on Hand" at the end of that year and also erred in disallowing depreciation80 claimed in the same year in the amount of $ 7,586.51 attributable to "Items of Equipment Sold." Error is also alleged in that the Commissioner failed to allow proper depreciation on items sold at a loss in the taxable year.FINDINGS OF FACTSome of the facts have been stipulated and are incorporated herein by this reference.Petitioner is a corporation organized and existing under the laws of the State of California, with its principal office at 200 Bush Street, San Francisco, Calif. Petitioner filed its income tax return for the fiscal year ended September 30, 1955, with the district director of internal revenue at San Francisco, Calif., on an accrual, completed-contract method.Petitioner was incorporated on or about September 29, 1947, to engage in the pipeline construction business as a successor to a partnership doing business as Pacific Pipeline Engineers.At all times here material, petitioner has been engaged in pipeline construction work, principally on the west coast and in the middle west sections of the United States. Its work has been extensive, requiring considerable amounts of construction equipment.On its income tax return for its fiscal year ended September 30, 81 1955, petitioner claimed depreciation on items of equipment on hand at the end of that fiscal year in the amount of $ 429,784.76.On its income tax return for its fiscal year ended September 30, 1955, petitioner claimed depreciation in the amount of $ 12,440.54 on items of equipment sold in that year.During the period October 1, 1949, to September 30, 1955, the petitioner acquired for use in its business numerous pieces of construction equipment, trucks, and automobiles which it also sold during that period. A schedule of equipment sales for the fiscal years 1950-56, the date acquired, cost, depreciation to the date of sale, date of sale, and sales price are all included in stipulated joint Exhibit 15-0 which is included herein by this reference. (The exhibit is too extensive for reproduction here.)In computing its depreciation deductions on such items for its taxable years ended September 30, 1948, through September 30, 1955, no amount was assigned as salvage value. In determining the deficiency herein the Commissioner established general salvage values for each separate class of petitioner's equipment; he accepted the useful lives for certain classes of equipment assigned by82 the petitioner and 228 adjusted the useful lives in the remaining classes. In general the following table indicates the adjustments made in useful lives.ClassPetitioner'sRespondent'slifelifeYearsYearsTrenchers2-77Compressors2-76Concrete mixer45Truck, tractor, and trailer2-75Shovels (backhoes)64Crawler tractors2-77Semitrailers2-74Pickups2-44Trucks2-74Trailers, lowbed4-74Beveling machine46Cleaning and priming2-77Straightening machine2-45Bending machine45Buckets46Boring machines2-46As reported on petitioner's returns, petitioner disposed of 702 pieces of equipment during its fiscal years 1950 through 1959 as follows:Fiscal yearNumber ofGainsitems sold(losses)Sept. 30 --195042$ 30,468.7419515434,990.6719524633,210.9219534362,236.76195410555,506.1419556341,656.62195667$ 57,140.56195794195,357.7019585276,102.97195913691,851.72702678,522.80The above-described disposals were made in accordance with an established policy. The actual decision to sell a piece or a group of equipment 83 was made by Roy Price, petitioner's vice president and general manager during the period January 1949 to June 1955, and its president from June 1955 to April 1959.In deciding whether to sell any particular piece of equipment, Price took several factors into consideration. In so deciding, Price particularly considered the previous depreciation on said equipment and the remaining undepreciated cost. He testified that in making sales as in other activities he "had a policy of trying to make money anyway I could."The actual sale or disposal of a piece of equipment was handled by Farris, the employee who was in charge of equipment buying or selling.In attempting to sell a piece of equipment, Farris would contact other contractors or equipment dealers. At times, petitioner would prepare brochures describing a particular piece or group of equipment and circulate them among potential purchasers. Price would make the decision of whether to sell the equipment at a particular price.Based upon petitioner's sales of its construction equipment during 229 the period October 1, 1949, to September 30, 1955, the following schedule indicates by class: (a) Petitioner's percentage of recovery84 of original cost of said equipment, and (b) salvage values established by respondent:(a)(b)Percentage ofClassrecovery ofRespondent'soriginal costssalvage valuefrom saleshistory(Percent)Trenching machines5725Automobiles5425Compressors6325Mechanical saw130Concrete mixer14125Truck, tractor, and trailer3820Light plants and generator2725Water pumps7425Roller6125Sheepsfoot roller1810Shovels (backhoes)5325Steam cleaner4025Tractors, crawler8225Tractors, tired5825Semitrailers8530Pickups3825Trucks2925Welders4425Cleaning and priming1610Grinding and buffing10010Pipe locater280Truck cranes4025Buckets6625Tar kettles1610Boring machines6425Lubrication machine1010The following schedule reflects petitioner's percentage of recovery of overall cost, by year, through its sales of construction equipment for each of its fiscal years 1950 through 1955, inclusive.FYE Sept. 30 --CostAmountRecovery ofrealizedoverall cost(Percent)1950$ 89,695$ 59,96467195181,78844,71955195283,76042,504511953138,19893,523681954196,48690,487461955115,14257,2425085 In its fiscal year ended September 30, 1955, petitioner sold 63 pieces of equipment; petitioner claimed depreciation in its return for that year on 34 pieces of this equipment. On 21 of these last-mentioned items, petitioner's claimed depreciation for fiscal year 1955, if allowed entirely, would result in an adjusted basis on each item less than the sales price received in fiscal year 1955. Or, differently stated, the 21 items were sold for prices in excess of their adjusted basis at the beginning of fiscal year 1955. Some of the remaining 13 items were sold for prices lower than their adjusted bases at the beginning of 230 fiscal year 1955 but in excess of the bases after offsetting the claimed depreciation for 1955, and others were sold for prices below their adjusted bases after offsetting the claimed depreciation for fiscal year 1955. If allowed, the total amount of the claimed fiscal year 1955 depreciation on these 21 items would reduce their aggregate bases below the total amount received by $ 7,586.51. In the deficiency notice the Commissioner established as salvage values for the above 34 items the amounts actually realized from the sale thereof in fiscal year 1955. 86 ULTIMATE FINDINGThe petitioner has not shown error in the Commissioner's determination of the deficiency herein.OPINIONThe major portion of the deficiency here results from the action of the Commissioner in assigning salvage values to the pieces of petitioner's equipment. The smaller portion comes about from some changes which he made in useful lives.The petitioner attacks the Commissioner's determination on the grounds that the depreciation methods established by the petitioner with the consent of the Commissioner in earlier years, which petitioner urges were in accordance with the regulations and rulings and the experience of the pipeline construction industry, should be followed. Further, the petitioner alleges that the Commissioner has made arbitrary and inconsistent adjustments to petitioner's depreciation methods which should not be permitted to stand.We disagree with petitioner. The burden of showing error in the Commissioner's determination is on petitioner. We think the record as a whole more than sustains that determination.The adjustments which have been made are based on the experience of petitioner over the years and on the particular circumstances of that experience. 87 The fact is that petitioner had consistently disposed of large amounts of depreciable equipment during the period of its existence at prices which resulted in the return of sums representing a substantial percentage of its cost basis in the equipment. Yet petitioner computed its claimed depreciation without assigning any salvage values. In these circumstances it is permissible for the Commissioner to determine a reasonable salvage value and reduce the claimed depreciation accordingly. See Massey Motors, Inc. v. United States, 364 U.S. 92">364 U.S. 92. The Commissioner certainly is not bound by his acquiescence in depreciation actions taken by petitioner in previous years based on adjustments suggested by internal revenue agents and followed by petitioner. If errors have been made in previous years they are not to be perpetuated in the taxable year involved. The Commissioner 231 has made no retroactive adjustments for previous years and we have only fiscal 1955 before us. See Automobile Club of Michigan, 353 U.S. 180">353 U.S. 180, and Dixon v. United States, U.S. (May 3, 1965).Petitioner also argues that while it did88 not take into account any salvage value on its books "as such," salvage values were actually taken "into account by the longer lives used, which contained a built in salvage value." We can make no such finding. We think the useful lives determined by the Commissioner were reasonably based on petitioner's experience as shown by the record and the salvage values determined by the Commissioner are also so based. There is some testimony as to industry experience in evidence, and while this is a factor that may be given consideration, it is the petitioner's own experience in its own business that is more important. Massey Motors, Inc. v. United States, supra.It may be, as petitioner claims, that some part of the disposal price of its machinery was the result of inflation and scarcity values, but the Commissioner's determination, in our opinion, makes ample allowance for this factor (if such be required) and should not be disturbed. In most instances, except for some items disposed of in the taxable year, the salvage values used by the Commissioner were substantially less than the amounts subsequently realized from the sales.With reference to the89 pieces of equipment sold by petitioner in 1955 it is the Commissioner's position that it is proper to take the actual sales price into consideration in determining the depreciation deduction for the year of disposition of the asset. This Court has recognized the propriety of such action. Both in C. L. Nichols, 43 T.C. 135">43 T.C. 135, and Bell Lines, Inc., 43 T.C. 358">43 T.C. 358, we stated that "the amount received upon the sale of property at or near the end of its estimated useful life (especially in the case of property with a short useful life) may be a relevant yardstick for purposes of determining salvage value." This was also indicated in McCabe Co., 42 T.C. 1105">42 T.C. 1105, 1115. These cases recognize that the burden is on the petitioner to overcome the presumptive correctness of the Commissioner's determination and there is some indication in the cases referred to that this can be done by showing that the estimates used by petitioner were correct and that the gain realized upon the sale resulted from market appreciation.Petitioner has failed to carry his burden. In evidence there are Wholesale Price Indexes of90 Construction Machinery and Equipment for the years 1940 through 1959 published by the Bureau of Labor Statistics of the U.S. Department of Labor. These show a gradual increase in prices over the years of a few percentage points a year. And there was testimony of a general nature to the effect that there had been a gradual increase in the price of construction equipment over the period. We do not see how such testimony helps this petitioner. 232 It has little probative value with respect to the particular equipment involved here. The specific experience and history of the petitioner's depreciation policies with respect to its equipment do. Consistently over the years it was selling depreciated equipment for more than its depreciated basis. It assigned no salvage value in computing depreciation when its experience clearly showed there was salvage value. How much of the price received was due to "market appreciation" has, in our opinion, not been proved. In the circumstances we approve the Commissioner's use of the price received for equipment sold in fiscal 1955 as salvage.The petitioner further contends that in any event 13 of the 34 items were sold in 1955 at a loss91 and that it should be allowed $ 1,567.12 depreciation for 1955 with respect to these items. At first blush it would appear that it would not matter if the deduction was attributed to a deduction of a loss on the sale or a deduction on account of depreciation. But in the matter of the 13 items the Commissioner did allow the claimed depreciation for the 1955 period for which these assets were held. What the petitioner is seeking is an additional and further depreciation deduction measured by the amount of the $ 1,567.12 loss on the 13 items. This apparently is on the theory that under the above conclusion that the petitioner is not entitled to any deduction for depreciation when the asset is sold for more than its depreciated base, when it is sold for less than such basis, equity requires that the further depreciation deduction should be granted. Such cannot be the case. With respect to a loss resulting from a sale under such circumstances, we are no longer concerned with the deduction of depreciation or its reasonableness, by reason of the sale price, but only with the amount of the loss on the sale. Here, as we have stated, the depreciation as claimed by the petitioner for *92 the year of the sale already has been allowed by the Commissioner. As the Commissioner suggests, the 13 items in question are section 1231 assets, the loss on which must be considered with the gains on the other 21 items to arrive at the amount of gains from the sale of these capital assets. To do as the petitioner urges would be more difficult than mixing oil and water.The Commissioner has conceded a number of errors in the computation which can be corrected under Rule 50.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620693/	AMIGO COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Amigo Coal Co. v. CommissionerDocket No. 11684.United States Board of Tax Appeals8 B.T.A. 598; 1927 BTA LEXIS 2846; October 7, 1927, Promulgated 2846 1. A reserve of $5,000 entered upon the petitioner's books in the year 1920 represents the amount which it believed would be necessary for it to expend in the subsequent year for the removal of rock and slate from the roof of its mine to permit of continued coalmining operations. The work of removing the rock and slate was performed in the year 1921 and the cost of such work amounted to $5,926.67. Held, that the cost of this work was not incurred in the year 1920 and the reserve was not a proper deduction from gross income in that year. 2. The evidence in this proceeding shows that the petitioner determined a debt of $44,443.40 to have been wholly worthless in December, 1920. It charged off within the year 1920 $15,608.52 thereof. Held, the Commissioner erred in refusing to allow the petitioner to deduct the amount charged off. E. J. Goodrich, Esq., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. LITTLETON598 The Commissioner determined a deficiency of $3,818.98 for the calendar year 1920. The deficiency notice shows no deficiencies for the calendar years 1921 to 1923, inclusive. Prior to the determination2847 of the Commissioner of the deficiency for 1920, petitioner filed a claim for the abatement of a portion of a tax originally assessed by reason of which it claims the tax in controversy in this proceeding is $13,302.78. The errors urged at the hearing are that the Commissioner erred (1) in disallowing as a deduction for 1920 a reserve in the amount of $5,000 entered upon the petitioner's books in that year for the removal of rock from its coal mine, which amount it is claimed would have been expended in the year 1920 but for the delay in obtaining repair parts for automatic drills which made it necessary to do this work in the year 1921, and (2) in failing to allow a deduction of $15,608.52 representing that portion of a debt for $44,443.40 determined to have been worthless and charged off within the taxable year 1920. FINDINGS OF FACT. Petitioner is a West Virginia corporation engaged in mining and selling coal with principal office at Amigo, Raleigh County, of that State. The mine operated by petitioner is a very low seam of coal ranging from 26 to 40 inches in thickness. It is necessary in the operation of this mine for the petitioner, as the extraction of coal progresses, 2848 to remove by the process of blasting, a considerable portion of sandstone 599 and slate roof of the mine to permit the erection of trolley wires and the operation of mine cars. Entries into the mine for the extraction of coal can not be advanced very far without the removal of the rock roof of the mine entry so as to permit of advancement of transportation facilities. Throughout the year 1920 petitioner had an arrangement with its miners whereby it paid them $5 a yard for the removal of a sufficient thickness of the sandstone and slate roof of the mine to permit of the proper operation of the mine. For the purpose of blasting this rock roof an automatic drill was used. The use of hand drills for this purpose was impracticable for the reason that the drilling had to be done overhead and because of the hardness of the stone. In or about December, 1920, the automatic drill became broken and the petitioner was unable, after repeated efforts during the remainder of that year, to obtain a new drill or proper repair parts for the drill which had been in use. Petitioner carried on its mining operations during the remainder of December, 1920, as best it could without any further2849 removal of the rock and on December 31, 1920, there were 1,185 1/3 yards of mine entry from which it would be necessary to remove the roof before it would be practicable to continue successful mining operations. At December 31, 1920, petitioner estimated the number of yards of stone roof which would have to be removed at a cost of $5 a yard and entered upon its books a reserve of $5,000 for this work. The repair parts for the automatic drill were finally secured and early in 1921 the 1,185 1/3 yards of rock roof were removed at an actual cost of $5,926.67. Petitioner claims this amount is a deduction from gross income for the year 1920 upon the ground that the cost of this work, which it knew it would have to do before successful mining operations could be continued, was an accrued expense in the year 1920. The Commissioner refused to allow the deduction of this reserve upon the ground that the setting up of reserves of this character is not permitted by the Revenue Act of 1918 and that the cost of removing the stone was neither paid nor incurred within the taxable year 1920. Some time in July, 1920, when the demand for coal was great and coal was selling at high prices, petitioner2850 entered into a contract with the Interstate Coal & Dock Co., hereinafter referred to as the Interstate Company, a corporation engaged in the sale of coal with principal office at Green Bay, Wis., whereby the Interstate Company agreed to purchase petitioner's entire output of coal. The Interstate Company also had branch offices or representatives in New York, N.Y., Chicago, Ill., in Richmond and Norfolk, Va., Beckley, W. Va., and at other coal-shipping points. This company was engaged exclusively as a coal-selling organization and had no assets other than coal contracts, and operated on a very small margin of cash. In 600 the contract with petitioner the Interstate Company agreed to purchase petitioner's entire output at $4.50 a ton. This contract also provided that in the event petitioner was compelled to increase the wages of its employees engaged in mining coal that the purchase price per ton to the Interstate Company would be increased accordingly. The Interstate Company had many contracts with many coal-operating companies. It had contracts to purchase the output of practically all of the coal mining companies in the West Virginia field. In these contracts the Interstate2851 Company agreed to make payment for coal shipped in the latter part of the month following the month in which shipment was made. Petitioner made shipments of coal to and received payments from the Interstate Company during the year 1920 as follows: MonthShipmentsPaymentsJuly$6,981.21None.August21,804.53None.September24,915.60$27,022.50October20,592.9825,292.28November21,279.4019,763.24December20,947.70None.Total116,521.4272,078.02This left a balance due petitioner by the Interstate Company of $44,443.40. In September or October, 1920, a slump in the coal market occurred and the price of coal declined materially. The Interstate Company therefore found itself with numerous contracts wherein it had agreed to purchase coal at high prices and with a large supply of coal on hand for which there was very little demand. It had difficulty in selling coal and that which it could sell was in most instances sold at prices considerably below the price at which it was compelled under its contracts to pay the operator. The Interstate Company relied upon payments to it for coal sold with which to pay for coal purchased and at2852 no time had a very large amount of ready cash on hand with which to meet its bills. In the latter part of September or in October, 1920, the Interstate Company finding itself unable to meet its bills gave trade acceptances and subsequently made part payments thereon. Early in December, 1920, the Interstate Company was hopelessly insolvent, its trade acceptances were protested and it was unable, after December 15, 1920, to make payments on coal which had theretofore been shipped to it. More than $339,000 of trade acceptances held by operators in the West Virginia field alone were protested for nonpayment early in December, 1920. In the latter part of November, and throughout the month of December, 1920, petitioner made every effort to collect on its 601 accounts but could get no remittances. It wrote letters and sent telegrams to the principal office of the petitioner and to its New York office but could get no reply. Petitioner's secretary and manager who was in charge of its operations and financial affairs did everything he could without personally going to Green Bay, Wis., to collect the amount due petitioner from the Interstate Company. He knew that the sudden drop2853 in coal prices and the lack of demand for coal had caused the Interstate Company to become financially involved and that this was the reason for his company not receiving payments in full for coal which had been shipped to the Interstate Company. He made several trips from Amigo to Beckley, W. Va., in an effort to confer with the representative of the Interstate Company in that territory with the view of seeing if anything could be done to have the Interstate Company make payment of its past due accounts. He was never able to see the Interstate Company's representative. None of the coal operators in the West Virginia field were able to collect anything on their accounts. About the middle of December, 1920, petitioner determined that the Interstate Company was hopelessly insolvent, could not pay anything upon its large outstanding indebtedness, and that the debt of $44,443.40 due it by the Interstate Company was worthless and a total loss. Before charging the amount off on the books of account, however, petitioner's secretary and manager, being uninformed as to income-tax matters and being desirous of strictly complying with the law and Department regulations, sought information2854 from those whom he believed knew something about the matter of charging off worthless debts insofar as such action related to income-tax matters. He consulted certain individuals who had previously been connected with the handling of some tax questions, explained the circumstances to them, told them that the debt of the Interstate Company of $44,443.40 was worthless and an absolute loss to his company, and asked if, under these circumstances, the total debt might under the income-tax statutes and regulations be legally charged off as worthless without subjecting the company to a penalty. Petitioner's officer was advised by those with whom he consulted that their understanding of the matter of charging off worthless debts from an income-tax standpoint was that before a debt could legally be charged off the debtor must have gone through bankruptcy and that every possible means to collect on the account must first have been exhausted. After being thus informed petitioner, although desirous of charging the debt off in full, concluded that the best it could do any stay within the regulations of the Treasury Department was to charge to profit and loss the amount of $15,608.52, which represented2855 the profit at which the company had sold the coal, and carry the remainder of 602 the account, amounting to $28,834.88, into the inventory as a part of the cost of goods sold. This effect of the treatment of the debt by the petitioner upon its books is explained by its principal officer that his "job was to dig that coal out of the hillside and get what I could for it. I could not understand the law on that [charging off of the debt] * . I asked everybody I could find, and some of them said 'well, you can take off your profit, as a net loss, or you can take your inventory at your cost of production, inventory your coal at cost of production or market value,' and I decided to do that, and I came to the conclusion that if we put in the inventory the cost which was above the market, and then take no credit to profit, that that at least would be subject to a fair interpretation that I was not trying to make a fraudulent return. Now, that is where I got that $15,608.52. The average cost of production that we could turn that in and charge the rest of it off." Shortly after December 31, 1920, before the books were closed for that year the petitioner charged $15,608.522856 of the $44,443.40 off as worthless. The Commissioner refused to allow any deduction on account of the debt of the Interstate Company. Petitioner employed the accrual method of accounting. The affairs of the Interstate Company were wound up by a court in bankruptcy some time in 1921. Petitioner filed its claim for $44,443.40 in the bankruptcy proceeding and the trustee in bankruptcy reduced the same in the amount of $9,543.34 on the ground that the contract price of coal with the Interstate Company was $4.50 a ton and declined to permit the petitioner to add 50 cents a ton under the contract on account of increase in the wages of miners prior to the shipment of the coal in question. Nothing was ever paid to the petitioner on account of the debt of the Interstate Company. OPINION. LITTLETON: No portion of the work representing a claim of expenditure of $5,926.67 was performed in the year 1920. At the end of the year 1920 the petitioner had incurred no liability to any one in respect of the amount which might be necessary to remove the roof of the mine. Petitioner claims that the expenditure of this amount was "incurred" in the year 1920 because it knew at the close of 19202857 that in order to proceed with its mining operations in the year 1921 it would be necessary for it to pay this amount, but knowledge of a taxpayer that some expenditure, even though determinable in amount, will have to be paid or incurred in the following year for certain work necessary, if its operations are continued, is not sufficient to justify a deduction of such amount in the taxable year in which it is neither paid nor liability therefor incurred. In these circumstances we are of the opinion that the reserve was not a proper deduction 603 from gross income. ; ; ; ; ; . The Board is of the opinion that the Commissioner was in error in declining to allow the petitioner a deduction of any amount in the year 1920 on account of the debt of the Interstate Coal & Dock Co. The debt was wholly worthless and was so determined within the taxable year, and $15,608.522858 was charged off in the return. In the petition only $15,608.52 is claimed as a deduction. The amount claimed, to wit, $15,608.52, was a proper deduction from the gross income for 1920. , and . The petitioner claims that because the trustee in bankruptcy reduced its claim of $44,443.40 by the amount of $9,543.34, representing the amount of 50 cents a ton added to the price mentioned in the contract on account of an increase in the miners' wages occurring prior to shipment of the coal in question, its income from sales should be correspondingly reduced, but the evidence is not sufficient to warrant us in holding that this should be done. The evidence submitted by the petitioner is to the effect that the contract with the Interstate Company specifically provided that the Interstate Company would pay $4.50 a ton for the coal and that this price should be increased by whatever amount should be necessary to take care of any increase which the petitioner might be compelled to make in the wages of its miners. Reviewed by the Board. Judgment will be entered on 15 days'2859 notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620695/	WILLIAM R. POKUSA and KATHLEEN M. POKUSA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPokusa v. CommissionerDocket No. 8038-75.United States Tax CourtT.C. Memo 1978-93; 1978 Tax Ct. Memo LEXIS 422; 37 T.C.M. (CCH) 434; T.C.M. (RIA) 780093; March 7, 1978, Filed Stanley W. Sokolowski, for the petitioners. James F. Kearney, for the respondent. FORRESTERMEMORANDUM FINDINGS OF FACT AND OPINION FORRESTER, Judge: Respondent has determined deficiencies in petitioners' Federal income taxes as follows: TaxableSection 6651(a) 1 yearIncome taxpenalty1972$35,990.66019733,317.67$829.42423 Concessions having been made, the following issues remain for our decision: (1) A determination of the amount of gain that petitioners realized upon sale of the Sundowner Mobile Home Park (Sundowner), depending in part upon whether they are entitled to a stepped-up basis in the Sundowner equal to its value at the time petitioner Kathleen M. Pokusa received it pursuant to an agreement with her former husband; and (2) Whether the rent collected by petitioners on the Sundowner property prior to its sale, and which was credited to the balance due from the purchasers at closing, is income earned by petitioners and taxable to them. FINDINGS OF FACT Petitioners William R. and Kathleen M. Pokusa, husband and wife, resided in Lighthouse Point, Florida, at the time the petition was filed herein. Petitioners filed joint Federal income tax returns for the years 1972 and 1973. Petitioners' 1973 return was filed on April 3, 1975. During the period from September 11, 1948 to October 27, 1969, petitioner Kathleen M. Pokusa (hereinafter Kathleen) was married to James E. Tate (hereinafter Tate and Kathleen will be referred to as the Tates). At the time of their marriage, neither of the424 Tates owned any appreciable property. During their marriage the Tates developed and operated a mobile home park and sales business in Ocean City, Maryland, under the name of the Sundowner. On August 16, 1963, the Tates acquired, as tenants by the entireties, the first block of realty for the Sundowner at a cost of $24,400. The Tates made such purchase with the proceeds of two mortgages on both of which they were jointly liable. In June 1964, the Tates acquired additional realty for the Sundowner at a cost of $52,000. A portion of the funds for such purchase was provided by a purchase money mortgage on which the Tates were jointly liable. The mortgages incurred by the Tates in the development and operation of the Sundowner were satisfied from the earnings of the Sundowner and from Tate's salary. The gross receipts of the Sundowner were generated through the rental of space for mobile homes and through the sale of mobile homes. During the period of the Tates' marriage, Tate was employed as a civil service employee with the Air Force and Kathleen was a civil service employee until 1964.After Kathleen left government service, she devoted hereself full time to the development425 and operation of the Sundowner. Tate worked at the Sundowner mostly on weekends because he continued to work full time for the Air Force during week.During their marriage, the Tates acquired through their joint efforts and contributions the following other properties which were owned jointly by them at the time of their divorce: a. Great Eastern Corporation which was a mobile home park similar to Sundowner. b. Great Eastern Mobile Home Sales, Inc., which was an operation similar to the mobile home sales of Sundowner. c. House and lot in Delaware.d. Lot in Calvert County, Maryland. e. Stock in radio station WSMD. f. Stock in a high-rise mobile home structure corporation. g. House and lot in Ocean City, Maryland. h. Two lots in Fort Myers, Florida. On October 27, 1969, the Tates were divorced by a decree of the Superior Court of Delaware. Such decree contained no provision regarding a property settlement. Kathleen was not entitled to alimony because of the grounds on which such divorce decree was entered. As a result of such divorce decree, the Tates became owners as tenants in common of all their jointly owned property. Kathleen was awarded custody426 of the Tates' 12-year-old son and provided his total support up to the time of the trial herein. After they had been divorced for about 15 months, and on January 30, 1971, the Tates "[agreed] to divide their property between themselves." Such agreement made no reference to any release of Kathleen's marital rights as a condition. As a result of the January 1971 agreement, Kathleen became the sole owner of the Sundowner. On March 11, 1972, Kathleen entered into a contract for the sale of the Sundowner to Exten Associates, Inc. (Sundowner Limited Partnership). On May 1, 1972, title to the Sundowner was conveyed to the Sundowner Limited Partnership. If petitioners are not entitled to a stepped-up basis then, at the time of the sale of the Sundowner in 1972, its adjusted cost basis was $95,799.87. For purposes of reporting their gain on the sale of the Sundowner, petitioners elected the installment sales method and used a stepped-up basis of $414,013.51. In his statutory notice, respondent determined that petitioners' basis in the Sundowner at the time of its sale was $95,799.87.In his amended answer, respondent asserted that the alleged deficiencies should be increased to427 the amounts shown below because he had incorrectly computed petitioners' gain under the installment sales method in the deficiency notice: Sec. 6651(a) YearIncome taxpenalty1972$41,467.6601973 23,440.01$860.00The contract of sale between Kathleen and the Sundowner Limited Partnership provided in part: "All space rental income for 1972 to go to the Buyer." Petitioners operated the Sundowner during the period from January 1, 1972 until May 1, 1972, during which time they collected space rental income in the amount of $58,190. Such amount did not include all space rentals due for 1972. Petitioners had complete dominion and control over such amount and it was used to pay operating expenses and loan payments relating to the Sundowner. Petitioners tried to collect the annual space rentals early in the year so that they could meet their February mortgage payment. Four tenants occupied their spaces year round but the remaining 172 tenants occupied their spaces428 only during the months of May through September. The contract of sale for the Sundowner provided for payment of the $1,100,000 purchase price as follows: Cash at closing$ 165,000Principal amount of existingmortgage to be assumed bybuyer120,000Principal amount of purchasemoney mortgage815,000$1,100,000At closing, the $58,190 of space rental income for 1972 was credited to the buyer, Sundowner Limited Partnership. Respondent concedes that the sales price of the Sundowner should be reduced by $58,190. On their 1972 return, petitioners did not include the $58,190 amount in their income but they did deduct various operating expenses of the Sundowner on Schedule C. In his statutory notice, respondent determined that the $58,190 of space rental income was includable in petitioners' income for 1972. Petitioners concede in their reply brief that respondent has correctly determined that they are liable for an addition to tax under section 6651(a) for 1973. OPINION We must first determine the amount of gain which petitioners realized upon the sale of the Sundowner. Petitioners argue that the transfer of the Sundowner to Kathleen pursuant to429 the January 1971 agreement with Tate was a taxable event so that they are entitled to a stepped-up basis equal to approximately one-half of the fair market value of the Sundowner when it was transferred to Kathleen plus one-half of the adjusted cost basis of the Sundowner immediately before its transfer to Kathleen. Respondent argues that Kathleen received the Sundowner as part of a nontaxable division of property between co-owners so that petitioners are only entitled to carryover the adjusted cost basis of the Sundowner in the hands of the Tates. Petitioners have the burden of providing that the transfer of the Sundowner to Kathleen was a taxable transaction. Rule 142(a), Tax Court Rules of Practice and Procedure.They rely solely upon United States v. Davis,370 U.S. 65">370 U.S. 65 (1962), in which the Supreme Court held that the husband's transfer of his property to the wife in full settlement and satisfaction of all her statutory marital claims and rights against the husband was a taxable exchange. The facts in Davis are far different from the facts in the instant case.In Davis, the taxpayer and his then wife made an agreement in 1954 calling for support payments430 to the wife and minor child in addition to the transfer of certain property to the wife. Under state law, all the property transferred was owned by the taxpayer subject to certain statutory marital rights of the wife including a right of intestate succession and a right upon divorce to a share of the husband's property. Under these facts, the Supreme Court concluded that the disposition in Davis was not analogous to a nontaxable division of property between co-owners "for the inchoate rights granted a wife in her husband's property by the Delaware law do not even remotely reach the dignity of co-ownership." (370 U.S. at 70.) In the instant case, however, petitioners have not met their burden of proving that Kathleen was not a co-owner of all the property transferred pursuant to the January 1971 agreement. It is stipulated that most of the property involved in the January 1971 agreement was jointly owned by the Tates prior to their divorce and there is no evidence whatsoever to indicate that any of the other property involved in such agreement was the separate property of either one of the Tates. Furthermore, the record indicates that the Tates accumulated their431 property through their joint efforts and contributions. It is also stipulated that as a result of their divorce, the Tates became owners as tenants in common of their jointly owned property. Therefore, since petitioners have not proved that the Tates were not co-owners of the property transferred pursuant to the January 1971 agreement, and since such agreement states simply that the parties "agree to divide their property between themselves" without any reference at all to the release of Kathleen's marital rights as a condition, the Tates' division of their property will be a nontaxable event if such division was intended to be equal. Beth W. Corporation v. United States,350 F. Supp. 1190">350 F. Supp. 1190 (S.D. Fla. 1972), affd. 481 F. 2d 1401 (5th Cir. 1973); Hornback v. United States,298 F. Supp. 977">298 F. Supp. 977 (W.D. Mo. 1969). Since respondent has determined that the property division was a nontaxable event, petitioners have the burden of proving that such division was intended to be unequal in support of their attempt to equate the facts of the instant case to those in Davis,supra. They assert that Kathleen received properties432 worth approximately $62,000 more than those received by Tate on the division, and that this excess value was "in full settlement and satisfaction of any and all claims and rights against the husband whatsoever." We need not decide whether such a difference in values alone would support petitioners' contention that the 1971 division was a taxable event, for petitioners have failed to prove that such division was not equal, or nearly so. To support their argument that the division was intended to be unequal, petitioners rely upon Kathleen's testimony and upon a worksheet on which the Tates listed the value of some of their property; however, such worksheet does not value all of the property which was divided in the January 1971 agreement. A lot in Calvert County, Maryland, stock in a high-rise mobile home structure corporation, stock in radio station WSMD, a second deed of trust secured against property in Clinton, Maryland, a deed of trust note secured against 62 acres owned by Great Eastern Mobile Home Sales, Inc., several trailers, and several "save harmless" agreements were not valued on the worksheet, but all of such property was transferred. Petitioners have presented no433 evidence to establish the value of most of these items. Kathleen's testimony was equivocal and added little. Since the Tates have not proved that they were not coowners of the property in question or that they intended to divide such property unequally under the January 1971 agreement, United States v. Davis,supra, is clearly distinguishable. We hold that the Tates' division of their jointly owned property was a nontaxable event, Beth W. Corporation v. United States,350 F. Supp. 1190">350 F. Supp. 1190 (S.D. Fla. 1972), affd. 481 F. 2d 1401 (5th Cir. 1973), so that petitioners' basis in the Sundowner is an adjusted carryover basis equal to $95,799.87. Petitioners argue that the $815,000 purchase money mortgage should be included at less than its face value in computing their gain on the sale of the Sundowner. We disagree. It has not been proved that the purchase money mortage, which was secured by the Sundowner, had a fair market value of less than $815,000 but, regardless of its fair market value, section 453 requires the use of the face amount of the note in computing petitioners' gain on the sale of the Sundowner under the installment434 sales method. Frizzelle Farms, Inc. v. Commissioner,61 T.C. 737">61 T.C. 737, 742 (1974), affd. 511 F. 2d 1009 (4th Cir. 1975); Mason v. United States,365 F. Supp. 670">365 F. Supp. 670, 673-675 (N.D. Ill. 1973), affd. 513 F. 2d 25 (7th Cir. 1975); sec. 1.453-5(a), Income Tax Regs.3In his amended answers, respondent sought an increased deficiency in order to correct two errors which he allegedly had made computing petitioners' gain on the sale of the Sundowner in his deficiency notice. One error was purely mathematical and we hold that it should be corrected. The other asserted error was that respondent's computed "contract price" for installment sales method purposes did not include the amount of the existing mortgage (which was assumed by the buyers) to the extent that such mortgage exceeded petitioners' basis. 435 Section 1.453-4(c), Income Tax Regs., clearly supports respondent's position. Accordingly, we hold that the "contract price" of the Sundowner should include the excess of the mortgage assumed by the buyers over petitioners' basis. The second issue for our decision is whether the amount collected by petitioners as annual rental for spaces in the Sundowner, and which was credited to the purchaser at closing, is includable in petitioners' gross income for 1972. Respondent argues that the space rentals in the amount of $58,190 are includable in petitioners' income because petitioners received such amount at a time when they were owners of the Sundowner and they retained complete dominion and control over such amount until the closing occurred on May 1, 1972. Petitioners' position, however, is that the annual space rental income is not includable in their income because such rental income for the most part had not been earned by May 1, 1972, when it was credited to the purchasers at closing. It is well settled that income derived from property is taxable to the owner of the property. Helvering v. Horst,311 U.S. 112">311 U.S. 112 (1940); 2 Lexington Avenue Corp. v. Commissioner,26 T.C. 816">26 T.C. 816 (1956);436 Ashlock v. Commissioner,18 T.C. 405">18 T.C. 405 (1952). In 2 Lexington Avenue Corp. v. Commissioner,supra, we stated (26 T.C. at 825): the income in question was earned at a time when the greater bundle of rights or attributes of ownership, including title, possession, management, and the substantial burdens and possibly the benefits of the ownership of the property, were all still possessed by * * * [the seller], and hence * * * [the seller] and not the [buyer] was liable for the tax thereon. * * * [Emphasis supplied.] In the instant case, petitioners possessed the greater bundle of rights or attributes of ownership until May 1, 1972. Prior to such date, petitioners retained title to the Sundowner and exclusive possession of it. Petitioners paid, without reimbursement, all expenses incurred with respect to the operation of the Sundowner prior to May 1, 1972. Petitioners were responsible for offering a marketable title to the purchaser on May 1, 1972. Accordingly, we hold that the portion of the annual space rentals collected by petitioners, which is attributable to the period prior to May 1, 1972, is includable in petitioners' 437 taxable income for 1972. The 1972 space rentals attributable to the period after May 1, 1972, are not includable in petitioners' income. The $58,190 amount credited to the purchasers at closing was intended by the parties to represent space rentals and it was not an adjustment to the purchase price. 4Hyde Park Realty, Inc. v. Commissioner,211 F. 2d 462 (2d Cir. 1954), affg. 20 T.C. 43">20 T.C. 43 (1953). While petitioners may not evade their responsibility by assigning what are really their earnings, the 1972 space rentals attributable to the period after May 1, 1972, had not been earned but were merely collected. See Hyde Park Realty, Inc. v. Commissioner,supra.Furthermore, when they were earned the Sundowner Limited Partnership, not petitioners, was both the legal and beneficial owner of the Sundowner. Respondent relies upon section 1.61-8 (b), Income Tax Regs., 5 in arguing that the entire amount of 1972 space rentals collected by petitioners should be included in their 1972 taxable income because such amount was collected when petitioners were the owners of the Sundowner and petitioners had complete dominion and control over438 such amount when collected. Respondent's reliance on section 1.61-8(b),, Income Tax Regs., is misplaced. Such regulation provides when rental income is reportable but not who must report it. Hyde Park Realty, Inc. v. Commissioner,supra.Since we hold that the 1972 space rentals attributable to the period prior to May 1, 1972, are includable in petitioners' income, it is necessary to determine what portion of the $58,190 amount collected by petitioners is attributable to such period. Petitioners argue that only an insubstantial portion of such amount is attributable to the pre-May 1, 1972 period because their business was seasonal so that only four out of 176 tenants occupid their spaces439 prior to May, although they paid year-round rent. We do not believe that the remaining 172 of petitioners' tenants would have paid a very large portion of the "annual" space rental to rent a space during the first four (off-season) months of 1972 unless by doing so they were able to reserve a space dursng the "reason." On the other hand, four of the spaces were occupied during the first four months of 1972 and the $58,190 amount does not represent all of the 1972 space rentals since some tenants had not paid their 1972 space rent prior to May 1, 1972. Although petitioners introduced no evidence of the amount of annual rental per space or the total space rentals for 1972, we are convinced that much less than $58,190, which amount respondent included in petitioners' 1972 income, is attributable to the period from January 1, 1972 to May 1, 1972. Accordingly, using our best judgment, we hold that $9,600 of space rental income is includable in petitioners' 1972 taxable income. Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954.↩2. Since petitioners used the income averaging method in their 1973 return, the 1973 deficiencies were increased as a result of respondent's asserted increase in their 1972 income.↩3. the vendor may return as income from each such transaction in any taxable year that proportion of the installment payments actually received in that year which the gross profit (as described in paragraph (b) of section 1.453-1) realized or to be realized when the property is paid for bears to the total contract price. * ↩4. We note, without expressing our opinion as to its correctness, that respondent has conceded that the $1,100,000 sales price should be reduced by $58,190 for purposes of determining gain under the installment sales method. ↩5. (b) Advance rentals; cancellation payments. Gross income includes advance rentals, which must be included in income for the year of receipt regardless of the period covered or the method of accounting employed by the taxpayer. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620696/	NIELSON-TRUE PARTNERSHIP, TRUE OIL COMPANY, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentNielson-True Pshp. v. CommissionerDocket Nos. 12069-95, 3980-96United States Tax Court109 T.C. 112; 1997 U.S. Tax Ct. LEXIS 57; 109 T.C. No. 6; 138 Oil & Gas Rep. 229; September 9, 1997, Filed 57 Decisions will be entered for respondent. P owned an interest in two wells in the same tight formation gas field. The field had been established under statutory procedures as a tight formation field. One well had been certified as producing tight formation gas under the established Federal statutory procedures, and the other had not. Congress provided a tax credit incentive to develop, among other fuels, tight formation gas. Sec. 29(c) (2) (A), I.R.C., requires that, as a prerequisite to the credit, "the determination of whether any gas is produced from * * a tight formation shall be made in accordance with section 503 of the Natural Gas Policy Act of 1978 [NGPA]", Pub. L. 95-621, 92 Stat. 3350, 3397, 15 U.S.C. sec. 3413 (1988). NGPA sec. 503 was also the procedural route to qualifying individual tight formation gas wells for incentive (higher than ceiling) price treatment administered by the Federal Energy Regulatory Commission (FERC). Under NGPA sec. 503, related statutes, and FERC regulations, determinations concerning tight formation gas were required for both the field in which a well was situated and the individual well. R determined that58 sec. 29, through reference to NGPA sec. 503, required individual well-category determinations to qualify for the tax credit. P contends and R does not deny that but for the lack of a certification under NGPA sec. 503, the well in question would meet the qualifications for tight formation gas. P contends that meeting the qualification by definition (in substance) should suffice and that actual certification is unnecessary. Held: Sec. 29, I.R.C., when read in conjunction with the provisions of NGPA sec. 503 and related materials, requires an individual well tight formation gas determination under the procedures of NGPA sec. 503 as prerequisite to tax credit eligibility. Douglas A. Pluss and Ronald M. Morris, for petitioner. Richard D. D'Estrada, for respondent. GERBER, Judge GERBER113 GERBER, Judge: Respondent mailed to True Oil Co. (petitioner), as tax matters partner, notices of final partnership administrative adjustment with respect to Nielson-True Partnership for the taxable years 1991 and 1992. The sole adjustment and issue concerns respondent's disallowance of section 291 credits in the amounts of $ 10,170 and $ 4,394 for 1991 and 1992, respectively. 261 FINDINGS OF FACT 3On October 14, 1983, True Oil Co., the tax matters partner, and Nielson Enterprises, Inc., a Delaware corporation, formed the Nielson-True partnership. The partnership's principal place of business was Casper, Wyoming, at the time the petition was filed. The primary objective of the partnership was to drill two wells in the "J" Sand formation in the Wattenberg Field in northern Colorado, a gas field covering parts of several counties, including Weld County, Colorado. Wells were drilled in Weld County, known as the Alvin Vonasek "B" well (the Vonasek well) and the Castor Hanson True well (the Hanson well). These wells draw from the "J" Sand formation and produce only gas. The Federal Energy Regulatory Commission (FERC or the Commission) made an administrative determination that the "J" Sand formation in the Wattenberg Field was a tight formation and that the gas produced from that formation was tight formation natural62 gas. 4 The Commission's determination 114 was pursuant to the Natural Gas Policy Act of 1978 (NGPA), Pub. L. 95-621, sec. 503, 92 Stat. 3350, 3397, 15 U.S.C. sec. 3413 (1988). 63 An unrelated corporation responsible for operating the wells in the Wattenberg Field submitted a well-category determination application to the local regulatory authority in Colorado for the Vonasek well. In response, the State agency determined that the Vonasek well was producing gas from a tight formation. This determination became final and was not overturned or reversed by FERC. The Vonasek and Hanson wells were part of a group of over 300 wells managed by the same operator. The individual wells in the group were routinely submitted for a well determination by the operator. Due to an oversight, no well-category determination application was filed with the Colorado local regulatory authority with respect to the Hanson well. During 1991 and 1992, the partnership had a working interest in the Vonasek and Hanson wells. Respondent allowed the nonconventional fuels tax credits under section 29 for the Vonasek well for 1991 and 1992. However, for the same tax years, respondent disallowed the claimed tax credits for the Hanson well on the grounds that no submission for a determination was made for the Hanson well. OPINION This is a case of first impression stemming from respondent's64 disallowance of a section 29 nonconventional fuels tax credit (credit). The issue we consider is whether the Hanson well qualifies for the credit even though it was not certified under the procedures contained in NGPA sec. 503. The parties approach the solution to this issue from different perspectives. Respondent contends that the statutes involved expressly and unambiguously require that a well-category determination must be obtained from the specified authorities for entitlement to the credit. Petitioner, contending that 115 the statute is ambiguous, construes the statute, when read in conjunction with the legislative history and other indicators of congressional intent, as permitting the credit without a formal procedural determination if the well otherwise meets the definitional requirements under the referenced statutory framework. Section 29, formerly section 44D, 5 was enacted by the Crude Oil Windfall Profit Tax Act of 1980 (COWPTA), Pub. L. 96-223, sec. 231, 94 Stat. 229, 268. This section was entitled "Credit For Producing Fuel From A Nonconventional Source", and it was intended to encourage the development of alternative energy sources and to provide producers of alternative65 fuels with protection against significant decreases in the average wellhead price for uncontrolled domestic oil. See S. Rept. 96-394, at 87 (1979), 3 C.B. 131">1980-3 C.B. 131, 205; H. Conf. Rept. 96-817, at 139 (1980), 3 C.B. 245">1980-3 C.B. 245, 299; see also Texaco Inc. v. Commissioner, 101 T.C. 571">101 T.C. 571, 574-575 (1993). Section 29(a) provides for a tax credit for qualified fuels produced by a taxpayer and sold to an unrelated person. Section 29(c) (1) (B) (i) lists gas produced from a tight formation as one of the qualified fuels. Section 29(c) (2) (A), in pertinent part, states that "the determination of whether any gas is produced from * * a tight formation shall be made in accordance with section 50366 of the * * [NGPA]." The parties differ in their interpretations of the term "determination". Respondent contends that, as a prerequisite to obtaining the credit, a tight formation well-category determination must be obtained by compliance with the application and approval procedures of NGPA section 503. Respondent concedes that the local regulatory authority and the Commission provided determinations that the Wattenberg Field "J" Sand formation contained tight formation gas. Respondent also concedes that the Hanson well was drilled in the Wattenberg Field "J" Sand formation and produced gas that would meet FERC's standards as tight formation gas. Respondent's position relies solely on the absence of a well-category determination under NGPA section 503 for the Hanson well. 116 Petitioner proposes several arguments, the main thrust of which is that the use of the term "determination" in the statute does not result in the requirement of a well-category determination from FERC or under NGPA section 503. Petitioner contends that the NGPA section 503 reference in section 29 provides a means to a substantive definition for tight formation gas and was not intended to require an actual certification67 under the NGPA. We agree with respondent. Section 29 does not literally support the result petitioner seeks. The use of the term "determination" and the reference in section 29(c) (2) to NGPA section 503 would require a reading of both sections to fully understand the requirements and meaning of section 29. In construing a statute, courts seek the plain and literal meaning of the language. United States v. Locke, 471 U.S. 84">471 U.S. 84, 95-96 (1985); United States v. American Trucking Associations, Inc., 310 U.S. 534">310 U.S. 534, 543 (1940). In that regard, words in revenue acts are generally interpreted in their "ordinary, everyday senses". Commissioner v. Soliman, 506 U.S. 168">506 U.S. 168, 174 (1993) (quoting Malat v. Riddell, 383 U.S. 569">383 U.S. 569, 571 (1966) (quoting Crane v. Commissioner, 331 U.S. 1">331 U.S. 1, 6 (1947))). On the other hand, words with a recognized legal or judicially settled meaning are generally presumed to have been so utilized, unless such an interpretation will lead to absurd results. See United States v. Locke, supra at 93, 95-96;68 United States v. Merriam, 263 U.S. 179">263 U.S. 179, 187 (1923); Lenz v. Commissioner, 101 T.C. 260">101 T.C. 260, 265 (1993) (citing United States v. American Trucking Associations, Inc., supra at 542-543). Our principal objective in interpreting any statute is to determine Congress' intent in using the statutory language being construed. United States v. American Trucking Associations, Inc., supra at 542; Helvering v. Stockholms Enskilda Bank, 293 U.S. 84">293 U.S. 84, 93-94 (1934); General Signal Corp. v. Commissioner, 103 T.C. 216">103 T.C. 216, 240 (1994). In order to interpret Congress' intent here, we must analyze section 29 and the NGPA section referenced in section 29. With these general principles in mind, we consider the phrase "the determination of whether any gas is produced from * * a tight formation shall be made in accordance 117 with section 503 of the Natural Gas Policy Act of 1978." 6Section 29 does not contain a definition of tight formation gas for purposes of the nonconventional fuels tax credit. Section 29 simply provides that the "determination" of "whether69 any gas is produced from * * * a tight formation shall be made in accordance with [NGPA] section 503". By way of contrast, another part of section 29 references NGPA section 2(18), 92 Stat. 3354, 15 U.S.C. sec. 3301 (1988), as providing the definition of the phrase "committed or dedicated to interstate commerce". See sec. 29(c) (2) (B) (i). 70 NGPA section 503 7 contains procedures by which particular types of natural gas may qualify for certain price incentives regulated by FERC. NGPA section 503, however, does not contain a specific reference to or definition of "tight formation gas". NGPA section 503 does contain reference to several categories of natural gas which are covered under its procedures, including "high-cost natural gas". See 15 U.S.C. sec. 3413(a) (1) (D). NGPA section 503 was enacted in 1978 and did not specifically mention tight formation gas. The introduction of tight formation71 gas to the price incentive provisions, including NGPA section 503, did not occur until some later time. The introduction of tight formation gas into this scenario occurred as described in Williams Natural Gas Co. v. FERC, 872 F.2d 438">872 F.2d 438, 441 (D.C. Cir. 1989), as follows: NGPA section 107(c) (5) gives the * * * [FERC] the power to prescribe an incentive price for high-cost natural gas which does not fit within the categories 118 enumerated in section 107(c) (1) - (4). On July 16, 1979, President Carter recommended the establishment of incentives for the production of "tight formation" natural gas. After conducting a rulemaking, * * [FERC] promulgated regulations establishing incentive prices for tight formation gas. [Fn. ref. omitted.]The courts thereafter held that NGPA section 503 is the procedural mechanism for the determination of whether a particular well's production qualifies for the price incentive as tight formation gas vis-a-vis the NGPA section 503 category "high-cost natural gas". See, e.g., Williston Basin Interstate Pipeline Co. v. FERC, 816 F.2d 777">816 F.2d 777, 780 (D.C. Cir. 1987). NGPA section 503 contains72 a four-step process by which determinations may be obtained. First, the local regulatory authority (local authority) recommended that a field be designated as a tight formation. 8 Second, FERC could affirm, reverse, remand, issue a preliminary finding, or take no action on the local authority's recommendation. If no action was taken by FERC, the local authority's recommendation became final 45 days after receipt of the recommendation by FERC. If FERC issued preliminary findings but failed to take further action, the local authority's recommendation became final 120 days after the date FERC's preliminary finding was issued. The third procedural step permitted an interested producer to petition the local authority for its recommendation that a particular well within the designated tight formation field should be classified as a tight formation well. Fourth, FERC could affirm, reverse, remand, issue a preliminary finding, or take no action on the local authority's recommendation with respect to a specific well. As in step 2, the local authority's individual tight formation well recommendation became final 45 days from the date FERC received the recommendation unless FERC issued a preliminary73 finding. In the event that FERC issued a preliminary finding, FERC had 120 days from the preliminary finding to take further action or the local authority's recommendation became final. 9 Finally, judicial review was available under NGPA section 503, but only in the event that FERC remanded or reversed 119 the local authority's recommendation. 15 U.S.C. sec. 3413(b) (4). For purposes of obtaining the gas price incentives, the four-step process outlined above is mandatory and not severable or elective. A well owner may not qualify merely by producing74 from a well located in a field that has been determined to be a tight formation. In addition to a field determination, the well owner must obtain a determination that each well produces tight formation gas. See, e.g., Enserch Exploration, Inc. v. FERC, 887 F.2d 81">887 F.2d 81, 82 (5th Cir. 1989); FERC Order No. 479, issued July 29, 1987, 52 Fed. Reg. 29003 (Aug. 5, 1987). Regulations under the NGPA indicate that the Wattenberg "J" Sand Formation had been finally determined to contain tight formation gas. See 18 C.F.R. sec. 271.703(d) (11) (1988). The Wattenberg "J" field is located north and east of Denver and underlies approximately 703,000 acres situated within four different counties. See 18 C.F.R. sec. 271.703(d) (11) (i). Accordingly, it is a relatively large area within which many wells may be situated. The parties do not dispute and the case law supports the principle that to be entitled to the price incentives administered by FERC under NGPA section 107(c) (5), 92 Stat. 3366, 15 U.S.C. sec. 3317 (1988), a well owner would be required to obtain a determination, under the NGPA section 503 procedures75 with respect to each individual well, that it produced "tight formation gas". The question is whether that same requirement ensues for the tax credit from the section 29 reference to a determination under NGPA section 503. Petitioner argues that the statutory ambiguity permits its use of the legislative history and other pertinent material to interpret the intent of the statute. Although we agree that in this instance we must look beyond the statutory language, it is difficult to reach the conclusion proposed by petitioner, considering the statutory language and case precedent concerning NGPA section 503. For example, could Congress, by incorporating the reference to NGPA section 503 in section 29, have intended that one procedural standard would be applied to determine whether a well is a tight formation well for price incentives and that a different approach and procedural standard would apply for income tax credits where both programs are to be governed procedurally pursuant to 120 NGPA section 503? This must be the case for petitioner to prevail. A statutory term should be given its common and ordinary meaning, unless persuasive evidence or context indicates otherwise. Commissioner v. Soliman, 506 U.S. at 174;76 Commissioner v. Brown, 380 U.S. 563">380 U.S. 563, 570-571 (1965). The word "determination" has been generally defined to mean the act of settling a dispute, suit, or other question by an authoritative decision, or the ascertainment or establishment of the extent, quality, position, or character of something. Webster's II New Riverside University Dictionary 369 (1984). In the legal sense, a "determination" is a "decision of a court or administrative agency" and, also, a "judgment and decision after weighing [all] the [relevant] facts." Black's Law Dictionary 450 (6th ed. 1990). Consequently, we do not find the term "determination" made in accordance with NGPA section 503 to be ambiguous. Section 29(c)(2) cannot be literally interpreted in a manner other than that it requires a determination under the procedures of NGPA section 503. Petitioner's contention that a well-category determination is not a prerequisite for eligibility for the tax credit is not a plausible literal interpretation of section 29. That is especially so when NGPA section 503 is considered in tandem with section 29, wherein it is referenced. Certainly, section 29 does not mean that respondent possessed77 the expertise or statutory authority to make determinations of whether gas was from a tight formation for tax credit purposes. 10 Petitioner's approach does not comport with the overall statutory design for obtaining the benefit of the tax credit. Petitioner relied heavily on the legislative history to present its position. Petitioner contends that the legislative history reveals Congress' intent that section 29 required that a well meet the definition of a tight formation as utilized by FERC in the NGPA section 503 administrative process. Although the legislative history does contain some references to possibilities for employing definitions established by FERC, those references do not provide a basis for 78 holding that the term "determination" should be interpreted differently from 121 its usual and established meaning. Our examination of petitioner's argument leads us to the same conclusion whether or not we consider the statute to be ambiguous. In addition, we may seek out any reliable evidence as to the legislative purpose even where the statute is clear. United States v. American Trucking Associations, Inc., 310 U.S. at 543-544; Centel Communications Co. v. Commissioner, 92 T.C. 612">92 T.C. 612, 628 (1989), affd. 920 F.2d 1335">920 F.2d 1335 (7th Cir. 1990). Congress enacted the NGPA in response to a generally growing demand for natural gas and rising prices for energy in the late seventies and early eighties. Williams Natural Gas Co. v. FERC, 872 F.2d at 440; ANR Pipeline Co. v. FERC, 870 F.2d 717">870 F.2d 717, 719 (D.C. Cir. 1989). Producers of gas from tight formations could qualify for incentive gas prices higher than the ceiling. These incentive prices were valuable when uncontrolled gas prices were high but did little to encourage development of high-cost tight formation79 gas when prices were low. See Texaco Inc. v. Commissioner, 101 T.C. 571">101 T.C. 571 (1993). Consequently, in enacting the nonconventional energy production tax credit under section 29 (formerly section 44D), Congress provided an additional incentive to compensate for the extra costs and risks of producing high-cost fuel, including tight formation gas. See S. Rept. 96-394, at 87 (1979), 3 C.B. 131">1980-3 C.B. 131, 205. Turning to the legislative history, the nonconventional fuels tax credit first appeared in COWPTA. The conference committee report states: For purposes of the credit, the definition of natural gas from geopressured brine, coal seams, and Devonian shale is the same as that determined by the Federal Energy Regulatory Commission (FERC) under the Natural Gas Policy Act of 1978 (NGPA). Until FERC defines the term "tight formation" under section 107(c)(5) of the NGPA, tight sands gas is defined in terms of average matrix permeability to gas. [H. Conf. Rept. 96-817, at 138 (1980), 3 C.B. 245">1980-3 C.B. 245, 298.]In addition, the conference report for the COWPTA stated: Conference agreement.--The conference80 agreement adopts a modified version of the Senate amendment. This provision is intended to provide producers of alternative fuels with protection against significant decreases in the average wellhead price for the uncontrolled domestic oil, with which alternative fuels frequently compete. * * * * * * * 122 Sources eligible for the credit, and the definitions of those sources, generally are the same as those in the Senate amendment. Natural gas produced from a tight formation, however, has the same definition as that determined by the FERC under the NGPA * * [Id. at 139-140, 1980-3 C.B. at 299-300.]Finally, the staff of the Joint Committee's General Explanation of COWPTA contains the statement that For purposes of the credit, the definition of natural gas from geopressured brine, Devonian shale, coal seams, or a tight formation is that determined by the Federal Energy Regulatory Commission in accordance with section 503 of the Natural Gas Policy Act of 1978 (NGPA). * * Staff of Joint Comm. on Taxation, General Explanation of the Crude Oil Windfall Profit Tax Act of 1980, at 81 (J. Comm. Print 1981). Accordingly, portions of the legislative history contain the81 expectation that FERC would create a definition of tight formation gas to be utilized for purposes of obtaining the tax credit. Petitioner contends that, by use of the term "determination", Congress intended to incorporate the definition to be promulgated by FERC, rather than to require a well-category determination for each specific well under NGPA section 503. We could agree that Congress expected that FERC would ultimately define "tight formation" gas. But Congress' choice of the term "determination", rather than "definition", in section 29 leaves petitioner's contentions without statutory support or substance. Petitioner also argues that Congress retained the "determined in accordance with section 503" language of section 29(c)(2)(A) even though the statutory authority under the NGPA to make determinations under section 503 for most new tight formation gas was revoked by the Natural Gas Wellhead Decontrol Act of 1989 (Decontrol Act), Pub. L. 101-60, sec. 3(b)(5), 103 Stat. 157, 159, effective January 1, 1993. In other words, petitioner argues that FERC and the relevant local regulatory agencies did not have the authority to issue well-category determinations after that date. 82 Petitioner also argues that, as a general matter, the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec. 11501, 104 Stat. 1388-479, extended and liberalized the availability of the tax credit for tight formation gas for wells drilled before January 1, 1993. In that regard, the section 29 credit for tight formation gas is allowable beyond January 1, 1993. 123 Conversely, respondent points out that FERC announced that it would continue processing well-category determinations until January 1, 1993, in order for producers to qualify for nonconventional fuels tax credits. FERC Order No. 523, 55 Fed. Reg. 17425 (Apr. 25, 1990). Respondent also relies on legislative history in connection with the repeal of the incentive-pricing provisions of the NGPA containing the statement that the repeal was not intended to affect the availability of the nonconventional fuels tax credit. See S. Rept. 101-39, at 9 (1989). Finally, respondent points out that Congress considered making the nonconventional fuels tax credit permanent but extended for only 2 years the time within which a well had to be drilled to qualify. This extension was intended to coincide with the 83 effective date of the repeal of the NGPA, so that the processing of well-category determinations could be continued. Consequently, respondent argues this leads to the conclusion that FERC and other local regulatory agencies were authorized to make well-category determinations. 1184 We are persuaded that Congress intended to couple the eligibility for the section 29 credit with the obtaining of well-category determinations under NGPA section 503. In particular, the legislative history of the Decontrol Act indicates that the repeal of FERC's determination review providing for incentive pricing in NGPA section 503 was not intended to 124 affect the availability of the nonconventional fuels tax credit. S. Rept. 101-39, supra at 9. 12Equally significant, the aforementioned85 congressional action illustrates an understanding that section 29 was linked with a procedural determination under NGPA section 503. Petitioner's perspective is that the FERC determination process was left in place to continue the process of defining tight formation gas. Even if that was the basic reason for extension, the section 29 statutory language plainly requires a "determination" under NGPA section 503. Petitioner also relies on Rev. Rul. 93-54, 2 C.B. 3">1993-2 C.B. 3, 13 for the proposition that a well-category determination is not necessary to qualify for the tax credit. In Rev. Rul. 93-54, supra, the Commissioner held that if a well is drilled after December 31, 1979, and prior to January 1, 1993, but is "recompleted" after January 1, 1993, and if the "recompletion" does not involve additional drilling to deepen or extend the well, the production qualifies for the tax credit. 14Rev. Rul. 93-54, supra, however, does not concern the question of whether a determination must be obtained under NGPA section 503 in order to be entitled to the tax credit. 86 The ruling assumes prior qualification, and under the circumstances described, holds that further qualification is unnecessary. It should also be noted that petitioner's argument is also undermined by timing, because the Commissioner issued this ruling after the repeal of section 29. Petitioner references other weaker arguments (analogous and tangential materials) in support of its position that section 29 should not be read as requiring an individual well-category determination by FERC. Petitioner's arguments individually or collectively are insufficient to overcome the use of the term "determination" and 125 the requirement of a specific well-category determination under NGPA section 503. 87 Accordingly, we hold that an individual well-category determination must be obtained in order to qualify for the section 29 tax credit attributable to tight formation gas. To reflect the foregoing, Decisions will be entered for respondent.Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the taxable years at issue, and Rule references are to this Court's Rules of Practice and Procedure.↩2. These cases were consolidated for purposes of trial, briefing, and opinion.↩3. The parties' stipulated facts and exhibits are incorporated by this reference.↩4. A "tight formation" is a sedimentary layer of rock cemented together in a manner that greatly hinders the flow of any gas through the rock. Because such a formation is characterized by low permeability, wells drilled into gas-bearing formations of this kind usually produce at very low rates. To stimulate production from these formations, producers must use expensive enhanced recovery techniques. [Citation omitted.]Williams Natural Gas Co. v. FERC, 872 F.2d 438">872 F.2d 438, 441 n.1 (D.C. Cir. 1989) (quoting Order No. 99, Regulations Covering High-Cost Natural Gas Produced From Tight Formations, 45 Fed. Reg. 56, 034 (Apr. 22, 1980)); see also Midwest Gas Users Association v. FERC, 833 F.2d 341">833 F.2d 341, 345 (D.C. Cir. 1987); Pennzoil Co. v. FERC, 671 F.2d 119">671 F.2d 119, 120↩ (5th Cir. 1982).5. Congress enacted sec. 44D in 1980. See Crude Oil Windfall Profit Tax Act of 1980, Pub. L. 96-223, sec. 231(a), 94 Stat. 268. In the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 471(c) (1), 98 Stat. 826, Congress redesignated sec. 44D as sec. 29↩.6. This phrase appears in section 29(c) in the following manner: SEC. 29(c). Definition of Qualified Fuels.--For purposes of this section-- (1) In general.--The term "qualified fuels" means-- (A) oil produced from shale and tar sands, (B) gas produced from-- (i) geopressured brine, Devonian shale, coal seams, or a tight formation, or (ii) biomass, and (C) liquid, gaseous, or solid synthetic fuels produced from coal (including lignite), including such fuels when used as feedstocks.(2) Gas from geopressured brine, etc.-- (A) In general.--Except as provided in subparagraph (B), the determination of whether any gas is produced from geopressured brine, Devonian shale, coal seams, or a tight formation shall be made in accordance with section 503 of the Natural Gas Policy Act of 1978.↩ [Emphasis added.]7. We note that the Natural Gas Wellhead Decontrol Act of 1989 (Decontrol Act), Pub. L. 101-60, sec. 3(b) (5), 103 Stat. 157, 159, eliminated wellhead and nonprice controls on the first sale of natural gas. Sec. (3) (b) (5) of the Decontrol Act repealed the Natural Gas Policy Act of 1978 (NGPA), Pub. L. 95-621, sec. 503, 92 Stat. 3350, 3397, 15 U.S.C. sec. 3413 (1988)↩, effective Jan. 1, 1993.8. NGPA sec. 503, 15 U.S.C. sec. 3413(c) (1)↩, defines the local regulatory authority as the "Federal or State agency having regulatory jurisdiction with respect to the production of natural gas."9. See Ecee, Inc. v. FERC, 645 F.2d 339">645 F.2d 339, 345-353↩ (5th Cir. 1981), for a discussion of the statutory division of responsibilities between the Commission and the local authority.10. Congress considered granting but did not grant authority to the U.S. Department of the Treasury to make determinations under NGPA sec. 503 in the Tax Simplification Act of 1993. See infra↩ note 12. These determinations by the U.S. Department of the Treasury were to be made consistent with NGPA sec. 503.11. These circumstances were described in Marathon Oil Co. v. FERC, 68 F.3d 1376">68 F.3d 1376, 1377-1378 (D.C. Cir. 1995), as follows: Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act of 1989 repealed NGPA price controls on wellhead sales of natural gas. As a result of the Decontrol Act, the Commission eliminated incentive prices for tight formation gas produced from wells "spudded" * * or "recompleted" after May 12, 1990. A year later, however, the Omnibus Budget Revenue Reconciliation Act of 1990 instituted a tax credit for natural gas from newly drilled wells in tight formations. In order to be eligible for the tax credit, the natural gas must (1) be produced from a well drilled or a facility placed in service after December 31, 1979 and before January 1, 1993 and (2) be sold before January 1, 2003. The Budget Act further provides that "the determination of whether any gas is produced from * * * a tight formation shall be made in accordance with section 503 * * * [NGPA]." Thereafter, the Commission [FERC] announced its intention to continue to process the initial determinations of agencies despite their loss of regulatory significance, until January 1, 1993. The Commission later extended this deadline to April 30, 1994 so long as the application for an initial determination was filed with the agency by December 31, 1992. However, the Commission said that it "will not accept determinations where the well was spudded or recompletion commenced on or after January 1, 1993." Explaining the reason for continuing to review agency determinations for a transition period, the Commission stated that "while NGPA Section 107 well category determinations have no price consequence, they are necessary to obtain the Section 29↩ tax credit." [Citations omitted.]12. See also Staff of Joint Comm. on Taxation, Technical Explanation of the Tax Simplification Act of 1993, at 204 (J. Comm. Print 1993). (The Tax Simplification Act of 1993 was not enacted.) That report contains the statement that In order to ensure that qualifying gas production from such wells in fact will receive the credit, it is believed necessary to continue the well and formation determination process for periods after * * * [the Commission] discontinues its role in this process. [Id.↩ at 205; emphasis added.]13. It is noted that we treat the Commissioner's rulings as having no more authority than that of the position of a party. See Gordon v. Commissioner, 88 T.C. 630">88 T.C. 630, 635 (1987); Estate of Lang v. Commissioner, 64 T.C. 404">64 T.C. 404, 407 (1975), affd. in part and revd. in part 613 F.2d 770">613 F.2d 770↩ (9th Cir. 1980).14. Petitioner defines "recompletion" by means of the example: "the well was later completed into a different, shallower reservoir".↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620632/	Estate of Anne B. Leach, Deceased, George Howe Bailey, Jr., Administrator ad Litem, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Leach v. CommissionerDocket Nos. 2243-81, 2244-81United States Tax Court82 T.C. 952; 1984 U.S. Tax Ct. LEXIS 57; 82 T.C. No. 72; June 14, 1984, Filed 57 Decisions will be entered under Rule 155. Prior to her death, decedent transferred common stock to three charitable remainder annuity trusts. Pursuant to the trust agreements, these trusts were to pay annuities to decedent for life and then to her husband, if he survived her. Upon the death of the last to die, remaining trust assets were to be distributed to charitable remaindermen designated in decedent's will. Decedent's will provided that an amount equal to 50 percent of her adjusted gross estate would be left to a marital trust, it being her stated desire to obtain the maximum marital deduction allowable. The will provided that all taxes were to be paid from the residuary estate. Held, the annuities constitute nondeductible terminable interests under sec. 2056(b), I.R.C. 1954, and therefore the annuities do not qualify for the marital deduction. Held, further, the annuities constitute temporary interests under the Florida apportionment statute, and the annuities cannot be charged with any portion of the estate taxes. Robert O. Rogers, for the petitioner.Stuart B. Kalb, for the respondent. Swift, Judge. SWIFT953 OPINIONRespondent, in statutory notices mailed to petitioner on November 7, 1980, determined a deficiency in petitioner's Federal estate tax liability of $ 740,937, and deficiencies in petitioner's Federal income tax liabilities of $ 102 for 1977 and $ 18,712 for 1978.Following concessions by the parties, the issues remaining for decision are (1) whether certain annuities, payable by three charitable remainder annuity trusts, qualify for the marital deduction pursuant to section 2056 of the Internal Revenue Code, 1 and (2) if it is held that the annuities do not qualify for the marital deduction, whether any portion of the Federal estate taxes should be charged to the annuities under the Florida apportionment statute, or whether the taxes can only be charged to the corpora of the trusts making the annuity payments. The income tax adjustments made by respondent have been settled by the61 parties.This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and attached exhibits are incorporated herein by this reference. The pertinent facts are summarized below.The decedent, Anne B. Leach, died testate on February 14, 1977. She was a resident of Palm Beach County, Fla., on the date of her death. Because the interests of the co-personal representatives of the decedent's estate, Willaford R. Leach and Anne W. Henry, are in conflict with respect to the issues involved in this case, George Howe Bailey, Jr., was appointed as administrator ad litem and will be referred to as the petitioner herein.A Federal estate tax return was timely filed on behalf of the estate with the Internal Revenue Service in Atlanta, Ga., on November 17, 1977. An amended Federal estate tax return was timely filed62 on September 5, 1978. Federal income tax returns were timely filed on behalf of the estate for the years 1977 and 1978, also in Atlanta, Ga.On February 5, 1973, decedent transferred 6,969 shares of common stock of Coca-Cola Co., Inc., to Trust Company Bank, as trustee, under the Mrs. Willaford Ransom Leach Charitable 954 Remainder Annuity Trust. On the date of execution of the trust agreement, the assets transferred had a fair market value of $ 1 million. On March 15, 1975, decedent transferred an additional 10,093 shares of common stock of Coca-Cola Co., Inc., 27 shares of common stock of Coca-Cola International, Inc., and $ 2,641.87 in cash to Trust Company Bank, as trustee, under the Mrs. Willaford Ransom Leach Charitable Remainder Annuity Trust No. 2. The assets transferred pursuant to this trust agreement also had a fair market value of $ 1 million on the date of execution of the trust agreement.As of the date of decedent's death, the sum of the fair market values of the corpora of the two trusts (hereinafter referred to collectively as the Wesleyan trust) was $ 2,174,202, and the sum of the fair market values of the annuities payable to decedent's surviving husband63 was $ 851,760.The basic provisions of these two trust agreements are identical. Article One, paragraph (a) of each agreement provides --During each taxable year of this trust, the trustee shall pay to me during my life, and upon my death, if my husband, Willaford Ransom Leach, survives me, shall pay to my husband during his life, an annuity amount equal to seven (7) percent of the initial fair market value of the assets constituting the trust, valued as of the date of execution of this trust; provided, however, that I expressly reserve the power, exercisable only by my will, to revoke and terminate the interest of my husband under this trust.Each trust agreement provides, with respect to the ultimate disposition of trust assets that, upon the death of the survivor of decedent and her spouse, the principal balance of the trust would pass to Wesleyan College. Article One, paragraph (b) provides --Upon the first to occur of (i) the death of the survivor of me and my husband or (ii) my death if I effectively exercise my testamentary power to revoke and terminate the interest of my husband under this trust, the trustee shall distribute all of the then principal and undistributed64 income of the trust, other than any amount due to me or my husband, to Wesleyan College, a Georgia corporation having its principal office in the City of Macon, Bibb County, Georgia, to be used in such manner as the trustees of Wesleyan College shall choose.Other provisions specify that the trustee shall select as beneficiary of the above distribution a comparable organization 955 in the event Wesleyan College is not an organization described in section 170 of the Internal Revenue Code at the time of the distribution.The annual annuity payments were to be made from trust income or, to the extent trust income was not sufficient, from trust principal. The trustee was given discretion over investment of trust assets. Article Seven of the trust agreements provides that "It is * * * my intention to create a charitable remainder annuity trust within the meaning of Section 664 of the Internal Revenue Code."On March 12, 1975, decedent made a third transfer to a charitable remainder annuity trust. This transfer consisted of 136 shares of common stock of Coca-Cola International, Inc., and $ 2,032 in cash to Emory University, as trustee. On the date of execution of this trust 65 agreement, the fair market value of the assets transferred was $ 1 million. Provisions under this trust agreement (referred to hereinafter as the Emory trust) with respect to the amount of annuity payments, termination of the husband's interest, and trustee discretion over investments are substantially similar to the Wesleyan trust. The Emory trust does contain an additional provision not found in the Wesleyan trust which provides that "No estate, inheritance or other death taxes with respect to the annuity trust shall be allocated to be recoverable from the annuity trust and the Donor agrees not to make any inconsistent direction in her Will." However, due to the insufficiency of the residuary estate, this provision failed and the estate taxes must be allocated under the Florida apportionment statute, as explained infra.In her will, decedent bequeathed to a marital trust for the benefit of her surviving spouse an amount equal to 50 percent of that portion of her adjusted gross estate (less the value of property passing to her surviving spouse outside her will) which was both includable in her adjusted gross estate and allowable as a marital deduction under section 2056. Article66 XI of the will established the marital trust with the following language:If my husband, WILLAFORD RANSOM LEACH, survives me, I give, devise and bequeath to my Trustees, hereinafter named, In Trust Nevertheless, for the uses and purposes hereinafter set forth, an amount equal to fifty percent (50%) of the value of my adjusted gross estate as finally determined 956 for Federal Estate Tax purposes, undiminished by estate or other death taxes, either state or federal, less the aggregate value of all interests in property, if any, which pass to my husband under other provisions of this Will or which have already passed to him or for his benefit otherwise than under this Will, by operation of law, through life insurance policies, or otherwise, but only to the extent that such interests are included in determining my gross taxable estate and are allowable as a marital deduction for Federal Estate Tax purposes, it being my intention to obtain the maximum marital deduction for my estate.With respect to the burden of paying taxes, article I of the will specifically provided that the taxes and other administration expenses would be paid out of the residue of the estate, as follows:67 I direct that all debts, funeral and administration expenses, and all estate, inheritance or other death taxes, together with all interest and penalties thereon, imposed by reason of my death, by the United States or any other government or subdivision thereof, in respect of any property required to be included in my gross estate for the purposes of such taxes, whether passing under this my will or otherwise, shall be charged against the residuary portion of my estate and be paid as soon after my death as may be practicable and convenient.The residuary of decedent's estate was bequeathed to a charitable remainder trust which was established pursuant to an agreement entered into by decedent, decedent's husband, and the Bank of Palm Beach & Trust Co., as trustee, on May 1, 1972. Ten different charitable organizations were named as beneficiaries of this trust, in varying percentages.For the reasons explained in more detail below, respondent determined that the value of the annuities payable to decedent's surviving spouse under the Wesleyan and Emory trusts does not qualify for the marital deduction. This determination increased the portion of the residue of the probate estate 68 passing under the marital trust, and reduced by that same amount the residue of the probate estate available for the payment of taxes, for the satisfaction of specific bequests, and for distribution to the charitable remainder trust that is the residuary beneficiary under decedent's will.The residue of the probate estate was reduced below the amount required to satisfy taxes and specific bequests, thereby requiring, in the event that said determination is sustained, some apportionment of estate taxes to and among properties passing both outside and under the will. In making such 957 apportionment, respondent determined that the annuity payments under the Wesleyan and Emory trusts were exempt from apportionment under Florida Law.Petitioner contests both of respondent's determinations. Petitioner claims that the annuities payable under the Wesleyan and Emory trusts do qualify for the marital deduction and, alternatively, if they do not so qualify, that they are not exempt from the burden of paying their share of estate taxes under the Florida apportionment statute. For the reasons explained below, we agree with respondent on both issues.I. Marital Deduction IssueSection69 2056(a) sets forth the general rule with respect to the marital deduction and provides for a deduction from the gross estate equal to the value of any interest in property passing to the surviving spouse. An exception to the general rule is provided in the case of an interest passing to the surviving spouse which may terminate and pass for less than full consideration to a third party who may possess or enjoy any part of the property after the surviving spouse. Sec. 2056(b).The definition of a terminable interest is provided in sec. 20.2056(b)-(1)(b), Estate Tax Regs., as follows:A "terminable interest" in property is an interest which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of some contingency. Life estates, terms for years, annuities, patents and copyrights are therefore terminable interests. [Emphasis added.]Even though an interest in property may be a terminable interest under the above definition, it will not be ineligible for the marital deduction unless the interest also may pass, for less than full consideration, to a person other than the surviving spouse and unless such other person may be in a position to possess70 or enjoy such interest after termination of the spouse's interest. Sec. 2056(b)(1).Petitioner contends that the annuities payable to the surviving spouse under the Wesleyan and Emory trusts qualify for the marital deduction and are not ineligible terminable interests since the annuities, themselves, constitute "the property" which passes to the surviving spouse and since no interest in that particular property (namely, the annuities) 958 passes to anyone other than the surviving spouse. Based on this argument, petitioner concludes that the value of the annuities as of the date of death qualifies for the marital deduction.Respondent contends that the annuities payable to the surviving spouse under the Wesleyan and Emory trusts do not constitute "the property," but only interests in property, that the corpora of the trusts constitute the property, and that an interest in that property may pass, for less than full and adequate consideration, from decedent to persons other than the surviving spouse (namely, the charitable remaindermen under the trusts) who may possess and enjoy that interest. Respondent therefore concludes that the surviving spouse's interests in the annuity71 payments under the Wesleyan and Emory trusts constitute terminable interests which do not qualify for the marital deduction.Respondent's position is supported by a prior decision of this Court in Estate of Rubin v. Commissioner, 57 T.C. 817 (1972), affd. 478 F.2d 1399">478 F.2d 1399 (3d Cir. 1973). The facts of that case are very similar to the facts herein. The husband-decedent bequeathed in his will 50 percent of his residuary estate to a trust to pay his widow $ 100 per week for life from the income or, if necessary, from the corpus of the trust. These provisions were made pursuant to a prenuptial agreement in which the decedent's intended wife agreed to relinquish all property rights in property then owned or thereafter acquired by her husband. The remainder of the trust property, upon the widow's death, was bequeathed to decedent's sons. This Court concluded that the widow's interest in the trust constituted a nondeductible terminable interest pursuant to section 2056 because the corpus of the trust constituted the property and because an interest therein would pass to the sons. The Court noted as follows:It is clear that Rose's72 interest in the trust does not qualify for the marital deduction under the above provisions. Upon Rose's death her interest in the trust will terminate and the property in the trust will pass from decedent to Isadore's sons, who will thereafter have absolute ownership of their respective shares of the property to possess and enjoy as they please. [57 T.C. at 821; emphasis added.]The Fourth Circuit reached the same result in Sutton v. Commissioner, 535 F.2d 254">535 F.2d 254 (4th Cir. 1974), affg. a Memorandum 959 Opinion of this Court. In that case, the present value of a surviving spouse's right to receive $ 400 per month pursuant to a prenuptial agreement, with remainder over to decedent's son, was held ineligible for the marital deduction on the ground that the remainder interest constituted an interest in the same property (namely, the trust corpus) which would pass to someone other than the surviving spouse.An argument very similar to that made by petitioner herein was rejected by the Supreme Court in Meyer v. United States, 364 U.S. 410">364 U.S. 410 (1960). In that case, a life insurance policy obligated73 the insurer to pay a death benefit of $ 25,187.50, which sum was included in the gross estate of decedent. The decedent had selected an optional distribution plan which provided for the distribution of proceeds in equal monthly installments to his wife for life, with 240 installments guaranteed, and further provided that if the wife should die before receiving all of the guaranteed installments, his daughter would receive the balance. If the daughter should die before receiving the balance, the value of the guaranteed payments left unpaid would be paid in one sum to the estate of the last to die. From the total proceeds of the policy of $ 25,187.50, the insurer determined that $ 17,956.41 was necessary to fund the 240 guaranteed annual payments to the wife, daughter, and/or estate of the survivor of them, and $ 7,231.09 was necessary to fund the monthly payments to the wife for her actuarial life expectancy beyond the 240 months certain. Accordingly, the insurer made these entries separately on its books.The executors of the estate contended that the insurer's bookkeeping entries constituted an actual division of the insurance proceeds into two separate "properties" -- one of74 $ 17,956.41 and another of $ 7,231.09 -- and that the latter qualified for the marital deduction because it was payable, if at all, only to the wife if she lived beyond the 240 months, and if no other person had any interest in or possibility of enjoying it.The Supreme Court, noting that the allocations made were "merely actuarial ones" (364 U.S. at 415), refused to characterize the $ 7,231.09 balance as a property interest separate from the $ 17,956.41, and treated both amounts as part of a single fund. Since there was a possibility that the daughter might receive a portion of the fund (i.e., the balance of the guaranteed 960 payments), it was concluded that the insurance proceeds did not qualify for the marital deduction. The Supreme Court relied, in part, on an example in the Senate committee report pertaining to the predecessor statute to sec. 2056. 2 The example illustrates the operation of the terminable interest rule, as follows:Example (2). The decedent during his lifetime purchased an annuity contract under which the annuity was payable during his life and then to his spouse during her life if she survived him. The value of the75 interest of the decedent's surviving spouse in such contract at the death of the decedent is included in determining the value of his gross estate. A marital deduction is allowed with respect to the value of such interest so passing to the decedent's surviving spouse inasmuch as no other person has an interest in the contract. If upon the death of the surviving spouse the annuity payments were to continue for a term to her estate, or the undistributed portion thereof was to be paid to her estate, the deduction is nevertheless allowable with respect to such entire interest. If, however, upon the death of the surviving spouse, the payments are to continue to another person (not through her estate) or the undistributed fund is to be paid to such other person, no marital deduction is allowable inasmuch as an interest passed from the decedent to such other person. [S. Rept. 1013 (Part 2), 80th Cong., 2d Sess. (1948), 1 C.B. 339">1948-1 C.B. 339-340. Emphasis added.] 3The Court found the example in the committee report to be indistinguishable in any relevant manner from the facts of Meyer, and concluded that it --makes it very clear that the marital deduction76 is not allowable in the case of an annuity for the surviving spouse for life if "upon the death of the surviving spouse, the payments are to continue to another person (not through her estate) or the undistributed fund is to be paid to such other person * ." [364 U.S. at 414.]Additional authority contrary to petitioner's position is found in section 20.2056(b)-1(e)(2), Estate Tax Regs. Under the regulation the corpus, not the annuity, is treated as the property. The regulation reads as follows:In determining whether an interest in the same property passed from the decedent both to his surviving spouse and 77 to some other person, a distinction 961 is to be drawn between "property" as such term is used in section 2056, and an "interest in property." The term "property" refers to the underlying property in which various interests exist; each such interest is not for this purpose to be considered as "property."Based upon the above authorities, the assets of the Wesleyan and Emory trusts are to be treated as the underlying property in which various interests, such as the surviving spouse's annuity interest, exist. The rights to receive annuity payments look to the underlying trust assets for their realization. As such, the rights to the annuity payments must be viewed as an interest in the property and not as separate property.Petitioner cites two revenue rulings in support of his position. Of course, we are not bound by revenue rulings. Minnis v. Commissioner, 71 T.C. 1049">71 T.C. 1049, 1057 (1979). However, we believe that the rulings cited are clearly distinguishable. In both Rev. Rul. 79-420, 2 C.B. 335">1979-2 C.B. 335, and Rev. Rul. 77-404, 2 C.B. 334">1977-2 C.B. 334, the annuity payments were78 severed from the decedent's inter vivos and testamentary assets and were paid by third parties (in the first, by a corporation, and in the second, by a charitable organization, under a contractual annuity obligation), and the settlor in each case retained no control over the assets which gave rise to the annuity payments.For the reasons set forth above, we hold that the annuities payable to decedent's surviving spouse under the Wesleyan and Emory trusts constitute nondeductible terminable interests under section 2056 and therefore do not qualify for the marital deduction.Finally (although not at all clear), it appears that petitioner is raising an alternative argument that the value of the annuities should be deductible as a claim against the estate. No authority is cited therefor but we assume the argument is based on section 2053. In the same summary fashion in which this issue has been raised and discussed by petitioner, we summarily reject it. See Sutton v. Commissioner, supra, which, among other things, held that annuity interests do not constitute deductible claims against an estate under section 2053.962 II. Apportionment of Estate79 TaxesThe second issue to be considered in this case concerns the proper method of apportioning the Federal estate taxes in order to determine the proper value of the charitable remainder for Federal estate tax purposes. A decision with respect to this issue is necessary because (as a result of our holding on the first issue) the residuary estate, out of which decedent in her will directed that the death taxes were to be paid, was reduced below the amount necessary to pay those taxes. 4The insufficiency of the residuary estate to pay the Federal estate tax liability triggers the application of the80 Florida apportionment statute. If, under that statute, the estate taxes are charged against the annuity income interests funded by the Wesleyan and Emory trusts, the estate taxes will not diminish the value of the charitable remainder interests in the trusts, and the Federal estate tax charitable deduction claimed with respect to that remainder will be preserved. On the other hand, if those taxes are charged against the charitable remainder interests in the trusts, the value thereof will be significantly reduced with a corresponding reduction in the Federal estate tax charitable deduction.The statutory and case law are clear that instructions by a testator in a will (and generally by a settlor in a trust) as to the apportionment of taxes will control. 5 However, where the tax provision of a will fails, as in the instant case, due to exhaustion of the assets specified by the decedent for the payment of taxes, the apportionment statutes are applied to determine what assets will bear that burden. Fla. Stat. sec. 733.805 (West 1975); First National Bank of Omaha v. United States, 490 F.2d 1054">490 F.2d 1054, 1056 (8th Cir. 1974); see also discussion at 71 A.L.R.3d 247">71 A.L.R.3d 247, 338-343 (1976).81 The Internal Revenue Code provides no general rules for the apportionment of Federal estate taxes. However, there are a number of specific rules in the Code for the apportionment of 963 Federal estate taxes to life insurance proceeds and to property over which the decedent has a general power of appointment (see secs. 2206 -- 2207). Neither party herein contends that either of the specific Federal rules is applicable to the annuity interests in question. 6 Accordingly, State law will govern the apportionment of the Federal estate taxes among properties passing under and outside the will in question. Riggs v. Del Drago, 317 U.S. 95">317 U.S. 95 (1942); Estate of Jack v. Commissioner, 8 T.C. 272">8 T.C. 272 (1947);82 Estate of Juster v. Commissioner, 25 T.C. 669">25 T.C. 669, 671 (1955).A brief review of the general purpose and scope of State apportionment statutes, followed by a summary of the contentions of the parties on this issue, may be helpful prior to a consideration of the specific terms of the Florida apportionment statute and of the specific arguments of the parties herein.State Apportionment StatutesFlorida, along with many other States, has adopted an apportionment statute. See Fla. Stat. sec. 733.817 (West 1975). The first Florida apportionment statute was enacted in 1949 and was modeled after the New York apportionment statute. 783 Under the common law rule, estate taxes were generally treated as expenses of administration and were therefore payable out of the residuary estate. This rule was perceived to result in hardship and injustice. Since the natural heirs of the decedent are generally bequeathed the residuary estate, under that common law rule, they were burdened with the entire tax, while beneficiaries of specific bequests and devises, unrelated to the decedent, would pay no tax. Many apportionment statutes, therefore, place estate taxes in a category different from an ordinary expense of administration and impose a "burden-on-the-recipient" rule in lieu of the common law "burden-on-the-residue" rule.The general purpose of many apportionment statutes is to require that those persons who receive gifts from the decedent's 964 estate, which gifts are included in the taxable estate and which thereby contribute to the tax liability, shall pay their share of the tax. Apportionment statutes generally reflect a strong public policy in favor of prorating the taxes, and an exception will not be easily inferred. The burden of proof is on those seeking to avoid apportionment. Guidry v. Pinellas Cent. Bank & Trust Co., 310 So. 2d 386 (Fla. Dist. Ct. App. 1975);84 and see discussion at 71 A.L.R.3d, supra at 267-276, 307-312 (1976).Provisions of apportionment statutes are generally mandatory, not only with respect to the provisions for apportionment, but also as to their other provisions regarding exemptions and deductions for specific property or types of property ( In re Mescall's Will, 54 Misc. 2d 165">54 Misc. 2d 165, 281 N.Y.S. 394">281 N.Y.S. 394 (1967); 71 A.L.R.3d, supra at 309); and apportionment statutes typically contain exemptions for property which is excludable or deductible from the taxable estate, and which property therefore does not contribute to the tax. Property eligible for the marital deduction and property bequeathed to charity are two prime examples. In re Fuchs' Estate, 60 So. 2d 536">60 So. 2d 536 (Fla. 1952); 71 A.L.R.3d, supra at 353-365.An additional exemption provision which is found in most apportionment statutes is particularly important to the issue involved herein. It applies when a will or trust instrument or other document creates a life income, life estate, or other temporary interest in property, followed by a remainder. In that situation, apportionment statutes85 generally provide that the temporary interest will be exempt from apportionment, and the tax liability attributable to both the value of the temporary interest and the value of the remainder will be charged against and shall be paid out of the corpus of the property. Estate of Jack v. Commissioner, supra; In re Setrakian's Estate, 169 Cal. App. 2d 795">169 Cal. App. 2d 795, 338 P.2d 247">338 P.2d 247 (1959); see discussion at 67 A.L.R.3d 273">67 A.L.R.3d 273, 277-278 (1975). This rule has the effect, for Federal estate tax purposes, of reducing the value of the charitable deduction claimed with respect to the charitable remainder interest.In National Newark & Essex Bank v. Hart, 309 A.2d 512">309 A.2d 512 (Me. 1973), the rule exempting temporary interests from the burden of apportionment was described as universally incorporated into the various apportionment statutes which had been 965 adopted, and the basis for the rule was described as follows (309 A.2d at 519):Providing for non-apportionment between temporary and remainder interests has been the universal rule adopted by almost 86 every state which has passed apportionment statutes, and dealt with the particular problem. The proposed Uniform Estate Tax Apportionment Act also provides for no apportionment, and that rule is explained as being "based upon the convenience in trust administration of paying the tax from principal, which avoids accounting problems incident to amortization, as well as on the possible hardship inherent in a requirement of immediate payment by an income tax beneficiary." Practical problems inherent in valuing temporary interests, and computing the tax share to be apportioned between temporary and remainder interests, are manifest. [Fn. ref. omitted.] 8As we noted previously, apportionment statutes also generally exempt charitable bequests from the burden of apportionment, and where a temporary interest is followed by a charitable remainder, as in this87 case, a conflict arises between the exemption for the temporary interest and the exemption for the charitable remainder. This conflict, however, has been addressed by a number of courts, and in virtually every case, the conflict has been resolved in favor of the temporary interest. After discussing a number of State court decisions on this point, this Court, in Estate of Jack v. Commissioner, supra at 277, which involved Massachusetts law, stated as follows:These cases also establish the rule, we think, that where a charity has not an outright bequest, but only a remainder interest after a preceding life estate, the charity must bear (in the sense that its bequest will be thereby reduced) only so much of the tax as is attributable to the preceding life estate. This is because of the provision in the apportionment statute which prevents apportionment as between a life tenant and remainderman.The commentary to section 6 of the Uniform Estate Tax Apportionment Act (1964), which specifies that there will be no apportionment between temporary and remainder interests, specifically addresses the same question and reaches the same conclusion, as follows: 88 It has been suggested by some members of the Section of Taxation, A.B.A., that Section 6 is unfair, especially where the transferee of the remainder is a charitable, public or like institution and the transfer of the remainder is not 966 subject to tax. There is, however, no practical way to work the matter out, except as stated in Section 6. Most, if not all of the state acts contain similar provisions. The representatives of the Section of Taxation agree with this. [Note, Uniform Estate Tax Apportionment Act, 8A U.L.A. sec. 6 (1964).]Summary of Contentions of the Parties on This IssueRespondent argues that the income annuity interests provided under the Wesleyan and Emory trusts constitute temporary interests under Florida law and, therefore, under the Florida apportionment statute, which exempts temporary interests from apportionment, the Federal estate taxes should be charged only to the corpora of the charitable remainder annuity trusts, thereby reducing the value of the estate tax charitable deduction available with respect to this charitable remainder interest.Petitioner argues that the Florida apportionment statute should be interpreted as containing the89 same exception to the temporary interest rule that New York has adopted. 9 The New York exception provides that an interest in a true or common law annuity is not treated as a temporary interest under its apportionment statute. Therefore, under the New York rule, a common law annuity is charged its share of estate taxes, leaving less taxes to be charged to the corpus of the trust, thereby producing a larger corpus and a higher value to be placed on the charitable remainder interest in the corpus.As authority for its position, petitioner asserts that Florida law has adopted the New York rule under which common law annuities are not treated as temporary interests. If Florida law has not adopted the New York rule for common law annuities, petitioner makes no other argument that the annuity interests involved herein are not temporary interests and are not exempt from apportionment as temporary interests under paragraph (c) of section 733.817, Florida Statutes90 (West 1975).The basis for petitioner's argument is that the first Florida apportionment statute, enacted in 1949, was modeled after the New York apportionment statute, and petitioner therefore argues that Florida implicitly intended to incorporate into its statutory apportionment scheme all pre-1949 New York judicial decisions interpreting the New York statute. The major 967 problem with petitioner's argument is that the Florida apportionment statute has been amended at least 7 times since 1949, and at no time has the Florida legislature incorporated into the Florida apportionment statute the special New York rule for common law annuities, even though the New York apportionment statute was itself amended in 1950 to specifically so provide.In addition to the absence, in all versions of the Florida apportionment statute since 1949, of the special New York rule for common law annuities (even though, we emphasize, it has been a part of the New York statute since 1950), there are additional reasons for rejecting petitioner's argument. The Florida apportionment scheme, since first amended in 1957, has substantially deviated from that of New York, and the various Florida judicial91 decisions and commentators concerning apportionment in that State have not suggested in any way that the New York rule for common law annuities has ever become a part of Florida law.We will first note the various amendments to the Florida statute, followed by a brief review of Florida judicial decisions and of law review articles. Lastly, we will discuss briefly the apparent basis for the New York rule and the criticism thereof by other courts.The Florida Apportionment StatutePrior to enactment of its first apportionment statute (1949 Fla. Laws ch. 25.435, secs. 1-4), the law in Florida was not clear as to whether equitable apportionment applied. Two cases decided shortly after the first statute was enacted stated that equitable apportionment was the common law rule in Florida. See Hagerty v. Hagerty, 52 So. 2d 432">52 So. 2d 432, 435 (Fla. 1951); In re Fuch's Estate, supra.The statements in the referenced cases are probably based on a statement of the Florida legislature when the 1949 statute was adopted that it --considers the equitable principle of this Act as merely declaratory of the existing public policy of this state. [Fla. Stat. Ann. 92 sec. 734.041, quoted in In re Gatos Estate, 97 N.Y.S.2d 171">97 N.Y.S. 2d 171, 175 (1950), involving Florida law.]However, other authority exists that equitable apportionment applied in Florida prior to 1949 only where the surviving spouse elected dower and only imposed a share of the estate 968 taxes on the dower interest. (See Wells v. Menn, 158 Fla. 228">158 Fla. 228, 28 So. 2d 881">28 So. 2d 881, 884 (1946); In re Ruperti's Estate, 194 Misc. 376">194 Misc. 376, 86 N.Y.S.2d 887">86 N.Y.S.2d 887 (Surr. Ct. 1949); Lindsay, "Florida's Estate Tax Laws -- Apportionment Versus A Charge Against Residue," 12 U. Fla. L. Rev. 50, 51 and n. 4 (West 1959).)The 1949 Florida statute (Fla. Stat. sec. 734.041 (West 1949)), provided for equitable apportionment among all assets of the estate that contributed to the tax, unless otherwise specified by will. The law was very general and gave rise to so many questions that it was "summarily scrapped [in 1957] and an entirely new" apportionment statute was enacted. Lindsay, supra at 59.Turning one hundred eighty degrees from the provisions of the 1949 statute, under93 the 1957 Florida apportionment statute (Fla. Stat. sec. 731.34 (West 1957)), all taxes were charged to the residue, unless otherwise specified in the will. Further amendments of less significance were made to the Florida statute in 1963 (1963 Fla. Laws ch. 63-106, sec. 1), and 1965 (1965 Fla. Laws ch. 65-230, sec. 1). In 1971, the statute was amended to the language which, in most respects, constitutes the present statute. Fla. Stat. sec. 734.041 (West 1971). Minor amendments were made in 1973, 1974, and 1975. (See Fla. Stat. sec. 734.041 (West 1973); 1974 Fla. Laws ch. 74-106, sec. 1; 1975 Fla. Laws ch. 75-220, sec. 95.)Section 733.817 of the current Florida Statutes (1975) provides a hybrid version of the typical apportionment statute. The relevant portions of that statute are set out below:Fla. Stat. sec. 733.817 (West 1975)(1) Any estate, inheritance, or other death tax levied or assessed under the tax laws of this or any other state, political subdivision, or country or of any United States revenue act concerning any property included in the gross estate under the law shall be apportioned in the following manner:(a) If a part of the estate passed under a will as a94 specific devise or general devise or in any other nonresiduary form, exclusive of property over which the decedent had a power of appointment as defined from time to time under the estate tax laws of the United States, the net amount of the tax attributable to it shall be charged to and paid from the residuary estate without requiring contribution from persons receiving the interests, except as otherwise directed by the will. In the event the residuary estate is insufficient to pay the tax attributable to the interests, any balance of the tax shall be equitably apportioned among the recipients of the interests in the proportions that the value of each interest included in the measure of 969 the tax bears to the total of all interests so included, except as otherwise directed by the will.(b) If a part of the estate passed under the will as a residuary interest, exclusive of property over which the decedent had power of appointment, the net amount of tax attributable to it shall be equitably apportioned among the residuary beneficiaries in the proportions that the value of the residuary interest of each included in the measure of the tax bears to the total of all residuary interests95 so included, except as otherwise directed by the will. When a residuary interest is an interest in income or an estate for years or for life or other temporary interest, the tax attributable to it shall be charged to corpus and not apportioned between temporary and remainder estates.(c) If a part of the property concerning which the tax is levied or assessed is held under the terms of any trust created inter vivos or is subject to a power of appointment, the net amount of the tax attributable to it shall be charged to and paid from the part of the corpus of the trust property or the property subject to the power of appointment included in the measure of the tax, as the case may be, and shall not be apportioned between temporary and remainder estates, except as otherwise directed by the trust instrument concerning the fund established by it or by the will.Paragraphs 1(a) and (b) pertain to the probate estate and (in a substantial departure from early apportionment statutes, and in particular, from the original and present New York statutes) provide, generally, that all taxes attributable to the probate estate will be charged to the residue of the probate estate, unless otherwise96 provided by will.Paragraph (b) provides that only those portions of the residue of the probate estate that are included in the tax base will be charged with taxes, thereby freeing from apportionment charitable and deductible marital gifts which are part of the residuary estate.Paragraph (a) specifies that only if the residue is insufficient to pay the total estate taxes due on the probate estate will the estate taxes be equitably apportioned among all assets of the estate contributing to the tax liability.Paragraph (c) of section 733.817, Florida Statutes, is pertinent to the inter vivos trusts which are involved in this case. It provides that the portion of the tax that is attributable to the inclusion in the estate of nonprobate property such as inter vivos gifts will be charged its pro rata share of the taxes due. However, at the heart of the instant controversy is the additional language in paragraph (c) that provides that with respect to nonprobate assets, where a life estate precedes a 970 remainder interest, no apportionment will occur as between those respective interests, and the corpus will bear the tax.We find nothing in these statutory provisions to suggest97 that any rule is applicable to the annuities involved herein, other than the stated exemption from apportionment which is given to temporary interests. As stated previously, when originally enacted in 1949, the Florida statute contained no exemption from the temporary interest rule for common law annuities, and none of the amendments thereafter through the present time have adopted such a rule. The basic statutory scheme of the Florida statute provides that, unless otherwise stated by the testator, the residue of the probate estate is to bear the burden of estate taxes attributable to probate property and that, with respect to nonprobate property included in the estate (such as the assets of an inter vivos trust), the estate taxes generally will be charged to the corpus, not to temporary interests therein. The dissimilarity between the Florida and New York apportionment statutes precludes a conclusion or inference that Florida has adopted the New York rule for common law annuities.Florida Cases and CommentatorsEarly decisions of the Florida courts do reflect that the original 1949 Florida statute was modeled after the New York statute (see In re Fuchs' Estate, supra at 538),98 but no decision concerning the Florida apportionment statute as substantially revised in 1957 and later years suggests that the Florida statute (since its revision in 1957) has had any particular kinship to the New York statute. If anything, those cases highlight the extent to which the Florida statute has moved away from the strict equitable apportionment concepts of the New York statute to a rule which imposes the tax burden on the residue unless otherwise specified by the testator in his will. In re Barret's Estate, 137 So. 2d 587 (Fla. Dist. Ct. App. 1962), it was held that under the amended 1957 Florida statute, the entire tax liability was to be borne by the residuary estate, and assets passing outside the will were not subject to taxes at all. Understandably, no particular mention of New York statutory or case law appears in that case. To the same effect are Aronson v. Congregation Temple De Hirsch, 971 138 So. 2d 69">138 So. 2d 69 (Fla. Dist. Ct. App. 1962), and In re Estate of Miller, 301 So. 2d 137">301 So. 2d 137 (Fla. Dist. Ct. App. 1974).In Estate of George v. McNutt, 2d 256">200 So. 2d 256 (Fla. Dist. Ct. App. 1967),99 the version of the Florida abatement statute was considered under which the assets of the estate first abated were the residuary assets, where there were inadequate assets to pay taxes. Abatement (as under the present Florida abatement statute, see Fla. Stat. sec. 733.805 (West 1975)) did not apply equitably to all assets.And, in a case involving life income interests in trust property, the Florida court noted that the 1963 amended version of the Florida apportionment statute provided that payment of death taxes was to come from the corpus of the trust, not from the life income interests. Guidry v. Pinellas Cent. Bank & Trust Co., supra. No reference was made in this opinion to New York law, let alone any reference to a special rule under Florida law for annuity interests.In 1949, the year Florida enacted its first apportionment statute, a Note, at 62 Harvard Law Review 1027, specifically explained the rule exempting temporary interests from apportionment and explained the consequences of that rule when the remainderman is a charitable institution, as in this case, as follows:Future Interests. -- While the federal100 tax statute is silent as to apportionment between temporary and remainder estates, the state statutes provide for payment of the entire proration from corpus. This method indirectly apportions the tax by reducing the income pro tanto, and generally avoids the difficulty of making separate valuations of present and future interests. Even in the case of charitable remaindermen, where such separate valuations are necessary in order to compute the amount of the federal tax, the courts have charged against corpus that portion of the tax attributed to the non-charitable temporary interests. [Fn. refs. omitted.]This Note does not mention the New York exception for annuity interests.In Riggs, "Florida Estate Tax Apportionment," 25 U. Fla. L. Rev. 719, 724-725 (1973), the rule concerning temporary income interests versus charitable remainder interests is expressly recognized, and no mention is made of any exception for income annuities, nor is any reference made on this point to New York law.972 The New York StatuteTurning briefly to the New York statute, the parties have pointed out that the portion of the New York apportionment statute 101 pertaining to temporary and remainder interests was amended in 1950 by the addition of the following sentence (N.Y. Est. Powers & Trusts par. 2-1.8 (McKinney 1981)):The provisions of this paragraph apply although the holder of the temporary interest has rights in the principal, but do not apply to a common law annuity.We find it significant that the New York legislature amended its statute in 1950, apparently in order to clarify its statute on this point, and yet the Florida legislature, while making numerous other major changes to its apportionment statute, has never conformed to the New York amendment. The only logical explanation is that common law annuities are treated under the Florida apportionment statute in the same manner as other temporary interests and that the New York rule for common law annuities has not been adopted in Florida.We also note that as early as 1958, the Supreme Court of Tennessee, in Moore v. Moore, 204 Tenn. 108">204 Tenn. 108, 315 S.W.2d 526">315 S.W.2d 526, 531 (1958), refused to apply the New York rule to Tennessee apportionment law and criticized the New York law as not having a logical basis. See also 71 A.L.R.3d, supra*102 at 336-337 (1976); 67 A.L.R.3d, supra at 295 (1975).In summary, it is concluded that the income annuity interests and the charitable remainder interests involved in this case are governed by the statutory language of Florida Statutes section 733.817 1(c). No portion of the additional estate taxes due herein and attributable to the inclusion of the Wesleyan and Emory trusts' assets in the taxable estate can be allocated to the annuity interests but must be allocated exclusively to the corpora of those trusts.For the reasons set forth above, we sustain respondent's determinations on the issues discussed above.Decisions will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the years at issue.↩2. Sec. 812(e)(1)(B), I.R.C. 1939↩, the relevant portions of which are identical to the statute during the years in issue.3. See also the discussion of the terms "property" and "an interest in property" which is contained in S. Rept. 1013 (Part 2), 80th Cong., 2d Sess. (1948), 1 C.B. 333">1948-1 C.B. 333↩. This discussion further supports respondent's position.4. As previously explained, the reduction in the residuary estate which occurred is attributable to the failure of the annuities associated with the Wesleyan and Emory trusts to qualify for the marital deduction. Under the formula marital deduction clause of the will, the decedent's specific bequest to her surviving spouse must be satisfied out of property which otherwise would have been part of the residuary estate.↩5. See secs. 2206 -- 2207; Fla. Stat. sec. 733.817(1) (West 1975); Estate of Jack v. Commissioner, 8 T.C. 272">8 T.C. 272, 274 (1947); Guidry v. Pinellas Cent. Bank & Trust Co., 310 So. 2d 386">310 So. 2d 386↩ (Fla. Dist. Ct. App. 1975).6. The Court agrees with this conclusion. Annuity interests appear clearly not to qualify as life insurance proceeds (see 71 A.L.R.3d 247">71 A.L.R.3d 247, 258↩ (1976)), and no power of appointment was retained by the decedent.7. The text of the original New York apportionment statute (N.Y. Decedent Estate Law ch. 13, sec. 124 (McKinney 1930)) and the development of State apportionment statutes is described in 71 A.L.R.3d, supra↩ at 265-275 (1976).8. Other cases reflecting the same approach are cited, and a further discussion of this principle is found, at 67 A.L.R.3d 273">67 A.L.R.3d 273, 277-279↩ (1975).9. N.Y. Est. Powers & Trusts par. 2-1.8(b) (McKinney 1981).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620634/	EAST MARKET STREET HOTEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.East Market Street Hotel Co. v. CommissionerDocket No. 8664.United States Board of Tax Appeals11 B.T.A. 796; 1928 BTA LEXIS 3715; April 24, 1928, Promulgated 3715 1. The Commissioner's determination, under the provisions of section 331 of the Revenue Act of 1918, of the invested capital of the petitioner, which, in exchange for stock, acquired certain assets from an individual, is approved. 2. Value of a leasehold acquired on January 7, 1918 for stock, determined for the purpose of deductions for exhaustion thereof. John T. Kennedy, Esq., and Floyd Chilton, Esq., for the petitioner. Henry Ravenel, Esq., for the respondent. LOVE 796 This proceeding is for the redetermination of deficiencies in income and profits taxes for the calendar years 1919 and 1920, in the amounts of $4,997.12 and $3,214.38, respectively. The petitioner alleges that, in determining the deficiencies, the Commissioner erred in the following particulars: In excluding from invested capital the value of a leasehold for which in January, 1918, $70,000 of capital stock was issued, which amount, it is alleged, represented its value at the time of acquisition. In disallowing deductions in the amount of $7,000 for each of the years in question, for the exhaustion of the leasehold acquired in January, 1918. FINDINGS OF FACT. 3716 The petitioner is an Ohio corporation. It is and was during the years in question engaged in operating a hotel in the City of Akron. On September 26, 1914, an agreement to lease certain property which is now known as the old part of the Hotel Akron, was entered into between Thomas J. Holden, now deceased, and C. J. 797 Snyder, also now deceased. The lease contract, which was subsequently executed, provided that it was to expire in January, 1925, and also provided for an annual rental of $6,000. No bonus was paid by Holden to Snyder for either the agreement or the lease. During the spring of 1916, C. J. Snyder was constructing an addition to the Hotel Akron, and at that time entered into an oral agreement with Holden to rent to him the new building or addition when it was completed. On December 28, 1916, there was an agreement executed by Holden and the C. J. Snyder Building Co., providing for the execution of a lease between the parties upon completion of the building at an annual rental of $20,700, payable monthly in installments of $1,725, the term of the lease to extend for ten years from the completion of the building. This agreement to lease, as is shown3717 by its terms, provided for the execution of a lease between the two parties of property, part of which, the old part of the Hotel Akron, was then occupied by Holden, and part of which, the addition to the hotel, was then under construction. It was also agreed that Holden would surrender his lease on the old part of the Hotel Akron which he had obtained in September, 1914, and would also surrender a lobby on the ground floor of the old building, there being a lobby equally as valuable provided in the addition to the building. No bonus was paid by Holden for the agreement of December 28, 1916. On September 4, 1917, Holden and the C. J. Snyder Building Co. entered into a lease covering the old building and addition thereto, with the exception of the lobby in the old building, effective September 19, 1917, and providing for an annual rental of $20,700, payable in monthly installments of $1,725. On September 28, 1917, Holden assigned to the C. J. Snyder Building Co. the lease on the old building, acquired in September, 1914. On November 28, 1917, the petitioner was incorporated with an authorized capital of $100,000 divided into 1,000 shares, each of the par value of $100, and3718 on December 20, 1917, subscriptions to its capital stock were made by six individuals, among them being Holden. On December 20, 1917, there was a meeting of the directors of the petitioner, at which time there was submitted by Holden a proposition for the sale to petitioner of the fixtures, equipment, stock in trade, lease, etc., and all property of whatever description owned and used by him in connection with the Hotel Akron, being the property under lease to him, for a consideration of 995 shares of the stock of petitioner. On that date a resolution was passed by the board of directors providing, in part: Whereas it appears that the equipment of said hotel is desirable for the purpose of this company and is reasonably worth the sum of $40,000, and whereas it appears that the lease of said Thomas H. Holden is desirable for 798 the purpose of this company and is reasonably worth the sum of $75,000, and whereas said hotel is a going concern and is doing a good hotel business and that it will be to the interest of this company and all its stockholders to accept this proposition; * * The resolution further provided for the acceptance of the proposition and authorized the3719 officers of the petitioner to accept delivery of the property and to issue the stock to Holden. On January 7, 1918, petitioner's officers were directed to issue to Holden 995 shares of the capital stock, Holden having theretofore transferred the property described in his offer. Thereupon the stock was issued to Holden and the transaction completed. Before entering into the agreement of December 28, 1916, with Holden, Pierce A. Snyder, who was an officer of the C. J. Snyder Building Co., had received an offer to lease the property covered by that agreement, at a monthly rental of $2,200, or $475 more rental per month than that afterwards provided in the agreement and lease to Holden. However, Holden at that time had a lease on the old part of the building and, consequently, Snyder was unable to accept the higher offer. During the years 1916 and 1917, rentals in the City of Akron were constantly advancing. The population was increasing rapidly and there was during those years at least a rise of 50 per cent in rentals. The city was growing due to increased business and prices were 'skyrocketing." During the year 1918 and prior to January 20, 1919, 128 shares of the stock3720 acquired by Holden were sold at par. In April, 1919, three individuals, two of whom had experience in the hotel business, acquired the entire stock of petitioner. These individuals purchased the stock on the basis of book value after all surplus had been distributed. The amount paid for the stock was par - $100,000. The balance sheet on which the sale was based showed the lease as an asset at $63,000. Upon audit of the returns for the years in question, the Commissioner excluded from invested capital the value of the leasehold, as set up on petitioner's books, which it had acquired from Holden, and he also disallowed for each of the years in question any deduction for exhaustion of the leasehold so acquired. OPINION. LOVE: The petitioner contends and the Commissioner denies that it is entitled to include in its invested capital for the years 1919 and 1920, the value of the lease at an amount equivalent to its value when acquired by Holden, less exhaustion to the beginning of each year. In this connection, it is urged that the lease had a value of 799 $70,000 when acquired by Holden in September, 1917, and the same value when acquired by it. Assuming for the3721 moment that the lease had the value claimed at the time it was acquired by petitioner, we are clearly of the opinion that, under the circumstances herein, the petitioner may not include any amount on account thereof in its invested capital. It is clearly established by the evidence that the lease in question was acquired by Holden without any expenditure therefor. It is further shown that Holden did not give up or relinquish any valuable right when he surrendered the first lease in order to obtain the one under consideration. We must, therefore, agree with the Commissioner that the lease of September, 1917, cost Holden nothing. Holden, in exchange for the lease and other property, received 955 of the 1,000 shares of petitioner's capital stock. Obviously, therefore, the computation of petitioner's invested capital is subject to the provisions of section 331 of the Revenue Act of 1918, which provides: In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any3722 of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value then would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation. (Italics ours.) The petitioner being entitled to include in invested capital only the sum representing the cost of the lease to Holden, it follows that, he having paid nothing or having relinquished no valuable right therefor, the petitioner may not include the value of the lease or any amount on account thereof in invested capital for the years in question. The Commissioner's3723 action in this respect is, therefore, approved. The petitioner's second contention is that the lease in question had a value at the time of its acquisition of $70,000 and that, as the term thereof was ten years, it is entitled to deduct annually for exhaustion one-tenth of its value, or $7,000. The Commissioner, on the other hand, denies that the petitioner is entitled to deduct for exhaustion of the lease the amount of $7,000 or any other amount. We come, therefore, to the question as to the value, if any, of the lease at the time it was acquired by the petitioner in exchange for its 800 stock. The record contains a veriety of opinions respecting the value of the lease at the time it was acquired by Holden and at the time it was acquired by the petitioner. Two witnesses, each in the real estate business in Akron, and each familiar with rentals in Akron during 1916 and 1917, testified that rentals had increased at least 50 per cent during these two years. It was also shown that the city was booming, due to business conditions, and that prices were rapidly rising. A disinterested qualified real estate dealer, specializing in property in that vicinity, testified3724 that at the time the lease was acquired by the petitioner, a fair rental for the property or "for the lease as it stands or written" would have been $30,000 a year, or about $10,000 more a year than the rental specified in the lease. Three of the five members of the board of directors who placed a value of $70,000 on the lease, were in the real estate business in Akron. Beginning three months after the acquisition of the lease by petitioner, and throughout 1918, stock of the corporation was sold at par, despite the fact that no dividends had been declared. After carefully considering all of the evidence presented by the petitioner with respect to the value of the leasehold at the time of its acquisition and giving due consideration to the contention of the Commissioner that the lease was merely given a value in order to absorb the total par value of the stock authorized and that the subsequent sale of stock at par was based on going concern value, we conclude that the lease on January 7, 1918, had an actual cash value of at least $60,000. Accordingly, during the years in question petitioner should be allowed to deduct exhaustion upon the leasehold on the basis of a cost of $60,000*3725 to be prorated over the life of the lease from January 7, 1918. 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/4620635/	SEARS IMPORTED AUTOS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSears Imported Autos, Inc. v. CommissionerDocket No. 13764-90United States Tax CourtT.C. Memo 1992-307; 1992 Tax Ct. Memo LEXIS 333; 63 T.C.M. (CCH) 3075; June 1, 1992, Filed 333 Decision will be entered under Rule 155. Saul A. Bernick and Neal J. Shapiro, for petitioner. Ellen T. Friberg, for respondent. COHENCOHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined a deficiency of $ 49,024.80 in petitioner's Federal income tax for 1986 and additions to tax of $ 2,451 and 50 percent of the interest due on $ 49,024.80 under section 6653(a)(1)(A) and (a)(1)(B), respectively. The issues for decision are (1) whether petitioner is entitled to a deduction for an addition to its reserve for bad debts in the amount that it claimed on its Federal income tax return for 1986 and (2) whether petitioner is liable for the additions to tax for negligence. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 1986, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated, and the facts set forth in the stipulations are incorporated in our findings by this reference. Sears Imported Autos, Inc. (petitioner), was a corporation with its principal place of business in Minnesota on the date the petition was filed. Petitioner334 sold new and used Mercedes-Benz, BMW, Rolls Royce, and Bentley automobiles and operated a parts and service department. Donald Sears (Sears) was the majority shareholder and the president of petitioner. In early 1986, Sears hired Steven Johnson (Johnson) to supervise its parts and service department. Johnson had previously worked for BMW and had consulted with automobile dealerships in the course of that employment. In late 1986, Johnson realized that petitioner had problems with its receivables in its accounts for the parts and service department (parts and service account). Johnson discovered that petitioner had receivables in its parts and service account that were 1 and 2 years old. As of December 31, 1986, petitioner had $ 249,187.18 in receivables in its parts and service account, $ 180,011.29 of which were for items sold and services rendered more than 90 days earlier. Prior to 1986, petitioner's books reflected that the amount of receivables in petitioner's parts and service account that were more than 90 days old was zero or an insignificant amount. The increase in that category of receivables resulted from petitioner's bookkeeper's failure to send to customers statements 335 of amounts owed for the purchase of parts from or services performed by the parts and service department. Petitioner's bookkeeper was experiencing personal and health problems. In or about October 1986, Sears hired John LaVold (LaVold), a certified public accountant, to "straighten out" the problems with petitioner's receivables in its parts and service account. Statements reflecting the receivables with respect to which customers had not previously been billed were sent to most customers in November and December 1986. Johnson stated to LaVold at that time that he felt that petitioner would be "lucky" to receive payment on half of those billings. Because of the length of time between the date that parts were purchased or services were rendered and the date that the statements were sent to customers, some of the customers questioned the amounts owed and requested documentation to support the statements. In some instances, it took petitioner several months to locate the supporting documentation. Petitioner made adjustments to some of the statements. Most of the customers that requested and received such documentation, however, paid the amounts that they owed. For 1981 through336 1986, petitioner used the reserve method of accounting for bad debts for both book and tax accounting purposes. For internal accounting purposes, LaVold determined that petitioner's reserve for bad debts should be adjusted to reflect receivables that were more than 90 days old and that had been discovered in 1986. He decided that the proper amount of the addition to the reserve for bad debts was $ 137,599.84, $ 3,500 of which was "warranty claims bad debt" and $ 134,099.84 of which was "customer bad debt". LaVold did not discuss with petitioner's Federal income tax return preparer whether the amount of the addition to the bad debt reserve for that year was proper. Rather, LaVold based his determination on what he understood to be guidelines provided to petitioner by Mercedes-Benz and BMW. LaVold also believed that the amount of the addition was consistent with generally accepted accounting principles. According to the "Mercedes-Benz Dealer Manual Standard Accounting System", it was that company's policy that amounts in a dealership's accounts receivable accounts that were more than 90 days old should be written-off the balance sheet. BMW had a similar policy. The Mercedes-Benz337 manual also stated that "All past due accounts should be followed up, either by phone or letter, to determine why the account was not paid." The accounting firm of Richard Reiss (Reiss), a certified public accountant, prepared petitioner's Federal corporate income tax returns for 1981 through 1986. A member of Reiss' firm prepared a summary based on schedules that LaVold had prepared for internal accounting purposes and had used to determine the amount of the addition to the reserve for bad debts for 1986. That summary reflected: (1) That the beginning balance of the reserve was $ 20,000, (2) that there was an adjustment in the amount of $ 4,099.84, (3) that there was an addition to the reserve in the amount of $ 137,599.84, and (4) that the ending balance of the reserve was $ 153,500. In the course of the preparation of petitioner's Federal corporate income tax return for 1986 (1986 Form 1120), Reiss brought to petitioner's attention that the amount of the addition to the reserve for bad debts for 1986 deviated significantly from the amount of the addition in prior years. The schedules that petitioner turned over to Reiss' firm and upon which the Federal corporate income tax338 returns for 1981 through 1985 were prepared reflected that the amount of receivables in petitioner's parts and service account that were more than 90 days old was zero or was an insignificant amount. Petitioner explained to Reiss the problems that it had discovered with respect to that account. Reiss then concluded that the amount of the addition to the reserve was reasonable and in accordance with generally accepted accounting principles. Sears relied on Reiss' conclusion that the amount of the addition was proper. On its 1986 Form 1120, petitioner claimed a deduction of $ 137,600 for bad debts. Schedule F (Bad Debts -- Reserve Method) reflected the following: Amounts added to reserveTrade notesand accountsReservereceivableAmountof badoutstandingCurrentchargeddebts atat end ofSalesyear'sagainstend ofYearyearon accountprovisionsRecoveriesreserveyear1981$ 120,145$ 13,092,305$ 20,471$ 16,661$ 37,132$ 15,0001982101,03313,578,46534,5387,05041,58815,0001983114,41714,589,686-0- 17,38817,38815,0001984267,75116,786,21817,7734,00016,77320,0001985303,00417,678,58724,59860825,20620,0001986432,76220,964,137137,600-0- 4,100153,500339 On petitioner's Federal corporate income tax return for 1987 (1987 Form 1120), petitioner claimed a deduction of $ 7,973 for bad debts. In the notice of deficiency, respondent determined that the proper amount of the addition to petitioner's reserve for bad debts for 1986 was $ 31,025. Respondent's computation was as follows: YearReceivablesBad Debts NetRatio of Losses1981$ 120,145 $ 20,47117.04%1982101,03334,53834.18%1983114,4170%1984267,75112,7734.77%1985303,00424,5988.12%1986432,7624,100.95%$ 1,339,112$ 96,48010.84%Accounts and Notes Receivable December 31, 1986$ 432,762Reserve on December 31, 1986 as adjusted46,925Add: Losses charged to reserve in 1986$ 4,100Less recoveries -0- 4,100Total Reserve requirement$ 51,025 Deduct Reserve as adjusted December 31, 198520,000Allowable addition to Reserve$31,025 Respondent also determined that a portion of the underpayment was due to negligence or intentional disregard of rules and regulations. OPINION Reserve for Bad DebtsSection 166(a) allows a deduction for any debt that becomes worthless within the taxable 340 year. Prior to its repeal by the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, section 166(c) permitted an accrual basis taxpayer to account for bad debts by the reserve method of accounting. Taxpayers were allowed, at the discretion of the Commissioner, a deduction for a "reasonable addition" to a reserve for bad debts in lieu of deducting specific bad debts that became worthless during the year. The question of whether a debt becomes worthless during a taxable year is to be determined on the basis of all of the surrounding facts and circumstances. Mueller v. Commissioner, 60 T.C. 36">60 T.C. 36, 41 (1973), affd. on this issue and revd. in part 496 F.2d 899">496 F.2d 899 (5th Cir. 1974). When the debt actually becomes worthless, the taxpayer reduces the reserve by the amount of the particular worthless debt. Roth Steel Tube Co. v. Commissioner, 620 F.2d 1176">620 F.2d 1176, 1178 (6th Cir. 1980), affg. 68 T.C. 213">68 T.C. 213 (1977). A reserve for bad debts is essentially an estimate of future losses that can reasonably be expected to result from debts outstanding at the close of the taxable year. Handelman v. Commissioner, 36 T.C. 560">36 T.C. 560, 565 (1961).341 Thus a "reasonable addition" is the "amount necessary to bring the reserve balance up to the level that can be expected to cover losses properly anticipated on debts outstanding at the end of the tax year." Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 546 (1979). What constitutes a "reasonable addition" to a bad debt reserve depends on the facts and circumstances, including the nature of the business, general business conditions, past experience in collecting accounts and bad debts, and the amount of the existing reserve. Mill Factors Corp. v. Commissioner, 14 T.C. 1366">14 T.C. 1366, 1372 (1950). See Black Motor Co. v. Commissioner, 41 B.T.A. 300">41 B.T.A. 300, 304 (1940), affd. on other grounds 125 F.2d 977">125 F.2d 977 (6th Cir. 1942). See also sec. 1.166-4(b)(1), Income Tax Regs. If the existing reserve is already adequate to cover expected losses, any further additions will be considered unreasonable and thus not deductible. James A. Messer Co. v. Commissioner, 57 T.C. 848">57 T.C. 848, 864 (1972). Where the Commissioner has challenged the reasonableness of an addition to a reserve for bad debts, the taxpayer must show not342 only that his own computation was reasonable but also that the Commissioner's computation was unreasonble and arbitrary. Thor Power Tool Co. v. Commissioner, 439 U.S. at 547-548; Westchester Development Co. v. Commissioner, 63 T.C. 198">63 T.C. 198, 211 (1974). In this case, respondent relied on the formula approved in Black Motor Co. v. Commissioner, supra.The Black Motor formula bases the addition on the arithmetic average of the taxpayer's total receivables and bad debt losses during the previous 6 years. (Respondent's computation of that arithmetic average in the notice of deficiency, as set forth in our findings of fact, was erroneous but that error was to respondent's detriment and does not affect our conclusion.) Maier Brewing Co. v. Commissioner, T.C. Memo. 1987-385, affd. without published opinion 916 F.2d 716">916 F.2d 716 (9th Cir. 1990). In Thor Power Tool Co. v. Commissioner, supra, the Supreme Court upheld the validity of that formula but explained that there were circumstances in which its application would not produce a reasonable addition: If a taxpayer's343 most recent bad-debt experience is unrepresentative for some reason, a formula using that experience as data cannot be expected to produce a "reasonable" addition for the current year. If the taxpayer suffers an extraordinary credit reversal (the bankruptcy of a major customer, for example), the "six-year moving average" formula will fail. In such a case, where the taxpayer can point to conditions that will cause future debt collections to be less likely than in the past, the taxpayer is entitled to -- and the Commissioner is prepared to allow -- an addition larger than Black Motor would call for. * * [Thor Power Tool Co. v. Commissioner, 439 U.S. at 549; fn. refs. omitted.]Petitioner contends that the conditions that it discovered existed at the end of 1986 establish both the reasonableness of its addition to its reserve for bad debts and the unreasonableness of respondent's application of the Black Motor formula for 1986. Petitioner discovered sometime in late 1986 that the amount of receivables in its parts and service account that were more than 90 days old had increased significantly. Petitioner thus contends: The company, with good344 reason, believed that the likelihood of collecting the accounts was poor at best. It therefore chose to increase its reserves by a substantial amount at the close of 1986. The company reserved all receivables over 90 days.For the reasons discussed below, we conclude that petitioner failed to prove that the likelihood of collecting those receivables was "doubtful" or that it had "good reason" to believe that the likelihood of collecting those receivables was "doubtful". First, we reject petitioner's assertion that it "determined", at the time that the decision as to the amount of the addition to petitioner's reserve for bad debts was made, that its receivables that were more than 90 days old were not collectible. Although Johnson had worked for BMW prior to the time that he was employed by petitioner and had consulted with dealers in the course of that employment, he did not indicate that he had any experience in handling problems similar to those that petitioner discovered in late 1986 and that caused the increase in the amount of its receivables that were more than 90 days old. We therefore give little weight to Johnson's statement to LaVold that he felt that petitioner345 would be "lucky" to receive payment on half of those receivables with respect to which petitioner had sent statements of amounts owed to customers at the end of 1986. Also, Johnson was not directly involved in the decision as to the amount of the addition to petitioner's reserve for bad debts. That decision rested with LaVold. LaVold's "determination" that petitioner's reserve for bad debts should be adjusted to reflect receivables that were more than 90 days old and that had been discovered in 1986 was based on what he understood to be the guidelines provided to petitioner by Mercedes-Benz. Petitioner offered the testimony and report of Johnson at trial to establish that those guidelines, which recommended that such receivables were to be written-off the dealer's balance sheet, were in turn consistent with "the industry standard for reserving bad debts". Because of Johnson's failure to state the facts or data upon which his opinion was based and lack of experience involving unbilled receivables, we did not receive Johnson's report in evidence. See Rule 143(f). In any event, even were we to conclude that LaVold's determination for internal accounting purposes was consistent346 with such industry standards and the Mercedes-Benz and BMW guidelines, it would not follow that the addition was "reasonable" for Federal income tax purposes. Compare McCamant v. Commissioner, 32 T.C. 824">32 T.C. 824, 826-827, 836-837 (1959) with Richardson v. United States, 330 F. Supp. 102">330 F. Supp. 102 (S.D. Tex. 1971). The reasonableness of an addition is to be determined on the basis of all the facts and circumstances at the end of the year. Mill Factors Corp. v. Commissioner, 14 T.C. 1366">14 T.C. 1366, 1372 (1950). Here, as petitioner states in its brief, "Petitioner decided to adopt the standards of Mercedes-Benz, BMW, and the automobile industry." Thus petitioner did not consider any of the other facts and circumstances that existed at the end of 1986. Compare Duffey v. Lethert, 11 AFTR 2d 1317, 63-1 USTC par. 9442 (D. Minn. 1963). Also, the facts in this case are materially distinguishable from the facts in cases that led this and other courts to conclude that the taxpayers' additions to their bad debt reserve were "reasonable". For example, in Westchester Development Co. v. Commissioner, 63 T.C. 198 (1974),347 the taxpayer, which had begun operations in the fiscal year preceding the first taxable year there in issue, made an addition to its reserve for bad debts based on the recommendation of a certified public accounting firm. The accounting firm had analyzed the financial stability and general history of the parties that were indebted to the taxpayer. On those facts, we concluded that the taxpayer's addition was not unreasonable and that the taxpayer's bad debt experience was "wholly unrepresentative" of the prior period. Westchester Development Co. v. Commissioner, 63 T.C. at 212. In contrast, petitioner has failed to prove that its prior bad debt experience was unrepresentative of the current period. As discussed, petitioner did not determine at the end of 1986 that any of its customers were unable to pay to petitioner any of the amounts that they owed. The only determination that was made at that time was that some of its receivables were more than 90 days old. The mere aging of receivables, without more, is not sufficient to establish the likelihood that petitioner would not receive payments or that an addition to the reserve for bad debts was reasonable. 348 See Valmont Industries, Inc. v. Commissioner, 73 T.C. 1059">73 T.C. 1059, 1069 (1980). This is particularly apt in this case, where petitioner had sent to its customers statements of amounts owed for the first time in November or December 1986. Compare, e.g., Drew v. Commissioner, T.C. Memo. 1972-40. We recognize that it is not implausible that some of petitioner's customers would refuse to pay to petitioner the amounts that they owed. Some of those customers requested supporting documentation upon the receipt of their statements. Petitioner does not contend, however, that any of its customers ever contested that they owed certain amounts or that they refused to pay, and we found that most of the customers that requested and received such documentation paid the amount due. Petitioner did make adjustments to some of the statements. It seems to us, however, that this would increase, and not cast doubt upon, the collectibility of amounts that customers owed to petitioner. Petitioner did not establish that it had any other reason to doubt the collectibility of those amounts. See Josten's, Inc. v. Commissioner, T.C. Memo. 1989-656,349 affd. 956 F.2d 175">956 F.2d 175 (8th Cir. 1992). Petitioner also cites section 1.166-4(b)(2), Income Tax Regs., and asserts that that regulation "compelled" it to add to its reserve those receivables that were more than 90 days old because it "realized in 1986 that their bad debts were more than estimated when the reserve was created." Section 1.166-4(b)(2), Income Tax Regs., provides as follows: (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.That regulation allows an addition to the reserve for bad debts where the estimate of bad debts for prior years was inadequate. See Massachusetts Business Development Corp. v. Commissioner, 52 T.C. 946">52 T.C. 946, 954 n.3 (1969). Petitioner, however, offered no evidence to prove, and does not argue, that the amounts that it subsequently realized with respect to debts outstanding at the time that350 the reserve was created (or to debts arising subsequent thereto) were less than estimated at the time that the reserve was created. Again, that petitioner "realized" in 1986 that the amount of its receivables outstanding at the end of the year had increased in 1986 does not prove that its estimate of its bad debts for the prior years was inadequate. Also, petitioner failed to prove the extent to which any of the receivables actually arose in years prior to 1986. Under these circumstances, petitioner's citation of and reliance upon the quoted regulation is inapposite. In sum, it is apparent that petitioner believed and now contends that the amount of the addition to its reserve for bad debts was "reasonable" based solely upon the increase in its receivables in its parts and service account that were more than 90 days old. That increase, however, was attributable to petitioner's failure to send to customers statements of amounts owed. Petitioner failed to prove that, once those statements were sent to its customers, the collection of the amounts therein "was doubtful" or the extent to which its prior bad debt experience was unrepresentative. There was no determination (and thus351 there is no basis for concluding) that any of those receivables were amounts that ultimately would result in actual losses, i.e., that any of the receivables that were more than 90 days old were "bad debts" within the meaning of section 166(c). An addition to a reserve for bad debts that merely anticipates a loss is not "reasonable"; the deduction for additions to such reserves must ultimately "reflect only the amounts actually lost from worthless debts." Brooks v. Commissioner, 63 T.C. 1">63 T.C. 1, 8 (1974). A taxpayer may not by his own actions render the debt uncollectible. See Roth Steel Tube Co. v. Commissioner, 620 F.2d 1176">620 F.2d 1176, 1181 (6th Cir. 1980), affg. 68 T.C. 213">68 T.C. 213, 221 (1977). On this record, we cannot conclude that an addition to a reserve for bad debts that increased the ending balance of that reserve more than 750 percent is "reasonable" where the total receivables outstanding at the end of the year increased by less than 35 percent. Our conclusion that petitioner's addition to its reserve for bad debts was not "reasonable" is confirmed by petitioner's actual loss experience in 1987, which we may consider. See Massachusetts Business Development Corp. v. Commissioner, 52 T.C. at 954.352 Petitioner did not attempt to establish that it actually sustained losses that approximated the amount that it added to its reserve in 1986, but petitioner claimed a deduction of only $ 7,973 for bad debts on its 1987 Form 1120. Finally, petitioner's failure to "point to conditions that * * [would] cause future debt collections to be less likely than in the past" requires us to conclude that petitioner has also not satisfied its heavy burden of proving that respondent's application of the Black Motor formula in this case was unreasonable and arbitrary. Thor Power Tool Co. v. Commissioner, 439 U.S. at 549. We therefore sustain respondent's determination on this issue. NegligenceThe second issue for decision is whether petitioner is liable for the section 6653(a) additions to tax. Section 6653(a)(1)(A) provides for an addition to tax equal to 5 percent of the underpayment of tax if any part of the underpayment is due to negligence or intentional disregard of the rules or regulations. Section 6653(a)(1)(B) provides for a further addition to tax equal to 50 percent of the interest due on the underpayment attributable to negligence. For the purposes353 of section 6653(a), negligence is defined as the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner bears the burden of proving that respondent's determinations are erroneous. Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791 (1972); Rule 142(a). The parties dispute whether petitioner relied on the advice of LaVold and of Reiss that the amount of the addition to petitioner's reserve for bad debts was proper and, if so, whether such reliance relieves petitioner of the addition to tax for negligence. Respondent contends that petitioner did not exercise due care because it disregarded its prior bad debt experience and it "did not rely on its advisers to determine the correct addition to the bad debt reserve for 1986." Generally, the addition to tax for negligence is not imposed where a taxpayer's deductions are taken in good faith and based on advice of a competent tax expert. Otis v. Commissioner, 73 T.C. 671">73 T.C. 671, 675 (1980), affd. without published opinion 665 F.2d 1053">665 F.2d 1053 (9th Cir. 1981). 354 Reliance on professional advice is not, standing alone, an absolute defense to negligence but is a factor to consider. Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 888 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. on other grounds 501 U.S. , 111 S.Ct. 2631 (1991). To insulate themselves successfully from this addition to tax, taxpayers must provide their agents with all of the relevant information necessary to prepare the return. Pessin v. Commissioner, 59 T.C. 473">59 T.C. 473, 489 (1972). Petitioner hired LaVold, a certified public accountant, to "straighten out" the problems that it had with its receivables in its parts and service account as soon as those problems were discovered. LaVold prepared schedules that he used to determine the amount of the addition to the reserve for bad debts for internal accounting purposes in 1986 and concluded that the amount of the addition was consistent with guidelines provided to petitioner by Mercedes-Benz and in accordance with generally accepted accounting principles. Petitioner then gave those schedules to a member of Reiss' accounting firm who prepared a summary used in355 the preparation of petitioner's 1986 Form 1120. The amount of the addition to the reserve for bad debts thus did not result from the taxpayer's failure to supply the return preparer with complete and accurate information. Compare Edison Homes, Inc. v. Commissioner, T.C. Memo. 1988-441, affd. 903 F.2d 579">903 F.2d 579 (8th Cir. 1990). Also, Sears relied on Reiss' conclusion that the amount of the addition was proper. Although Reiss, a certified public accountant, did not personally compute the amount of the addition to the reserve, he testified as follows: Q. Did you deal with the company at all about that amount? Did you consult with the company? A. Well, in preparation of the tax return I questioned them because it was such a deviant amount from the previous year. I brought it to their attention and they explained to me what the situation was as far as the problem with the receivables. * * Q. Did you believe that the one fifty-three thousand five hundred dollar amount was reasonable? A. Yes I did. Q. And was that subject to generally accepted accounting standards? A. Absolutely.That the amount of the addition was subsequently determined*356 by this Court to be unsupported by the record does not render petitioner's reliance on Reiss' advice unreasonable. See Jackson v. Commissioner, 86 T.C. 492">86 T.C. 492, 539 (1986), affd. 864 F.2d 1521">864 F.2d 1521 (10th Cir. 1989). Under these circumstances, petitioner is not liable for the additions to tax under section 6653(a)(1)(A) and (a)(1)(B). To reflect the foregoing, Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620636/	Aviation Country Club, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentAviation Country Club, Inc. v. CommissionerDocket No. 47316United States Tax Court21 T.C. 807; 1954 U.S. Tax Ct. LEXIS 283; February 26, 1954, Promulgated 283 Decision will be entered for the petitioner. Held, petitioner, during the fiscal years involved, was an organization exempt from income tax under section 101 (9), Internal Revenue Code. Stanley L. Drexler, Esq., for the petitioner.Gene W. Reardon, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 807 The respondent determined deficiencies in income tax of petitioner as follows:Fiscal year endedAmountApr. 30, 1950$ 13,492.93Apr. 30, 19518,061.06The question presented is whether or not petitioner qualifies during the years involved for exemption from income tax as a corporation "* * * organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder * * ."FINDINGS OF FACT.Petitioner is the Aviation Country Club, Inc., a corporation organized on April 15, 1944, under the laws of the State of Colorado. The income tax returns here involved were filed with the collector of internal revenue for the district of Colorado.Prior to February 1949, there were a number of clubs or groups in the vicinity of Denver, Colorado, 284 interested in aviation. Most of these clubs met regularly. None had a club house or meeting place of its own.The Broadmoor Country Club (hereinafter called Broadmoor), a private taxable corporation incorporated in 1925, operated a ballroom, restaurant, and cocktail lounge at Edgewater, Colorado, on the outskirts of the city of Denver. The business enterprise was owned by Nellie Ott and her son, Eddie Ott (hereinafter sometimes respectively 808 referred to as Nellie and Eddie), with each owning an equal interest. The premises consisted of a large tract of land on which was located a building, constructed in 1925 by the Otts at a cost of $ 50,000 to $ 75,000, containing a main dining room and a dance floor, a south dining room, a kitchen, and a cocktail lounge known as the Hurricane Hut. The main dining room accommodated approximately 400 persons. There were also outdoor dining facilities known as the Garden Walk at which approximately 400 persons could be served and an outdoor dance floor. The corporation opened the night club for business on October 1, 1925, and thereafter operated it until about May 1, 1949, or shortly before. Of the original cost of construction, all285 except $ 10,000 thereof, was borrowed. During the ensuing years, all except about $ 10,000 of such borrowing had been repaid out of the profits of the operation of Broadmoor. In addition such profits had furnished the principal livelihood of Eddie, George Ott (hereinafter called George), a brother of Eddie, and Nellie (hereinafter collectively referred to as the Otts). For several years prior to May 1, 1949, George had been actively managing Broadmoor and during the fiscal years immediately preceding such date, the profits derived and the losses sustained thereby were as follows:1945($ 376.00)19467,839.67 1947(1,016.71)1948 (10 months ended Apr. 30, 1949)(5,525.46)No income was derived in the foregoing years from the operation of slot machines.Eddie is widely known in Denver as being a good restaurant operator. He has been identified with a number of restaurant, ballroom, and cocktail lounge operations. He and members of his family have been engaged in the food business in the Denver area for approximately 40 years. In the latter part of 1948, Eddie took over the management of Mt. Vernon Country Club.Among the members thereof was W. J. Bain, then Commissioner286 for Aviation for the State of Colorado. Bain mentioned to Eddie that there were a number of groups interested in aviation and suggested that Broadmoor, the facilities of which were well suited for adaptation to the operation of a private membership club, might possibly be converted into an aviation club house. Eddie was receptive to the idea and both he and Bain discussed the matter further with George. Following these conversations a letter was sent out by George and Bain to the various aviation groups inviting their representatives to meet at Broadmoor to consider the possibility of the formation of an aviation country club and the leasing of the Broadmoor premises for this purpose.809 The substance of the conversation at the meeting was that the Otts would be willing to lease the Broadmoor Country Club premises to an aviation club if there could be recruited from the various aviation groups a sufficient number of members so that an aviation club could be operated as a private club on the Broadmoor premises. The persons attending the meeting as representatives of the various aviation clubs were to return to the clubs which they represented and ascertain the reaction of287 the membership. Such reaction was favorable, and representatives of the various aviation clubs held from 6 to 8 additional meetings among themselves, which meetings were attended by from 12 to 20 such representatives. George and Eddie were called in at various stages of these meetings when it was desired to reach informal agreements. As a result of such meetings, petitioner's articles of incorporation and bylaws were drafted, and representatives of petitioner and the Otts began negotiations leading to the drafting of the lease and the management contract here in question.Although Broadmoor had been incorporated in 1925 as a nonprofit corporation in order to obviate anticipated difficulty in obtaining a dance license, it was in fact at all times operated and filed its tax returns as a profit making organization. Its articles expired in 1945 and the period in which they might be renewed passed without the knowledge of the Otts or their legal advisers. It was necessary, therefore, that the corporation be liquidated and the lease with petitioner entered into by the individual owners of the property, Nellie and Eddie. Broadmoor, the corporation, was dissolved and liquidated. Its288 assets were distributed one-half each to Nellie and Eddie, each of whom gave George a one-sixth undivided interest in the assets so distributed, with the result that Nellie, Eddie, and George each owned a one-third undivided interest therein. Each of the three then contributed his interest to a newly formed partnership bearing the same name. Simultaneously on April 28, 1949, a lease agreement covering the Broadmoor premises was entered into between the partnership as lessor and petitioner as lessee. A management contract was entered into between George, who had been managing Broadmoor since about 1938, and petitioner.The fair market value on April 28, 1949, of Broadmoor's assets was reported by Nellie and Eddie for gift tax purposes as being $ 38,552 computed as follows:Tract 7, Grandview Acres,5 acres more or less -- land value$ 5,000Improvements -- Dance hall27,500Furniture & fixtures4,454Kitchen equipment -- china, dishes & silver1,598Total$ 38,552810 The book values as of April 27, 1949, of the Broadmoor properties were reported on a partnership tax return filed thereby for the fiscal year ended April 27, 1950, as follows:Land$ 5,000.00Depreciable assets34,834.29289 The actual appraised value of such properties including fixtures, equipment, land and buildings, etc., was $ 200,400 as of April 1949.The lease entered into between petitioner and Broadmoor, the partnership, covered the land, improvements, furniture, fixtures, and equipment, excepting a second floor apartment, which was occupied during the years in question by Nellie and Eddie. The term of the lease was 10 years with option for renewal of another 10 years on the same conditions. Of the annual net profits, 40 per cent was payable as rent; 30 per cent was to be used for improvements and major repairs as directed by the lessor; and the remaining 30 per cent was to go to petitioner, with a guarantee that this 30 per cent would amount to $ 10,000, provided a membership of 1,500 were maintained during the year. The lease provided for minimum dues of $ 10 per year with a minimum of 1,500 members. If this membership were not reached within 6 months, the lease was cancelable by either party. A management contract whereby George would serve as manager was tied in with the lease. All revenues as defined in the lease received by the lessee were to be deposited in a designated bank and290 expended by check signed by the manager, or in case of his illness or inability to attend to his duties, then by the president and treasurer of the lessee. During the fiscal years involved, George signed checks for petitioner.The lease provided for payment of property taxes and maintenance expenses by the lessee. It contained the usual provisions regarding subletting and assignment. The lessee was required to maintain a nonprofit and a tax-exempt status. The lease provided that no activities contrary to law were to be carried on and that the facilities of the club were to be restricted to members and their guests. The lessee agreed to obtain liquor licenses. Failure to do so would render the lease null and void. Petitioner had no funds to start out with. The lessor agreed to advance up to $ 750 in organization expenses and the cost of obtaining licenses. Either party might terminate the lease on its anniversary without cause by giving 120 days' notice. The lessor could terminate the lease in the event of breach of the covenants thereof by the lessee at any time. The lease contained the usual provisions regarding vacation of the premises during the term, insurance, acceptance291 of the premises, and waiver. With respect to the improvement fund the lease provided as follows:Lessee agrees to improve the leased premises on the following terms: Thirty per cent of the annual net profits, * * * shall be segregated quarterly by lessee in a separate improvement fund which shall be expended by lessee exclusively 811 for such permanent improvements and major repairs * * as directed by lessors only. Lessee shall have no authority save and except to segregate such funds in its name and pay out the same when so instructed by lessors. Any balance remaining in said fund not obligated or designated for definite improvements shall be divided equally between lessors and lessee on or before date of cancellation or termination of this lease. Lessee shall have the right to make advances from time to time to the improvement fund and shall receive credit for such advances on each subsequent installment of the improvement fund until such credit is exhausted. Lessors, however, will not be obligated to repay such advances in the event of expiration or termination of this lease. All improvements so made shall belong to and be the property of lessors upon cancellation292 or termination of this lease.The management contract recited that petitioner was a new corporation organized to promote and operate a clubhouse for its members; that George, manager and one of the lessors, had devoted his life to the operation of amusement enterprises and clubs and was personally interested in the success of the petitioner's venture. It provided for his employment as manager for the term of the lease or any renewal thereof at a salary of $ 6,000 per year. His prescribed duties consisted of the assumption of full, complete, and absolute responsibility for the management and operation of the premises, including catering and food and drink services, maintenance and repairs, management and employment of all personnel, and supervision and control of all activities conducted on the premises. The decisions of the manager in carrying out his duties were final and binding upon petitioner provided that such decisions were not in violation of petitioner's articles of incorporation or bylaws as they then existed. The manager agreed to carry out his prescribed duties and to devote his entire time and attention to the management of the petitioner's clubhouse, to employ a bookkeeper293 to keep the books and accounting records which should be open to inspection by the lessee, and to use his best efforts to maintain the club on a level comparable with other similar clubs. The manager agreed to see to it that only members and their guests were admitted to the club and that no illegal activities were carried on on the premises. It was agreed that all funds received from operation of the club, including dues paid by members, be regularly deposited in a Denver bank, and that all disbursements therefrom be made by checks issued and signed by the manager "* * * or in the event of his illness or inability to attend to his duties, then and in which event only, by the President and Treasurer of the Company * * ." The manager assumed the risk of credit losses with respect to credit authorized by him as distinguished from the directors or officers. In the case of the death of George the surviving lessors were entitled to designate his successor. It was agreed that the management contract constituted a part of the consideration for the leasing of Broadmoor; that it was made simultaneously 812 with the lease and could not be extinguished without also extinguishing the294 lease agreement.Petitioner's articles of incorporation recited that the incorporators were desirous of associating themselves for civic, educational, scientific, and social purposes, and not for pecuniary profit. The objects of the corporation were stated to be to promote a club and clubhouse facility for the exclusive pleasure, recreation, and social benefit of the members of the club and for such other nonprofit purposes as might best promote the interests of the members, and to maintain a clubhouse or similar facility to be operated for the exclusive use of the members of the club and their guests. The articles prohibit operation for the pecuniary benefit of any member or the use of the club for any lobbying or legislative purposes. The articles place the affairs of the corporation under the control and direction of a board of directors consisting of 12 persons and give them extensive powers. The board is empowered to determine the qualifications for membership, to sell, lease, convey, encumber, or dispose of any property of the corporation, and to make, alter, amend, or repeal bylaws.Petitioner's bylaws provide for annual membership meetings and for special meetings on call295 of the board of directors. Proxy voting is prohibited. Directors were to be elected by the members and for staggered terms. Provision is made for regular monthly directors' meetings and for special meetings. The board of directors is given broad control and supervision over all expenditures, the approval or disapproval of candidates for membership, and is given the power to act as a court before which all questions affecting the interest of the club may be brought. It is empowered to exact penalties against members, including expulsion or suspension for the violation of the bylaws or rules, the power to hire or discharge employees, fix salaries and delegate this authority to a club manager upon such terms as the board may see fit. The bylaws also provide for the usual offices with the usual powers. All persons over the age of 21 years, who are directly connected with the aviation industry, or who have demonstrated an interest in aviation generally, are eligible for membership. The bylaws, as originally written, provide for dues of $ 10 per year. Election to membership requires an affirmative vote of the board of directors. Each candidate for membership must be proposed by296 one member, and the proposal submitted to a membership committee appointed by the president. After approval by the committee, the name of the candidate is to be posted on the bulletin board of the club for at least 10 days. As a matter of practice, to become a member during the taxable years, required that an applicant be endorsed by two members, pay his $ 10 annual dues, and be passed upon by the membership committee. Not all members of petitioner were interested in aviation.813 Representatives of petitioner felt that the foregoing management contract and lease were advantageous to petitioner. Percentage leases and those under which the lessee assumes the cost of property taxes and maintenance are not unusual in the Denver area.The Otts were interested in making a profit in the operation of Broadmoor. Eddie, while manager of the Mt. Vernon Club where slot machines were in operation, conceived the idea of reorganizing Broadmoor into a private club operation so that it would be enabled to install slot machines. There were virtually no private clubs in the Denver area where slot machines were not operated during 1949 and part of 1950. Although illegal, such operation 297 was with full knowledge and acquiescence of the law enforcement officials. Slot machines were removed from private clubs in early 1951 as a result of legislation and national publicity emanating from the congressional crime investigations. When slot machines went out 5 or 6 clubs which depended upon slot machine revenue went out of business. Petitioner continued to show a profit in 1951 and subsequent years. All clubs felt the pinch of the loss of slot machine revenue and endeavored, like petitioner, to control operations more closely. Slot machines often provided a club its margin of profit.The Otts were considering a private club operation but thought it would be better to get some bona fide group like the aeronautical group and let them come into the picture instead of going out and getting members themselves. The primary purpose in leasing the property to the petitioner was to make money for the Otts. The installation of slot machines was one of the factors which induced them to lease.There was no discussion at the original meeting between George, Eddie, and the representatives of the aviation clubs with respect to whether or not slot machines should or would be operated298 at the Aviation Country Club nor were there any discussions during subsequent preliminary meetings. The aviation groups were not especially interested in slot machines. Two or three weeks before petitioner opened, slot machines were discussed for the first time as to whether their operation would be permitted. In the negotiations during the last few weeks before the incorporation of petitioner, slot machines were discussed along with all the other sources of possible revenue including meals, liquor, and dues, in connection with attempting to fix percentages under the lease. Thereafter Eddie made arrangements with certain persons to place the latters' slot machines in the club. There were from 4 to 8 slot machines placed in operation, ranging in denominations from nickels to dimes, quarters, one-half dollars, and dollar machines. Their owners and George made the collections from the machines. Of the revenue taken from the slot machines during the taxable years, 75 per cent was retained by petitioner.814 Among the activities which were carried on at the club during the years in question were family night buffet parties, dinner dance parties, Sunday morning breakfasts, 299 fashion shows, book reviews, and bridge parties. Petitioner sponsored an issue of a magazine called Rocky Mountain Aviation. It contributed to the Boy Scouts, the Girl Scouts, the Young America League, the polio fund, and many others. It also donated money to the Civil Air Patrol for the living expenses of two Civil Air Patrol cadets as exchange students to Europe under the Marshall Plan.During the years involved, petitioner's directors met at least once a month and often more frequently. The average attendance was between 85 and 90 per cent and the average length of each directors' meeting was between 3 1/2 to 4 hours. Petitioner's president was at its premises on club business at least weekly, and daily conducted correspondence, telephone calls, and negotiations with contractors and business people. For this he received an allowance of $ 150 per month, which would about compensate him for his actual out-of-pocket expenses.Eddie has never been a member or a director of petitioner. He has attended one directors' meeting on invitation and has taken no part whatever in the day-to-day operations of petitioner. George is not and never has been a member or director of petitioner; 300 he attends meetings on invitation only. The Otts played no part whatever in the selection of members or the passing upon the candidacy of members. The number of members has been limited at all times, although the Otts were not in favor of the limitations as imposed by the board of directors, and the view of the board of directors has always prevailed. Recommendations of the Otts were always carefully and cautiously examined by the directors.Petitioner's books are kept by a bookkeeper employed by petitioner through George. These books are audited quarterly by a certified public accountant chosen and employed by the board of directors without consultation with the Otts. The Otts have their own accountant, who has no connection with the accountant employed by the petitioner through the board of directors. Separate records are kept for the Aviation Country Club and Broadmoor. The board of directors employed a certified public accountant in order to obtain more current information on the operations of the petitioner. It wished to secure at least monthly instead of quarterly operating statements.Although petitioner's lease places the control of the improvement fund in the hands301 of lessor, most of the improvements made have in fact represented the directors' ideas rather than the Otts' ideas. The pitch and putt golf course, the bowling green, the putting green, and the children's playground reflected the directors' ideas.815 A cocktail lounge was in the process of construction when the lease was entered into and was completed about 2 weeks after the lease was signed. Thereafter petitioner added a rug for the main dining room, drapes and chairs, kitchen equipment, enlarged the kitchen, installed a pitch and putt golf course, a bowling green, a putting green, and a children's playground. Most of these expenditures were made during the taxable years in question. During the taxable year ended April 30, 1950, there was expended on improvements $ 42,029.71. This amount exceeded 30 per cent of the net income by $ 26,803.35. During the year ended April 30, 1951, there was expended $ 7,191.93 on improvements whereas 30 per cent of the profits amounted to $ 15,406.55. There were thus at the end of the taxable year ended April 30, 1951, cumulative overexpenditures of $ 18,588.73. These overexpenditures were credited in later years. During the taxable302 year ended April 30, 1950, $ 13,830 was spent on the Terrace Lounge, $ 981 on rest rooms, $ 13,628 on new kitchen equipment, $ 94 on a side entrance, $ 2,302 for additional land on which the golf course was constructed, $ 225 on water taps for the proposed swimming pool, $ 7,373 for the golf course, $ 584 for a new office, and $ 3,007 on the dining room and additions to the Hurricane Hut, a cocktail lounge. During the taxable year ended April 30, 1951, $ 5,191 was spent on the golf course and $ 2,000 on a new storage room in the rear of the kitchen.Guests of members may use the facilities of the club only when accompanied by a member. An attendant at the door checks membership cards and no food or drink is served without the member's number appearing on the check. A large sign appears at the entrance to the club reading, "Private, Members Only." Petitioner's articles, bylaws, and the terms of the lease and management agreement all stipulate that only members and their guests may be permitted to use the facilities of the club. A member may charge an expenditure for food or drink for his guests and himself or may pay cash. A member may bring nonmembers to a party or to a luncheon. 303 Food and liquor bills may be paid in cash by nonmember guests and such guests may also spend their money at the club by playing slot machines. Between 75 and 80 per cent of revenue was estimated to represent member patronage with the remainder guest patronage.The gross receipts, gross income, membership fees, slot machine revenue, and net income received by petitioner during the taxable years involved here, are in round figures, as follows:Fiscal year ended Apr. 3019501951Gross receipts$ 304,000$ 336,000Gross incomes258,000261,000Membership fees35,00043,000Slot machine revenue68,00043,000Net income40,00029,000816 The rent paid, the sums allocated to the improvement fund, insurance, repairs and maintenance, and property taxes paid by petitioner during the years involved, follow:Fiscal year ended Apr. 3019501951Rent$ 20,301.81$ 20,542.06Allocation to improvement fund15,226.3615,406.55Insurance3,278.121,921.14Repairs and maintenance7,305.565,091.67Property taxes991.681,346.33Respondent disallowed petitioner's claim for exemption from income taxation for the fiscal years ended April 30, 304 1950, and April 30, 1951.The petitioner, during the fiscal years here in question, was a club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inured to the benefit of any private shareholder.OPINION.The sole question presented is whether petitioner qualified during the taxable years involved as a corporation exempt from income tax pursuant to section 101 (9), Internal Revenue Code. 1In order so to qualify petitioner must have been, during the period, a club " * * organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which * * * [inured] * * * to the benefit of any private shareholder * * * ." Whether petitioner can be said305 to come within such qualification is purely a question of fact, those pertinent to which have been set forth above in extenso. Further elaboration thereon is unnecessary. We have considered such facts and carefully assayed all the evidence of record on which they are grounded. We have concluded and found as a fact that petitioner was such an organization during the years before us. Accordingly, we here so hold. Cf. Aviation Club of Utah, 7 T.C. 377">7 T.C. 377, affd. 162 F.2d 984">162 F.2d 984, in which, during the war, the club was opened to nonmember Army officers and practically taken over by them. The club was diverted from its previous exempt status, resulting in large indirect profits to the members of the club in the shape of enlarged facilities, and otherwise. The net income for 1943 was 25 times the normal net income for the year 1941. The holding of the Court was that the club was exempt from taxation in 1941 but taxable in 1942 and 1943. In the instant case, there is a notable parallelism between the situation obtaining in the Utah case 817 in 1941 and the taxable years here involved for petitioner. Respondent's determination*306 to the contrary is error and it is reversed.Decision will be entered for the petitioner. Footnotes1. SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.(9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder;↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620637/	LEON and MARY ANN OHANESIAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentOhanesian v. CommissionerDocket Nos. 14751-83, 14752-83, 14753-83.United States Tax CourtT.C. Memo 1986-88; 1986 Tax Ct. Memo LEXIS 523; 51 T.C.M. (CCH) 551; T.C.M. (RIA) 86088; March 4, 1986. Leon Ohanesian, pro se. Irene Scott Carroll, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined the following deficiencies in and additions to petitioners' Federal income taxes: Addition to TaxYearDeficiencySec. 6653(b) 11977$75,050$37,5251978152,00076,000197911,8075,903After concessions the issues for decision are whether petitioners underpaid their 1977 and 1978 Federal income taxes by claiming a certain interest deduction in each year, and, if so, whether a portion of each underpayment was due to fraud. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Petitioners are husband and wife and resided in Los Angeles, California, 525 when they filed their petitions herein. They filed joint Federal income tax returns for 1977 and 1978. As of the date of trial, petitioner Leon Ohanesian (petitioner) has been a real estate investor and developer for approximately 30 years. Petitioner completed high school and 6 months of college. He is an intelligent, sophisticated man possessing substantial business acumen. In or about 1966, petitioner met Hazel C. Ross (Ross), a former Wall Street stockbroker whose husband of 30 years had recently died. At that time, Ross was approximately 59 years old, and petitioner was approximately 31 years old. Petitioner and Ross spent considerable time together, and Ross fell in love with petitioner. At petitioner's request, Ross made loans to petitioner totaling approximately $171,400 from 1966 through 1971, including $60,000 on July 1, 1966. Substantially all of the loans were evidenced by 5-year unsecured promissory notes bearing interest at 12 percent per annum. Some of the notes required monthly interest payments, while others provided for payment of interest at maturity. Although petitioner initially made monthly interest payments to Ross on the earliest loans, he made526 only nominal payments after 1967. On May 1, 1970, petitioner and Ross executed a "Note Extension Agreement" extending the maturity dates stated in the notes for 120 months.Under the agreement, neither interest nor principal would be payable until the extended maturity dates. Ross sued petitioner in Los Angeles County Superior Court on July 13, 1973, for payment on the original promissory notes. In her complaint she alleged that petitioner had obtained both the loans and the May 1, 1970 agreement through fraud. Petitioner filed a cross complaint for usury. The parties settled the suit on December 30, 1974, when petitioner stipulated to a judgment in favor of Ross for $200,000 plus $20,000 attorney's fees. The judgment dismissed with prejudice Ross' claims for payment on the notes. Petitioner made only nominal, if any, payments to Ross on the judgment. On March 3, 1977, Ross wrote a letter to petitioner indicating that she desperately needed funds and requesting payment of the judgment. Petitioner subsequently arranged to meet Ross on or about July 1, 1977. Petitioner brought to that meeting a personal check for $150,000 payable to Ross and marked "on account of accumulated527 accrued interest"; a bank statement evidencing deposit of such amount in petitioner's checking account; two 8 percent unsecured demand notes payable from petitioner to Ross, one for $150,000 and one for $59,092.99; and an agreement that provided in pertinent part as follows: Leon Ohanesian as an individual, as maker of 15 certain promissory notes executed in favor of Hazel C. Ross as beneficiary, hereby agrees to tender the accumulated and accrued interest on said notes from the execution date of each respective note to July 1, 1977, in the following manner. A total cash amount of interest is to be remitted to the beneficiary immediately upon execution of this agreement by both parties and that amount shall be $150,000.00; and for the remaining unpaid accrued interest maker shall execute a promissory note in the amount of $59,092.99 which completes payment in full of the total accrued interest on said notes which amounts to $209,092.99. Said note to bear interest at the rate of 8% and shall be due and payable on or before 60 months from the date of execution. 2 The undersigned maker and beneficiary further agree that commencing July 1, 1977 the interest on said 15 promissory notes528 shall bear interest at the rate of 8% and both principal and interest shall be on demand after July 1, 1977. From the execution date of each note the maker has been obligated for interest at the rate of 12% and said payment made pursuant to this agreement has been calculated at the said 12% interest rate. However all future calculations of interest shall be made at the 8% rate. Petitioner made an emotional appeal to Ross, cajoling her to sign the various papers he presented to her. Ross signed the agreement, 3 and petitioner paid Ross $500 cash. Petitioner subsequently deposited the check endorsed by Ross in his bank account. On December 14, 1977, Ross' counsel sent petitioner a letter demanding payment on the July 1, 1977 notes. Petitioner subsequently made only nominal, if any, payments on such notes. Petitioner and Ross met again on or about July 1, 1978. Petitioner brought to that meeting a personal check for $103,540.53 payable to Ross; a bank529 statement evidencing deposit of $104,000 in petitioner's checking account; an 8 percent unsecured demand note for $103,540.53 payable from petitioner to Ross; and an agreement similar to the July 1, 1977 agreement. The July 1, 1978 agreement listed all notes payable to Ross previously made by petitioner, including the two July 1, 1977 notes, and provided as follows: The above notes are to continue to bear interest at the rate of 8%. The accumulated unpaid interest on the 15 notes dated prior to July 1, 1977 remaining due and owing is $59,092.99 which the maker herein agrees to tender to beneficiary upon execution of this agreement by both parties. Maker further agrees to remit accumulated interest on the $150,000 and $59,092.99 notes from July 1, 1977 to July 1, 1978 at the rate of 8% upon execution of this agreement and also to remit the earned interest on the 15 notes dated prior to July 1, 1977. Said interest being 8% accruing from July 1, 1977 to July 1, 1978. The interest on said 15 notes totalling $181,000 at 8% on $150,000 [sic] accruing from July 1, 1977 to July 1, 1978 is $12,000. The interest on $59,092.99 at the accruing rate of 8% from July 1, 1977 to July 1, 1978 totals530 $4,727.54. Therefore, the total accrued and accumulated interest due to the beneficiary herein on all of the 17 outstanding promissory notes as of July 1, 1978 is $90,300.53 which is hereby remitted by maker to beneficiary. With this payment of interest the note for $59,092.99 is fully liquidated and there remains [sic] only 16 outstanding notes being on demand, bearing interest from July 1, 1978 at the rate of 8% with a total unpaid principal balance due of $331,000. The undersigned maker further agrees to remit the interest due to be earned for the balance of 1978 from July 1, 1978 to December 31, 1978 on the $331,000 unpaid principal balance. Thereafter, said $331,000 will accrue interest at 8% from January 1, 1979. The amount of said interest to accrue for the 6 months on said $331,000 is a total of $13,240 which when said amount is added to the accrued interest of $90,300.53 will now total $103,540.53 which is hereby tendered. The above terms conditions and provisions are hereby accepted and agreed to by the undersigned maker and beneficiary. Petitioner made an emotional appeal to Ross, cajoling her to sign the various papers he presented to her. Ross signed the531 July 1, 1978 agreement, and petitioner paid Ross $500 cash. Petitioner subsequently deposited the check endorsed by Ross in his bank account. Petitioner made only nominal, if any, payments on the notes to Ross after July 1, 1978. As part of their Federal income tax returns for 1977 and 1978, petitioners filed Schedules C for petitioner's business using the cash method of accounting. On such schedules, petitioners deducted as interest on business indebtedness the $150,000 and $103,540.53 purportedly paid to Ross on July 1 of those years, respectively. In his statutory notice of deficiency dated March 22, 1983, respondent determined that these amounts were not paid or incurred as interest and that the underpayments in petitioners' tax were due to fraud. ULTIMATE FINDINGS OF FACT Petitioner did not intend to and did not in fact make payments of interest due to Ross in July 1977 and July 1978. He falsely claimed that such payments had been made, with the intent of evading taxes known to be owing for 1977 and 1978. OPINION At issue in this case are the deficiencies and the additions to tax for fraud under section 6653(b) resulting from petitioners' deducting as interest532 certain amounts petitioner allegedly paid to Ross. The 50-percent addition to tax in the case of fraud is a civil sanction provided primarily to protect 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, that some part of an underpayment for each year was due to fraud. Sec. 7454(a); Rule 142(b), Tax Court Rules of Practice and Procedure. Fraud is an intentional wrongdoing motivated by a specific purpose to evade a tax known or believed to be owing. Akland v. Commissioner,767 F.2d 618">767 F.2d 618, 621 (9th Cir. 1985), affg. a Memorandum Opinion of this Court; 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 (5th Cir. 1968), affg. a Memorandum Opinion of this Court. The requisite underpayment may result from an overstatement of deductions as well as an understatement of income. 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).533 The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud will never be presumed. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970). Fraud may, however, be proven by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. The taxpayer's entire course of conduct may establish the requisite fraudulent intent. 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 issued the statutory notice of deficiency more than 3 years after petitioners filed their 1977 and 1978 tax returns. Accordingly, assessment is barred by the statute of limitations unless respondent proves, for each respective year, that petitioners filed a false or fraudulent return with the intent to evade tax. Section 6501(a), (c)(1); see Farmers Feed Co. v. Commissioner,10 B.T.A. 1069">10 B.T.A. 1069 (1928). 4 In the present case, respondent's burden of proof under section 6501 is534 identical to that under section 6653(b). Considine v. United States,645 F.2d 925">645 F.2d 925, 932 (1981), and cases cited therein.Based on our consideration of the entire record, we conclude that respondent has proven by clear and convincing evidence that petitioners made an underpayment in their tax for both 1977 and 1978 and that a portion of each underpayment was due to fraud. Because petitioners used the cash receipts and disbursements method to compute the income or loss from petitioner's business, they are entitled to the interest deductions is issue only if petitioner paid such interest to Ross. 535 Sections 163(a), 461(a); section 1.461-1(a)(1), Income Tax Regs.; Eckert v. Burnet,283 U.S. 140">283 U.S. 140 (1931). Petitioners argue that petitioner's presentation of the $150,000 and $103,540.53 checks to Ross at the July 1, 1977 and July 1, 1978 meetings, respectively, constituted payment of the interest. They assert that Ross was free to do with the checks as she pleased and that she chose to reloan the money to petitioner by endorsing the checks for petitioner. The parties argue at length over whether Ross actually endorsed the checks and signed the related agreements. Contending that the signatures were forged by petitioner, respondent points to Ross' testimony to that effect. Although we found Ross' testimony for the most part credible, her statements regarding the signatures were not reliable. She became so excited and disturbed when questioned about signing the documents that she repeatedly exclaimed that all of the documents were forgeries without considering the specific question asked her or examining the specific document before her. Petitioner points out that an Internal Revenue Service handwriting expert issued a written report concluding that the endorsement536 signatures were Ross'. The expert did not testify at trial, however, and his report did not include the basis for his conclusions. The record is thus unclear as to the authenticity of the signatures. Because respondent bears the burden of proof, we have assumed that Ross' signatures were genuine. We nevertheless conclude that petitioner did not place the checks in Ross' control but only created the illusion of doing so to reduce petitioners' income tax liability. Although Ross undoubtedly made many imprudent loans to petitioner before the years in issue, circumstances had changed by that time. Petitioner failed to make any substantial payments on the initial notes; Ross sued petitioner and received a stipulated judgment; and petitioner failed to make any substantial payments on the judgment. By 1977 Ross badly needed funds, and petitioner made no substantial payments on the July 1, 1977 notes. We do not believe that Ross would have surrendered the checks to petitioner based upon his unsecured notes unless she had no option to keep them. Even if petitioner persuaded Ross to sign the documents at the meetings, we conclude that he neither intended to part nor actually parted537 with the checks. Petitioner thus never paid any interest to Ross. All of the $150,000 purported interest payment in 1977 and $59,092.99 of the $103,540.53 purported payment in 1978 represented interest computed at 12 percent on the notes initially issued by petitioner. Each of these notes was dated before 1974 and the largest ($60,000) was dated July 1, 1966. The December 31, 1974 stipulated judgment, however, discharged petitioner's obligations on the notes, and under California law the judgment accrued interest at only 7 percent. Cal. Civ. Proc. Code sec. 682.1 (West 1980) (repealed 1983). We do not believe that petitioner, a shrewd businessman reluctant to satisfy his debts to Ross, could have inadvertently or gratuitously paid more "interest" to Ross than he was obligated to pay. Petitioner's own testimony illustrates that the "payments" to Ross possessed no economic substance other than the creation of an asserted tax deduction: Had I not intended to pay Mrs. Ross any of the interest as called for in the 1977 and '78 [agreements], I wouldn't have gone through the trouble to go out and take money out of savings banks and go through a transaction. 538 However, if Mrs. Ross had agreed at that time not to reloan the money back to me, * * * [t]he original $150,000 would have been for and in full settlement. And I would have had no interest payment to her, nor would I have a deduction. * * * Petitioner thus testified that, in exchange for Ross' reloaning him the $150,000, he agreed to incur the obligation to pay Ross ondemand approximately $380,493 ($171,400 principal amount of original notes plus $209,092.99 "interest"). We refuse to believe that petitioner would acquiesce in, much less propose, such an irrational agreement except as a means to reduce petitioners' tax liability without relinquishing control over the funds allegedly paid to Ross. Indeed, his former employee testified that petitioner characterized the July 1 transactions as "a way to get out of tax consequences." Although a desire to minimize taxes and an honest mistake of law do not constitute fraud, Mayock v. Commissioner,32 T.C. 966">32 T.C. 966, 974 (1959), petitioners' underpayments were due not to an innocent mistake but to petitioner's deliberate and carefully crafted design. In this respect the present case is analogous to Professional Services v. Commissioner,79 T.C. 888">79 T.C. 888 (1982).539 The individual taxpayer in Professional Services claimed a deduction in 1976 for an amount purportedly paid for the purchase of materials relating to business trust organizations. The taxpayer "borrowed" the purchase price from an entity related to the seller of the materials, but neither the taxpayer nor the "lender" intended to create a bona fide debt. The taxpayer claimed deductions in 1977 for amounts purportedly paid but over which the taxpayer did not relinquish control. We concluded that both transactions involved payments in form only, not in substance, and upheld the Commissioner's determinations under section 6653(b) for both years. See Professional Services v. Commissioner, 79 T.C. at 912-917, 920-932. In United States v. Rosenthal,470 F.2d 837">470 F.2d 837 (2d Cir. 1972), the Court of Appeals for the Second Circuit affirmed the conviction under section 7201 of a taxpayer who failed to report income from fraudulently obtained loans. The court concluded that an intent to evade taxes was established because the loans constituted taxable income and the defendant knew that he had taxable income equal to the amount of the loans. The court's decision540 in Rosenthal rested upon a finding that the taxpayer had no intent to repay the loans. 470 F.2d at 842. The parties dispute whether petitioner intended to make payments on the notes given to Ross at the July 1 meetings. 5 Resolution of this issue, however, is not necessary for our decision. Even if, at the times petitioner gave the notes, he intended subsequently to make payments thereon, the understatements in petitioners' taxes resulted from their claiming deductions for alleged cash payments in 1977 and 1978 that never left petitioner's control. 6Petitioners argue that petitioner's cooperation and candor with respondent indicate that his conduct was not*541 fraudulent. Such conduct might be regarded as part of a continuing plan to shift the burden of taxation to Ross. Regardless of petitioner's actions after the years in issue, we have found that petitioner possessed the requisite mental state when he created the fictitious interest "payments" and filed tax returns claiming them as deductions. Because of concessions by the parties, Decisions 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 in issue.↩2. Contrary to this language, the $59,092.99 note was payable on demand, as our earlier finding reflects. ↩3. As discussed in our opinion herein, it is not certain from the record that Ross signed all the documents.↩4. Petitioners filed a separate petition for each of the years 1977, 1978, and 1979. A taxpayer relying upon the statute of limitations must so state in his pleadings. Rule 39, Tax Court Rules of Practice and Procedure.↩ Although petitioners alleged the statute of limitations in their petition for 1977, they did not do so in their petition for 1978. Moreover, the record indicates that petitioners may have agreed to a limited waiver of the statute with respect to 1978. Respondent does not raise these issues herein. In light of our holding, we need not resolve them.5. Subsequent to trial of this case, petitioner filed a proceeding in bankruptcy. We do not know what, if any, effect that proceeding had on his debts to Ross. ↩6. Petitioners do not argue that the execution of the notes constituted deductible payment of interest. Such an argument would be erroneous. See Helvering v. Price,309 U.S. 409">309 U.S. 409 (1940); Wilkerson v. Commissioner,655 F.2d 980">655 F.2d 980 (9th Cir. 1981), revg. on a more specific issue 70 T.C. 240">70 T.C. 240↩ (1978).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620639/	The Hoersting Family Trust, Eleanor F. Sherman, Trustee v. Commissioner.Hoersting Family Trust v. CommissionerDocket No. 62871.United States Tax CourtT.C. Memo 1958-3; 1958 Tax Ct. Memo LEXIS 232; 17 T.C.M. (CCH) 13; T.C.M. (RIA) 58003; January 14, 1958C. Chester Guy, Esq., for the petitioners. David M. Robinson, Esq., for the respondent. LEMIRE Memorandum Findings of Fact and Opinion This proceeding involves a deficiency in income tax of petitioners for the year 1952 in the amount of $1,992.43. The sole contested issue is whether the respondent erred in disallowing a deduction of $6,400 paid in 1952 claimed by petitioners as interest paid on indebtedness under section 23(b) of the Internal Revenue Code of 1939. Findings of Fact On August 20, 1940, the eight sons and daughters of Frank J. Hoersting conveyed in trust to Albert J. Hoersting and Eleanor Sherman as trustees, certain real and personal property. The trustees filed a fiduciary return for the year 1952, with the director of internal revenue for the district of Ohio. 233 The trust instrument, so far as here pertinent, provides as follows: "TO HAVE AND TO HOLD the same to the said Trustees, their successor or successors, in trust nevertheless, for the following uses and purposes and with the following powers, to-wit: "1. All and any of the income derived from the above described property shall be paid out by said Trustees in the following order, to-wit: First, for taxes, insurance, repairs and maintenance of said real estate; Second, for the payment of principal and interest upon obligations of the Trustees; and third, for distribution to the Settlors, in equal shares, for their natural lives and/or the duration of this trust. "2. In the event of the death of any of the Settlors prior to the termination of this Trust, his or her proportionate share of the income to be derived from the corpus of this Trust, shall be paid to the heirs of the body of such deceased Settlor, share and share alike, from the date of the death of such Settlor or Settlors until the termination of this Trust. Should any Settlor die prior to the termination of this Trust, leaving no heir of the body surviving, then his or her proportionate share of such income shall be234 divided equally among the surviving Settlors, or the heirs of the body of any deceased Settlor, per stirpes. "3. Upon the 19th day of August, 1960, this Trust shall terminate and cease, and the corpus thereof then remaining in the hands and names of the Trustees shall be conveyed, transferred and delivered unto the Settlors, in like manner as provided for the distribution of the income thereof in the next preceding item hereof. Should the Trustees find that the corpus of this Trust then remaining in their hands cannot be equally and fairly divided and/or distributed, as hereinabove provided, without manifest injury to such corpus, the Trustees shall proceed to liquidate such real estate and/or personalty before making distribution to the Settlors. "4. The Trustees shall hold and control the corpus of this Trust during the life of this Trust with power to sell, transfer, convey, assign and deliver the same. The said Trustees shall hold, manage and control such property during the life of this trust with power to sell, transfer, assign and deliver the same and with full power to invest and reinvest the principal thereof, with like power over all investments, which investments or235 re-investments may be made by the said Trustees in their sole discretion without limitation to such investments as may be by law designated as proper investments for Trustees. "5. The said Trustees shall have full power to converting personalty into realty and realty into personalty; to consent to consolidations and reorganizations; and to execute and deliver all powers of attorney, deeds, mortgages and agreements which they may deem necessary and advisable in the administration of this trust. "6. Receipts signed by the said Trustees for any monies or other property delivered to them shall at all times be sufficient to discharge the person or persons delivering same from all further accountability for such property and no person, corporation or transfer agent dealing with said Trustees as to matter purporting to affect the trust estate shall be concerned or required to inquire as to such transactions nor as to the disposition of the proceeds thereof. "7. The Trustees shall not be required to set aside any sinking fund, shall have full power to determine what amount be considered corpus and what income of this trust, and shall not be held accountable for any errors of judgment236 but shall be liable only for gross negligence or wilful default in the administration of this trust. "8. Should either of the Trustees, named herein, die prior to the termination of this trust, the surviving Trustee shall serve as sole Trustee for the remainder of the term of this trust. Should both Trustees die prior to the termination of this Trust, Ralph E. Grimme shall serve as Trustee for the remainder of the term of this Trust. "9. This trust is hereby declared to be irrevocable and the Settlors hereby fully and completely release, convey, transfer and assign the property herein described to the Trustees herein named without any right, power or authority in any way to cancel, revoke or alter the transfer, conveyance or assignment herein referred to, or any of the terms of this trust agreement." On or about the same date, the trustees executed and delivered certain instruments designated as a "bond" in the aggregate principal amount of $80,000. Each settlor received a so-called bond in the amount as follows: Leo H. Hoersting$ 9,643.75Louis J. Hoersting9,493.75Marie Daugherty11,543.75Eleanor Sherman10,443.75Florence Quinnan9,543.75Hilda Plunkett7,243.75Albert J. Hoersting10,693.75Frank L. Hoersting11,393.75237 The bonds were issued at the direction of and in the amount determined by the father of the settlors, and were designed to equalize the interests of his children taking into consideration amounts which the father of the settlors had previously advanced or expended on behalf of some of the children. The following instrument is typical of the bonds executed and delivered to each settlor of the trust. "BOND "$10,443.75 No. 4 "Albert J. Hoersting and Eleanor E. Sherman, Trustees. "20 YEAR 8% BONDS "Albert J. Hoersting and Eleanor E. Sherman, Trustees, for value received, promises to pay to Eleanor Sherman on the 19th day of August, 1960, the sum of Ten Thousand Four Hundred Forty-three & 75/100 ($10,443.75) Dollars in lawful money of the United States of America, at Cincinnati, Ohio, and to pay interest thereon in like lawful money out of the net income of the Trust at the rate of 8% per annum, payable quarterly on the 1st day of January, 1st day of April, 1st day of July, and 1st day of October, in each year at Cincinnati, Ohio, to holders of record, ten days prior to aforesaid quarterly interest periods, conditioned, however, upon the net income of the Trust being sufficient238 during any interest period to pay the amount due as interest, in accord with the terms and provisions hereof. "This Bond is one of an authorized issue of Bonds in the aggregate principal amount of Eighty Thousand ($80,000.00) Dollars, all of like tenor and effect and known as their "20 Year 8% Bonds" of various denominations; all of which are issued, received and held subject to all the terms and conditions, and entitled to all the benefits specified in a Trust Agreement dated the 20th day of August, 1940, made by and between Albert J. Hoersting and Eleanor E. Sherman, Trustees, and Ralph E. Grime, to which Trust Agreement reference is hereby made for a description of the rights of the holders of such Bonds and of the Trustee, with respect to the enforcement thereof. "This Bond may be redeemed at the option of the Obligor on any interest date prior to maturity upon notice in the manner and upon the terms provided in the Trust Agreement by payment of its principal amount and accrued interest to the date of redemption; after such redemption date, interest on the Bonds called for redemption shall cease unless payment thereof shall be refused after presentation. "If any of the events239 of default specified in the Trust Agreement shall occur, all Bonds outstanding hereunder may be declared to be due and payable in the manner and with the effect provided in the Trust Agreement. "The authorized aggregate amount of this issue of Bonds may, at any time before maturity of this issue, be increased by the affirmative vote of the holders of 51% in amount of this issue then issued and outstanding. "This Bond shall not be valid or become obligatory for any purpose unless or until the certificate endorsed hereon shall have been executed by the Trustee under said Trust Agreement, and properly registered. "This Bond is not transferable until after first being offered to the Trustee at the same price as offered; if the offer is in excess of Face or Par value, then these Bonds shall first be offered at Par to the Trustee; notice of such offer to be by registered mail. If the Trustee refuses to purchase same within thirty (30) days, then the holder hereof shall have the right to order transfer to a designated party and have same registered in his or her name at the office of Partnership. "IN WITNESS WHEREOF, Albert J. Hoersting and Eleanor E. Sherman, Trustees, have caused240 this Bond to be signed by each partner. "/s/ Albert J. Hoersting, Trustee. /s/ Eleanor Sherman, Trustee. /s/ Ralph E. Grimme, Trustee. "TRUSTEE'S CERTIFICATE. "This is one of the 20 YEAR 8% BONDS described in the within mentioned Trust Agreement. "/s/ Ralph E. Grimme, Ralph E. Grimme, Trustee. "and "WHEREAS, the form of assignment for the transfer of said Bonds shall be in the following form: "ASSIGNMENT. "For value received, the undersigned, sells, assigns and transfers unto… Bonds of the unit face value of… each of Albert J. Hoersting and Eleanor E. Sherman, Trustees, and hereby authorizes said Trust to transfer same on their books. "Dated this… day of…. WITNESS: " At the time the trust was created in 1940, the total face amount of the bonds issued to the settlors thereof accounted for substantially all of the value of the equity of the settlors in the assets conveyed to the trust. For the taxable year 1952 the "Hoersting Family Trust" filed a fiduciary income tax return (Form 1041), no claim for interest paid under item 11 was made, but the amount of $6,400 was deducted under Schedule G as distributions of income to beneficiaries. The instruments241 purporting to be "bonds" were issued for the purpose of evidencing the capital investment of the respective settlors in the trust, and were not issued with the intention of creating a bona fide creditor relationship. Petitioners have failed to show that the payments made in the taxable year 1952 to the beneficiaries of the trust constitute interest paid within the meaning of section 23(b) of the 1939 Code. Opinion LEMIRE, Judge: The question presented is whether the Hoersting Family Trust, an association taxable as a corporation, is entitled to deduct the amount of $6,400 in the taxable year 1952 as interest paid to the holders of certain instruments purporting to the [be] "bonds" issued by the trustees of such trust. The respondent primarily contends that petitioners are estopped by our prior decision in the proceeding entitled "The Hoersting Family Trust", Docket No. 4630, filed July 26, 1945, from now litigating this issue. In the prior proceeding the sole issue litigated and determined was whether "The Hoersting Family Trust" was an association taxable as a corporation. In the present proceeding the petitioners again raise that identical issue, but concede that our242 prior decision is res adjudicata, as to that issue. Petitioners, however, contend that the question of the deductibility of interest paid upon the so-called "bonds" was not litigated nor decided in the former proceeding and, hence, the doctrine of collateral estoppel is not applicable to their claim based upon a different cause of action. We agree. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591; Sam Schnitzer 13 T.C. 43">13 T.C. 43, affd. per curiam 183 Fed. (2d) 70. On the merits, the question presented is one of fact to be resolved from a consideration of the entire record. Gooding Amusement Co., Inc., 23 T.C. 408">23 T.C. 408, affd. 236 Fed. (2d) 159, certiorari denied 352 U.S. 1031">352 U.S. 1031. Petitioners rely principally on the fact that instruments which are designated as "bonds" provide for the payment of a fixed sum with stated interest and have a definite maturity date clearly establishing that the parties intended to create a genuine indebtedness. The Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521. This argument, we think, overlooks the fact that the "bond" by apt reference constitutes the trust agreement an essential to the243 full understanding of the nature and extent of the promise to pay. The promise to pay is not a complete instrument in itself but is part of the trust agreement containing many independent provisions and requiring the doing of things by both the makers and the payee. Where two or more instruments are executed at the same time and referring to each other they must be read together as constituting a single contract. We have set forth in our Findings of Fact the pertinent provisions of the two instruments. Some of the provisions are obviously inconsistent. That the instrument is called a "bond" is not determinative of its character since we are concerned with substance and not form. The payment of interest is contingent upon the net income being sufficient to pay the interest when due. Interest is not cumulative. The principal is payable to a specific settlor if living at the termination of the trust, the maturity date of the "bond", and, therefore, is not negotiable. The distinguishing feature of a bond is that it is an obligation to pay a fixed sum with stated interest at a specified time. Stock on the other hand confers part ownership of the assets and the right to participate244 pro rata in the surplus profits of the corporation and ultimately upon dissolution in the assets after payment of debts. Reading the two instruments together they partake in a marked degree of the distinguishing features of preferred stock. Upon the expiration of the trust the holders of the "bonds" are entitled to share in the assets of the trust and the so-called bond will be satisfied, not only upon the payment of the face value, but upon the payment of a ratable portion of the trust assets whether more or less than the amount called for upon its face. Such features are characteristic of the stock and are foreign to the accepted definition of a bond. An analysis of the terms and conditions of the two instruments convinces us that the instrument purporting to be a "bond" is, in legal effect, preferred stock, representing a capital ivestment rather than a bona fide indebtedness of the association. Petitioners contend that since the trust would have been entitled to deduct the amount in question as a distribution to the beneficiaries, the deduction should be allowed. The contention is without merit. The settlors of the trust chose to conduct their business as an association taxable*245 as a corporation and the income of the business is taxable under such method. Upon this record, we hold that petitioners have failed to show that the contested amount constitutes interest paid within the meaning of section 23(b) of the 1939 Code. The respondent's determination is sustained. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620640/	APPEAL OF CHILLICOTHE BOTTLING CO.Chillicothe Bottling Co. v. CommissionerDocket No. 2140.United States Board of Tax Appeals2 B.T.A. 340; 1925 BTA LEXIS 2435; July 14, 1925, Decided Submitted May 26, 1925. 2435 W. J. Hogan, Esq., for the taxpayer. Robert A. Littleton, Esq., for the Commissioner. 340 Before TRUSSELL and LITTLETON. This is an appeal from a determination by the Commissioner of a deficiency in income and profits tax for the calendar year 1918 in the amount of $3,532.08. The appeal is based entirely upon the refusal of the Commissioner to compute the profits tax for the calendar year 1918 under the provisions of section 328 of the Revenue Act of 1918. In support of its claim that the profits tax should be computed under section 328, the taxpayer contends that, due to the extraordinary demand for its product during the year 1918, the plant equipment, utensils, auto trucks, wagons, etc., were used to such an extent that the usual allowance for exhaustion, wear and tear was insufficient to cover the depreciation which the plant and equipment sustained during the taxable year 1918; that it was compelled, in order to be in a position to sell its output to, and supply the demand of, an Army cantonment located at Chillicothe, to make expenditures of a capital nature in the sum of $20,000; that the expenditures for machinery were made necessary because2436 of the war situation, which was unproductive to a great extent after the cessation of war activities, and that the apparent extraordinary profits during the year 1918 represent a realization in one year of the earnings of capital unproductively invested or employed through a period of years. 341 FINDINGS OF FACT. Taxpayer is an ohio corporation engaged in the business of manufacturing ice, ice cream, and soft drinks at Chillicothe. During the month of July, 1917, construction was begun on an Army cantonment, afterwards known as Camp Sherman, on the outskirts of Chillicothe. From July, 1917, to January, 1918, the population of Chillicothe increased about 20,000 persons. In the early part of 1918 soldiers, numbering about 40,000 enlisted men and officers, were stationed at this camp, as a result of which the taxpayer's business greatly increased. In order to be in a position to supply the Army camp with ice, ice cream and soft drinks, taxpayer was compelled to comply with certain specific requirements prescribed by the military authorities, which involved expenditures of large sums of money of a capital nature - namely, the installation of a new and complete distilling*2437 plant - without any corresponding relief by way of appropriate reduction from gross income. Further, in order to supply the demand for its product taxpayer installed additional bottling machinery and other equipment at an approximate cost of $17,000. For the calendar year 1918 taxpayer had an invested capital amounting to $119,123.27, and after an allowance by the Commissioner of $20,088.41 for exhaustion, wear and tear of the property used in the business it had a net taxable income of $71,651.13, upon which a total income and profits tax of $45,155.50 was due. DECISION. The determination of the Commissioner is approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620641/	Robert L. Barnard v. Commissioner.Barnard v. CommissionerDocket No. 1131-62.United States Tax CourtT.C. Memo 1963-338; 1963 Tax Ct. Memo LEXIS 6; 22 T.C.M. (CCH) 1773; T.C.M. (RIA) 63338; December 27, 1963Benjamin Becker, for the petitioner. Frederic S. Kramer, for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: A deficiency in 1959 income tax of $220 has been determined. The issue is whether cash advances made by petitioner (1) constituted an allowable nonbusiness bad debt under section 166(d), I.R.C. 1954, or, if not, (2) constituted a deductible loss under section 165(c), I.R.C. 1954. Findings of Fact Petitioner Robert L. Barnard (hereinafter referred7 to as petitioner) is an individual presently residing at 121 Madison Avenue, Borough of Manhattan, City and State of New York. He filed a timely income tax return for the taxable year 1959 with the district director of internal revenue, Manhattan district, New York. Prior to and during the entire taxable year of 1959, petitioner was engaged full time in the IBM servicing and computing business. Petitioner was the dominant stockholder actively participating in the management of Barnard, Inc., located at 432 Fourth Avenue, New York, New York. In October 1957 the Barr-Barnard Company (hereinafter referred to as the company) was formed. According to the "Business Certificate for Partners" filed with the county clerk and clerk of the Supreme Court of New York, Albert W. Barr (hereinafter referred to as Barr) and Inez Barnard (hereinafter referred to as Inez), the sister of petitioner, were partners in the company. Inez had no interest in the company. She contributed no investment to the company and performed no services. She did not at any time function within the company or exercise any supervision or control. Inez received no money or compensation in any form from the company. 8 Petitioner, by virtue of his standing in the business community, loaned his name for the benefit of the company. The company was formed for the purpose of selling industrial chemicals, which business was in no way related to the business conducted by Barnard, Inc. No written partnership agreement was ever entered into between Barr and either Inez or petitioner. No agreement was ever entered into between petitioner and Barr whereby petitioner and Barr were to share the profits or losses from the company. Petitioner advanced the company $3,000 cash to open its bank account on October 10, 1957. Subsequently, petitioner made other cash deposits in the company's account in order to keep the company solvent. The advances of money by petitioner were made because he wanted to help Barr, who was his friend, get started in business. Barr did not invest any money in the business. At the time petitioner advanced the money to the company he expected it to be repaid to him. Petitioner did not advance the money with the expectation of making a profit. There were no due dates set for the repayment of any of the advances made by petitioner. The repayment of the advances to Barr was contingent9 upon the existence of company profits; if there were no profits, there was no obligation on the part of Barr to repay any advances. In addition to the advances, petitioner purchased office furniture for the company in October 1957 for $600 cash. Petitioner also co-endorsed a bank note with Barr in the amount of $800 for a loan made to the company for the operation of the business. Petitioner's endorsement on the note was necessary in order for the company to borrow money from the bank, as the company had no credit standing. Petitioner did not at any time receive a note from Barr or the company with regard to any indebtedness owing from Barr or the company to petitioner. Petitioner never made a written agreement with either Barr or the company evidencing any indebtedness from either Barr or the company to petitioner. There was no provision for the payment of interest on any of the advances made by petitioner to the company. Petitioner's only protection was that all checks had to be signed jointly, so that Barr could not receive anything from the company profits until petitioner was repaid in full. Petitioner never received any compensation from the company. He had nothing to10 do with the management of the company. He and Barr had brief conferences two or three times a month when the checks had to be signed. From October 1957 to mid-year 1958 Barr lived with petitioner. They had some business discussions in the evenings after business hours. In January or February 1959 Barr disappeared. Before he departed, Barr collected in his own name on bills owing to the company. He induced the indebted companies to make their checks payable to him personally rather than to the company. He did not turn the money over to the company. Petitioner attempted to trace Barr. Upon finding that Barr could not be located, petitioner paid the following company bills: (1) $800 to the Chemical Corn Exchange Bank by check dated April 23, 1959 as repayment of the bank note which petitioner had co-endorsed with Barr; (2) $400 to an attorney for defending a case brought by a supplier against the company prior to Barr's disappearance; (3) $56.99 to the New York Telephone Company on February 16, 1959; and (4) $18.10 to "We-Answer-Phones-Inc." on August 4, 1959. During the period of its existence, the company realized no profit. It did not file any partnership return or any other11 type of income tax return. After Barr's disappearance, petitioner received $540 repayment from the company. Petitioner had no hope of collecting any of the other money advanced to the company. Any funds paid out after Barr's disappearance were expended without hope of repayment. Petitioner was never engaged in a partnership with Barr. The company was not petitioner's business, nor did he have any expectation of making a profit from it. Repayment of petitioner's advances by either Barr or the company was contingent on the earning of profits by the company, and no profits were earned. No debt was ever created between Barr or the company and the petitioner. Opinion Petitioner does not contend that he is entitled to a business bad debt deduction, cf. Darwin O. Nichols, 29 T.C. 1140">29 T.C. 1140, 1145 (1958), but claims deductibility for a nonbusiness bad debt 1 or, in the alternative, for a loss 2 resulting from the operation of a partnership. 12 A nonbusiness as well as a business bad debt requires that there be an indebtedness. Zimmerman v. United States, 318 F. 2d 611 (C.A. 9, 1963). Aside from the circumstance that there was no note or other instrument of indebtedness, no due date, and no provision for interest, the existence of a contingency alone is fatal to petitioner's first contention. As he testified, repayment of his advances was conditioned upon the existence of company profits, and, in the absence of profits, neither Barr nor the company owed anything. * * * The fact that the obligation to repay was subject to a contingency which did not occur alone [precludes] a finding that a bona fide debt (business or nonbusiness) existed. [Zimmerman v. United States, supra at 613.] We have been referred to no authority, and have found none, permitting us to characterize this as a debt either for tax purposes or under the applicable New York law. Cf. William Park, 38 B.T.A. 1118">38 B.T.A. 1118 (1938), affd., 113 F. 2d 352 (C.A. 3, 1940). On the contrary, the essential requirement of a debt is the absolute obligation to pay. Hattie Wolff, 26 B.T.A. 622">26 B.T.A. 622, 626 (1932).13 * * The liability to pay in the future, contingent upon something which may or may not occur, is not indebtedness, and the taxpayer may not treat as worthless debt amounts which are at a particular time merely contigent liabilities. * * * Where the liability to pay is not absolute, the existence of a deductible debt has not been accepted. [Milton Bradley Co. v. United States, 146 F. 2d 541, 542 (C.A. 1, 1944).] Petitioner's alternative contention must also fail. His testimony that he advanced the money without any expectation of making a profit, as well as the absence of any agreement to share profits and losses, precludes deductibility as a loss. Whatever Barr's business may have been, it was not that of petitioner. And "[when] there is no intended profit and naturally could be none, there is no just demand for a deduction of a loss." Edgar M. Carnrick, 21 B.T.A. 12">21 B.T.A. 12, 22 (1930). The result may be unfortunate, especially in the light of petitioner's obvious sincerity and candor. But we must take the record and the law as we find them. Decision will be entered for the respondent. Footnotes1. SEC. 166 [I.R.C. 1954]. BAD DEBTS. * * (d) Nonbusiness Debts. - (1) General rule. - In the case of a taxpayer other than a corporation - (A) subsections (a) and (c) shall not apply to any nonbusiness debt; and (B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. (2) Nonbusiness debt defined. - For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than - (A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or (B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. * ↩2. SEC. 165 [I.R.C. 1954]. LOSSES. * (c) Limitation on Losses of Individuals. - In the case of an individual, the deduction under subsection (a) shall be limited to - (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620643/	Drayton Cochran v. Commissioner. Estate of Elizabeth Cochran Bowen, Deceased, Mary Bowen Hjorth, William F.C. Ewing and Harry M. Zuckert, Executors, v. Commissioner.Cochran v. CommissionerDocket Nos. 8600, 9525.United States Tax Court1948 Tax Ct. Memo LEXIS 175; 7 T.C.M. (CCH) 325; T.C.M. (RIA) 48094; June 1, 1948James T. Tynion, Esq., 39 Broadway, New York 6, N.Y., William S. Hirschberg, Esq., Smith Bldg., Greenwich, Conn., and Sidney L. Zuckert, Esq., for the petitioners. Conway Kitchen, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: These proceedings have been consolidated for trial and report. The respondent determined a deficiency in gift tax for the year 1941176 in Docket No. 8600, Drayton Cochran, in the amount of $58,215.37. The respondent determined a deficiency in estate tax in Docket No. 9525, Estate of Bowen, in the amount of $205,072.93. He has made claim for increase in the amount of the deficiency under section 871 (e) of the Internal Revenue Code to $205,780.88. The increase in the deficiency results from increase in the value of the net taxable estate by the sum of $1,335.74, on account of error in the amount of a deduction which was allowed by the respondent in determining the net value of the estate. Petitioners agree that the net taxable estate should be increased by the above amount, but deny that there is deficiency in estate tax in the amount which has been determined. One issue is common to both proceedings, namely, the fair market value on December 19, 1941, and November 3, 1942, of the common stock and scrip of Alexander Smith & Sons Carpet Company. The question of fair market value is the main question to be decided. Drayton Cochran made gifts of common stock and scrip certificates of Alexander Smith & Sons Carpet Company to four trusts on December 19, 1941. The aggregate amount of stock177 which was the subject of the gifts was 66 shares. Two gifts consisted of 17 shares, each; and two gifts consisted of 16 shares, each. Elizabeth Cochran Bowen, the decedent, died on November 3, 1941. Petitioners have elected to have the estate valued on the optional valuation date, November 3, 1942. Part of the property of the estate consists of 73 shares of common stock and scrip certificates of Alexander Smith & Sons Carpet Company. The gift tax return for 1941 was filed with the collector for the third district of New York. The estate tax return was filed with the collector for the collection district of Connecticut, at Hartford. In Docket No. 9525, Estate of Bowen, petitioners do not contest one determination of the respondent; they have waived certain issues. The amounts of certain items for which deductions are allowable are to be agreed upon by the parties under Rule 50. Also, further deductions, if any, for executors' commissions, attorneys' fees, and administration expenses are to be agreed upon by the parties under a Rule 50 stipulation. Effect will be given to the various concessions and agreements of the parties in the recomputations to be filed by them under Rule178 50. Findings of Fact 1. The petitioner, Drayton Cochran, by four separate indentures of trust, each dated December 19, 1941, transferred to Morgan J. O'Brien, Jr., and Gifford A. Cochran, as trustees, 66 shares of capital stock of Alexander Smith & Sons Carpet Company, with accompanying scrip certificates, also 66 in number. The four trusts created were for the benefit of the children and wife of the petitioner. 2. Petitioner filed a Federal gift tax return for the year 1941 with the collector of internal revenue for the third district of New York, and therein reported the gifts of said 66 shares and said accompanying scrip certificates at a value of $2,500 per share (including the value of said accompanying scrip) on the date of the gifts, namely, December 19, 1941, making an aggregate value of gifted property of $165,000. 3. The respondent determined the value of said stock and scrip, as of December 19, 1941, to be $514,907.58, or $7,801.63 a share. 4. Elizabeth Cochran Bowen died testate, a resident of the town of Greenwich, county of Fairfield, state of Connecticut, on November 3, 1941. On November 17, 1941, the Probate Court for the District of Greenwich, Connecticut, 179 granted letters testamentary to Mary Bowen Hjorth, William F. C. Ewing, and Harry M. Zuckert, executors. 5. The Federal estate tax return for the estate of said decedent was duly filed by the executors with the collector of internal revenue at Hartford, Connecticut. In this return the executors elected to have the gross estate valued as of a date or dates subsequent to the decedent's death as authorized by section 811 (j) of the Internal Revenue Code. 6. Among the assets included in the gross estate of the decedent were 73 shares of capital stock of Alexander Smith & Sons Carpet Company, and accompanying scrip certificates, also 73 in number. In the Federal estate tax return, the stock and accompanying scrip were reported at a value of $182,500, or $2,500 per share (including the value of said accompanying scrip) as of the optional valuation date, November 3, 1942. 7. The respondent determined the value of said stock and scrip, as of November 3, 1942, to be $569,518.99, or $7,801.63 a share. 8. The Alexander Smith & Sons Carpet Company (hereinafter designated as SmithCompany) is one of the principal manufacturers of wool pile rugs and carpets, and is180 a successor to the original business which was established by Alexander Smith in 1845 in West Farms, New York, and which, in 1864, was removed to Yonkers, New York, where it has since been located. The present company was incorporated in 1873, taking over the assets of a co-partnership in which Alexander Smith had the principal interest. 9. At the time of the organization of the SmithCompany, 3,000 shares of capital stock, par $100value per share, were issued, and very shortly thereafter scrip certificates were issued so that each certificate of stock was accompanied by a certificate of scrip having a face value equal to the par value of the stock. The scrip bore no interest, and was transferable only with an equivalent amount of stock; the scrip had never participated in any distribution of earnings, and was considered a part of the share which it accompanied. Wherever reference is made hereafter to a share of such stock, the scrip which accompanied such share, and had no separate value, is deemed to be included. The capital structure as thus established had, on December 19, 1941, and on November 3, 1942, remained unchanged. 10. The Company's stock has been closely held from181 the time of incorporation to the basic dates herein, and has never been listed on any stock exchange. On December 19, 1941, and on November 3, 1942, the descendants and kin of the family of Alexander Smith owned almost 77 per cent of the stock. Another 14 1/2 per cent was owned by the Sloane family. Decedent, Elizabeth Cochran Bowen, was a granddaughter of the founder of the business, and Drayton Cochran is his great grandson. 11. The Company manufactures axminster, velvet and wilton carpets and rugs in a wide variation of widths and sizes, as well as of designs and patterns. 12. From November 1, 1938, to and including December 31, 1942, part of the earnings of the SmithCompany resulted from a sales agency contract with another carpet manufacturer, C. H. Masland & Sons. The original contract, which was for a three-year term, was amended twice before the expiration of the term, and was then renewed with certain revisions for another three-year term ending November 1, 1944. The commissions on the Masland contract amounted to over 9 per cent of SmithCompany's net income before taxes in 1939 and in 1940, over seven per cent thereof in 1941, and over 17 per cent thereof in 1942. 182 13. Since November 1938, SmithCompany has handled its own sales. About twothirds of its products have been sold through distributors who in turn sold to department stores and other outlets. The remaining third has been sold through mail order houses, or, directly, through the Company's own warehouses. Approximately 20 to 25 per cent of the Company's total sales were made through the mail order houses, and most of this was accounted for by two customers. 14. From 1935 to 1942 dividends, per share, were as follows: 1935, $100; 1936, $200; 1937, $250; 1938, 0; 1939, $400; 1940, $400; 1941, $400 and 1942, $250. For the seven-year period, 1935-1941, inclusive, Smith's dividends averaged $250 per share. For the seven-year period, 1936-1942, inclusive, Smith's dividends averaged $271 per share. 15. The gross sales of SmithCompany for the years 1936 to 1942, inclusive, were as follows: 1936$17,480,995193719,164,899193814,436,051193921,810,491194023,628,600194133,955,565194232,550,252The SmithCompany's earnings (or losses) for the fifteen years 1928-1942, inclusive, and its earnings per share during such years were as follows: EarningsYearEarningsper share1928$ 456,820 $1521929704,265 (loss)235 (loss)19302,297,752 (loss)766 (loss)1931565,275 (loss)168 (loss)193211,716 (loss)4 (loss)1933648,9622161934118,188391935856,2522851936898,2002991937562,4011871938125,6584219392,887,01996219402,651,70388419412,857,93895319421,589,517530183 16. Carpets and rugs are a luxury or semiluxury product. The carpet and rug industry is highly cyclical and among the first to suffer in a depression, and to lag behind in the subsequent period of recovery. The turnover of capital and the margin of profit are normally lower than in manufacturing industries generally. The sales of SmithCompany follow the general pattern of the industry as a whole. 17. There has been a declining trend in the amount of carpet used by the average family; the output of cheaper linoleums and other floor coverings have increased tremendously, while their cost has steadily declined. From 1909 to 1939 the physical volume of production of carpets and rugs declined from some 81,200,000 to some 63,500,000 square yards. 18. Raw materials are the chief element in the Company's cost of production. The price of these materials is subject to violent fluctuations, against which the Company cannot protect itself by hedging. An additional source of uncertainty is due to changes and prospective changes in tariff regulations and schedules to which the industry is subject. 19. The production cycle is a lengthy one. An extremely heavy investment in both raw and finished184 materials is necessary due in part to that fact, and because of the large variety of sizes, patterns, colors and qualities which are required to be kept on hand, and because the principal raw materials must be imported. This requires the Company to bear a correspondingly heavy inventory risk. 20. Availability and cost of labor is an important factor affecting SmithCompany's earnings. In 1941 labor represented 28 per cent of the total production cost. Approximately 64 per cent of the labor is skilled, and 7 per cent semi-skilled. The average hourly wage rose from 63.1 cents in 1937 to 82.6 cents in 1942. The Company inaugurated a Retirement Income Plan in 1941, at a cost, during the first year of over $104,000. 21. There is intense competition in the industry. The sales price is a more than usually important competitive factor due in part to the inability of the general purchasing public to observe relative advantages in quality and construction, or, except as identified by labels, to distinguish the products of one manufacturer from those of another. Over 50 per cent of the entire output is accounted for by the SmithCompany, Bigelow-Sanford Carpet Co., Inc., of New York, and185 Mohawk Carpet Mills, Inc., of Amsterdam, New York and Thompsonville, Connecticut. There is no connection between these companies. Smith has no advantage over the others through ownership of patents or processes, and is somewhat at a disadvantage with respect to labor and real estate taxes. 22. The SmithCompany spun and dyed its woolen yarns, but it had no cotton yarn spinning facilities. 23. The industry was a "non-essential" one and was so classified by the War Production Board in February 1942. 24. Supplies of foreign raw materials were immediately restricted following the outbreak of the war in Europe in 1939. Shipping became scarce. Within less than a month after the United States entered the war, the use of carpet wools was curtailed, and later the use of jute, these being the two most important raw materials used by the Company. 25. As early as September 1941, the outlook for the Company was recognized as highly uncertain and gloomy. Labor was being siphoned out of the Company's mill to war industries, and there was doubt whether the Company would be permitted to continue in civilian production. Curtailment or retrenchment and the possibility of having to withdraw immediately186 from business on a liquidating basis were seen by the Company as threatening. 26. On December 16, 1941, the O.P.A. had limited prices on carpets and rugs to the highest charged between January 1 and October 13, 1941, increasing this by 5 per cent on January 2, 1942, and with no further increase during 1942. 27. The SmithCompany was not in a favorable position as regards war work. Its possibilities were limited to heavy duck and blankets, and the Company started on its own initiative, in 1941, to change a number of carpet looms over to the set-up by which they could be used to make duck, even though war orders had not yet been obtained and there was the risk of not being compensated for the costs of converting looms in preparation for war orders, if war orders at satisfactory prices were not obtained. By December, 1941, twenty-six looms had been converted to the manufacture of duck; on December 17, 1941, it purchased ninety-nine draper looms for such production, and thereafter it converted a large number of carpet looms to such manufacture and also purchased blanket looms. In January, 1942, 342 carpet looms were converted to manufacturing cotton duck. The cost of such changing187 over of its equipment in 1942 to handle war work was just short of $623,000. The Company was, at first, unable to get orders for duck, partly because of O.P.A. price ceilings. Its costs were high because it could not successfully compete with companies having cotton yarn spinning facilities; it was obliged to pay the southern manufacturers more for the yarn than the existing ceiling price on finished duck really allowed; its labor costs were over 40 per cent higher than those of the southern manufacturers; and its looms were heavy and slow and not capable of the multiple operations practiced in the southern mills. O.P.A. permitted the prices of the component cotton yarns to rise but held down the selling price of duck. It was not until February, 1942, that the Army consented to pay the Company more for duck than the O.P.A. ceiling price. The other conditions remained unimproved. All of these factors kept the Company from getting war orders in 1941. 28. On December 19, 1941, the Company, despite diligent efforts, had no war contracts, and was uncertain whether it could secure them and maintain employment for its labor. Its first orders were under subcontract in February, 1942, and188 under a direct contract from the Government in March, 1942. 29. The trend of corporate taxes was upward on both the basic dates herein. Substantial tax increases were imposed by the Revenue Act passed in September 1941, and even heavier increases were imposed by the new tax bill passed in October 1942. 30. On both the basic dates herein the trend in residential construction, on which the demand for carpets largely depended, was downward, with increasingly stringent Government prohibitions against it. 31. During 1942 the SmithCompany's costs of production of carpets and rugs rose steadily. Wool rose 4 cents and jute 5.5 cents per pound, and the other material prices rose similarly. Labor costs rose approximately 15 per cent, with production efficiency decreasing. There was also a decrease in sales, so that there was a shrinkage of some two and a half million dollars in the operating profit on carpet and rugs during that year. 32. The business for 1942 in the ordinary products of the Company was, inventories, and this had been true to some extent in 1941. The inventory of finished rugs and carpets decreased from $5,408,682.58 at the end of 1940 to $4,981,464 at the end of 1941189 and to $1,025,646 at the end of 1942 and there was also a substantial decline in the inventory of carpet raw materials and of work in process during 1942. 33. During 1942 the Company suffered large and substantial losses from its sales to the Government. 34. Due to the shrinkage in carpet profits and the losses sustained in Government production there was a decline in the Company's income before taxes in 1942 as against 1941 of 51.3 per cent after certain adjustments. 35. As of November 3, 1942, there was every indication that the war would be a long one, with ever increasing Government control, with no certainty whether raw materials or shipping facilities would be available at the termination of the war or not until some still more distant time; the Company had lost numbers of skilled workers to the armed forces and war industries, and a very sharp drop had occurred in the number of looms engaged in carpet production. 36. The trading in stocks had showed a decided drop in 1941, and even greater during the first ten months of 1942. From December 1941, to November 1942, the investment atmosphere was characterized by caution and inactivity. 37. On April 11, 1933, thirty-nine190 shares of stock of the SmithCompany were sold through brokers by Walter W. Law, Jr. to Maitland Griggs (ten shares), Mr. Edie (ten shares), William F. C. Ewing (twelve shares), and Harry M. Zuckert (seven shares), at a price of $1,282.50 a share. 38. On December 15, 1937, ten shares of stock were sold by the Greenwich Trust Company, as successor trustee for Robert Irving Von Schuckman, to Harry M. Zuckert, acting for himself (with respect to three shares), for Frederick B. Klein (with respect to five shares) and for Robert P. Ridges (with respect to two shares), at a price of $2,500 a share. 39. On September 28, 1938, three shares of such capital stock were sold at public auction by Martha Law Kerr to Harry M. Zuckert, acting as attorney for Frederick B. Klein, at a price of $2,000 a share. 40. In September 1938, 120 shares of such stock were sold at public auction by the executors of the estate of Henry T. Sloane and bought by the trustees of that estate at a price of $2,015 a share. 41. On November 20, 1940, five shares of such stock were sold at public auction at which several persons bid on the stock, by Alston Beekman, executor of the estate of Helen C. Smith, to Harry191 M. Zuckert, acting as attorney for five individuals (Frederick B. Klein, M. L. Griggs, William D. Gardner, W. F. Cochran, Jr., and Drayton Cochran, the petitioner in Docket No. 8600), each of whom purchased a single share, at a price of $2,700 a share. 42. On July 31, 1941, ten shares of such stock were sold by Theodore Gilman Law, executor of the estate of Henry H. Law, to Gifford C. Ewing, at a price of $2,500 a share. Both seller and buyer were represented by attorneys. 43. On November 27, 1941, ten shares of such stock were sold by the Superintendent of Banks of the State of New York, as liquidator of the Westchester Trust Company, to William D. Gardnet, at $3,000 a share. Mr. Gardner retained two of the shares, and sold or "distributed" the remaining eight to Robert P. Ridges, Frederick B. Klein, M. L. Griggs, and W. C. Hammel, at the same price. Beginning with the year 1936, condensed balance sheets and profit and loss statements of the SmithCompany had been sent annually to the liquidator, in response to his inquiries, the latest statements, consisting of the Company's balance sheets as of the end of 1940 and operating figures for that year, had been furnished him in192 May 1941. 44. The Bigelow-Sanford Carpet Company and Mohawk Carpet Mills are engaged in the same line of business as SmithCompany and the stock of both of them is listed on an exchange. The similarity between these three leading companies is unusually close. All have been long-established. During 1929-1942 the sale of the Smith Company varied from 24 per cent to 34 per cent of the total sales of the three companies; the percentages in 1941 and 1942 being 33 per cent and 31 per cent, respectively. In 1941 and 1942, and for many years prior thereto, the products of all three companies represented a comparable, comprehensive and diversified line. All three companies spun their own wool yarn and operated their own dyeing facilities; and the manufacturing properties of all three were located in the northeastern section of the country. All had enjoyed substantial continuity of management. The balance sheets of the three companies, as of December 31, 1941, and as of December 31, 1942, show great similarity in financial position and the overall composition of their net worth; in particular, as regards relationship of current assets to current liabilities, and as regards proportion193 of net worth represented by inventory, as well as proportion represented by fixed assets. The capital structure of each of the three was quite similar; the capital of Smith and Mohawk was comprised solely of common stock, and Bigelow-Sanford had only a relatively unimportant issue of preferred. There is a close similarity in the percentage of selling and administrative expenses to sales, in the percentage of receivables to sales, and in the percentage of inventories to sales. The sales and earnings history of the three companies, over the period 1925-1942, presents remarkably similar fluctuations. All companies suffered severely from the depression as well as from depressed conditions in 1938, while all benefited from the expansion in public buying power in 1939, 1940, and 1941; and all sustained a substantial drop in earnings in 1942. All three companies were similarly affected by price fluctuations in raw materials and by the restrictions on the supply thereof caused by the war in Europe, and, after the entry of the United States, by the limitations imposed by the War Production Board; and all were similarly affected by the price ceiling on finished carpets. The uncertain outlook194 resulting from adverse war conditions, as regards Bigelow-Sanford and Mohawk, is reflected in the annual reports issued by those companies on February 17, 1942, and February 10, 1942, respectively. 45. The stock of Smith Company, from 1873 through 1942, has never been listed on any stock exchange. It has always been closely held, and unlike its chief competitors, the number of shares outstanding has remained limited, and comparatively small in numbers of shares. Sales transactions in the SmithCompany stock have been infrequent. 46. Twelve thousand seven hundred shares of Bigelow-Sanford's common stock were traded in on the New York Stock Exchange during October, November and December, 1941, and 6,400 shares during September, October and November, 1942. On December 19, 1941, the price was 24 1/2. November 3, 1942, was a holiday. The price on November 2 was 25 1/2, on November 4, 26 bid and 28 asked, and on November 5, 25 1/2 to 25 3/4. The preferred stock, dealt in on the Boston Stock Exchange, showed no sales in the week of December 19, 1941, but in the previous week had been traded in at 106 and in the subsequent week at 105 3/4 to 106. The closest sales in 1942 were in the week195 ending October 23 at 103, and in the week ending November 13 at 103 1/2 to 104. Fourteen thousand five hundred shares of Mohawk's stock were traded in on New York Stock Exchange in October, November and December, 1941, and 6,300 in September, October and November, 1942. On December 19, 1941, the prices were from 13 to 13 3/8. On November 2, 1942, the prices were 17 1/4 to 17 5/8, and on November 4, 17 1/2 bid, 18 asked. 47. The foregoing sales represent a market appraisal for Bigelow of $10,482,139 as of December 19, 1941, and of $10,899,746 as of November 3, 1942 (313,609 shares common and 26,403 shares preferred); for Mohawk, of $7,046,000 as of December 19, 1941, (542,000 shares) and of $9,292,500 as of November 3, 1942, (531,000 shares). 48. The book values per share of SmithCompany, (3,000 shares) Bigelow-Sanford common (313,609 shares common and 26,403 preferred) and Mohawk (542,000 shares in 1941 and 531,000 shares in 1942) from 1937 to 1942 were as follows: SmithBigelowMohawk1937$6,234.55$65.85$30.6119386,276.4460.8427.6419396,788.7862.8528.3619407,324.3465.9630.1019417,876.9967.9831.7619428,123.5069.5033.18196 The average sale prices of Bigelow-Sanford stock were at the following percentages of its book value: 1937, 70 per cent; 1938, 38.6 per cent; 1939, 39 per cent; 1940, 37.1 per cent; 1941, 39 per cent, and 1942, 34.5 per cent. The average sale prices of Mohawk stock were at the following percentages of its book value: 1937, 88.2 per cent; 1938, 56 per cent; 1939, 54.7 per cent; 1940, 48.2 per cent; 1941, 47.2 per cent; and 1942, 45.2 per cent. 49. Net current assets (working capital) per share of the three companies at the end of 1941 and the end of 1942, respectively, were: SmithBigelow-SanfordMohawk(after deducting pfd. stock.)1941$4,650 $41 $2319424,8864525The mean market price of both Bigelow-Sanford and Mohawk in 1941 was 65 per cent of net working capital per share. The mean market price in 1942 of Bigelow-Sanford was 53 per cent and of Mohawk 60 per cent of working capital. 50. The surplus of Alexander Smith & Sons Carpet Company as shown on the balance sheets of said Company for the calendar years 1936 to 1942, inclusive, was as follows: 1936$18,291,270.68193718,103,672.33193818,229,330.93193919,766,350.83194021,373,041.31194123,030,979.39194223,770,497.36197 51. The officers of Smith Company from 1928 through 1942 were as follows: President William Hetherington, * 1928 to May 15, 1931 Thomas Ewing, * May, 1931, to March, 1933 Frederick B. Klein, * March, 1933, through 1942 First Vice-President Thomas Ewing, * 1928 to June, 1931 Frederick B. Klein, * June, 1931, to March, 1933 William F. C. Ewing, * March, 1933, through 1942 - (also, Treasurer 1936-1942) Vice-President Maitland L. Griggs, * March, 1933, through 1942 Vice-President (Sales) William D. Gardner, * 1939 through 1942 Treasurer Richard Edie, * 1928 to October 2, 1935 William F. C. Ewing, * October, 1935, to December 31, 1935 Secretary Arthur Land, 1928 to August, 1931 William F. C. Ewing, * August, 1931, to March, 1933 Herbert Golding, March, 1933, to September, 1937 Robert P. Ridges, October, 1937, through 1942 Assistant Secretary William F. Cochran, Jr. * 1936 through 1938 Drayton Cochran, * 1939 through 1940 Frank G. See, 1941 through 1942 52. The directors of Smith Company from 1928 through 1942 included at various times some of those named above after whose names asterisks appear. 53. The financial statements of198 SmithCompany for the years 1936-1942, Exhibit 3, are incorporated herein as part of the findings of fact by this reference. The balance sheets and accompanying income statements, prepared by Lybrand, Ross Bros. & Montgomery for the years 1937-1942, both years inclusive, Exhibits 5, 6, 7, 8, 9, 10, E-B, are incorporated herein as part of the findings of fact by this reference. Condensed comparative balance sheets of SmithCompany for the years 1939 through 1942, and the condensed statements of income and surplus for the same years are as follows: TABLE A CONDENSED COMPARATIVE BALANCE SHEETSDecember 31, 1939-1942ASSETS:1939194019411942Current assets: Deposits in banks and cash on hand$ 1,170,588.32$ 2,284,283.87$ 3,385,584.67$ 2,454,838.26Government bonds2,001,200.003,101,200.00Notes, accounts and other receivables,less reserves3,540,724.683,173,554.713,756,582.682,644,625.87Inventories10,204,470.7310,931,799.6911,901,840.4511,202,811.79Total current assets$14,915,783.73$16,389,638.27$21,045,207.80$19,403,475.92Government bonds on deposit as guarantyor security156,058.11156,058.11156,058.11216,261.24Investment in Sloane-Blabon Corporationand predecessors601,400.00741,968.65741,968.65741,968.65Other investments343,279.72318,320.81320,525.13380,952.77Plant and equipment, less allowance fordepreciation7,837,783.987,930,591.368,246,226.718,330,529.90Trade-marks and patents1.001.001.001.00Prepaid expenses and deferred charges413,117.24389,180.26456,158.74388,843.43Total assets$24,267,423.78$25,925,758.46$30,966,146.14$29,462,032.91LIABILITIES: Current liabilities: Notes payable, banks, other notes andacceptances payable$ 112,304.15$ 39,725.99$ 38,665.09Accounts payable1,834,913.011,527,066.021,674,334.60$ 1,791,814.33Accrued liabilities1,776,274.362,195,980.275,381,725.142,954,599.41Total current liabilities$ 3,723,491.52$ 3,762,772.28$ 7,094,724.834,746,413.74Reserves177,581.43189,944.87240,441.92345,121.81Capital stock300,000.00300,000.00300,000.00300,000.00Scrip certificates300,000.00300,000.00300,000.00300,000.00Surplus19,766,350.8321,373,041.3123,030,979.3923,770,497.36Total liabilities$24,267,423.78$25,925,758.46$30,966,146.14$29,462,032 $91199 TABLE B - CONDENSED COMPARATIVE STATEMENTS OF INCOME AND SURPLUS FOR THE YEARS 1939-1942 (After certain adjustments) Gross sales, less discounts, etc$21,810,491.66$23,628,600.74$33,955,565.08$32,550,252.09Cost of goods sold14,960,391.2716,405,177.7822,724,733.7326,780,470.81Gross profit on sales$ 6,850,100.39$ 7,223,422.96$11,230,831.35$ 5,769,781.28Sales agent commissions344,133.20365,100.56503,192.69597,718.99$ 7,194,233.59$ 7,588,523.52$11,734,024.04$ 6,367,500.27Sales, admin., gen'l. expenses3,385,740.853,709,878.194,841,080.723,104,633.59Operating profit$ 3,808,492.74$ 3,878,645.33$ 6,892,943.32$ 3,262,866.68Other income43,897.7852,372.6884,460.58143,401.16$ 3,852,390.52$ 3,931,018.01$ 6,977,403.90$ 3,406,267.84Other deductions111,504.9499,879.7226,465.8221,749.87Income before taxes$ 3,740,885.58$ 3,831,138.29$ 6,950,938.08$ 3,384,517.97Reserves for taxes853,865.681,179,435.04 14,093,000.00 11,795,000.00 1Net income$ 2,887,019.90$ 2,651,703.25$ 2,857,938.08$ 1,589,517.97Provision for post-war conversion100,000.00Net income$ 2,887,019.90$ 2,651,703.25$ 2,857,938.08$ 1,489,517.97Dividends$ 1,200,000.00$ 1,200,000.00$ 1,200,000.00$ 750,000.00Bal. Surplus Jan. 1 after adjustments 2$18,079,330.93 2$19,921,338.06 2$21,373,041.31$23,030,979.39Bal. Surplus December 3119,766,350.8321,373,041.31$23,030,979.3923,770,497.36200 54. At all times, including 1942, the capitalization of SmithCompany has amounted to $600,000, representing the par value of 3,000 shares of stock outstanding, $100 per share, and the par value of 3,000 accompanying scrip certificates, $100 per share. From 1928 to 1942, the Company had no bonded indebtedness. 55. The net current assets of the Company in 1941 and 1942 were as follows: 1941$13,950,483$4,650 per share194214,657,0624,885 per share56. The book value of the stock in SmithCompany was $7,957.14 per share in 1941, and $8,288.54 per share in 1942. 57. The gross sales of SmithCompany in 1941 were the largest in the history of the Company. 201 58. The sales of stock in SmithCompany in 1933, 1937, 1938, 1940, and 1941, above set forth, were bona fide sales. 59. The estate has resources on hand sufficient to pay fees of executors and attorneys when they are determined. 60. The stock of SmithCompany lacked marketability. 61. The fair market value of SmithCompany stock was $2,930 per share on December 19, 1941, and $3,320 per share on November 3, 1942. Opinion The only question is the fair market value of the stock and acompanying scrip of Alexander Smith & Sons Carpet Company, for purposes of gift and estate taxes, on December 19, 1941, and November 3, 1942. The respondent, in making the determinations which give rise to the deficiencies, did not determine that the values differed on the respective dates. He determined that the value of the stock was $7,801.63 on each date. In the gift and estate tax returns, the value was reported to be $2,500 per share on each date. These proceedings were submitted upon a record consisting of general testimony, expert testimony and exhibits. Petitioners called two expert witnesses, Duncan M.Spencer and Robert J. Wilkes. The respondent called one expert witness, Dr. Paul M. 202 Atkins. Respondent now contends, on brief, that the fair market value of the stock was at least $5,000 per share on December 19, 1941, and $4,550 on November 3, 1942. Petitioners now contend, on brief, that the fair market value of the stock was $2,900 per share on December 19, 1941, and $3,000 on November 3, 1942. The regulations of the Commissioner relating to the gift tax, Regulations 108, section 86.19 (c), provide that, in the case actual sales or bona fide bid and asked prices are not available, consideration should be given to the Company's net worth, earning power, dividend paying capacity, and all other relevant factors having a bearing upon the value of the stock to be value. See also, Regulations 105, relating to the estate tax, section 81.10 (c), which makes the same provision. Every relevant factor having a bearing upon fair market value must be considered. Laird v. Commissioner, 85 Fed. (2d) 598, 601. Prices at which stock is traded in the open market on the pertinent date are regarded generally as the best evidence of fair market value on that date. 203 Estate of Leonard B. McKitterick, Dec'd, 42 B.T.A. 130">42 B.T.A. 130, 136. Under the pertinent regulations, above cited, where the stock to be valued is unlisted, but is dealt in by brokers, and where there were no sales on the critical date, prices at which stock changed hands in transactions on a date nearest to the critical date, before and after, may be considered if the dates were within a reasonable period. The evidence shows that transactions in SmithCompany stock were infrequent and few in number, and there is no evidence of any sales in 1942. There was one transaction, involving ten shares, on November 27, 1941, within thirty days before the first valuation date, and another on July 31, 1941, involving ten shares. The sales prices were $3,000 and $2,500 per share. The transactions were bona fide. However, each one involved only ten shares of stock; and it was one of the infrequent transactions in the stock. Whatever market there was for the stock was limited because the SmithCompany is a family owned, family controlled, close corporation. See Brooks v. Willcuts, 78 Fed. (2d) 270. Also, the stock is not listed. The sales of stock on July 31, 1941, and on November 27, 1941, are204 given consideration, but they are not determinative nor controlling of the question of fair market value. See Wood v. United States, 29 Fed. Supp. 853, 859. The question of fair market value must be decided in this case upon the general evidence adduced, including the opinions of the three expert witnesses, all of whom were qualified by training and experience to formulate estimates of value. The SmithCompany stock was owned by two families to the extent of about 91 1/2 per cent of the outstanding stock. The stock lacks marketability because it is unlisted, closely held, and the total amount of stock outstanding is small. It is not readily available for sale. The unit price per share is necessarily large because of the small amount of outstanding stock. The property to be valued is 73 shares, in the estate tax proceeding, and four gifts of small lots of stock. In the gift tax proceeding there were two gifts of seventeen shares, each; and two gifts of sixteen shares, each Each gift is to be valued. See Lawrence C. Phipps, 43 B.T.A. 1010">43 B.T.A. 1010; aff'd, 127 Fed. (2d) 214; and Thomas A. Standish, 8 T.C. 1204">8 T.C. 1204. Each lot of stock represents205 a minority interest in SmithCompany. Both of the expert witnesses of the petitioners took into consideration in formulating their opinions of fair market value, SmithCompany's net worth, earning power, and dividend paying capacity. They considered other factors which were relevant and had a bearing upon fair market value, as follows: The position of SmithCompany in the carpet and rug industry; the characteristics and problems of the carpet and rug industry, such as wide fluctuations in the demand for the product, the importance of raw materials and of inventories; the economic and business situation in the country in December 1941, and during 1942; the problem of raw materials, which were imported, which arose in the war period; limitations imposed by the Government on the industry; limitations on the production of carpets and rugs during the war; the gradual liquidation of inventories; declining sales of carpets and rugs during the war; necessity for conversion to war production; the trend toward increased taxes; the condition of the securities market in December 1941, and during 1942; the lack of marketability of the stock; the minority interests which the stock to be valued206 represented; prospects of future earnings; the adverse effects of the war upon the industry as a whole and upon SmithCompany; and the various elements which enter into valuation of common stocks, such as book value on the critical basic dates, earnings per share; yield; the past volume of sales, earnings and dividends of SmithCompany in normal years and poor years; net worth of the Company. The witnesses of petitioners made a thorough analysis and comparison of the three leading concerns which manufacture carpets and rugs in the United States, Bigelow-Sanford, Mohawk, and SmithCompany. In the seven years ending with 1941, the combined sales of these three leading companies represented an average of 48.7 per cent of the total shipments of the industry as compiled by the Institute of Carpet Manufacturers of America, Inc. The three companies are very closely comparable; in fact the similarities of each company to the other is rather unusual in industry. The stock in Bigelow-Sanford and Mohawk are listed on the stock exchange. As the three companies are closely comparable, it was a sound approach to the valuation question presented for the two experts of petitioners to consider in207 their opinions of value the market prices at which the stocks of Bigelow-Sanford and Mohawk were selling at the critical dates, and to compare the values of the stocks in the three companies on the several bases which are usually considered by professional, commercial analysts. This test of fair market value of unlisted stocks by comparison with stocks in comparable corporations is a standard test, and now has been given approval by the Congress in the new provision in the Internal Revenue Code, subsection (k) of section 811, which was enacted in 1943. The value of stocks of similar corporations, engaged in the same business is one of the factors properly to be considered, along with all other factors. See Horlick v. Kuhl, 62 Fed. Supp. 168, 175; Blackard v. Jones, 62 Fed. Supp. 234; Oxford Paper Co. v. United States, 52 Fed. (2d) 1008; Rheinstrom v. Willcuts, 26 Fed. Supp. 306. In making the comparisons, consideration was given to the seven-year period, 1935 through 1941. The year 1941 was taken into account. Consideration was given to other periods; the fifteen-year period from 1928 through 1942; and the five-year period, 208 1938 through 1942. These periods provide satisfactory test periods of normal operations, and comparisons. Abnormalities of the year 1938 were noted. Comparative sales, earnings, dividends, and net worth of the three companies were studied, and per share values of each of the three companies were computed on the basis of sales, dividends, and net worth of each company. The value of the stock of the SmithCompany was computed on the basis of use of factors arrived at from the market values of the stock of the other two companies. Upon careful consideration of the analyses made by the petitioners' experts, we consider them to be sound. Both of petitioners' expert witnesses first computed the value of SmithCompany stock, on the basis of many relevant factors, and comparisons with market values of stocks of the other two companies without consideration of the factor of lack of marketability. Such value assumed the same marketability as the stocks of the other two companies enjoyed. Both witnesses believed that the disadvantage inherent in an unlisted and closely held stock would be considered by the assumed willing buyer and willing seller in arriving at a price in a sale transaction, 209 and that a discount below the market prices of comparable stocks must be applied in the final valuation of SmithCompany stock. One expert considered that a 20 per cent discount should be applied the other applied a 15 per cent discount. Respondent's expert gave attention to several factors of general relevance to valuation on the critical dates, but it appears that he gave them very little weight. He rejected any comparison whatsoever with the market values of stocks in Bigelow-Sanford and Mohawk for reasons which we consider to be superficial, namely, rather small differences in the amounts of dividends per share paid, respectively, and in increases in net worth. The close similarities among the three companies, which make them the triplets of the carpet and rug industry, so to speak, he recognized, nevertheless. Valuation is a matter of making estimates, and there is no one method which must be used. The requirement as to method is general and broad in that all relevant factors must be considered. However, we think that in rejecting comparison with the other two companies, Dr. Atkins failed to check the reasonableness of the factor upon which he relied the most. The respondent's210 expert gave chief weight, if not entire weight, to capitalization of dividends paid by SmithCompany for one year in making his valuation as of each critical date. The rate of capitalization adopted by him was 8 per cent for 1941, and 5.5 per cent for 1942. He arrived at these percentages by taking the yield, as of each critical date of 125 industrial stocks listed in the Supplement of the Survey of Current Business, which probably represents a general index of market prices. At any rate, the index was not explained, and it appears that the 125 companies were not a group selected on the basis of comparability with Smith Company. Dr. Atkins found that the dividend yield of the 125 industrial stocks was 7.3 per cent in December 1941, and 5.5 per cent in November 1942. In his own judgment he raised this to 8 per cent for 1941, and adhered to 5.5 per cent for 1942. He capitalized SmithCompany's 1941 dividends at the rate of 8 per cent, and the 1942 dividends at the rate of 5.5 per cent, which resulted in a valuation of $5,000 per share, and $4,545 for 1942. He rounded out the second result to $4,550, and concluded that the fair market value of the stock was $5,000 and $4,550 on the respective211 dates. Each value represents a multiple of one year's dividends. If Atkins had taken the average dividends of SmithCompany over a seven-year period and capitalized the average dividend at 8 per cent, the result would have been a lower value for the 1941 date, and, also, would have compared realistically with the yield on the December 19, 1941, market prices of Bigelow-Sanford and Mohawk based upon their average dividends. We find from all of the evidence that the preceding seven years was a representative period. It appears that the rate of 5.5 per cent used in computing the 1942 value was too low for SmithCompany stock when compared to the market prices of the stocks of the other two companies, which had a dividend yield in 1942 of an average of about 8.5 per cent based on average dividends paid over a seven-year period. Comparison of the method used by Atkins with Wilkes' analysis of dividend yields of the other two companies, which is part of the record, leads us to conclude that Atkins' method was not a fair one to apply to SmithCompany stock. 1212 It has been held to be error, as a matter of law, to base the estimate of value for purposes of fair market value upon one factor to the exclusion of other relevant factors. See Commissioner v. McCann, 146 Fed. (2d) 385; Richardson v. Commissioner, 151 Fed. (2d) 102, 105; Schlegel v. United States, 71 Fed. Supp. 495. In Worcester County Trust Co. et al. v. Commissioner, 134 Fed. (2d) 578, the court disapproved the method there applied of basing value on the one factor of a multiple of earnings, and we think that respondent's proposed value runs athwart the adverse ruling in the Worcester County Trust Company case. It is based upon a multiple of one year's dividends, and little if any weight is given to any other factors. Alexander Smith & Sons paid dividends totaling $400 per share in 1941. The average dividends paid over a seven-year period was $250 per share. In 1942, dividends totaled $250 per share. In 1941, earnings were unusually high, the highest since 1928, with the exception of the year 1929. A representative period of earnings213 and dividends should be considered so that the estimate of value may not be distorted by the abnormalities of one year. See White & Wells Co. v. Commissioner, 50 Fed. (2d) 120, 121; and Laird v. Commissioner, supra.Respondent has given too little weight to the Company's record of past earnings, past dividends, the cyclicle nature of the industry, prospective earnings, and other factors. Just as earnings are only one of the elements to be considered in determined the value of stock, so dividends are only one of the factors. Cf. Augustus E. Staley, 41 B.T.A. 752">41 B.T.A. 752, 756. It is generally recognized by the courts that unlisted stocks in close corporations lack marketability. Wood v. United States, supra. Respondent's expert testified that he recognized that this factor should be considered in valuing the SmithCompany stock, but we are unable to recognize any real consideration of that factor by the respondent. Net asset value and book value are factors to be considered, but where the problem is to value the stock of a going concern these factors are to be considered beside other factors. See Ray Consolidated Copper Co. v. United States, 268 U.S. 373">268 U.S. 373;214 and Paul, Federal Estate and Gift Taxation, Vol. II, p. 1297, par. 18.33, where it is said: "The capital stock of a corporation, its net assets, and its shares of stock are entirely different things. The value of one bears no fixed or necessary relation to the value of the other. This is particularly true as to minority interests in a closed corporation; such interests are usually worth much less than the proportionate share of the assets to which they attach." It is noted that respondent's estimates of value of $5,000 and $4,550 exceeds and comes close to, respectively, the net current asset value per share of the stock which was $4,650 in 1941, and $4,886 in 1942. See Spreckels-Rosekrans Inv. Co. v. Lewis, 146 Fed. (2d) 982; Mathilde B. Hooper, Administratrix, 41 B.T.A. 114">41 B.T.A. 114. Consideration has been given to Dupont v. Deputy, 26 Fed. Supp. 773. However, each case, particularly one involving the problem of valuation, must stand upon its own facts. The record in these proceedings, the facts presented to us here, must be the best guide in determining the value of the stock here involved. We have given consideration to all of the factors215 set forth in the regulations, to all of the exhibits and testimony, and to the opinions of all of the experts. Upon all of the evidence, it has been found as a fact that the fair market value of the SmithCompany stock was $2,930 on December 19, 1941; and $3,320 on November 3, 1942. It is held that the values of the gifts which were made on December 19, 1941, were $49,810, each, for 17 shares and scrip; and $46,880, each, for 16 shares and scrip; and that the value of the 73 shares, including the scrip, held in the estate of Elizabeth Cochran Bowen, deceased, was $242,360. Certain matters are to be given effect in the Rule 50 recomputation. Decisions will be entered under Rule 50. Footnotes1. Includes provisions for excess profits taxes in 1940, 1941 and 1942 of $735,622, $2,743,600 and $820,000, respectively. Operations for the years 1943 and 1944 resulted in estimated refunds of such taxes for the years 1941 and 1942 of $509,000 and $315,000, respectively, under the carry-back provisions of the Internal Revenue Code. ↩2. Adjustments made to reduce surplus balance in 1939 for contingent wkmn's. comp. claims and awards; and to increase balance in 1940 for unused reserves of prior years.↩1. The following excerpts from the analysis of Wilkes, for the petitioner, is pertinent: (Exhibit 66, pp. 15 and 27.) * * The dividend record of these three companies which is given on page 10 shows that Bigelow-Sanford had paid an average of $2.07 per share for the seven years ending with 1941, and a corresponding average for Mohawk Carpet of $1.18. These dividend payments were equivalent to a yield of 8.5% on the December 19, 1941 market price of $24 1/2 for Bigelow-Sanford and to 9.1% on Mohawk Carpet's market price of $13. Alexander Smith's average dividend had been $250, and if this were capitalized on the same basis as Mohawk Carpet, it would indicate a value for Alexander Smith stock of $2,750, and if capitalized at the Bigelow-Sanford rate, a value of $2,940. The average of these two figures is $2,845 which is, therefore, the value of a share of Alexander Smith stock, had the dividends which it received during the several preceding years been appraised on the same yield basis as that represented by the December 19, 1941 market price of Bigelow-Sanford and Mohawk Carpet common stocks relative to the dividends which they had received in the same period. * *The dividend record of these three companies which is given on page 22 shows that Bigelow-Sanford had paid an average of $2.36 per share for the seven years ending with 1942, and a corresponding average for Mohawk Carpet of $1.39. These dividend payments were equivalent to a yield of 9.08% on the November 3, 1942 market price of $26 for Bigelow-Sanford and to 7.95% on Mohawk Carpet's market price of $17.50. Alexander Smith's average dividend had been $271, and if this were capitalized on the same basis as Bigelow-Sanford, it would indicate a value for Alexander Smith stock of $2,985, and if capitalized at the Mohawk Carpet rate, a value of $3,415. The average of these two figures is $3,200 which is, therefore, the value of a share of Alexander Smith stock, had the dividends which it received during the several preceding years been appraised on the same yield basis as that represented by the November 3, 1942 market price of Bigelow-Sanford and Mohawk Carpet common stocks relative to the dividends which they had received in the same period.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620645/	Hensel Phelps Construction Co., Petitioner v. Commissioner of Internal Revenue, RespondentHensel Phelps Constr. Co. v. CommissionerDocket Nos. 10685-78, 11695-78United States Tax Court74 T.C. 939; 1980 U.S. Tax Ct. LEXIS 91; July 31, 1980, Filed 91 Decisions will be entered under Rule 155. Petitioner agreed to construct an office building for no profit in exchange for an interest in partnership capital. Held, on the facts, petitioner must include the value of the partnership interest in taxable income in the year that the partnership agreement was executed. Held, further, the value of that interest to be recognized as income to petitioner is equal to the value of the services exchanged for it by petitioner in an arm's-length agreement. Robert S. Rich, Herrick K. Lidstone, and Albert Theodore Powers, for the petitioner.Jeff P. Ehrlich, for the respondent. Featherston, Judge. FEATHERSTON940 In these consolidated cases, respondent determined deficiencies in Federal income tax in the following amounts:Docket No.FYE May 31 --Deficiency10685-781974$ 110,85711695-78197572,38919762,314Concessions having been made, the issues remaining for decision are:(1) Whether petitioner received a partnership93 interest in exchange for services rendered in the tax year ended May 31, 1974; and(2) Alternatively, whether respondent correctly allocated income in the tax years in question from the partnership to petitioner under section 482. 1FINDINGS OF FACTAt the time of filing its petition, petitioner Hensel Phelps Construction Co.'s principal place of business was located at Greeley, Colo. Petitioner and its wholly owned subsidiaries, Clearwater Hydromech Corp. (Clearwater) and Stone Bridge Cellars, Inc. (Stone Bridge), filed a consolidated Federal income tax return for the tax year ended May 31, 1974, with the Internal Revenue Service Center, Ogden, Utah. Petitioner and its wholly owned subsidiaries, Clearwater, Stone Bridge, and Clearwater Constructors, Inc. (Constructors), filed consolidated Federal income tax returns for the tax years ended May 31, 1975, and May 31, 1976, with the94 Internal Revenue Service Center, Ogden, Utah. During the years in issue, petitioner and its subsidiaries reported their income on the accrual method of accounting, except that income from long-term contracts commenced 941 before June 1, 1973, was reported on the percentage-of-completion method of accounting, and income from long-term contracts commenced after May 31, 1973, was reported on the completed contract method of accounting.Petitioner is engaged in the general contracting business primarily as a prime contractor to private and public owners. Prior to 1972, petitioner's operations were limited to jobs for which petitioner competitively bid. In early 1972, petitioner hired John C. Todd (Todd) to secure negotiated contract projects in which petitioner would acquire an equity interest. During late April or early May 1972, Todd met with Louis Bansbach (Bansbach), Peyton Perry (Perry), and Donald Macy (Macy) (hereinafter collectively referred to as the individual owners) to discuss jointly developing real estate. On or about May 5, 1972, the individual owners jointly entered into a contract to purchase 5.6 acres of undeveloped land in Glendale, Colo., for $ 731,160 from95 sellers unrelated to petitioner or the individual owners. The individvual owners completed the purchase of the land on or about September 1, 1972.After several meetings, petitioner and the individual owners agreed to study the feasibility of constructing an office building on the land purchased by the individual owners. This agreement was reduced to writing by letter dated July 6, 1972, to petitioner from the individual owners. That letter provided, inter alia:This will confirm our oral understanding and serve as a letter of intent to guide our joint activities prior to consummation of a joint venture agreement. We have preliminarily agreed to form a joint venture depending upon satisfactory feasibility studies to develop the site into an office complex which may consist of one or more buildings to be constructed in several phases. We would contribute our contract to purchase the site to the joint venture and you would contribute your contractor's fee (profit and overhead) to the joint venture. Based upon these contributions we would each own 50% of the joint venture.* * * It is our understanding that you have agreed to spend up to $ 20,000 beginning at once for the initial96 feasibility studies and planning. This would include, among other things, a proposed design of the project, site planning, space planning, suggested types of construction, estimated construction costs and preliminary drawings, and schematic designs. At the earliest practical date after your acceptance of this letter, we will jointly select the design and planning team. Copies of all drawings, maps and other data will be made available to both of us for inspection and copying at any reasonable time.The timely completion of the feasibility studies and entering into a formal 942 joint venture agreement are critical to all of us as well as the viability of the project. Therefore, we believe it would be desirable to set forth some target dates. We feel the feasibility studies should be completed by September 10, 1972 and the execution of a joint venture agreement should be done by October 10, 1972. If we elect to terminate this letter of intent for any reason prior to October 10, 1972, we will reimburse you for all of your out-of-pocket expenses paid to outside parties up to $ 20,000 for work which we have mutually authorized to be done on this project. In addition to the97 actual expenses, we will pay to you an amount of 10% of said expenses as administrative overhead.It has been a pleasure to discuss this project with you and we are looking forward to a mutually satisfactory venture.On July 10, 1972, Todd endorsed the letter on behalf of petitioner and returned it to the individual owners. On the same day, the individual owners organized Bansbach, Perry & Macy, Inc. (BPM, Inc.), a Colorado corporation wholly owned by the individual owners in equal shares. Subsequent to the date of the letter, petitioner and the individual owners jointly selected and petitioner financed the hiring of various engineers, architects, and consultants to assist in the initial feasibility studies and planning for the construction of an office complex on the land. The individual owners did not exercise their right to terminate the agreement by October 10, 1972, as provided for in the July 6, 1972, letter. Additionally, the parties did not, as was contemplated in the letter, execute a joint venture agreement by October 10, 1972, because they were unable to arrange financing by that date.By letter dated April 27, 1973, petitioner and the individual owners received a proposal98 from General Electric Credit Corp. of Colorado (G.E. Credit) to provide a combination construction and permanent mortgage loan in the amount of $ 6,200,000. The letter was addressed to Cherry Creek Plaza Associates (CCP Associates), described as a general partnership consisting of petitioner and the individual owners. Pursuant to the terms of the letter, petitioner paid $ 20,000 to G.E. Credit as a deposit to cover G.E. Credit's expenses in making the loan.On May 2, 1973, petitioner and the individual owners conditionally agreed upon arrangements to develop the office complex. This agreement was reduced to writing by letter dated May 3, 1973, to petitioner from the individual owners. That letter provided, inter alia:This will confirm our understanding of the agreements reached between 943 your company and us regarding the project referred to above during the meeting held in our office yesterday.1. Entity and Interest. We will proceed at once to form an appropriate entity, probably a limited partnership with HPCC [petitioner] and each of us or our corporation as general partners. We will contribute to the partnership our equity in the 5.6 acres on the east side of99 Cherry Street and HPCC will contribute its contractor's profit and overhead for building the first proposed office building. HPCC will be entitled to one-half of the profits, losses and capital of the partnership and we will be entitled to the other one-half. Any parties to the entity other than HPCC and us will be admitted only as limited partners. * * 5. Expenses. HPCC will advance all expenses which have been and which will continue to accrue until satisfactory financing is obtained and such amounts can be reimbursed to HPCC. If satisfactory financing is not obtained or if the first building is not constructed, the HPCC shall be reimbursed for 110% of its out-of-pocket expenses from the profit in the 5.6 acres at such time as the profit is realized. Any additional profit realized after payment to HPCC shall accrue solely to us.6. Liability. It is agreed we have a substantial equity in the land which we are contributing to the partnership and we will pledge our interests in the partnership to HPCC as collateral for any advances made on our behalf. Therefore, it is understood that we will not be personally liable for making any cash contributions to the partnership100 nor for repayment of any advances made by HPCC on our behalf whether such advances are made to the partnership or to third parties for project expenses.We are pleased to be partners with you in this project and look forward to a mutually satisfactory and successful venture.The letter was approved the following day by Todd on behalf of petitioner.Petitioner and CCP Associates, as the owner of the property, entered into a contract for the construction of the office building. The contract, which described CCP Associates as a limited partnership, stated on its face that it was effective as of May 1, 1973. Although the contract apparently was executed by Perry on behalf of BPM, Inc., described as a general partner of CCP Associates, and by Todd on behalf of petitioner, no date accompanied their signatures. Moreover, a clause in the contract stated that "the Guaranteed Maximum Cost includes the cost of all standard tenant finish work as defined in HPCC's Estimate dated August 10, 1973 but does not include the cost of any additional tenant finish work." The contract provided that the maximum cost of the project would not exceed $ 4,543,878, and that the building would be substantially101 completed by September 1, 1974.944 Petitioner commenced construction of the office building prior to June 1, 1973, and had incurred costs of $ 68,368, including the initial feasibility studies and the $ 20,000 paid to G.E. Credit. Petitioner also had entered into various subcontracts and purchase agreements for the project by June 1, 1973.G.E. Credit sent a letter, dated July 5, 1973, to CCP Associates committing itself to lend $ 6,400,000. The commitment letter described CCP Associates as a "limited partnership whose general partners are" petitioner and BPM, Inc. The letter provided, among other things, that the borrower should furnish "a true copy of the Borrower's partnership agreement" and "Evidence that Borrower is a corporation or partnership in good standing and existing under the laws of the State of Colorado." On July 20, 1973, the letter was accepted and approved by Macy as borrower, petitioner as general partner, and BPM, Inc., as general partner. In accordance with the terms of the letter, petitioner paid a $ 64,000 commitment fee to G.E. Credit on behalf of CCP Associates.Petitioner, the individual owners, and BPM, Inc., entered into an agreement of limited102 partnership, entitled CCP Associates, dated August 1, 1973, and executed by them on August 7, 1973. The agreement listed petitioner and BPM, Inc., as general partners, and petitioner and Bansbach, Perry, and Macy as limited partners. The agreement provided in part that:Initial Contributions. The individual Limited Partners, Bansbach, Perry and Macy, shall contribute to the partnership their equity interest in the said 5.6 acres of land. The land shall be conveyed to the partnership subject to the existing indebtedness which is secured only by the land and neither the partnership nor any of the partners shall personally assume any of the said indebtedness. The partnership shall reimburse Bansbach, Perry and Macy for their initial principal investment in the land in the amount of $ 48,235.75 plus the amounts of interest, taxes, insurance premiums, soil testing and all other direct costs of the land paid by said individuals since September 1, 1972. For purposes only of the initial entries on the books of the partnership, the said individuals shall be deemed to have transferred property to the partnership with an agreed value of $ 300 or $ 100 on behalf of each such individual. 103 HPCC shall initially contribute $ 300 to the partnerrship as a Limited Partner.The agreement further provided that petitioner would advance the first $ 300,000 cash needed, and that petitioner and the individual owners would each provide one-half of any additional cash needed. Additionally, the agreement provided that operating profits were to be divided as follows: 945 Petitioner as general partner5 percentBPM, Inc., as general partner5 percentPetitioner as limited partner45 percentBansbach as limited partner15 percentPerry as limited partner15 percentMacy as limited partner15 percentThe net losses were to be allocated as follows:Petitioner as general partner5 percentBPM, Inc., as general partner5 percentPetitioner as limited partner75 percentBansbach as limited partner5 percentPerry as limited partner5 percentMacy as limited partner5 percentThe agreement further provided that:The net gain resulting from the sale or other disposition of the northerly parcel of land as described on Exhibit A and the improvements thereon shall be allocated first to * * [petitioner], as a Limited Partner, to the extent of the 104 aggregate amount of net losses in excess of 45% which had been allocated to * * [petitioner] under the provisions * * * [allocating net losses.] Any excess net gain not used in the disproportionate allocation to * * * [petitioner] under this subparagraph * * * shall be allocated among all partners in accordance with their shares of net operating profit set forth in subparagraph (a) * * * [providing for division of net operating profits]On August 8, 1973, a certificate of limited partnership for CCP Associates was recorded in Arapahoe County, Colo., which certified, among other things, that the individual owners each had contributed to the partnership an undivided one-third equity interest in the land. Subsequently, on April 8, 1976, the partnership agreement was amended to reflect certain address changes and a $ 30,000 contribution to equity by petitioner.G.E. Credit and CCP Associates closed the $ 6,400,000 loan on August 7, 1973, and CCP Associates gave G.E. Credit its promissory note in that amount. CCP Associates paid petitioner $ 212,100 for construction costs incurred from May 1, 1973, through July 31, 1973, $ 149,628 as reimbursement for payments made to architects and105 consultants from July 1972 through July 31, 1973, and $ 84,000 as reimbursement for payments to G.E. Credit in May and July 1973. CCP Associates also paid the individual owners $ 48,235.75.The books and records of CCP Associates reflect petitioner's contributions to the partnership's capital as follows: 946 Date of contributionAmount1973$ 3001975300,000197630,000CCP Associates filed Federal partnership returns of income for the years August 1, 1973, through December 31, 1973, 1974, 1975, and 1976. No partnership return for CCP Associates was filed for any period prior to August 1, 1973. The partnership return for the period August 1, 1973, to December 31, 1973, states that business commenced August 1, 1973. The partnership return for 1974 shows that depreciation deductions on buildings, furniture and fixtures, elevators, and tenant finishing were claimed beginning August 1, 1974. Prior to January 1, 1973, no income was earned or deductible expenses incurred with respect to the project.Petitioner's gross profits from construction contracts as percentages of its gross revenues during the 5 fiscal years ended May 31, 1976, were as follows:FYE May 31 --Percentage19726.7519734.6719743.3719754.9619767.03106 Neither BPM, Inc., nor any of the individual owners had any interest, either directly or indirectly, in petitioner.In the notice of deficiency issued to petitioner, respondent made the following determination:It is determined that during the taxable year ended May 31, 1974, you received a partnership interest in exchange for services in connection with the construction of Cherry Creek Plaza. It is further determined that the fair market value of the partnership interest received by you is $ 239,151.00, which figure is equivalent to the value of the services exchanged. The value of the partnership interest received by you is includable in your gross income under section 61 of the Internal Revenue Code. Therefore, your taxable income is increased by the amount of $ 239,151.00.Alternatively, respondent allocated additional income to petitioner under section 482 for the taxable year ended May 31, 1974.947 OPINIONThe three individuals who owned the 5.6-acre tract of land had a substantial equity interest in the land and agreed to contribute it to a partnership to be formed with petitioner. As its contribution, petitioner agreed to construct at cost an office building on107 the land. Petitioner was to own a 50-percent capital interst in the partnership, and the three individuals were to own the other 50 percent. After considerable planning and negotiations, the parties executed a formal partnership agreement. The first issue is whether petitioner received a capital interest in the partnership in exchange for its services before or after the close of its fiscal year ended May 31, 1973.Petitioner does not dispute that the performance of services in exchange for a partnership capital interest generally is a taxable event under section 61. See sec 1.721-1(b)(1), Income Tax Regs. 2 Cf. United States v. Frazell, 339 F.2d 885">339 F.2d 885 (5th Cir. 1964), cert. denied 380 U.S. 961">380 U.S. 961 (1965). Petitioner contends, however, that the partnership was created, and an interest transferred to petitioner, in the fiscal year ended May 31, 1973, a year which is not before the Court. Respondent, to the contrary, argues that the formation of the partnership occurred during the fiscal year ended May 31, 1974, a year which is before the Court. Although this issue is difficult, we find for respondent.108 The term "partnership," as used in the tax laws, is "broader in scope than the common law meaning of partnership, and may include groups not commonly called partnerships." Sec. 1.761-1(a), Income Tax Regs. Conversely, an enterprise which is a partnership under local law may fail to qualify as such for Federal tax purposes. Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, 287-288 (1946). In Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, 742 (1949), the Supreme Court stated that a partnership exists for Federal tax purposes if "considering all the facts * * * the 948 parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise."The issue is basically factual. In exchange for petitioner's completed services and promised future services in constructing the office building complex, petitioner received a 50-percent interest in the partnership. A careful review of the numerous documents introduced in evidence in light of the testimony convinces us that petitioner did not acquire its capital interest in the partnership until August 1, 1973. As of that date, the partnership109 was created and capitalized by the transfer of the land. Under section 1.721-1(b)(1), Income Tax Regs., petitioner realized taxable income at that time.Petitioner makes several alternative arguments to support its contention that a partnership was formed, and petitioner received its 50-percent interest, not later than May 31, 1973. First, petitioner contends that the letter of July 6, 1972, and related facts show that a partnership had been created and an interest transferred to petitioner by that date. Petitioner observes that Todd, Perry, and Macy testified that they believed that a partnership had been created between petitioner and the individual owners by July 6, 1972. Further, they held themselves out to others as partners, and pursuant to the agreement contained in the July 1972 letter, jointly selected the consultants and engineers to complete the feasibility studies.Contrary to petitioner's argument, however, the terms of the July 1972 letter indicate that the intent of the parties at that time was to eventually enter into a joint venture depending upon the successful completion of the preliminary studies and attempts to secure financing. The letter itself states that: 110 This will confirm our oral understanding and serve as a letter of intent to guide our joint activities prior to consummation of a joint venture agreement. We have preliminarily agreed to form a joint venture depending upon satisfactory feasibility studies to develop the site into an office complex which may consist of one or more buildings to be construced in several phases. We would contribute our contract to purchase the site to the joint venture and you would contribute your contractor's fee (profit and overhead) to the joint venture. Based upon these contributions we would each own 50% of the joint venture. [Emphasis added.]Thus, the language of the letter indicates that the parties merely anticipated the formation of a joint venture and did not actually enter into one at that time. Clearly, by July 6, 1972, petitioner had no proprietary interest in the capital or profits of 949 the alleged partnership. At the discretion of the individual owners, the letter of intent could be revoked and petitioner would be entitled to reimbursement only for 110 percent of its costs up to $ 20,000 rather than a share of partnership property. Hence, by July 1972, there111 was no intent "to join together in the present conduct of the enterprise." Commissioner v. Culbertson, supra at 742; cf. S. & M. Plumbing Co. v. Commissioner, 55 T.C. 702">55 T.C. 702, 707 (1971); Podell v. Commissioner, 55 T.C. 429">55 T.C. 429, 431 (1970).Petitioner's second contention is that, even if the July 1972 letter did not create a joint venture, petitioner's partnership interest vested on October 10, 1972. On that date, petitioner argues, the individual owners' right to terminate the arrangement lapsed in accordance with the terms of the July 1972 letter. It is true that the July 1972 letter provided for an election by the individual owners to terminate the letter of intent at any time prior to October 10, 1972, and contained no provision for terminating the agreement after that date. Nevertheless, the lapse of that right to an election to terminate the arrangement did not in itself create a partnership. The July 1972 letter also provided that by October 10, 1972, the parties would enter into a joint venture agreement. Because of the lack of financing, however, this was not done. Thus, as we interpret112 the July 1972 letter, it merely set forth the intent of the parties to enter into a joint venture by October 10, 1972. As stated in the letter, the dates for taking various steps were "target dates." The letter did not stipulate that a joint venture would come into being unless the individual owners exercised their right to terminate the arrangement by October 10, 1972.The letter of May 3, 1973, from the individual owners to petitioner supports this interpretation. In that letter, the parties specified the form of the entity under which they intended to do business. Pursuant to the provisions of that letter, if the project was canceled, however, petitioner would still be entitled only to reimbursement for 110 percent of its costs. Petitioner did not have an equity interest in the land or an interest in the capital of a partnership. Moreover, the letter stated that the parties "will proceed at once to form" a partnership. This anticipatory language indicates that no partnership existed as of May 3, 1973. The terms of the partnership agreement were still to be negotiated. Thus, it is clear that a partnership between petitioner 950 and the individual owners was not created113 on October 10, 1972, or even on May 3, 1973.Petitioner alternatively contends that by October 10, 1972, it had received an undivided 50-percent interest in the land in exchange for its agreement to construct a building upon that land. The evidence, however, supports the contrary conclusion. As previously discussed, the only rights given to petitioner by the letters of June 6, 1972, and May 3, 1973, were to receive 110 percent of costs incurred in the preliminary work done on building the complex. Those letters did not give petitioner any interest in the land upon which the building was to be constructed. Indeed, the limited partnership agreement dated August 1, 1973, provided that the individual owners were contributing their interest in the land to the partnership. No mention was made of the contribution by petitioner of an interest in the land. If petitioner had owned an interest in the land prior to August 1, 1973, we think the partnership agreement would have reflected that fact. It did not do so, and we conclude that petitioner had no equity interest in the land or capital interest in the partnership prior to May 31, 1973.Petitioner also argues that the enterprise was114 a "classic sharing arrangement" and thus petitioner is not subject to Federal income taxes. Citing Rev. Rul. 77-176, 1 C.B. 77">1977-1 C.B. 77, petitioner contends that "a party to a sharing arrangement does not recognize income on its contribution of services in exchange for an interest in the property to which the services are rendered." That revenue ruling, however, deals only with the applicability of the "pool of capital" theory in cases concerning the developing and leasing of oil and mineral property. See G.C.M. 22730, 1 C.B. 214">1941-1 C.B. 214. The ruling does not override the general principle, recognized by petitioner, that an interest in partnership capital received in exchange for services constitutes income. Cf. Bryant v. Commissioner, 46 T.C. 848">46 T.C. 848, 855-862 (1966), affd. 399 F.2d 800">399 F.2d 800 (5th Cir. 1968).It is true that some of the documents dated prior to May 31, 1973, refer to CCP Associates as a partnership. For example, a letter dated April 27, 1973, from G.E. Credit was addressed to CCP Associates, a general partnership. In addition, petitioner and CCP Associates115 entered into a construction contract stated to be effective May 1, 1973. Nevertheless, these documents do not show that petitioner acquired a capital interest in a 951 partnership prior to May 31, 1973. The May 3, 1973, letter endorsed by the parties, which is dated after the G.E. Credit letter and the construction contract, indicates that no partnership had been formed at that time. Further, Todd testified in connection with the dates of the documents that "many things were done for the benefit of the lender." Thus, because G.E. Credit required the borrower to be a valid corporation or partnership, petitioner and the individual owners may have represented themselves as partners during the preliminary negotiations in order to assist in processing the papers required to secure financing. In addition, although the construction contract was dated May 1, 1973, a clause in it referred to an estimate prepared August 10, 1973, indicating that the May 1, 1973, date was not the date it was signed. Todd also admitted that the date of the contract was probably incorrect. Consequently, we do not think these documents support a finding that a partnership existed prior to May 31, 1973. 116 We think that the partnership was created when the parties entered into a limited partnership agreement dated August 1, 1973. Although in 1972 the parties intended to eventually enter into a partnership to construct an office complex, the project depended upon the completion of feasibility studies and the acquisition of financing. Financing was not secured until July 5, 1973, when G.E. Credit committed itself to make the loan. The loan was accepted on July 20, 1973, and shortly thereafter, the partnership agreement was executed. Until that time, petitioner had no proprietary or capital interest in the partnership which was to own the real property. The earliest partnership return that was filed in connection with the project was for the year August 1, 1973, through December 31, 1973. That return stated that business commenced August 1, 1973. Additionally, the partnership agreement stated that the individual owners' contribution was their interest in the land. If, as petitioner contends, they were actually exchanging their interests in a previously created general partnership for limited partnership interests, we think the agreement would have reflected that fact. Thus, we117 conclude that the partnership was created, and petitioner received its partnership interest in exchange for the services it was to perform, during the tax year ended May 31, 1974.Assuming, arguendo, that a partnership arrangement between petitioner and the individual owners was such that 952 petitioner received a 50-percent interest during the tax year ended May 31, 1973, we nevertheless reject petitioner's conclusion that the taxable event occurred in that year rather than the year ended May 31, 1974. Under section 83, 3118 property received for services must be included in income, to the extent that the fair market value of the property exceeds the amount paid for the property, in the year that the rights to the property are transferable or not subject to a substantial risk of forfeiture. As defined by section 83(c), 4 a right is subject to a substantial risk of forfeiture when the right "to full enjoyment of such property * * [is] conditioned upon the future performance of substantial services by any individual." Moreover, if the rights of a transferree are subject to a substantial risk of forfeiture, the rights are not transferable. Sec. 83(c).Here, until the parties executed the partnership agreement dated August 1, 1973, the land was the property of the individual owners and not the partnership. Whatever rights petitioner might have had in the whole arrangement were subject to a substantial risk of forfeiture because the individual owners could terminate the agreement and liquidate those rights by paying petitioner 110 percent of its costs rather than a share of partnership property. Similarly, although no evidence on the 953 point has been introduced, we infer that if petitioner could have transferred its 119 rights prior to August 1, 1973, the transferee would have been subject to the same substantial risk of forfeiture as was petitioner. Thus, any rights held by petitioner in the enterprise prior to the execution of the partnership agreement were also nontransferable within the meaning of section 83(c)(2).At the time the August 1, 1973, partnership agreement was signed, the building obviously had not been completed. From the information contained in the 1974 partnership return, the building was not completed until August 1, 1974, the date as of which the first depreciation deductions were taken. Nevertheless, as we read the partnership agreement, petitioner's right to a capital interest in the partnership was not "conditioned," within the meaning of section 83(c)(1), on the completion of the building. Rather, petitioner was obligated to complete the construction of the building by the separate construction contract into which it had entered. Petitioner's rights in the partnership became vested upon the execution of the partnership agreement and the immediately subsequent transfer of the land to the partnership. Thus, within the meaning of section 83(c), petitioner's partnership120 interest was transferable or not subject to a substantial risk of forfeiture after August 1, 1973. 5 Consequently, pursuant to section 83, the taxable event occurred during the tax year ended May 31, 1974, rather than during the previous year.Petitioner also disputes121 the value of the partnership interest determined by respondent. Petitioner apparently contends that the value of the interests in the land contributed by the individual owners did not exceed the $ 300 that each owner was credited with in the partnership's capital account. Petitioner also observes that it lent the partnership large sums of money. Hence, it concludes that the value of the partnership interest 954 which it received did not exceed the amount petitioner paid for the interest. We disagree.We think it clear that the value of the unimproved land far exceeded the $ 900 that petitioner implies it was worth. The land had been purchased in 1972 for $ 731,160. In the May 3, 1973, letter, quoted in part in our findings, signed by the three individual owners and approved on behalf of petitioner, it is stated that: "It is agreed we have a substantial equity in the land which we are contributing to the partnership." For that reason, the individual owners were to be relieved of making cash contributions to the venture. Indeed, Macy testified that the $ 300 figure was an arbitrary nominal sum.Petitioner's contention that it paid in full for the value of the partnership122 interest it received because it lent the partnership money is without merit. The value of the partnership interest that petitioner received is difficult to determine. There is no dispute, however, that petitioner and the individual owners dealt at arm's length. Thus, presumably, the value of the interest petitioner received equaled the value of petitioner's construction services in addition to the value placed upon petitioner's loans to the partnership. Cf. United States v. Davis, 370 U.S. 65">370 U.S. 65, 72 (1962); Estate of O'Nan v. Commissioner, 47 T.C. 648">47 T.C. 648, 663-664 (1967). In other words, the value of the construction services are presumed to be equal to the value of the partnership interest that petitioner received in excess of the value placed upon petitioner's loans. Thus, petitioner is taxable upon this amount, which represents the fair market value of petitioner's partnership interest in excess of the amount paid for it by petitioner. See secs. 1.721-1(b)(1) and 1.83-1(a), Income Tax Regs.Respondent determined that amount by computing the value of the construction services petitioner rendered to the partnership. Petitioner's123 average profit margin for the 5 years ended May 31, 1976, was 5.36 percent. Respondent divided the total construction cost of the project 6124 by 0.95 to yield the hypothesized *955 gross revenue that petitioner would have received if it had received a profit margin of 5 percent. The difference between the hypothesized gross revenue and the actual cost is the value of the services that petitioner contributed to the partnership in exchange for his partnership interest. We do not find that respondent's computation is erroneous. 7To reflect the foregoing,Decisions will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.↩2. Sec. 1.721-1(b)(1), Income Tax Regs., provides in part:"The value of an interest in such partnership capital so transferred to a partner as compensation for services constitutes income to the partner under section 61↩. The amount of such income is the fair market value of the interest in capital so transferred, either at the time the transfer is made for past services, or at the time the services have been rendered where the transfer is conditioned on the completion of the transferee's future services. The time when such income is realized depends on all the facts and circumstances, including any substantial restrictions or conditions on the compensated partner's right to withdraw or otherwise dispose of such interest."3. SEC. 83. PROPERTY TRANSFERRED IN CONNECTION WITH PERFORMANCE OF SERVICES.(a) General Rule. -- If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of -- (1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over(2) the amount (if any) paid for such property,↩shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm's length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.4. SEC 83(c). Special Rules. -- For purposes of this section --(1) Substantial risk of forfeiture. -- The rights of a person in property are subject to a substantial risk of forfeiture if such person's right to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.(2) Transferability of property. -- The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture.↩5. Under the terms of that agreement, although petitioner could transfer its 5-percent general partner interest only with the written consent of the other general partner, it could transfer its 45-percent limited partner interest subject only to the right of first refusal by the other limited partners. The agreement further provided that petitioner was responsible for contributing funds to the partnership to the extent necessary, up to a maximum of $ 300,000. If petitioner failed to do this, then the other partners could, among other things, sell petitioner's interest, pay off the partnership obligations which were due, and return any remaining amount to petitioner. This does not constitute a substantial risk of forfeiture within the meaning of sec. 83.↩6. Respondent used the amount of $ 4,543,878 as the actual cost of the project. Such amount was listed in the construction contract bearing the date of May 1, 1973, as the maximum cost of the project. Petitioner has not argued that the actual costs were less than this amount. Because petitioner's right to a partnership interest vested as of Aug. 1, 1973, the date of the creation of the partnership, we think that is the appropriate valuation date. The building had not been completed on that date, but the partnership held a favorable contract calling for its construction at cost with no profit to petitioner. Theoretically, the determined value should be discounted for the 1-year time lag between the valuation date and completion of the building, but petitioner has not so contended and has offered no evidence on which a discount should be based.↩7. Because of our holding, we do not reach respondent's alternative argument that sec. 482 is applicable here.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620647/	NATIONAL PRODUCTS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.National Prods. Co. v. CommissionerDocket No. 6136.United States Board of Tax Appeals7 B.T.A. 632; 1927 BTA LEXIS 3131; July 13, 1927, Promulgated 3131 1. The provisions of section 278(d) of the Revenue Act of 1924, providing that a tax assessed within the statutory period may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax, have no application to an assessment made before the enactment of that Act. 2. Collection of the deficiency asserted in the instant appeal held to be barred by the period of limitation prescribed by law. Ewing Laporte, Esq., for the petitioner. A. R. Marrs, Esq., for the respondent. PHILLIPS 632 The petitioner takes this appeal from the action of the Commissioner in denying in part a claim for the abatement of an assessment of income and profits taxes for 1917 of $197,847.78, all of such amount being in excess of the tax shown upon the return filed by the petitioner. The petitioner assigns various errors, some upon the merits of the respondent's determination and others in the nature of pleas in bar upon its contention that collection of the tax is barred by the period of limitation prescribed by statute. The answer of the respondent admits many material allegations with respect to the plea in bar, and3132 the proceeding came on for hearing upon petitioner's motion for judgment on the pleadings, at which time, by agreement of counsel for the parties and on order of the Board, a hearing was had and evidence introduced with respect only to the issues raised by the plea in bar. FINDINGS OF FACT. The petitioner is a West Virginia corporation with its principal place of business in Pittsburgh, Pa.The petitioner's original income and profits-tax return for 1917 was filed April 29, 1918. Thereafter the petitioner executed and forwarded to the Commissioner a consent, dated February 13, 1923, prepared by the Commissioner and accepted by him on or about February 21, 1923, which reads as follows: FEBRUARY 13, 1923. INCOME AND PROFITS-TAX WAIVER. In pursuance of the provisions of subdivision (d) of section 250 of the Revenue Act of 1921, National Products Company, of Pittsburgh, Pennsylvania and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Corporation for the years 1917 under the Revenue Act of 1921, or under3133 prior income, excess-profits, profits, 633 or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909. This waiver is in effect for one year from the date it is signed by the taxpayer. Corporate Seal. NATIONAL PRODUCTS COMPANY, Taxpayer.(Signed) By F. W. FINLEY, President.D. H. BLAIR - AHF., Commissioner.Attest: (Signed) M. E. EBERLE, Secretary.Feb. 21, 1923. Thereafter petitioner executed and forwarded to the Commissioner a consent dated January 7, 1924, prepared by the Commissioner and accepted by him on or about January 10, 1924, which reads as follows: JANUARY 7, 1924. INCOME AND PROFITS-TAX WAIVER. In pursuance of the provisions of subdivision (d) of section 250 of the Revenue Act of 1921, National Products Company of West Virginia, Pittsburgh, Pennsylvania, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said3134 Company for the year 1917 under the Revenue Act of September 8, 1916, as amended by the Act of October 3rd, 1917. This waiver is effective for one year from date signed by taxpayer. Corporate Seal. NATIONAL PRODUCTS COMPANY OF W. VA.Taxpayer,(Signed) by F. W. FINLEY, President.D. H. BLAIR - SA., Commissioner.Attest: (Signed) M. E. EBERLE, Secretary.JAN. 10, 1924. On March 22, 1924, an assessment of an additional tax of $197,847.78 for income and profits tax for 1917 was made by the Commissioner, being the tax here involved. On April 14, 1924, the petitioner filed a claim for the abatement of this tax. On July 1, 1925, the Commissioner mailed to the petitioner the deficiency notice in which it was determined that a portion only of the additional tax so assessed should be abated. No part of such additional assessment has been paid. The petitioner filed his petition with the Board on August 10, 1925. On July 7, 1926, petitioner filed with the collector of internal revenue of the district in which such assessment was made a letter in which it contended that the period of limitations for the collection of the tax had expired and requested3135 that the assessment "be certified back to the Commissioner of Internal Revenue on Form 53." Such form consists of a report by the collector to the Commissioner that taxes assessed have not been collected, that the collector 634 is unable to collect such taxes and provides for the statement of the reason therefor. The collector filed such form with the Commissioner and, as ground for his failure to collect, attached thereto a copy of the letter from the petitioner claiming that collection was barred. The Commissioner thereafter, on July 17, 1926, signed and delivered to the said collector a schedule known and entitled "Schedule of assessments abated as uncollectible," which authorized the collector to take credit on his accounting forms and records for the taxes thereon specified, which had been reported as uncollectible and were allowed as uncollectible. Such schedule listed and included the taxes here in controversy. The petitioner was advised by the collector of such action. Thereafter under date of August 28, 1926, the respondent mailed a letter to the said collector with respect to said additional assessment which read in part as follows: The Income Tax Unit states3136 that the uncollectible claim has been reconsidered in view of the fact that the case is pending before the United States Board of Tax Appeals. Therefore, it will be necessary for your office to reverse the uncollectible assessment of $180,819.56. Your accounts should be adjusted by debiting account 6a and crediting account 18 in this amount. Please attach a copy of this letter to the Form 820 in which this transaction is reflected. Appropriate notation should be made on your copy of the schedule. Thereafter the collector made an entry on his assessment list, purporting to reverse the entry abating the assessment. OPINION. PHILLIPS: The contentions made by the petitioner are divided into two groups: (1) that collection of any additional tax for 1917 is barred by the period of limitation within which such collection may be made, and all liability is extinguished under section 1106(a) of the Revenue Act of 1926; and (2) that the assessment of such additional tax for 1917, having been abated pursuant to the petitioner's claim or request in writing and the period for further assessments having expired, there is no deficiency. The Commissioner contends that under the Revenue3137 Act of 1924 he has six years from the date of assessment within which to collect the tax. The first contention of the petitioner is based upon two grounds: (a) that under the law the period for collection has expired, and (b) that if the statute (Revenue Act of 1924) can be construed to allow a longer period for collection, there is a specific agreement between the petitioner and the respondent, authorized by the Revenue Act of 1921, by which the right to collect expired January 7, 1925. The consent dated February 13, 1923, was by its express terms in effect only for one year after its date. No action was taken thereunder. Before it expired, a similar consent dated January 7, 1924, 635 was executed by the parties. It is with the latter that we are principally concerned. This was executed by the parties pursuant to the terms of section 250(d) of the Revenue Act of 1921 which, so far as is here material, provides: The amount of income, excess-profits, or war-profits taxes due * * under prior income, excess-profits, or war-profits tax Acts, * * * shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer3138 consent in writing to a later determination, assessment, and collection of the tax; and no suit or proceeding for the collection of any such taxes * * shall be begun, after the expiration of five years after the date when such return was filed * * . The assessment here involved was made under the provisions of such Act on March 22, 1924. On June 2, 1924, the Revenue Act of 1924 became effective. This Act, so far as here material, provided: SEC. 277. (a) * * (2) The amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1916, the Revenue Act of 1917, * * * shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period. SEC. 278. * * * (c) Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon. (d) Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by3139 distraint or by a proceeding in court, begun within six years after the assessment of the tax. Nothing in this Act shall be construed as preventing the beginning, without assessment, of a proceeding in court for the collection of the tax at any time before the expiration of the period within which an assessment may be made. (e) This section shall not (1) authorize the assessment of a tax or the collection thereof by distraint or by a proceeding in court if at the time of the enactment of this Act such assessment, distraint, or proceeding was barred by the period of limitation then in existence, or (2) affect any assessment made, or distraint or proceeding in court begun, before the enactment of this Act. SEC. 283. This title shall take effect as of January 1, 1924. SEC. 1100 (a) The following parts of the Revenue Act of 1921 are repealed, to take effect (except as otherwise provided in this Act) upon the enactment of this Act, subject to the limitations provided in subdivisions (b) and (c): Title II (called "Income Tax") as of January 1, 1924; * * (b) The parts of the Revenue Act of 1921 which are repealed by this Act shall * * * remain in force * * * for the assessment3140 and collection, to the extent provided in the Revenue Act of 1921, of all taxes imposed by prior income, war-profits or excess-profits tax acts * . The decision of this case is controlled by that of the Supreme Court in , and collection is barred unless the time for collection was extended by the Revenue Act of 1924. 636 While the 1924 Act provides that Title II, which includes section 278, shall take effect as of January 1, 1924, it is expressly provided in subdivision (e) of section 278 that such section shall not affect any assessment made before the enactment of the Act. The general provision of the Act must give way before this specific provision. The assessment having been made before the enactment of the 1924 Act, section 278(d), granting six years after assessment within which the tax may be collected, has no application. ; United Statesv. Cabot, 5 Am.Fed. Tax Rep. 6172; *3141 . The respondent must then look to the provisions of the Revenue Act of 1921, preserved as to assessment and collection of taxes under that Act and prior Acts, by the saving clause of the Revenue Act of 1924, quoted supra. The consent executed under that Act expired on January 7, 1925. Thereafter the collection of any deficiency was barred. The deficiency notice was mailed to the petitioner on July 1, 1925, some six months later and no proceeding to collect had theretofore been taken. Under section 1106 of the Revenue Act of 1926 the statute of limitations not only bars the remedy but extinguishes the liability. There is no deficiency. Reviewed by the Board. Decision will be entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620649/	ESTATE OF HERMAN LAFF, DECEASED, JUNE T. LAFF, EXECUTRIX, AND JUNE T. LAFF, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Laff v. CommissionerDocket No. 2698-74.United States Tax CourtT.C. Memo 1979-523; 1979 Tax Ct. Memo LEXIS 6; 39 T.C.M. (CCH) 813; T.C.M. (RIA) 79523; December 31, 1979, Filed Walter G. Schwartz, for the petitioners. Eugene H. Ciranni, for the respondent. TIETJENSMEMORANDUM OPINION TIETJENS, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes for the years 1964 through 1966: YearDeficiency1964$1,340.9419651,341.4819661,504.69The sole issue for our determination is whether the gain from the sale of petitioners' business in 1963, received by petitioners in the taxable years at issue, constitutes long-term capital gain or ordinary income. This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and attached exhibits are incorporated herein by reference. At the time of filing their petition, Herman Laff (now deceased) and June T. Laff7 resided at San Mateo, California. June T. Laff was appointed executrix of her husband's last will and testament by the Superior Court of the State of California for the County of San Mateo, California. Petitioners timely filed joint Federal income tax returns for the years 1964 through 1966 with the District Director of Internal Revenue at San Francisco, California. From 1958 until 1963, Herman operated Jay Hampton Tailors (hereinafter Tailors), a sole proprietorship engaged in the suit-selling business. Tailors operated as a "suit club" in which suits and topcoats, manufactured by a Los Angeles company, were sold in weekly installments through the use of coupon books. Outside salesmen would solicit a customer to come into one of Tailors' three sales offices (in Oakland, San Jose, or San Francisco) where he would be measured, sign a contract, and receive a coupon or payment book. After the customer paid at least $20 in weekly payments of $2, he would be fitted for a suit which would then be ordered from Los Angeles. When the customer received his suit, he would often still owe money under the contract (generally $15 to $30). Tailors' accounting records were maintained8 on an accrual basis. As a payment was received on a suit contract, the cash account would be debited and "customers' deposits," a deferred-income account, would be credited. After the customer picked up his suit, the deferred-income account would be debited and the sales account, credited. Any unpaid balance remaining on the contract would then be charged to an accounts receivable account. Tailors' salesmen received their commissions when Herman verified and accepted the contracts. The sales commission expense, however, would be charged as a deferred expense ("deferred commissions") and would not be claimed as a business expense until the customer actually picked up his suit. On July 26, 1963, petitioners sold Tailors. According to the balance sheet on the date of the sale, the following assets were sold and liability assumed: AssetsBasisAccounts receivable $ 5,273.88Inventories12,489.11Furniture and Fixtures$1,657.20AccumulatedDepreciation (330.00)1,327.20Deferred commissions65,000.00Goodwill (purchased)13,842.0397,932.22LiabilitiesCustomers' deposits164,184.16The contract for sale made no allocation of the purchase9 price to the items sold. According to the contract, specifically excluded from the sale were cash and investments which petitioners retained. Specifically included were accounts receivable, inventory, work in progress, furniture and fixtures, goodwill, business name and customers' lists. The total gain realized by petitioners was $137,572.52 calculated, and stipulated by both parties, as follows: Total sales price: Note:$ 71,600.00Assumption ofLiabilities164,184.16$235,784.16Less: Basis in assetstransferred97,932.22Selling expense279.42(98,211.64)Total gain realized$137,572.52The buyer gave petitioners a promissory note in the face amount of $71,600 as partial payment for the sale. Additionally, he assumed the obligations on petitioners' deferred-income account as of the date of sale. Under the promissory note, petitioners were to receive $4,000 immediately plus weekly payments of $200 for 338 consecutive weeks or until Herman died, whichever occurred first. After the buyer acquired Tailors, 60 percent of the customers whose contracts he had purchased actually completed payments under their contracts.Of those who did10 complete payments, 7 percent returned as repeat customers. In 1963, petitioners received $8,400 with respect to the note. That amount together with $164,184.16, the assumption of the deferred-income liability account, was treated by respondent as being received in 1963. 1 Because of the contingent nature of the note payments, the parties agree that the gain from the sale of the business should be reported under the "recovery of basis" method. In each of the years 1964 through 1966, petitioners received 52 weekly payments or a total of $10,400. Since petitioners fully recovered their basis in 1963, all of the $200-per-week payments they received in the years at issue constitute gain to them. 11 Petitioners contend that the payments on the promissory note received by them in the taxable years 1964 through 1966 are taxable as long-term capital gain since the income represented by the "customers deposits" account could have been taxed in earlier years and since the payments were not the result of the assumption by the buyer of liabilities under the deferred income account (which, they assert, occurred in 1963) nor of advanced payments which were also taxed as ordinary income in 1963. Respondent argues that the gain from the sale of petitioners' business is attributable to the sale of only one item, the "customers' deposits" deferred-income account, which item, he maintains, is an ordinary income item. Alternatively, respondent contends that since petitioners disposed of an ordinary income item which they receive but, because of their accounting method, had not reported as income, they must recognize ordinary income on the sale of that item. Pridemark, Inc. v. Commissioner, 42 T.C. 510 (1964), affd. as to this point 345 F.2d 35">345 F.2d 35 (4th Cir. 1965); Jud Plumbing & Heating, Inc v. Commissioner, 153 F.2d 681">153 F.2d 681 (5th Cir. 1946). Respondent12 asserts, finally, that none of the gain petitioners realized on the sale of their business is attributable to the sale of goodwill. We agree with respondent. Respondent's determination of a deficiency is presumptively correct. Petitioners have the burden of proving such determination is wrong. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.The sale of a going business by a sole proprietor is the sale of all the assets of that business, rather than the sale of a single entity.The selling price must, therefore, be allocated among the individual assets with the character of the gain with respect to an asset determined by the character of that asset. Williams v. McGowan, 152 F.2d 570">152 F.2d 570 (2d Cir. 1945); Bialock v. Commissioner, 35 T.C. 649">35 T.C. 649 (1961). The burden for making the allocation is on the taxpayer. Where he has failed to prove the capital nature of items sold, the gain will be taxed as ordinary13 income. Friedlaender v. Commissioner, 26 T.C. 1005">26 T.C. 1005 (1956); Newton v. Commissioner, 12 T.C. 204">12 T.C. 204 (1949). The taxpayer also has the burden of proving what portion of the selling price is attributable to the sale of goodwill. Wilmot Fleming Engineering Co. v. Commissioner, 65 T.C. 847">65 T.C. 847 (1976); Newton v. Commissioner, supra.Petitioners have failed to show both what portion of the selling price is allocable to each item sold and the capital nature of these items. Several assets sold are specifically excepted from the definition of capital asset in section 1221: 2 accounts receivable (section 1221(4)), inventories (section 1221(1)), furniture and fixtures subject to depreciation (section 1221(2)). In their brief, they seem to have accepted respondent's allocation that all of the gain from the sale of Tailors was from the sale of "customers' deposits," a liability account. 14 They argue, however, that this income might have been taxed in earlier years and thus gain from the sale of this account can only be capital gain. There is no merit to this argument. Petitioners cite Schlude v. Commissioner, 372 U.S. 128">372 U.S. 128 (1963); American Automobile Assn. v. United States, 367 U.S. 687">367 U.S. 687 (1961); S. Garber, Inc. v. Commissioner, 51 T.C. 733">51 T.C. 733 (1969); Farrara v. Commissioner, 44 T.C. 189">44 T.C. 189 (1965), in support of their contention. These cases merely indicate that if the Commissioner had challenged Tailors' method of accounting, petitioners would have had to report income when received even though Tailors was on the accrual basis.The Commissioner, however, has not objected to petitioners' accounting method. In their reply brief, petitioners assert that since the buyer assumed the liability account in 1963 and since petitioners were also taxed on advance payments in 1963, the payments received by them in the taxable years in issue cannot be the result of either. This argument is also without merit. The payments petitioners received in 1964 through 1966 stemmed from the sale of their business in 1963. 15 That they received payments from this sale in later years does not fragmentize the sale itself. The sale of the "customers' deposits" account allowed petitioners to keep the cash represented by this bookkeeping entry and transferred to the buyer the obligation to deliver the suit to the customer as well as the right to receive any balance due under the customer's contract to purchase a suit. This account was integral to the everyday operation of Tailors and represented a right to future income. Since the term "capital asset" is to be narrowly construed and applied where there has been an "appreciation in value accrued over a substantial period of time," Commissioner v. Gillette Motor Co., 364 U.S. 130">364 U.S. 130, 134 (1960), it is an inappropriate characterization of "customers' deposits." Rather, respondent's classification of this item, which could have given rise to future income or loss, as an ordinary income item is more appropriate. See Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260 (1958); Corn Products Refining Co. v. Commissioner, 350 U.S. 46">350 U.S. 46 (1955).16 In their reply brief, moreover, petitioners claim that at least some of the gain from the sale of Tailors is attributable to goodwill. They argue that the sales agreement included the sale of "goodwill, business name and customers' lists," that the balance sheet of the business immeidately before the sale contains "goodwill (purchased)," that Tailors was able to collect deposits of $164,184.16, and that the buyer paid more than book value for the business. There is little evidence in the record to support petitioners' contention. The goodwill referred to on the balance sheet relates to goodwill purchased sometime in the past. Any additional goodwill included in the sale at issue has not been shown. Decisions will be entered for the respondent. Footnotes1. respondent issued a notice of deficiency to petitioners for 1963, asserting that petitioners had failed to report ordinary income in the amount of $74,372.52 resulting in an alleged deficiency of $23,776.88. Petitioners paid the asserted deficiency but after a denial of their claim for a refund, filed a refund suit in the United States District Court for the Northern District of California (No. C-70-2558 LHB). Our research indicates that case did not go to judgment on its merits.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue, unless otherwise stated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620624/	James Louis Stafford v. Commissioner.Stafford v. CommissionerDocket No. 6382-66.United States Tax CourtT.C. Memo 1968-80; 1968 Tax Ct. Memo LEXIS 218; 27 T.C.M. (CCH) 394; T.C.M. (RIA) 68080; May 2, 1968. fileo James Louis Stafford, pro se, 4962 Loleta Ave., Los Angeles, Calif. Loren P. Oakes, for the respondent. 395 FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the calendar year 1964 in the amount of $294.93. The sole issue for determination is whether respondent's disallowance of travel expenses in the amount of $1,394.50 was proper. Findings of Fact Some of the facts have been stipulated, and the stipulation of facts is hereby incorporated by this reference. Petitioner filed his Federal income tax return for the calendar year 1964 with the district director of internal revenue at Los Angeles, California. Petitioner was a resident of Los Angeles, California, at the time of the filing of the petition herein. Petitioner, 219 at all times material to this case, was employed as a social worker by the Bureau of Public Assistance, County of Los Angeles, California. From July 1961 until December 1963 his principal post of duty was in Los Angeles. In December 1963 he was promoted with a change in post of duty to Lancaster, California. At the same time he moved his residence to Palmdale, California, which is located approximately eight miles south of Lancaster. From January 1964 until approximately July 1, 1964, petitioner drove his automobile to and from work. On or about July 1, 1964, petitioner moved his residence from Palmdale to Glendale, California. Glendale is located approximately 66 miles from Lancaster. Petitioner for the balance of the tax year in question resided in Glendale and continued to work in Lancaster. Each day he drove his automobile between his residence in Glendale and his duty post in Lancaster, a total distance of 132 miles. Petitioner continued to work in Lancaster until February 1965. Petitioner moved to Glendale in July because he had vacation time available during which time he could effectuate the move. He did so acting on the assumption that he would take and pass a promotional220 examination to be given during either August, September, or October 1964. If he scored well on the examination, he assumed he would be transferred to the central business district of Los Angeles. Glendale is more proximate to this area than is Palmdale. There was no requirement that petitioner live other than in Palmdale in order to qualify for the examination. Nor was there any pressure from his employer for him to do so. Whether petitioner took the examination is not clear from the record. He did, however, remain at the Lancaster office until February 1965. On his income tax return for the calendar year 1964 petitioner claimed that the travel between Glendale and Lancaster amounted to a total of 17,160 miles. The petitioner computed his claimed deduction on the basis of 15 cents per mile for the first 10,000 miles and 5 cents per mile for the additional miles in excess of 10,000. He then reduced the amount so computed by 25 percent, which he deemed to represent personal expenses. He therefore claimed a deduction in the amount of $1,394.50. In his statutory notice of deficiency, respondent disallowed the claimed deduction as being a nondeductible personal expense. Opinion221 The sole issue for determination is whether respondent's disallowance of this claimed transportation expense deduction is proper. A review of the record before us indicates that respondent's determination must be sustained. Expenses incurred in traveling between one's personal residence and place of business are generally nondeductible personal expenses. Income Tax Regs. sections 1.162-2(e) and 1.262-1(b)(5); Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465 (1946); Arthur Sansone, 41 T.C. 277">41 T.C. 277 (1963); and Beatrice H. Albert, 13 T.C. 129">13 T.C. 129 (1949). The petitioner, though he agrees with the above statement of the law, contends that there are, herein, mitigating circumstances which should entitle him to the deduction. We do not agree. In general, petitioner argues that there was a greater opportunity for advancement in the central business district of Los Angeles than in Lancaster. Petitioner assumed he would be selected for advancement and would soon be working in the Los Angeles area. With this expectation, he moved to Glendale, which is more proximate to the central business district of Los Angeles than is Palmdale. He thereafter222 commuted between Glendale and Lancaster, a total of 132 miles round trip. 396 The expenses so incurred are clearly personal. The petitioner was merely exercising his personal preference physically to establish his personal residence at a location which he hoped would correspond with his future employment expectations. The expenses of commuting between his new personal residence and his same post of duty are, therefore, not deductible. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620625/	LEONARD A. LUTZ, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLutz v. CommissionerDocket No. 23618-83.United States Tax CourtT.C. Memo 1986-13; 1986 Tax Ct. Memo LEXIS 592; 51 T.C.M. (CCH) 262; T.C.M. (RIA) 86013; January 13, 1986. 592 P has totally and willfully failed to produce documents despite a specific order of this Court directing him to do so. Held, P's failure constitutes a default and judgment therefor is appropriate respecting the income tax deficiencies and the additions to the tax under sec. 6654, I.R.C. 1954. Rule 104(c)(3), Tax Court Rules of Practice and Procedure.Held further, P is liable for the additions to tax for fraud under sec. 6653(b), I.R.C. 1954. Rule 104(c)(1), Tax Court Rules of Practice and Procedure.Durovic v. Commissioner,84 T.C. 101">84 T.C. 101 (1985), followed. 593 Leonard A. Lutz, pro se. Russell F. Kurdys and Willie E. Armstrong, Jr., for the respondent. CANTRELMEMORANDUM OPINION CANTREL, Special Trial Judge: This case is before the Court on respondent's Motion to Impose Sanctions [under Rule 104(c)] 1 filed on August 15, 1985. 2Respondent, in his notice of deficiency issued to petitioner on May 19, 1983, determined deficiencies in petitioner's Federal income tax and additions to the tax for the taxable calendar years 1979 through 1981 in the following respective amounts: Additions to Tax, I.R.C. 1954 3YearsIncome TaxSection 6653(b)Section 66541979$1,583.98$791.99$65.8419802,261.281,130.64144.0719811,465.65732.83112.32The adjustments to income as determined by respondent in his deficiency594 notice are: 197919801981Salaries & Wages Unreported$1,970.00$2,514.28$ 550.00 Rents Unreported2,043.002,160.002,160.00 Distributive share ofpartnership ordinaryincome unreported1,230.315,862.184,517.02 Capital Gains Unreported3,797.70853.12 Exemption(1,000.00)$9,041.01$10,536.46$7,080.14 Petitioner resided at 202 Sylvan Heights Drive, Sylvania, Georgia on the date his timely petition was filed. He filed no Federal income tax returns with the Internal Revenue Service for the years at bar. 4At paragraph 4 of his petition filed on August 12, 1983 petitioner recites--"I do not believe I owe any of the above." 5595 Respondent filed his answer on February 27, 1984 and, as stated earlier, petitioner filed his reply on June 14, 1984, on which date the pleadings were closed. More than 30 days thereafter respondent commenced discovery. See Rules 34, 36, 38 and 70(a)(2). This case has had quite a history preceding the invocation of discovery. Since that matter is not pertinent to our present inquiry it will not be discussed. Suffice it to say petitioner is no stranger to this Court. He has been here before with his spouse (who currently is before the Court on an identical motion to that we consider here at docket No. 23619-83) in the case designated docket No. 9211-81. There, when they failed to appear for trial, their case was dismissed for failure to properly prosecute and decision ws entered embracing a 1978 income tax deficiency on November 3, 1982. Respondent, by and through his motion, seeks dismissal of this case and entry of decision for the income tax deficiencies and all of the additions to the tax determined in his deficiency notice. On December 18, 1984 respondent, pursuant to Rule 72, served on petitioner an 11 paragraph document request. A review of those requests reveals596 that they seek documents which are highly relevant and material to the issues at dispute in this case. The purpose of the pleadings and discovery is to give the parties and the Court fair notice of the matters in controversy and the basis for their respective positions. See Rule 31(a) and Kabbaby v. Commissioner,64 T.C. 393">64 T.C. 393, 394 (1975). All of the pertinent and relevant facts necessary to the disposition of a case should see the light of day prior to the trial of a case. The basic purpose of discovery is to reduce surprise by providing a means for the parties to obtain knowledge of all relevant facts in sufficient time to perfect a proper record for the Court if a case must be tried. "For purposes of discovery, the standard of relevancy is liberal. Rule 70(b) permits discovery of information relevant not only to the issues of the pending case, but to the entire 'subject matter' of the case." Zaentz v. Commissioner,73 T.C. 469">73 T.C. 469, 471 (1979). When petitioner597 totally failed to respond to respondent's discovery request, respondent submitted a Motion to Compel Compliance Therewith, which the Court filed on January 22, 1985. 6By Order dated February 12, 1985, a copy of which was served on the parties by the Court on February 14, 1985, respondent's Motion to Compel was granted and petitioner was advised therein, in pertinent part, as follows: ORDERED that respondent's above-referenced motion to compel is granted in that petitioner shall, on or before May 1, 1985, produce to counsel for respondent those documents requested in respondent's request for production of documents served on petitioner on December 18, 1984. 7 It is further ORDERED that in the event petitioner does not fully comply with the provisions of this order, this Court will be inclined to impose sanctions pursuant to Tax Court Rule 104, which may include dismissal of this case and entry of a decision against petitioner. 598 Petitioner did not produce the documents as directed by this Court and it appears he had no intention of doing so for in a letter dated May 22, 1985 to respondent's District Counsel at Pittsburgh, Pennsylvania he states-- Having spoken to you on the phone and understanding that I have one of two choices (i.e. take evidence in to be used against myself OR refuse to go in at all) I have chosen not to go in since this would violate my rights under the 5th amendment to the Constitution (sic) of the United States of America. I assume this means that the court will immediately deny me any farther (sic) hearing in this matter, but this cannot be helped in the light of those rights which are mine under the Constitution. On August 15, 1985 respondent filed the motion we now consider. A copy of that motion together with a copy of a Notice of Hearing calendaring respondent's motion for hearing at Washington, D.C. on September 18, 1985 were served on petitioner on August 19, 1985. When the case was called on September 18, 1985 petitioner did not appear, no response to respondent's motion was filed nor did he comply with our discovery order. Our Rules of Practice and our orders mean599 exactly what they say and we intend that they be complied with. Rosenfeld v. Commissioner,82 T.C. 105">82 T.C. 105, 111 (1984); Odend'hal v. Commissioner,75 T.C. 400">75 T.C. 400, 404 (1980); Branerton Corp. v. Commissioner,61 T.C. 691">61 T.C. 691, 692 (1974). Although given more than an ample opportunity to comply with our Rules and a specific order of this Court petitioner has not done so and there is not one valid reason extant in this record to explain his total failure to comply. He has, in essence, ignored and defied our order of February 12, 1985, and, by his inexcusable conduct, shown complete and utter disrespect for our Rules and an order of this Court. Indeed, petitioner's total failure to act has worked to his detriment. On this record, we find petitioner's absolute failure to comply with our order to be willful. Petitioner's due process rights have not been abrogated or abridged here. Ginter v. Southern,611 F.2d 1226">611 F.2d 1226 (8th Cir. 1979); Cupp v. Commissioner,65 T.C. 68">65 T.C. 68 (1975), affd. in an unpublished opinion 559 F.2d 1207">559 F.2d 1207 (3rd Cir. 1977). His general assertion that his Fourth and Fifth Amendment600 rights have been violated is wholly frivolous. See Rechtzigel v. Commissioner,79 T.C. 132">79 T.C. 132, 136-139 (1982), affd. per curiam 703 F.2d 1063">703 F.2d 1063 (8th Cir. 1983). In Edwards v. Commissioner,680 F.2d 1268">680 F.2d 1268, 1270 (9th Cir. 1982), the Court said-- Appellant's fourth amendment claim is without foundation and utterly devoid of merit.Requiring taxpayers, who institute civil proceedings protesting deficiency notices, to produce records or face dismissal constitutes no invasion of privacy or unlawful search and seizure. 8As we view this record, respondent's discovery request sought documents highly relevant and material to the issues at dispute. Nowhere in this record does petitioner argue to the contrary. 601 Nonetheless, he made no attempt to comply with those requests despite a specific order of this Court directing him to do so. Rule 104, respecting enforcement actions and sanctions, provides in pertinent part as follows-- (c) Sanctions: If a party * * * fails to obey an order made by the Court with respect to the provisions of Rule * * * 72 * * * the Court may make such orders as to the failure as are just, and among others the following: * * * (3) An order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the case or any part thereof, or rendering a judgment by default against the disobedient party. Rule 104(a) and (c) provide various sanctions for failure to respond to discovery requests and for failure to comply with discovery orders. The sanctions for each are the same and are enumerated in Rule 104(c). Where no discovery order is outstanding dismissal is appropriate only upon total failure to respond to discovery requests. 602 However, where a party fails to comply with a Court order dismissal may be appropriate even though there has been a partial response. Dusha v. Commissioner,82 T.C. 592">82 T.C. 592, 602-604 (1984), which was reviewed by the Court. Here, petitioner has, without justification, totally and willfully refused to respond to respondent's discovery request in spite of a specific order of this Court directing him to do so. Among the sanctions available, dismissal is one of the most severe and should not be ordered indiscriminately. Dusha v. Commissioner,supra at 605. Nevertheless, it must be available under appropriate circumstances not merely to penalize the party for failure to comply with a Court order but also to deter other taxpayers from engaging in similar conduct. Dusha v. Commissioner,supra at 605-606; National Hockey League v. Met. Hockey Club,427 U.S. 639">427 U.S. 639, 643 (1976). Dismissal is proper for failure to comply with this603 Court's discovery orders where such failure is due to willfulness, bad faith or other fault of the party. Dusha v. Commissioner,supra at 604; Societe Internationale v. Rogers,357 U.S. 197">357 U.S. 197, 212 (1958). Where the evidence requested is material, failure to produce it constitutes an admission of the lack of merit in the party's position. Dusha v. Commissioner,supra at 605; Hammond Packing Co. v. Arkansas,212 U.S. 322">212 U.S. 322 (1909). In the circumstances of this case we conclude that petitioner's persistent, stubborn and, thus, unwarranted and unjustified conduct constitutes a default and that dismissal of this case respecting the income tax deficiencies and the additions to the tax under section 6654 for failure to comply with our rules and a specific order of this Court is, albeit a severe sanction, appropriate under Rule 104(c)(3). See Steinbrecher v. Commissioner,712 F.2d 195">712 F.2d 195 (5th Cir. 1983), affg. T.C. Memo. 1983-12; Miller v. Commissioner,741 F.2d 198">741 F.2d 198 (8th Cir. 1984), affg. per curiam an order of dismissal and decision of this Court; Hart v. Commissioner,730 F.2d 1206">730 F.2d 1206 (8th Cir. 1984),604 affg. per curiam an order of dismissal and decision of this Court; Rechizigel v. Commissioner,supra; McCoy v. Commissioner,696 F.2d 1234">696 F.2d 1234 (9th Cir. 1983), affg. 76 T.C. 1027">76 T.C. 1027 (1981); Eisele v. Commissioner,580 F.2d 805">580 F.2d 805 (5th Cir. 1978). 9605 Next, we turn our consideration to the additions to the tax under section 6653(b). Rule 104(c) provides as a sanction that we may make "[a]n order that the matters regarding which the order was made or any other designated facts shall be taken to be established for the purposes of the case in accordance with the claim of the party obtaining the order." 10Respondent has the burden of proving fraud by clear and convincing evidence, and he may carry his burdne by relying on facts deemed established by reason of a Court order. Rechtzigel v. Commissioner,supra at 139-143; Marcus v. Commissioner,70 T.C. 562">70 T.C. 562, 571-573 (1978), affd. without published opinion 621 F.2d 439">621 F.2d 439 (5th Cir. 1980);*606 section 7454(a) and Rule 142(b). Moreover, it is clear that, as a sanction for the total and willful failure to comply with our Order of February 12, 1985, we may deem established for purposes of this case certain facts, including facts pertaining to the additions to the tax for fraud. Durovic v. Commissioner,84 T.C. 101">84 T.C. 101, 118-119 (1985). 11 By and through our Order dated December 18, 1985 and as a sanction we deemed established for purposes of this case the affirmative allegations contained in paragraph 6(a) through (r) of respondent's answer. The facts which we have deemed established are sufficient for respondent to carry his burden of proof and to show that there was a fraudulent underpayment of taxes by petitioner. An appropriate order and decision will be entered.Footnotes1. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. This case was assigned pursuant to sec. 7456(d)(3), Internal Revenue Code of 1954↩, as amended, and Delegation Order No. 8 of this Court, 81 T.C. XXV (1983).3. All section references are to the Internal Revenue Code of 1954, as amended.↩4. The 1979 Form 1040, which petitioner submitted to the Internal Revenue Service on May 21, 1980 and which was completely devoid of information concerning income, did not constitute a valid Federal income tax return. Jarvis v. Commissioner,78 T.C. 646">78 T.C. 646, 652-655↩ (1982), and cases cited therein. At paragraph 6(b) of his Reply to respondent's Answer filed on June 14, 1984 petitioner admits that he filed no Federal income tax return for 1980 or 1981.5. This is the sum and substance of petitioner's case. We observe, however, that he has not placed the income tax deficiencies at dispute. He disputes only the additions to the tax under secs. 6653(b) and 6654↩.6. Respondent served a copy of his motion on petitioner on January 16, 1985.↩7. Petitioner was given more than the usual time to produce the requested documents since he advised the Court that he had recently moved, his spouse was to undergo surgery and his two grade school children needed supervision. Petitioner's time to produce was further extended, at his request, to June 3, 1985.↩8. See Ricket v. Commissioner,773 F.2d 1214">773 F.2d 1214 (11th Cir. 1985), where the Court rejected a Fifth Amendment claim as frivolous. We observe that venue on appeal of this case lies in the United States Court of Appeals for the Eleventh Circuit. See also, Hallowell v. Commissioner,744 F.2d 406">744 F.2d 406, 408↩ (5th Cir. 1984).9. See also, Keating v. Commissioner,T.C. Memo. 1985-312; Hollander v. Commissioner,T.C. Memo. 1985-184; Delaney v. Commissioner,T.C. Memo 1985-73">T.C. Memo. 1985-73; Baranski v. Commissioner,T.C. Memo 1984-639">T.C. Memo. 1984-639; Kuhn v. Commissioner,T.C. Memo. 1984-638; Romano v. Commissioner,T.C. Memo. 1984-568; Burton v. Commissioner,T.C. Memo. 1984-99; Douglas v. Commissioner,T.C. Memo. 1983-786, affd. without published opinion 754 F.2d 373">754 F.2d 373 (6th Cir. 1984); Kuever v. Commissioner,T.C. Memo. 1983-58; Murmes v. Commissioner,T.C. Memo. 1983-55; Riehle v. Commissioner,T.C. Memo. 1982-141; Farley v. Commissioner,T.C. Memo. 1981-606; Gaar v. Commissioner,T.C. Memo. 1981-595↩.10. We wish to emphasize at this point that petitioner, in his reply filed on June 14, 1984, admits that he received the adjustments to income set forth in the proceeding schedule and that he did not report any of those amounts on any Federal income tax return for the years at bar.↩11. See and compare Hartman v. Commissioner,T.C. Memo. 1985-482↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620626/	GARY E. STOUT AND PATTI J. STOUT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentStout v. CommissionerDocket No. 13198-83.United States Tax CourtT.C. Memo 1984-492; 1984 Tax Ct. Memo LEXIS 180; 48 T.C.M. (CCH) 1124; T.C.M. (RIA) 84492; September 13, 1984. Gary E. Stout, pro se. Kenneth Burns, for the respondent. DRENNEN MEMORANDUM OPINION DRENNEN, Judge: This matter is before the Court on respondent's motion for summary judgment, made orally at trial on June 6, 1984. By notice of deficiency dated February 24, 1983, respondent determined the following deficiencies in and additions to petitioners' Federal income tax: Additions to TaxTaxable YearDeficiencySec. 6651(a) 1Sec. 6653(a)1979$18,701.00$943.90$1,103.90198013,191.89659.59181 Petitioners resided in Nevada at the time they filed their petition herein. During 1979 and 1980, petitioner Gary Stout was engaged in a business involving the sale of real estate. During 1980, petitioner Patti Stout was engaged in a business involving the sale of real estate, and also was employed by Vogue Cleaners. During both years, petitioners held rental property from which they reported net losses. Petitioners filed joint Federal income tax returns for 1979 and 1980. On their 1979 return, petitioners reported business income of $45,430. The deficiency for 1979 is attributable to respondent's disallowance of various Schedule C business expenses, a farm loss, various itemized deductions, and two exemptions for dependents. On their 1980 return, petitioners reported business income of $16,051 and wages of $6,661. On line 21 of their Form 1040, petitioners claimed a negative adjustment to income in the amount of $48,372 for "non-taxable income"; no explanation of this item was given. The deficiency for 1980 is attributable to respondent's disallowance of that adjustment, as well as his disallowance of various Schedule C business expenses, a farm loss, a rental182 loss, various itemized deductions, and one exemption for a dependent. The petition does not contain any specific assignments of error, but merely states: We have presented our arguments relating to the taxation of income, etc. However, we have also tried to present documentation regarding the claimed deductions. All to no avail. We have had all deductions disallowed. This is wrong even if we cannot prove anything else. We have not been granted an Appeal Hearing, either. This proceeding was called for trial on June 6, 1984 in Las Vegas. At that time, petitioner Gary Stout appeared and advised the Court that he and Patti were divorced since the time they filed the petition herein, and that he was authorized to represent Patti. We shall hereinafter refer to Gary as petitioner. Contrary to the statement in the petition, petitioner has made no effort to cooperate with respondent, and has provided no documents or receipts to substantiate any of the items in dispute. Apart from the pleadings, petitioner's only communication with respondent consisted of interrogatories of a "tax protest" nature which he mailed to respondent. Petitioner obtained the interrogatories183 and other "tax protest" materials from a Mr. Pelletier, who purportedly "represented" petitioner before respondent's appeals officers. 2At the time this proceeding was called for trial, petitioner advised the Court that he did not intend to provide any evidence substantiating the items in dispute, but would rely wholly on constitutional arguments such as the contention that compensation for personal services does not constitute taxable income. Petitioner adhered to this position despite our warning to him that his failure to provide any evidence concerning the items in dispute likely would result in a decision for respondent for the full amounts of the deficiencies. We also cautioned petitioner that we would consider imposing damages under section 6673 in light of his frivolous constitutional arguments. When it became clear that petitioner would not proffer any evidence, counsel184 for respondent moved for summary judgment for the full amount of the deficiencies and additions to tax. After explaining to petitioner the meaning and procedure of summary judgment, we agreed to hear argument on respondent's motion. The parties agreed that the only issue was whether compensation for personal services constitutes taxable income, and we thereupon heard argument solely on that legal issue. Petitioner asked permission to file a written brief rather than state his arguments orally. We granted permission to petitioner of file a brief outlining his argument, and took respondent's motion for summary judgment under advisement. The "brief" petitioner submitted is nothing more than a voluminous assemblage of "tax protest" materials, containing no facts or arguments relevant to the instant proceeding. Rule 121 3 provides that a party may move for summary judgment upon all or any part of the legal issues in controversy so long as there are no genuine issues of material fact. Rule 121(b) states that a decision shall be rendered if the record shows that "there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." 185 A motion for summary judgment is proper and will be granted where no facts have been pleaded showing a genuine issue for trial. , affg. an unreported decision of this Court; ; . Petitioner's obstinacy in adhering to his misguided tax protest arguments, rather than attempting to substantiate the items in dispute, leaves no issue of material fact in this proceeding, and we have no alternative but to grant respondent's motion for the full amount of the deficiencies and additions to tax herein. Petitioner's frivolous argument that compensation for services is not taxable income has been rejected repeatedly by this Court, and merits no further discussion. See, e.g., ; . Nor has petitioner presented any facts showing that the underpayments in question were not due to negligence or the186 intentional disregard of rules and regulations within the meaning of section 6653(a), an issue on which he bears the burden of proof. ; Rule 142(a). Indeed, petitioner's complete reliance on frivolous and thoroughly discredited tax protest arguments renders the imposition of this addition to tax a foregone conclusion. See ;; . In the notice of deficiency respondent determined that petitioner's return for 1979 was not timely filed and that failure to file on time was not due to reasonable cause. Petitioner, who has the burden of proof on this issue, did not specifically claim error in this determination in his petition and offered no evidence with respect thereto. Respondent's determination on the addition to tax under section 6651(a) for 1979 is therefore sustained. Respondent's motion for summary judgment will be granted in every respect. Finally, we must consider whether to award damages to the United States under section 6673. 4187 Respondent did not press his request for damages in connection with his motion for summary judgment. We observe that at the time he filed his 1979 return, petitioner demonstrated no inclination to protest the payment of tax. Sometime later, petitioner apparently encountered Pelletier, who we think influenced him to engage in tax protest activity and misled him in regard to the possible consequences of such activity. Under the particular circumstances of this case we will not award damages. However, we advise petitioner that further continuation of such activity will probably result in section 6673 damages being awarded. 188 An appropriate order and decision will be entered.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years in issue.↩2. We became aware during the Las Vegas trial session that Mr. Pelletier, who is not an attorney, has orchestrated the activities of a large number of tax protesters in the Las Vegas area and has repeatedly attempted to represent such taxpayers before the Internal Revenue Service and this Court.↩3. All rule references are to the Tax Court Rules of Practice and Procedure.↩4. As effective for cases commenced in this Court after December 31, 1982, sec. 6673 provides: SEC. 6673. DAMAGES ASSESSABLE FOR INSTITUTING PROCEEDINGS BEFORE THE TAX COURT PRIMARILY FOR DELAY, ETC. Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless, damages in an amount not in excess of $5,000 shall be awarded to the United States by the Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary and shall be collected as a part of the tax.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620629/	Milton J. Noell and Adelaide Noell, Petitioners v. Commissioner of Internal Revenue, RespondentNoell v. CommissionerDocket No. 925-73United States Tax Court66 T.C. 718; 1976 U.S. Tax Ct. LEXIS 74; July 19, 1976, Filed 74 Decision will be entered under Rule 155. 1. In 1968, petitioner sold a 15.987-acre tract located in Dallas County, Tex. Petitioner's basis in the tract depended on its value in March 1944 when he inherited his interest in the property. Held, the value of the 15.987-acre tract as of March 1944 determined.2. Petitioner also had an interest in an 85-acre tract which he and his partner subdivided into 68 homesite lots and an adjoining airport runway with two main taxiways. The resulting development is known as Air Park Estates, and its most important feature is that it allows homeowners to taxi their private aircraft along-side their homes. The partnership retained ownership and control over the airport facilities. While petitioner had contractual obligations to the homeowners with respect to the airport facilities, these facilities remained open to separate commercial exploitation by petitioner. Held, petitioner's basis in the airport facilities cannot be allocated among the lots sold. Held, further, petitioner is entitled to an investment credit in 1968 for the construction of the airport runway. Clinton J. Wofford, Jr., for the petitioners.James R. Turton, for the respondent. Wilbur, Judge. WILBUR719 Respondent has determined a deficiency in petitioners' Federal income tax for the taxable year 1968 in the amount of $ 10,927.81.Several issues have been settled by the parties and the following issues remain for our decision:(1) Petitioners' basis in a 15.987-acre tract of land sold in 1968.(2) Whether the petitioners' basis in a main airport runway and two adjacent taxiways should be added to the basis of 68 subdivided lots in an 85-acre tract.(3) Whether petitioners are entitled to an investment tax credit in 1968 for their investment in the airport runway and two adjacent taxiways.FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.The petitioners, Milton J. and Adelaide Noell, husband and wife, resided in Addison, Tex., at the time their petition was filed herein. They filed their joint income tax return for the year 1968 with the Director, Internal77 Revenue Service Center, Austin, Tex. Unless otherwise indicated, Milton J. Noell will be referred to as petitioner.720 On July 29, 1968, petitioner sold a 15.987-acre tract of land in the Noah Good Abstract No. 520, Dallas County, Tex. (sometimes referred to as subject property), for $ 127,896. 1 The Noah Good Survey is a 640-acre tract located in what is now the city of Addison, Dallas County, Tex. The subject property was part of a larger 185-acre tract located in the Noah Good Survey. As of March 28, 1944, the subject property did not front on any street or road, although the 185-acre tract of which it was a part did have frontage on both Marsh Lane and Spring Valley Road. The 15.987-acre tract and the surrounding area were largely undeveloped in 1944 except for scattered residential properties. The area had not been incorporated into any city limits and public utilities were not available. The area was used primarily for pasture land.78 Petitioner also owned an 85-acre tract of land in Collin County, Tex. This tract was subdivided into 68 homesite lots and an adjoining airport runway and two main taxiways. The development is known as the Air Park Estates, and its most important feature is that it allows homeowners to taxi their private aircraft alongside their homes. The homesite lots were for residential purposes only, although private hangars could be built if they were limited in size and incorporated into the architecture of the home.The contract of sale contained several restrictive covenants, including the following:The operation or construction of business houses, aircraft maintenance shops, hotels, boarding, lodging and/or apartment houses is likewise prohibited. Nothing herein contained shall be construed as preventing Air Park Associates or their assigns from erecting and maintaining recreational facilities or a community center for the benefit of the home owners.However, the restrictive covenants specifically exempted "the commercial properties east of the landing strip" from this restriction and other restrictions that would inhibit the use of the commercial property for aviation-related businesses. 79 Air Park Associates, a copartnership composed of Milton J. Noell and David W. Noell, retained ownership of the main airport runway and two adjacent taxiways as well as the commercial property east of the runway where hangar space was 721 leased and it was contemplated that aviation-related commercial facilities would be erected. However, ownership of the main runway and two adjacent taxiways was retained subject to the following provisions of paragraph B of the contracts of sale of the individual lots:B. An aircraft landing area being a minimum of 300 feet wide and 3,000 feet long will at all times be available to the homesites property owners via taxiways arranged according to said plat filed in Collin County, Map Records. Said landing area will be owned, controlled and maintained by Air Park Associates, their heirs or assignees at no cost to the homeowners for a minimum period of ten years and will continue thereafter until such time as said landing strip might cease to be economically feasible and at which time said strip and taxiways will be donated to the homeowners in exchange for access and usage privileges without charge to the donors except for a proportionate part80 of the maintenance cost which will be determined by a board of three independent appraisers, if necessary. In the event of discontinuance of use of said landing strip as an aircraft landing area, title to same will revert to the donors, their heirs or assignees.Thirty-four of the lots in Air Park Estates were sold in 1966, 1967, and 1968. 2From late 1965 until October 22, 1968, petitioner was engaged in constructing the paved runway and two adjacent taxiways. The manufacturing process consisted of grading, 81 hauling in dirt, supplying a rock base, laying the asphalt pavement, and some incidental sodding. Three layers of the rock base had to be laid into place and the runways had to be paved over with two layers of asphalt.Prior to the time the runway was completed, airplanes landed on a grass strip. After the rock base was laid in place in 1967 some airplanes used the runway, but the roughness of the rock surface made it unsatisfactory for permanent use. Moreover, since the underlying black soil became sticky when wet, the rock surface was only usable under good weather conditions.OPINIONThe first issue to be decided is the basis of the 15.987-acre tract sold by petitioner in 1968. Petitioner inherited a remainder 722 interest in this tract in March 1944 from his father. Petitioner's mother inherited a life estate in the same tract. In 1952 petitioner's mother relinquished to him whatever interest she had in the land, and as a result petitioner acquired a fee simple interest.The basis of property acquired from a decedent is the fair market value of the property at the date of decedent's death. 3 Sec. 1014. 4 Accordingly, petitioner's basis in the property was the fair82 market value of the 15.987 acres on March 28, 1944, the date of his father's death. 583 Petitioner contends that the fair market value of the 15.987-acre tract on March 28, 1944, was between $ 750 and $ 1000 per acre. Respondent, relying on the expert testimony of his witness presented at trial, places the value of this property at $ 300 per acre at that time. 6Fair market value is the price at which property would change hands in a transaction between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both being reasonably informed as to all the relevant facts. O'Malley v. Ames, 197 F.2d 256">197 F.2d 256 (8th Cir. 1952); Harry L. Epstein, 53 T.C. 459 (1969). After careful consideration of the evidence in the record, we find that the fair market value of the 15.987-acre tract as of March 28, 1944, was $ 450 per acre. In reaching this finding we looked at a number of factors affecting the value of the land, including the topography of the land, the highest and best possible use for the property at that time, the accessibility of the parcel, and comparable land sales in the immediate vicinity.723 Respondent's expert witness, Mr. M. P. Christensen, placed primary reliance on eight land sales in the vicinity of petitioner's 15.987-acre tract. These sales took 84 place from 1939 to 1945 and the prices ranged from $ 150 to $ 400 per acre. 7 Except for one sale in 1945, each of the sales examined by Mr. Christensen took place prior to 1944. Two of these sales took place in 1939, with the land selling for $ 350 per acre. Mr. Christensen did not examine the resale of these two properties in February 1946 for approximately $ 750 per acre. While we recognize that the value of land in the area took a sharp upturn after World War II, and that the comparatively stable prices prior to 1944 provide a more certain guide to land values in the area, we nevertheless believe that the later sales are also useful in determining the 1944 value of the subject property. 885 Petitioner arrived at a value in 1944 of $ 750 to $ 1,000 per acre. Petitioner presented no expert witnesses but based his conclusion on his own familiarity with the area. Unfortunately, petitioner has presented little tangible evidence to support his view. He notes that his estimation of value reflected its worth to his family. Furthermore, he asserts that the refusal of his father to sell for less was vindicated by the sharp rise in the value of the land in future years. It is clear, however, that the fair market value at a given point in time cannot be arrived at through the use of hindsight. It is no less clear that a person's subjective view of the value of property does not necessarily reflect its fair market value. While one of the elements carefully considered, petitioner's testimony must be weighed in the light of these problems.The next issue for decision is whether the cost of constructing airport facilities should be added to petitioner's basis in the subdivision lots. It is well established that a subdivider of real property may include in the cost basis of each lot a pro rata portion of expenses incurred for other land or improvements which benefit the development86 as a whole. This principle has been applied to the cost of streets and drives, the cost of constructing water and sewage systems, the cost of recreation areas, and payments made to utility companies to obtain service 724 for the purchasers of the lots. Commissioner v. Laguna Land & Water Co., 112">118 F.2d 112 (9th Cir. 1941); Willow Terrace Development Co. v. Commissioner, 345 F.2d 933 (5th Cir. 1965); Country Club Estates, Inc., 22 T.C. 1283">22 T.C. 1283 (1954); Colony, Inc., 26 T.C. 30 (1956), affd. on other issues 244 F.2d 75">244 F.2d 75 (6th Cir. 1957); Albert Gersten, 28 T.C. 756">28 T.C. 756 (1957), affd. in part and remanded in part on different issues 267 F.2d 195">267 F.2d 195 (9th Cir. 1959); Derby Heights, Inc., 48 T.C. 900 (1967). See also Biscayne Bay Islands Co., 23 B.T.A. 731">23 B.T.A. 731 (1931).When the subdivider constructs a facility for the benefit of the development, without reserving any significant future benefit for himself other than enhancing the value87 of the remaining parcels, it is appropriate to treat his expenditures as part of the cost of the benefited parcels. Where, however, the subdivider retains full ownership and control of the other land or improvements, we have held that he cannot add the cost of these facilities to the basis of each lot sold. Colony, Inc., supra. The rule was stated in Estate of M.A. Collins, 31 T.C. 238">31 T.C. 238, 256 (1958):if a person engaged in the business of developing and exploiting a real estate subdivision constructs a facility thereon for the basic purpose of inducing people to buy lots therein, the cost of such construction is properly a part of the cost basis of the lots, even though the subdivider retains tenuous rights without practical value to the facility constructed (such as a contingent reversion), but if the subdivider retains "full ownership and control" of the facility and does "not part with the property [i.e., the facility constructed] for the benefit of the subdivision lots," then the cost of such facility is not properly a part of the cost basis of the lots.In the instant case, it is true that the airstrip and related88 facilities were constructed to facilitate the sale of lots within the subdivision and that the landing facilities were an integral part of the 85-acre development. Nevertheless, we are of the view that petitioner retained sufficiently complete control and ownership over the landing facilities for ancillary but independent commercial exploitation that they represent a separate asset whose cost is not properly allocable to the cost of the lots.The contract between Air Park Associates and each lot purchaser provided that:Said landing area will be owned, controlled and maintained by Air Park Associates, their heirs or assignees at no cost to the homeowners for a minimum period of ten years and will continue thereafter until such time as said landing strip might cease to be economically feasible and at which time said strip and taxiways will be donated to the homeowners * . In the event of discontinuance 725 of use of said landing strip as an aircraft landing area, title to same will revert to the donors, their heirs or assignees.The agreement did not provide that the facility would be given over to the lot owners at some date certain, and after 10 years the property 89 owners could be charged for use of the airport facilities. Only if any charges ultimately levied against the lot owners and other users, as well as income from the airport related commercial facilities that were contemplated, 9 were not adequate to operate the landing facilities on an "economically feasible" basis would they be donated to the property owners. The contractual language itself contemplates substantial independent commercial use of the landing facilities.The effect of this agreement and attending circumstances is to make the airstrip facilities commercially separate from the surrounding lots. Petitioner90 had commercial interests in these facilities on which he hoped to realize further income. In addition, the agreement provided no restriction against the expansion of these interests.The critical question is whether petitioner intended to hold the facilities to realize a return on his capital from business operations, to recover his capital from a future sale, or some combination of the two; or whether, on the other hand, he so encumbered his property with rights running to the property owners (regardless of who retained nominal title) that he in substance disposed of these facilities, intending to recover his capital, and derive a return of his investment through the sale of the lots. 10 Each case must turn on its facts without the assistance of any litmus paper test. We believe, for the reasons indicated, that the facts of this case fall into the former category, precluding petitioner from attributing the cost of the airport facilities to the adjacent lots.91 726 The facts before us are to be sharply distinguished from those present in Country Club Estates, Inc., 22 T.C. 1283 (1954). In that case the taxpayer was likewise engaged in the building of subdivision lots. As part of a plan to induce people to purchase these lots, the taxpayer deeded one-half of the tract to a nonprofit country club on which a golf course was later built. We held that the cost of the land donated to the country club was to be treated as part of the cost of the lots. The instructive feature of Country Club Estates is that the taxpayer there parted with the ownership of the land for the benefit of the adjacent property owners. Here, by contrast, petitioner retained ownership for separate commercial exploitation. It is this distinction which is critical to our determination.Petitioner argues that the application of the guidelines set forth in Willow Terrace Development Co. v. Commissioner, 345 F.2d 933">345 F.2d 933 (5th Cir. 1965), would produce a different result than the one we have reached above. In deciding whether the water and sewage systems built by the taxpayer there should be added to the92 cost of the lots, the Fifth Circuit noted at page 938:Some relevant factors to be considered in determining the proper tax treatment of the costs of such facilities are whether they were essential to the sale of the lots or houses, whether the purpose or intent of the subdivider in constructing them was to sell lots or to make an independent investment in activity ancillary to the sale of lots or houses, whether and the extent to which the facilities are dedicated to the homeowners, what rights and of what value are retained by the subdivider, and the likelihood of recovery of the costs through subsequent sale. * An examination of the instant case with emphasis on these factors only reinforces our conclusion that the cost of the landing facilities should not be added to the basis of the lots. While the airport facilities were important to the sale of the lots, petitioner also regarded these facilities as an independent investment activity. The subdivider retained the ownership of virtually all rights in the property, subject to the restrictive covenants.The agreement gave Air Park Associates the right to commercially exploit the landing facilities, and there was no prohibition93 against Air Park Associates selling the facility subject to the restrictive covenants. Moreover, the landing strip and main taxiways were not surrounded by the lots. All of the lots were directly west of the landing facilities, and while connected to the facility by a series of taxiways the airstrip could nevertheless 727 be owned and used for the foreseeable future as an income-generating activity separate from the income realized from the sale of lots. Thus the cost of the facilities could be recovered in a subsequent sale, or through depreciation and income from commercial usage. We therefore hold that under the circumstances here present the cost of the landing facilities may not be added to the basis of the lots in Air Park Estates.The final issue for our determination is whether petitioner is entitled to an investment credit on the runway and taxiway improvements. Respondent argues at the outset that petitioner is not entitled to an investment tax credit since he did not claim the credit on his return or in his petition, but raised the issue for the first time at the trial of this case. Despite respondent's objections, respondent knew in advance that this issue 94 would be presented at trial, had the opportunity to cross-examine petitioner, and argued the question on brief. Furthermore, in examining petitioner's books and records for the purpose of computing allowable depreciation on the runway improvements, respondent focused on facts which would establish the amount of an allowable investment credit. Consequently, we find that respondent was not prejudiced by the presentation of this issue.Moreover, the investment credit question was ancillary to the issue of whether petitioner's costs in constructing the airport facilities should be added to the basis of the lots. If the airstrip expenditures were not properly includable in the basis of the lots, then it is evident that there are other issues, including the investment credit, with respect to the tax rules relating to capital recovery. Indeed the parties stipulated the amount of depreciation allowable assuming the cost of the landing facility may not be allocated to the basis of the lots. We believe consideration of this issue is necessary for a fair resolution of the taxes properly due and owing. Rule 1(b), Tax Court Rules of Practice and Procedure.1195 Sections 38 and 46 allow as a credit against income tax a specified percentage of the taxpayer's qualified investment for the taxable year. 1296 728 The first substantive issue with respect to petitioner's claim for an investment credit is whether the main runway and two taxiways were placed in service in 1968. Section 1.46-3(d) of the Income Tax Regulations provides that section 38 property 13 will be considered as placed in service the earlier of:(i) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins; or(ii) The taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity.97 In the instant case, the issue is when the landing strip was placed in a state of availability for a specific function in petitioner's trade or business. Respondent argues that since airplanes began to use the runway after the rock was laid in place in 1967, the runway was placed in service that year. Petitioner, on the other hand, contends that the use of the runway during the time 729 its construction was still in progress did not mean that the facility had been placed in service. We agree with petitioner.The runway was not "in a condition or state of readiness" in 1967. The rock surface on which some planes landed in 1967 was clearly only a stage in the construction of the facility. This surface was quite unsatisfactory and pilots risked damaging their aircraft by landing on it. Moreover, the rock surface could not be used on a permanent basis, since the landing area easily could be ruined by the weather. In fact, the runway here had been ruined three times before petitioner finally put the pavement down.In short, the facility was simply not available for full service until the runway was paved in 1968. We therefore hold that the landing facilities were not placed98 in service until that year.Finally, respondent argues that there is no evidence establishing a useful life of the airport runway and two adjacent taxiways from which an investment tax credit can be established. We find this to be an unpersuasive argument, in view of the fact that respondent has stipulated depreciation allowable on the runway and taxiways in 1968. 14 After carefully reviewing the entire record, we conclude that in the circumstances here present petitioner is entitled to a full investment credit on the airport runway and two main taxiways for the taxable year 1968. Cf. Rev. Proc. 62-21, 2 C.B. 418">1962-2 C.B. 418, with subsequent modifications.99 Decision will be entered under Rule 155. Footnotes1. Petitioner had expenses of sale amounting to $ 1,965.90. In addition, petitioner had capital expenditures totaling $ 5,985 which should be added to petitioner's basis in the 15.987-acre tract.↩2. In 1968, the petitioner's basis in the 68 lots was $ 726.52 per lot, not including the cost of airport facilities. Petitioner's basis in the main airport runway and two adjacent taxiways, comprising 28.90 percent of the total 85-acre tract, was $ 58,588.39 ($ 35,532.07 comprising the cost of land, and $ 23,056.32 attributable to improvements). If the basis of these facilities is added to the basis in the 68 lots, there would be an added basis to each of $ 861.59, or a total basis of $ 1,588.11 per lot.↩3. If elected, the property may also be valued at an alternate valuation date, pursuant to sec. 2032, I.R.C. 1954, or Sec. 811(j), I.R.C. 1939↩. The date of death is the relevant valuation date here.4. Unless otherwise stated all statutory references are to the Internal Revenue Code of 1954, as amended.↩5. Although petitioner originally received a remainder interest in the property, and only came into possession of the full fee when his mother relinquished her life estate, petitioner's basis in the property must be determined as of the date of decedent's death. Sec. 1.1014-4(a)(2), Income Tax Regs., provides:(2) Under the law governing wills and the distribution of the property of decedents, all titles to property acquired by bequest, devise, or inheritance relate back to the death of the decedent, even though the interest of the person taking the title was, at the date of death of the decedent, legal, equitable, vested, contingent, general, specific, residual, conditional, executory, or otherwise. Accordingly, there is a common acquisition date for all titles to property acquired from a decedent within the meaning of section 1014, and, for this reason, a common or uniform basis for all such interests. * (See also sec. 1.1014-5(a)(2), Income Tax Regs.↩, and sec. 1015.)6. In his statutory notice of deficiency, respondent assigned a value of $ 200 per acre to the property.↩7. The $ 400-per-acre price must be discounted somewhat by the two-story dwelling on the property at the time of the sale. The entire tract was 50.2 acres.↩8. The two sales in 1946 were of property only about one-half mile from the subject property. Too direct a comparison of prices, however, is misleading since the two properties sold in 1946 have more desirable topographical features and greater accessibility.↩9. The record contains a plat of the development indicating that in the commercial area between the entrance road and the runway, some or all of the following commercial facilities were contemplated: a cafe, an air motel, stores, a shop (apparently for airplane maintenance), and hangar space for lease. Petitioner was deriving significant income from hangar rentals in 1968, the year before the Court.↩10. Actually, in most of the cases, the asset involved is encumbered with rights running to the property owners which significantly diminish the value of an asset which nevertheless retains substantial value. This diminution, resulting from restrictions benefiting the adjacent lots, represents a pro tanto disposal with each lot. However, there is no basis in the decided cases, and certainly none in the record before us, for making an allocation based on the rights disposed of and the property retained.↩11. See Rule 41(b), and 3 Moore, Federal Practice, par. 15.13 (2d ed. 1974).↩12. Subject to certain limitations not applicable here. Sec. 46(c) provides:(c) Qualified Investment. -- (1) In general. -- For purposes of this subpart, the term "qualified investment" means, with respect to any taxable year, the aggregate of -- (A) the applicable percentage of the basis of each new section 38 property(as defined in section 48(b)) placed in service by the taxpayer during such taxable year, plus(B) the applicable percentage of the cost of each used section 38 property (as defined in section 48(c)(1)) placed in service by the taxpayer during such taxable year.(2) Applicable percentage. -- For purposes of paragraph (1), the applicable percentage for any property shall be determined under the following table:The applicableIf the useful life is --percentage is --3 years or more but less than 5 years33 1/35 years or more but less than 7 years66 2/37 years or more100 For purposes of this subpart, the useful life of any property shall be the useful life used in computing the allowance for depreciation under section 167 for the taxable year in which the property is placed in service.↩13. We believe that the landing strip and two main taxiways constitute sec. 38 property, and respondent concedes as much in Rev. Rul. 69-329, 1 C.B. 30">1969-1 C.B. 30, and does not really contend otherwise in this litigation. Sec. 48 defines sec. 38 property as follows:SEC. 48. DEFINITIONS; SPECIAL RULES.(a) Section 38 Property. -- (1) In general. -- Except as provided in this subsection, the term "section 38 property" means -- (A) tangible personal property, or(B) other tangible property (not including a building and its structural components) but only if such property --(i) is used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or * *Such term includes only property with respect to which depreciation (or amortization in lieu of depreciation) is allowable and having a useful life (determined as of the time such property is placed in service) of 3 years or more.↩14. Unfortunately, respondent evinced more interest in preventing the issue from being raised than in fairly resolving it. Nevertheless, the useful life assumed in the stipulation appears to be 10 years, and on the basis of all of the evidence, we feel quite certain that the runway and taxiways had a useful life of 8 years or more.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620631/	JACK D. GREENWOOD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGreenwood v. CommissionerDocket No. 19753-88United States Tax CourtT.C. Memo 1990-362; 1990 Tax Ct. Memo LEXIS 379; 60 T.C.M. (CCH) 149; T.C.M. (RIA) 90362; July 18, 1990, Filed 379 Decision will be entered for the respondent. Jack D. Greenwood, pro se. Osmun R. Latrobe, for the respondent. COHEN, Judge. COHENMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies in and additions to petitioner's Federal income taxes as follows: Additions to TaxSec.Sec.Sec.Sec.YearDeficiency6653(b)(1)6653(b)(2)66546661(a)1982$ 53,137$ 26,569$ 5,173$ 13,284198358,35129,1763,57114,588198461,53230,7663,86815,383198564,57632,2883,70016,144380 Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years in issue. By amendment to the answer, respondent has asserted additions to tax for failure to file and for negligence in the event that we do not sustain the additions to tax for fraud. By reason of petitioner's failure to present evidence or otherwise properly to prosecute the case, all issues other than the additions to tax under section 6653(b), as to which respondent has the burden of proof, are decided against petitioner. Rules 123, 142(a), and 149(b), Tax Court Rules of Practice and Procedure.FINDINGS OF FACT Petitioner resided in Oklahoma City, Oklahoma, at the time he filed his petition. Petitioner did not file tax returns for any year from 1970 through 1988 other than 1973. On May 12, 1987, he was convicted of failure to file Federal income tax returns for 1974 and 1975 in violation of section 7203. Petitioner381 also has been convicted of failing to file Oklahoma State income tax returns and incarcerated as part of his sentence. Over a period of years, at least including 1977 and 1979, petitioner was an active participant in tax protest groups that conducted seminars on means of avoiding Federal income taxes. During the years in issue, petitioner was an insurance agent for State Farm Insurance Companies (State Farm). He received commission income and other compensation from State Farm of $ 109,973.93 in 1982, $ 124,863.32 in 1983, and $ 130,535.56 in 1984. Petitioner also received other income. He did not have business expenses or personal deductions that would offset his gross income, and he had substantial taxable income and income tax liabilities for each of the years in issue. Although petitioner received reports of his earnings from State Farm, he failed and refused to maintain records that would disclose his taxable income. He refused to present records for examination by the Internal Revenue Service when his tax liability was investigated. By commencing or threatening suits for damages, he attempted to intimidate persons involved in determination of his tax liabilities, including382 special agents examining his liabilities for 1974 and 1975, respondent's counsel in this case, and an employee of State Farm who testified as a witness. OPINION Notwithstanding his prior criminal convictions, petitioner has continued to maintain frivolous tax protest positions. He challenges the jurisdiction of this Court, although he filed a petition seeking relief from us. His petition alleged that he is not liable for income tax. At the commencement of trial, he filed a Motion for Leave to Withdraw Petition, claiming that he is not a taxpayer. His petition cannot be withdrawn. See Estate of Ming v. Commissioner, 62 T.C. 519">62 T.C. 519, 524 (1974). Petitioner refused to present evidence of his income or deductions. He was called as a witness by respondent, but he objected to almost all of the questions and refused to answer them, citing the Fourth and Fifth Amendments to the Constitution. The Court did not overrule his claimed Fifth Amendment privilege because his continuing failure to file tax returns suggests a risk of self-incrimination for years subsequent to those in issue. Moreover, it was apparent that threatening petitioner with incarceration for contempt383 would not coerce testimony from him. The petition alleged that petitioner had not been allowed certain deductions to which he was entitled. In response to a question by respondent's counsel about his business deductions, petitioner asserted that the average State Farm agent incurred expenses varying from 55 to 65 percent but that his would "probably have been 75 percent or over that." Petitioner claimed that he had no records of his business expenses and objected to questions about his personal deductions. In response to a question by respondent's counsel about a pretrial request for records relating to deductions and business expenses, petitioner testified: On that date [August 16, 1989], I had already been advised of the ruling of the appeals court, and was aware that I was headed for incarceration, and if you sent me anything at that time, it didn't mean any more to me than a circular, sir. It would have gone in the trash.We cannot accept petitioner's assertions that he had expenses, followed by a refusal to specify or substantiate them, in satisfaction of his burden of proving that he is entitled to deductions. See New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934);384 Rockwell v. Commissioner, 512 F.2d 882">512 F.2d 882 (9th Cir. 1975), affg. a Memorandum Opinion of this Court. It is apparent from his assertions, however, that he did earn a profit from his activities as a State Farm agent. Once respondent proved that petitioner received income, it was up to petitioner to prove offsetting deductions. Cf. United States v. Shavin, 320 F.2d 308">320 F.2d 308, 310-311 (7th Cir. 1963); Elwert v. United States, 231 F.2d 928">231 F.2d 928, 933-936 (9th Cir. 1956).Notwithstanding respondent's burden of proof as to fraud, there comes a time when the taxpayer must come forward with evidence to support his claimed defenses. Brooks v. Commissioner, 82 T.C. 413">82 T.C. 413, 433 (1984), affd. without published opinion 772 F.2d 910">772 F.2d 910 (9th Cir. 1985). The addition to tax under section 6653(b) 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).Cf. United States v. Thompson, 279 F.2d 165">279 F.2d 165, 169 (10th Cir. 1960).385 Respondent has the burden of proving, by clear and convincing evidence, that there was an underpayment for each year and that some part of the underpayment was due to fraud. Sec. 7454(a). The burden is met if it is shown that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of 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 (5th Cir. 1968), affg. a Memorandum Opinion of this Court. The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978).Fraud may be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. The taxpayer's entire course of conduct may establish the requisite fraudulent intent. 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). In Zell v. Commissioner, 763 F.2d 1139">763 F.2d 1139, 1144-1145 (10th Cir. 1985),386 the Court of Appeals for the Tenth Circuit, to which this case is appealable, held that disclosed defiance of laws requiring the filing of income tax returns does not establish fraud. While acknowledging a split in the circuits, the Court of Appeals stated: a taxpayer is not liable for the civil fraud penalties unless he commits some affirmative act of concealment or misrepresentation. Mere failure to file, whether disclosed or not, does not justify the fraud penalties even when the taxpayer knows taxes are due. [763 F.2d at 1146.]In Zell, the Court found sufficient affirmative acts of concealment in the taxpayer's filing of false Forms W-4 and continued: In addition, * * * [the taxpayer] in this case did not cooperate with the IRS agents during the investigation. To the extent that this factor has been considered in a number of cases in finding an intent to defraud, it counts against the taxpayer in this case. See, e.g., Powell v. Granquist, 252 F.2d 56">252 F.2d 56, 61 (9th Cir. 1958); Jones v. Commissioner, 259 F.2d 300">259 F.2d 300, 303 (5th Cir. 1958) (finding that taxpayer's cooperation with IRS agents helped to negate387 any inference of fraud). The lack of cooperation, combined with the failure to file and the false withholding statements, indicates an intent to deceive the government and to impede the collection of his taxes. [763 F.2d at 1146.]In this case, petitioner was not an employee, and he did not submit Forms W-4. We are convinced, however, that he had an intent to deceive the Government and took affirmative steps to impede the collection of his taxes. Petitioner did more than fail to cooperate during the investigation of his tax liabilities. He deliberately refused to maintain or produce records of his income. Even at trial of this case, he attempted by intimidation to prevent disclosure of information concerning his income. This conduct is an affirmative act of concealment. His pattern of failure to file continued even after his criminal convictions, when clearly he was on notice that his claim that he was not required to file returns and pay taxes on his income lacked merit. On this record, and particularly in view of the rationale of Helvering v. Mitchell, supra, the additions to tax for fraud are sustained. Decision388 will be entered for the respondent. Footnotes*. 50 percent of the interest due on the underpayment.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/1511758/	398 A.2d 415 (1979) PRIDE'S CORNER CONCERNED CITIZENS ASSOCIATION et al. v. The WESTBROOK BOARD OF ZONING APPEALS and the Portland Water District. Supreme Judicial Court of Maine. March 6, 1979. 416 Lund, Wilk, Scott & Goodall by Clifford H. Goodall (orally), Augusta, for plaintiffs. Verrill & Dana by Michael T. Healy (orally), Charles A. Harvey, Jr., Portland, for Water Dist. Gagan & Desmond by James E. Gagan (orally), Michael D. Cooper, Westbrook, for Westbrook Bd. of Zoning Appeals. Before McKUSICK, C. J., and POMEROY, WERNICK, ARCHIBALD and GODFREY, JJ. ARCHIBALD, Justice. Reduced to its essential procedural status, this becomes an appeal by one plaintiff, namely, Basil R. Swan, from a decision of the Superior Court in an 80B proceeding affirming a decision of the Westbrook Board of Zoning Appeals (Board) in which the Portland Water District (District) was granted a special exception allowing it to construct and operate a sludge composting facility on its Westbrook property. Mr. Swan likewise owned property in Westbrook which abutted that of the District. We deny the appeal. Before discussing the merits, we must determine whether Mr. Swan had the necessary standing to appeal from the Superior Court decision.[1] Both the Board and the 417 District argue that (a) Mr. Swan did not formally become a party before the Board at its hearings, and (b) he demonstrated no particularized injury or damage as a result of the decision reached by the Board. 30 M.R.S.A. § 2411(3)(F) provides: An appeal may be taken, within 30 days after the decision is rendered, by any party to Superior Court from any order, relief or denial in accordance with the Maine Rules of Civil Procedure, Rule 80B. The hearing before the Superior Court shall be without a jury. [emphasis supplied] The record furnished on appeal makes it apparent that Mr. Swan did, in fact, appear on October 12, 1977, in person before the Board at the initial hearing on the District's request for a special exception to authorize the construction of the composting facility. A subsequent meeting was held on October 26, 1977, at which Mr. Swan was identified as "one of 96 citizens from the Pride's Corner area." The record of these meetings indicates that he propounded several questions which were pertinent to the issue being considered by the Board. Following the October 26th meeting the Board indicated its intent to grant the special exception but subject to "conditions to be worked out to the correct legal language." Subsequently, a petition to reconsider and deny was filed with the Board and Mr. Swan was identified therein as one of the petitioners. A hearing was held on this petition on November 16, 1977, which resulted in the formal granting of the special exception but subject to several enumerated conditions.[2] The 80B proceeding was initiated by complaint dated November 23, 1977, but premised on the previously described proceeding before the Board. One of the plaintiffs was Basil R. Swan. A justice of the Superior Court affirmed the decision of the Westbrook Board of Zoning Appeals, from which decision this appeal ensued. District-appellee asserts that having failed to enter an appearance, request and be granted the right to fully participate in the proceeding, Basil Swan cannot be a "party" within the meaning of Section 2411(3)(F). We disagree. Within a statutory scheme a word should be construed according to its usage as a legal term of art only when it appears that such a construction was legislatively intended. See Town of Arundel v. Swain, Me., 374 A.2d 317 (1977); Davis v. State, Me., 306 A.2d 127 (1973). For two reasons we do not believe that the legislature intended "party" within Section 2411(3)(F) to be construed in terms of Rules 17-25, M.R. Civ.P. First, as the record in this case clearly indicates, matters before a local board of appeals are conducted in a fashion far less formal than court proceedings or a hearing before the Public Utilities Commission.[3] To superimpose a formal structure of appearance, withdrawal and substitution of parties upon an otherwise open proceeding seems purposeless and unrealistic. This conclusion is reinforced by an obvious legislative attempt to allow appeals by persons aggrieved by the action of various administrative agencies. See, e. g., Matter of Lappie, Me., 377 A.2d 441, 442 n. 3. To construe "party" within Section 2411(3)(F) to 418 mean any more than a participant in the proceedings who is aggrieved by the action of the appeals board would be contrary to other obvious expressions of legislative intent.[4] As a "party" within the context of Section 2411(3)(F), Mr. Swan must also suffer a particularized injury from the order of the Board in order to have standing to seek judicial review of that order. Since Mr. Swan is an abutting land owner, the sludge disposal operation could conceivably pose problems of seepage, odors, noise from traffic, and the pollution of surface waters. Mr. Swan, thus, had a basis for alleging grievance and is, therefore, "a person having standing to seek judicial review of the Board's order by virtue of this potential for particularized injury." Matter of Lappie, supra at 443. Having determined that Mr. Swan had standing to appeal, we may now examine the record in its totality to determine if the Board acted properly in granting the application of the District. Sierra Club v. Morton, 405 U.S. 727, 737, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972). The authority of the District is clearly delineated by the legislative act which created it. Chapter 84, Private and Special Laws of 1975, chartered the Portland Water District, constituting it a public municipal corporation with the right to operate in several municipalities in Cumberland County, including Westbrook. Within its purposes is authorization to "provide facilities for the handling . . . of . . . sewage consisting of domestic, commercial, municipal and industrial wastes." The same act also authorized it to provide "treatment facilities" for "transmission and disposal of waste water and sewage received from municipal collection systems."[5] (emphasis supplied) Section 3 of the enabling act authorized the District, inter alia, to "purify, discharge and dispose of all waste water and sewage collected by the participating municipalities." (emphasis supplied) Section 3 continues: "All incidental powers, rights, and privileges necessary to the accomplishment of the object[ives] herein set forth are granted to the district." Reverting for a moment to the facts, the District owns a considerable acreage in Westbrook, some of which is in the residential zone in which Mr. Swan resides. The proposed composting facility was to be constructed within this area. The record discloses that sludge is a necessary by-product of the operation of a sewage treatment facility and must be disposed of in some non-pollutant manner. The District planned to remove the sludge from the treatment plant, convey it to the composting site and treat it in such a manner that it would thereafter become available as a soil conditioner. This was to be accomplished by mixing the sludge with certain quantities of wood chips which would thereafter be removed. The addition of the wood chips enhanced the natural process of composting and was effective in the elimination of odor. When the wood chips were removed the resultant compost could be utilized beneficially as a soil conditioner. The Westbrook zoning ordinance allowed "public and private utility uses" in residential districts as a special exception subject to approval by the Zoning Board of Appeals. The ordinance gives no special or limiting definition of "public and private utility uses." Therefore, we are free to apply a common and generally accepted meaning to this expression. Robinson v. Board of Appeals, Town of Kennebunk, Me., 356 A.2d 196, 199 (1976). The appellant does not argue that sludge is not a by-product of an appropriate utility function, namely, sewage treatment. However, he does contend that converting sludge into a usable soil conditioner goes 419 beyond a utility use and becomes a manufacturing process, thus not being an appropriate function in a residential zone. Appellant relies on Leeds v. Gravel Company, 127 Me. 51, 141 A. 73 (1928). While we may agree that there is sometimes a fine line which distinguishes manufacturing from the mere conversion of a product into usable form, Leeds is not appropriate to the facts in this record. Leeds held "to make an article manufactured, the application of the labor must result in a new and different article with a distinctive name, character, or use." 127 Me. at 56, 141 A. at 75. Applying this definition to the facts it was there held that crushing stone or screening gravel to make the same usable for various purposes was not a manufacturing process since all that was done was taking the same raw material and, without changing its chemical constituency, making it usable for such things as paving highways. "The reduced sizes were the raw material no less than when blasted in rock form from the cliff." 127 Me. at 56, 141 A. at 75. As we understand this record, the addition of the wood chips and their ultimate removal from the sludge made it possible for the substance to become compost and thus usable. We may assume for purposes of this case that this process did in some degree alter the raw material from its original condition. The foregoing conclusion does not alter the result reached by the justice below. The Legislature saw fit to define the utility purposes for this particular District and authorized it to execute the same. An appropriate utility use, therefore, as legislatively defined and as not limited by the Westbrook Zoning ordinance, was to provide for treatment facilities aimed at the ultimate disposal of sewage, including sludge. This minor type of manufacturing process (if such it be) is certainly incidental to the general obligation to treat and dispose of sewage, recalling that the enabling act gave the District "all incidental powers. . . necessary to the accomplishment of [its objectives]." The entry is: Appeal denied. Judgment affirmed. DELAHANTY and NICHOLS, JJ., did not sit. NOTES [1] Pride's Corner Concerned Citizens Association is claimed to be an unincorporated association of residents of Pride's Corner. A document captioned a petition to "reconsider and deny," addressed to the Board of Zoning Appeals, was signed by a legal firm said to represent the association, and in this petition thirty individuals were identified, of whom one was Basil R. Swan. There was no appeal from the decision of the Superior Court dismissing the 80B complaint initiated by the association as to all members thereof except Mr. Swan. [2] The Board made its grant of the special exception subject to its right to oversee and supervise the construction and the actual operation of the composting facility. These reservations included a limitation on the hours during which the facility could be operated, limiting traffic control at the site, the right to test the quality of ground water, requiring the District to obtain all necessary state and federal permits, granting the City engineer the right to make periodic inspections and, finally, providing for another hearing to be held in a year to review the operation. [3] In requiring notification of owners of property within 500 feet of the property involved or abutting the property for which the appeal is taken, the Westbrook Zoning Ordinance recognized the appellant, an abutting land owner, as a proper party. Notice of the Board proceedings was, in fact, mailed to Mr. Swan. [4] Whether a person is a "participant" in a particular administrative proceeding will depend on the unique facts there developed, which will rarely parallel the background circumstances of this case. [5] Private & Special Laws of 1975, ch. 84, § 2(B).	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4474444/	OPINION. Arundell, Judge'. The principal issue in this case is whether the petitioner, a foreign corporation, during the taxable years 1940 to 1943, inclusive, realized “fixed or determinable annual or periodical” income from sources within the United States within the meaning of section 231 (a) of the Internal Revenue Code.1 As the evidence clearly establishes that during the years in issue petitioner maintained no office or place of business in this country and the parties are in agreement that petitioner was not engaged in trade or business within the United States, we are not here concerned with the question of whether petitioner is taxable under section 231 (b). Our first inquiry must necessarily be directed to the actual source of the petitioner’s income, which the respondent seeks to tax as being from sources within the United States. Although the details of the arrangement between petitioner and American Timken were somewhat different in 1940 than in subsequent years, it seems clear from the evidence that in all transactions title to the purchased bearings passed directly from American Timken to petitioner’s distributors and customers and the collection of the sales price was made by American Timken. In the circumstances, we do not believe that it can be held that there was a purchase within the United States by petitioner and thereafter a sale from petitioner to its customers outside the United States. We think it is equally clear that American Timken was not the agent of petitioner in the United States. See Amalgamated Dental Co., Ltd., 6 T. C. 1009. Respondent suggests that the arrangement between the companies, which was a temporary means of conducting business under war conditions, constituted a profit-sharing agreement. The record provides no foundation for such an interpretation, which is obviously in conflict with the respondent’s admission that petitioner was not engaged in trade or business in this country. Moreover, it is plain that petitioner’s income was in no way related to the profit realized, from the sale of bearings to its distributors and customers by American Timken, but was measured at first by the difference between American Tim-ken’s price to petitioner and the price received from petitioner’s distributors and customers and later by a fixed percentage of gross sales which ^experience had showed was the approximate equivalent of that difference. Where the income of a taxpayer is derived from the sale of personal property, the situs of the sale and the “source” of the income attributable to the sale is the place where the seller surrenders all his right, title, and interest to the buyer. East Coast Oil Co. v. Commissioner, 31 B. T. A. 558; affd., 85 Fed. (2d) 322; Ronrico Corporation, 44 B. T. A. 1130; G. C. M. 25131, C. B. 1947-2, p. 85. In the present case, the bearings were shipped to the consignee f. o. b. Canton, Ohio, title passing in Canton from American Timken to the Australian distributor or purchaser, and if we were concerned here with the source of the income of American Timken, we would of course have no difficulty in placing the sources of its income as within the United States. But we do not regard the fact that the situs of the sales was within the United States as determinative of the source of petitioner’s income. Although a manufacturer’s profits may be the direct result of the production and sale of its products, it does not follow that such sales constitute the source of the income of many persons associated with the sales such as its salesmen, buyers, agents, and officers whose earnings are attributable to other considerations such as their sales ability or technical knowledge. This is true even though the compensation received may be measured by the amount of sales. It is the situs of the activity or property which constitutes the source of the compensation paid and not the situs of the sales by which it is measured that is of critical importance. See Mertens, Law of Federal Income Taxation, vol. 8, sec. 45.27, p. 289. Petitioner had established a sales force by appointing agents to handle the sale of bearings in its territory and had at its own expense sent consulting engineers to Australia to induce industrial users to incorporate Timken roller bearings into their original design of machinery. These sales facilities produced orders for bearings during the years in issue which were filled from petitioner’s production in England, as well as the orders which were forwarded direct to American Timken. Petitioner and its agencies maintained contact with users of Timken bearings, procured orders, fixed the prices and terms of the sales of bearings made in its territory, and classified the orders, at no expense to American Timken. It is also clear that American Timken could not have sold its bearings to petitioner’s distributors and cutomers without the petitioner’s consent, unless it chose to violate the agreement between the companies in regard to their respective territories. American Timken was petitioner’s largest stockholder and the record shows that in 1940 and 1941 it was disturbed over the possibility that petitioner’s inability to supply sufficient bearings to its Australian users would result in its competitors’ making gains that would threaten the postwar demand for Timken roller bearings in that country. It appears that it was with considerable reluctance that petitioner agreed to let American Timken supply its customers even under these conditions. As we have already stated, the amount paid by American Timken to petitioner was a rough approximation of the difference between the price petitioner would have paid American Timken and the price charged by the latter to petitioner’s distributors and customers for the same bearings. The arrangement was a temporary one, forced by the war, and it was evidently the desire of both companies that from a profit standpoint they would both receive out of the transaction substantially what they would have received under normal peacetime operations. It seems evident that whatever petitioner did to warrant the payment to it of the so-called commissions was performed outside of the United States. The Commissioner and the petitioner agree that the latter was not engaged in trade or business within the United States and had no office or place of business within this country. The bearings were sold directly by American Timken to petitioner’s distributors and customers and petitioner itself never had either legal or beneficial title to the goods at any point in the transactions. As we view the matter, the sums paid petitioner were in recognition of the fact that the orders for bearings came as a direct result of the activities of petitioner’s agents in its allotted territory and the further fact that the bearings were being sold in a market exclusively reserved to the petitioner under a long standing agreement between the companies. In our opinion, the source of petitioner’s income was in the British Empire, which was the situs of the sales activities of petitioner’s agents and the situs of petitioner’s exclusive right to sell Timken bearings to customers. See Piedras Negras Broadcasting Co., 43 B. T. A. 297; affd., 127 Fed. (2d) 260; Sabatini v. Commissioner, 98 Fed. (2d) 753; and Korfund Co., 1 T. C. 1180. We, therefore, conclude and hold that the amounts received by petitioner from American Timken in the taxable years in issue were from sources without the United States and are not taxable to the petitioner under the provisions of section 231 (a) of the Internal Revenue Code. In view of our conclusion on this point, a determination of whether the sums paid petitioner were fixed or determinable annual or periodical income and whether petitioner is liable for a 25 per cent penalty for failure to file timely returns is unnecessary. Reviewed by the Court. Decision will be entered for the 'petitioner. Hill, J., dissents. SEC. 231. TAX ON FOREIGN CORPORATIONS. (a) Nonresident Corporations.— (1) Imposition op tax. — There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by séctions 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business within the United States from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 30 per centum of such amount * * *	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474445/	OPINION. Disney, Judge: Was the petitioner, in the taxable years, engaged in a business, in making the expenditures in question here, that is, in connection with “Mass Consumption”? We have studied the facts in this matter, and the cases cited by the parties, particularly Doggett v. Burnet, 65 Fed. (2d) 191, primarily relied upon by the petitioner, and Chaloner v. Helvering, 69 Fed. (2d) 571, and James M. Osborn, 3 T. C. 603, respondent’s principal citations. These cases more nearly resemble the instant case than any others suggested or found. After such study, we have come to the conclusion that the petitioner was not, in the matter of “Mass Consumption” involving the expenditures here involved, engaged in trade or business within the purview of section 23 of the Internal Revenue Code. The question is one of fact, and we need not set forth in deta?1 our analysis of the circumstances. We have here a business man engaged in the management of at least two companies and interested in others, deriving an income of approximately $17,000 from only two, who also becomes interested in an economic theory and writes upon the subject, to his financial loss. Of course, it is well settled that he is not limited to one business, and that the mere fact of loss is not determinative; but, as said in Cecil v. Commissioner, 100 Fed. (2d) 896: * * if the gross receipts from an enterprise are practically negligible in comparison with expenditures over a long period of time it may be a compelling inference that the taxpayer’s real motives were those of personal pleasure as distinct from a business venture * * * ” The personal pleasure may well consist in the satisfaction found in expression in writing, or forwarding a theory of interest to the person involved, as here. We find the situation here more analogous, to that in Chaloner v. Helvering, supra, and James H. Osborn, supra, where the deductions were disallowed, than in the Doggett case, supra. A fair appraisal of all the circumstances is convincing that the petitioner was not in the taxable years expecting to make a profit, and that the closest approach thereto was a vague idea that sometime in the future there might be such, in a position with the “Mass Consumption” organization, much as in the Osborn case, and that he was pursuing, not a business, but a hobby, as in the Chaloner case. We do not find so much similarity to the Doggett case. There, the sale of books was limited; here, practically no sales in the taxable years are shown. No income therefrom is reported. The petitioner in the Doggett case was devoting apparently her entire time to the pursuit of publishing and attempting to sell the books involved, with possibilities of large current profit. Here, the petitioner devoted his days, and at times also much of the night, to the real estate business (of only two of his companies), and not only does he appear to have little time left for “Mass Consumption,” but no proof whatever appears as to the amount of time spent on it. As to intention, the evidence is vague. Though he testified that profit was to be from lectures and sale of pamphlets in the years under review here, in his returns from 1942 and 1943 he refers to the expenses claimed as those of getting the job of introducing mass consumption in the United States, while for 1944 his return made no claim for “Mass Consumption” expenses, the amount involved being claimed as a contribution to “Mass Consumption.” “Mass Consumption” was, in our view of all these facts, a hobby or scientific study for the petitioner, not a business. He hoped that the publication of pamphlets and the book would help his reputation as student and scholar. He stated in writing that usefulness was his whole motive in mass consumption work. It would be altogether unrealistic, in our opinion, to view such work as trade or business for the petitioner. In his letter of December 19, 1946, he stated that the expenses in 1942 and 1943 may be considered contributions by him to “this scientific and educational work”; i. e., “Mass Consumption.” His hope of fitting himself to earn a salary in the future with “Mass Consumption” bears analogy to the intentions of the petitioner in the Osborn case. Without further discussion of the facts, we conclude and hold that the petitioner was not engaged in trade or business in the matter of “Mass Consumption” and that the Commissioner is not shown to have erred in denying the deduction of expense thereof, under section 23 (a) (1) (A) of the Internal Revenue Code. This renders it unnecessary to consider whether such expenditures were properly or fully shown by the evidence. Decision will be entered for the resfondent.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474446/	OPINION. Disney, Judge-. This case involves a deficiency in excess profits tax for the year 1943 in the amount of $114,176.94, with a resulting overassessment in income tax in the amount of $30,686.02, and a claim for refund of excess profits tax for 1943, the amount dependent upon the conclusion reached in this case. The issue is whether petitioner is entitled to unused excess profits credit carry-overs from the years 1941 and 1942, with a resulting unused excess profits credit adjustment for 1943 in the amount of $196,246.09. . The parties have stipulated all of the facts, reading (except statement of the issue stipulated as above set forth) as follows: Petitioner is a corporation, with its principal place of business in Fort Worth, Texas. As of January 1,1935, petitioner acquired from its predecessor corporation all of the assets of such predecessor corporation, in pursuance of an order of the Federal court having jurisdiction over the matter in a proceeding under section 77B of the National Bankruptcy Act, petitioner having been organized to effectuate a plan of reorganization approved by said court in such proceeding, said assets being acquired in exchange solely for stock or securities of petitioner. Petitioner’s average equity invested capital for the year 1943, determined in accordance with its predecessor’s basis in such assets, is $8,278,760.21, and its invested capital for such year is $11,854,976.65. For the year 1941, petitioner’s average equity invested capital, determined in accordance with its predecessor’s basis, is $8,278,760.21, and its invested capital for 1941 so determined is $11,734,151.02. Similarly, for 1942, petitioner’s average equity invested capital, determined in accordance with the predecessor’s basis, is $8,278,760.21, and its invested capital so determined is $11,873,052.14. Petitioner’s excess profits credit for 1941 and 1942, determined on the basis of an invested capital of $11,734,151.02 and $11,873,052.14, respectively for such years is $854,049.06 and $862,383.13. Its excess profits net income for the years 1941 and 1942, determined in accordance with its predecessor’s basis, is respectively $772,338.41 and $747,847.69. Petitioner’s unused excess profits credit for the years 1941 and 1942, determined on the basis of an invested capital of $11,734,151.02 and $il,873,052.14, respectively for such years is $81,710.65 and $114,535.44, or a total unused excess profits credit carry-over from 1941 and 1942 and a resulting unused excess profits credit adjustment for 1943 in the amount of $196,246.09. It is petitioner’s position in this proceeding that under the provisions of sections 112 (b) (10), 113 (a) (22) and other applicable provisions of the Internal Revenue Code, it is entitled to have its unused excess profits credit carry-over from the years 1941 and 1942 and a resulting unused excess profits credit adjustment for the year 1943 computed in accordance with the basis of its predecessor corporation in the assets acquired by petitioner from such predecessor on January 1, 1935. It is respondent’s position in this proceeding that petitioner is not entitled to any unused excess profits credit carry-over from the years 1941 and 1942 to .1943, by reason of the provisions of sections 112 (b) (10), 113 (a) (22), and other applicable provisions of the Internal Revenue Code. If petitioner is correct in its position, it is agreed that petitioner is entitled to an unused excess profits credit adjustment for the year 1943 in the amount of $196,246.09. If respondent is correct in his position in this proceeding, petitioner is not entitled to any unused excess profits credit adjustment for the year 1943. If petitioner is correct in its position, it is agreed that there should be a determination of a deficiency in income tax for the year 1943 of $47,812.42 and an overassessment in excess profits tax for the year 1943 of $62,444.55, exclusive of post war refund of $2,882.63. It is agreed that said overassessment is not barred by the statute of limitations. If respondent is correct in his position, it is agreed that the determination made in the statutory notice of a deficiency in excess profits tax for the year 1943 in the amount of $114,176.94, and an overassessment in income tax for such year in the amount of $30,686.02, is correct. We find the facts as agreed above. The question for our determination is whether petitioner is entitled to have its unused excess profits credit adjustment for 1943 computed in accordance with the basis of its predecessor corporation for the assets acquired from such predecessor on January 1, 1935, under the provisions of section 121 of the Revenue Act of 1943. That section provides, in general, for the use by a successor corporation of the basis of its predecessor corporation if the successor acquired title through bankruptcy proceedings (as is agreed was the case here); and subsection (e) provides that such provisions “* * * shall be deemed to be included in the revenue laws respectively applicable to the taxable years beginning after December 31, 1933.” The subsection, however, proceeds: “but shall not affect any tax liability for any taxable year beginning prior to January 1, 1943.” (Italics supplied.) The petitioner’s point here, therefore, is that to compute its unused excess profits tax credit for 1941 and 1942 by use of its predecessor’s basis, as permitted by section 121 of the 1943 Act, and, nnder section 710 (c) (3) (B) to carry such unused excess profits credit forward and use it in 1943, the taxable year, does not “affect any tax liability” in any way for 1941 or 1942, so that petitioner is free, for 1943, to compute its unused excess profits credit carried forward from 1941 and 1942 by the use of predecessor’s basis. In other words, petitioner argues that it is entitled to have its unused excess profits credit carryovers from 1941 and 1942, and resulting unused excess profits credit adjustment for 1943 “computed as if Section 112 (b) (10) and Section 113 (a) (22) [providing use of predecessor’s basis] were a part of the Internal Revenue Code in effect in Í941 and 1942.” The petitioner points out that Regulations 111, section 29.113 (a) (22), provides that with the exception indicated (that the basis shall have no effect in determination of tax liability for years prior to 1943) “the basis so prescribed is applicable both for income and excess profits tax purposes from the date of acquisition of such property.” The respondent, however, takes the view that, under the definition of “unused excess profits credit” contained in section 710 (c) (2) of the Internal Revenue Code, the unused excess profits credit for 1941 and 1942 (proposed to be carried forward to 1943 and there used) must be “computed on the basis of the excess profits credit applicable to such taxable year” (italics supplied), i. e., 1941 or 1942; therefore, since the actual basis of excess profits credit applicable to 1941 and 1942 was not the predecessor’s basis, here sought by the petitioner, the predecessor’s basis can not be used in computing the excess profits credit for 1943; and that to permit application of petitioner’s theory would be indirectly to affect the tax liability of 1941 and 1942, contrary to the exception provided in section 121 (e) of the Revenue Act of 1943 to the use of the predecessor’s basis. The petitioner may not, the respondent argues, construct hypothetical unused excess profits credits for 1941 and 1942 to use in 1943, but says that the statutory scheme was to give the taxpayer benefit, by way of a carry-over, of that credit which was actually available to it in the earlier year. The question is new, as the parties agree. Neither suggests any case as bearing directly upon it. The petitioner, however, cites, by way of analogy, Commissioner v. Moore, Inc., 151 Fed. (2d) 527, affirming 4 T. C. 404. Therein the court held petitioner’s net loss carry-over from 1941 to 1942 could be determined by refiguring net operating losses which had for 1941 been figured on a basis which was changed by provisions of section 150 (e) of the Revenue Act of 1942. That section provided (in effect by omitting mention of “long” or “short term” as to capital gains and losses) for a change in treatment of capital gains and losses in determining net operating loss carry-over to another year. The statute provided that it was applicable “with respect to taxable years beginning after December 31, 1941,” and, since 1942 was the taxable year being considered, the court disagreed with the idea that refiguring the net operating loss to be carried over from 1941 would produce a net loss which had not in truth existed. In our view, the Moore case is in principle applicable here. The petitioner, because of the new basis provided by section 121 of the 1943 Act, seeks to refigure the “unused excess profits credit” which is to be carried forward from 1941 and 1942 to 1943, the taxable year. Section 121 provides expressly as to the effective date (of the changes in basis of property acquired in bankruptcy) and says those changes shall be deemed included in the revenue acts after 1933. The taxpayer, computing its tax for 1943, therefore, properly used the changed basis. Section 121 provided only, as exception, that such changes should not affect tax liability for years prior to 1943. But the petitioner’s computation does not in any way affect petitioner’s tax liability for 1941 or 1942. It is simply upon a basis differing from the basis used for those years — changed by the 1943 statute, expressly providing the change for previous years. The respondent’s contention that there is to be found in the definition of the “unused excess profits credit” here involved, the requirement that it be “computed on the basis of the excess profits credit applicable to such taxable year” as stated in section 710 (c) (2) does not overcome petitioner’s contention, for section 121 (e) of the 1943 Act makes the change in basis “applicable to taxable years beginning after December 31,1933,” and, therefore, applicable to 1941 and 1942. The changed basis, being applicable to those years, affirmatively appears applicable in computing “unused excess profits credits” for those years under the definition thereof, and since the result does not “affect any tax liability” for 1941 or 1942, for only tax liability for 1943 is affected, no reason can be seen for not allowing the recomputation of the unused excess profits credit for those years for the mere purpose of the carry-over to 1943. Regulations 111, section 29.113 (a) (22), referring to the exception that the new basis shall not affect tax liability prior to 1943, states that “with the exception indicated, the basis so prescribed is applicable both for income and excess profits tax purposes from the date of acquisition of such property”; from which we see that the instant conclusion, in the excess profits tax field, is within the ambit of the Treasury regulations, provided only that it is concluded, as we have, that there is no tax effect on the years from which comes the carry-over of unused excess profits credit. Reo Motors, Inc., 9 T. C. 314; affd., 170 Fed. (2d) 1001, is mentioned and distinguished from the Moore case by the petitioner on the ground that there was, with respect to the statute involved in the Reo case, no provision for retroactive effect as here, and petitioner further points out that this Court distinguished the Moore case in that it involved treatment of capital gains and losses, whereas the Reo case involved a change in the character thereof from a capital asset to a noncapital asset. The United States Court of Appeals referred to the change in character. The respondent does not rely upon or suggest the Reo case. We consider it inapplicable here. We conclude and hold that petitioner did not err in computing for 1943 its unused excess profits credits, carried over from 1941 and 1942, on the new basis provided by section 121 of the Revenue Act of 1943. Therefore, in accord with the stipulation of the parties, Decision will be entered that there was an overpayment of excess profits tax for the year 19Jf3 m the amount of $62,1^1^.55. No deficiency was determined in income tax, and, for lack of jurisdiction, no decision will be entered with respect to income tax. Reviewed by the Court.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620751/	APPEAL OF IMPERIAL DEVELOPMENT CO.Imperial Development Co. v. CommissionerDocket No. 4183.United States Board of Tax Appeals3 B.T.A. 713; 1926 BTA LEXIS 2582; February 13, 1926, Decided Submitted November 11. 1925. 1926 BTA LEXIS 2582">2582 A foreign corporation was in existence during 1911, 1912, and 1913, and during each of those years sustained a net loss in the operation of its business. Held, that such corporation is not entitled to have its profits taxes computed under section 205(a)(1) of the Revenue Act of 1917. Frank G. Butts, C.P.A., for the taxpayer. Ward Loveless, Esq., for the Commissioner. PHILLIPS 3 B.T.A. 713">713 Before PHILLIPS and TRAMMELL. Taxpayer appeals from the determination of a deficiency of $5,387.97 income and profits taxes for 1917. FINDINGS OF FACT. 1. Taxpayer is a foreign corporation, organized and operating under the laws of Mexico. 2. During the years 1911, 1912, and 1913, and each of them, the taxpayer sustained net losses. 3. The Commissioner determined the invested capital of the taxpayer for 1917 to be $1,056,547.33, allowed 7 per cent of that amount as the war-excess-profits-tax deduction under Title II of the Revenue Act of 1917, and determined the deficiency upon that basis. DECISION. The determination of the Commissioner is approved. OPINION. PHILLIPS: The Commissioner determined taxpayer's profits tax for 1917 under1926 BTA LEXIS 2582">2583 the provisions of section 203(a) and (c) of the Revenue Act of 1917. Taxpayer claims that such tax should have been computed under the provisions of section 205, on the ground that the taxpayer had no net income from the trade or business during the pre-war period. Section 205(a)(1) refers specifically to domestic corporations, while taxpayer is a foreign corporation. Taxpayer claims, however, that it falls within section 203(d), in that it is impossible satisfactorily to determine the average amount of the annual net income of the trade or business during the pre-war period, and that, in such a case, a foreign corporation may fall within the provisions of section 205(a)(1). Without passing upon the question raised by the taxpayer, it is sufficient to point out that 3 B.T.A. 713">714 there is a marked difference between inability to determine the average amount of the annual net income of the trade or business during the pre-war period and the determination that during the pre-war period the taxpayer had no net income from the trade or business. The taxpayer has not shown that its average net income for the pre-war period can not be determined, and it does not fall within the provisions1926 BTA LEXIS 2582">*2584 of section 203(d).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620752/	The Northern Trust Company, Transferee and Trustee; Arthur L. Simon, Transferee and Trustee; and Jeffery J. Simon, Transferee and Trustee, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentNorthern Trust Co. v. CommissionerDocket Nos. 6859-80, 21439-80, 21440-80, 21441-80, 21442-80United States Tax Court87 T.C. 349; 1986 U.S. Tax Ct. LEXIS 68; 87 T.C. No. 21; August 11, 1986, Filed 1986 U.S. Tax Ct. LEXIS 68">68 Decisions will be entered under Rule 155. In furtherance of an "estate tax freeze" plan, after a corporate reorganization J, W, P, L, and C transferred shares of class A voting common stock and class B nonvoting common stock of CCC, a closely held company, 1986 U.S. Tax Ct. LEXIS 68">69 to certain long-term trusts. C died 3 days after transferring her shares. Held: The fair market value of the shares for Federal estate and gift tax purposes determined. The value was not affected by the transfer of the stock to the trusts. Estate of Curry v. United States, 706 F.2d 1424">706 F.2d 1424 (7th Cir. 1983); Ahmanson Foundation v. United States, 674 F.2d 761">674 F.2d 761 (9th Cir. 1981), applied. William H. Pokorny, Jr., and James A. Clark, for the petitioners.Thomas C. Borders and Luanne D. Dimauro, for the respondent. Nims, Judge1986 U.S. Tax Ct. LEXIS 68">70 . NIMS87 T.C. 349">349 Respondent determined a deficiency of $ 154,683.45 in the Federal estate tax of petitioner, the Estate of Cecilia C. Simon. 2 Respondent determined the following deficiencies in other petitioners' Federal gift taxes: 3CalendarDocket No.quarter endingPetitionerDeficiency21439-80June 30, 1976John H. Curran$ 131,777.6021440-80June 30, 1976William Curran131,777.6021441-80June 30, 1976Patricia A. Curran$ 131,777.6021442-80June 30, 1976Linda R. Curran131,777.601986 U.S. Tax Ct. LEXIS 68">71 87 T.C. 349">350 The issue for decision is the fair market value of 6 shares of class A common voting stock and 2,300 shares of class B nonvoting common stock of Curran Contracting Co. held respectively by petitioners John Curran, William Curran, and the Estate of Cecilia Simon on May 7, 1976 (see note 21).FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.Cecilia Simon died a resident of Illinois on May 11, 1976. Petitioners John H. Curran and Linda Curran, husband and wife, and petitioners William Curran and Patricia Curran, husband and wife, resided in Illinois at the time their respective petitions were filed.Petitioners John Curran (John) and William Curran (William), together with their sisters Cecilia Simon (Cecilia) and Judy Pokorny (Judy), were the sole shareholders of Curran Contracting Co. (CCC), a Delaware corporation engaged in the asphalt paving business. CCC had been incorporated in December 1975, as part of an overall plan of reorganization of several companies owned by members of the Curran family. The reorganization of the Curran family companies occurred1986 U.S. Tax Ct. LEXIS 68">72 as follows:Prior to the incorporation of CCC, John, William, Cecilia, and Judy, together with their cousin Henrietta Johnston (Henrietta), owned all of the issued and outstanding stock of Suburban Oil Co. (Suburban) and H.J. Curran Contracting Co. (HJCCC) as follows:Stock ownershipShareholderSuburbanHJCCCJohn144 shares of148 shares ofvoting common voting common William144 shares of148 shares ofvoting common voting common Cecilia142 shares of146 shares ofvoting common voting common Judy142 shares of146 shares ofvoting common voting common Henrietta16 shares of3,520 shares ofvoting common preferred 87 T.C. 349">351 Suburban was the parent company directly or indirectly of Holland Co. (Holland) and Holland Railway Equipment, Ltd. (Holland, Ltd.). HJCCC was the parent company directly or indirectly of Stahl Construction Co. (Stahl), Curran Development Corp. (Curran Development), and Kaneland Construction Co. (Kaneland).As the first step in a reorganization of the above companies, Suburban merged 4 with HJCCC. To effect this merger Suburban redeemed the 16 shares of Suburban common stock owned by Henrietta for $ 3,730 per share. 1986 U.S. Tax Ct. LEXIS 68">73 The remaining shareholders then contributed their shares of Suburban common stock to HJCCC, where it was included in the paid-in capital surplus account of that company.Subsequent to the merger of Suburban and HJCCC, HJCCC redeemed the 3,520 shares of HJCCC preferred stock owned by Henrietta for $ 30 per share. HJCCC then merged with CCC. Pursuant to the terms of the merger, John, William, Judy, and Cecilia received the following shares of CCC stock:ShareholderShares of stock ownedJohn 6 shares class A voting common2,300 shares class B nonvoting common1,960 shares nonvoting preferredWilliam6 shares class A voting common2,300 shares class B nonvoting common1,960 shares nonvoting preferredJudy 6 shares class A voting common2,300 shares class B nonvoting common1,933 shares nonvoting preferredCecilia6 shares class A voting common2,300 shares class B nonvoting common1,933 shares nonvoting preferred1986 U.S. Tax Ct. LEXIS 68">74 87 T.C. 349">352 Each share of CCC preferred stock provided for a noncumulative dividend of $ 80. At the time of the reorganization, CCC had adequate earnings to pay these dividends. The Curran companies, however, had historically paid very small dividends and at the time of the reorganization, CCC's board of directors did not intend to pay dividends on CCC's preferred stock. The past and present management of CCC believed that profits should be reinvested in the business rather than paid out as dividends.Moreover, the preferred shareholders of CCC could not compel the company to redeem their stock. The board of directors of CCC, however, could call the preferred stock at a charter specified redemption price of $ 1,000 per share. John and William intended to cause CCC to redeem their preferred shares at the time of their respective deaths for an amount that would produce sufficient income to pay the living expenses of their surviving spouses. They also intended to redeem the preferred shares owned by Cecilia and Judy at the time of each of their husband's deaths for an amount that would produce sufficient income to pay the living expenses of Cecilia and Judy. John and William did1986 U.S. Tax Ct. LEXIS 68">75 not intend to redeem the preferred stock for the stated price of $ 1,000 per share.After the merger of CCC and HJCCC, John became CCC's president and chairman of its board of directors. William became CCC's vice president and a member of its board of directors. Jim Johnston, a cousin of John and William, served as CCC's secretary and as the third and final member of its board of directors.As a result of the merger of HJCCC with CCC, CCC became the parent company directly or indirectly of Stahl, Kaneland, Suburban, Curran Development, Holland, and Holland, Ltd. These companies were engaged in the following businesses:CCC, Stahl, and Kaneland were primarily engaged in the asphalt paving business. CCC performed most of its work in McHenry County, Illinois, which was the site of its asphalt production plant. 5 CCC received approximately 80 percent of its work from Federal, State and local governments. The 87 T.C. 349">353 remaining 20 percent of its work was done for larger commercial concerns.1986 U.S. Tax Ct. LEXIS 68">76 Stahl performed most of its work for Northern Illinois University located in DeKalb County, Illinois. DeKalb County was the site of Stahl's asphalt production plant. During the 1970s, Northern Illinois University was rapidly expanding. As of May 1976, this expansion was projected to continue through 1978.Kaneland, which was located in Kane County, Illinois, had no access to an asphalt plant. Kaneland was therefore limited to performing "squirt work" in Kane County, which involved spraying oil on dusty gravel roads.Suburban was engaged in the retail sale of heating oil to homeowners and commercial and industrial concerns located on the west side of Chicago and its western suburbs. During the early 1970s, Suburban's oil business sharply declined as gas replaced oil as the main energy source for residential and commercial heating. John and William therefore decided on or before May 7, 1976, to dispose of Suburban's retail fuel oil business and become fuel brokers. As fuel brokers, John and William intended to purchase oil from the major refineries and to hire independent truckers to deliver the oil to commercial and industrial concerns in retail quantities. As brokers, John1986 U.S. Tax Ct. LEXIS 68">77 and William would never take actual possession of the fuel.Suburban also owned a parcel of investment property which was located in Oak Brook, Illinois. In 1974, Suburban entered into a contract to sell the property for $ 740,000. The purchaser subsequently paid an earnest money deposit of $ 40,000 but eventually defaulted on the contract.Curran Development was formed in the 1970s to purchase and hold title to a parcel of land located adjacent to property that had been donated to the DeKalb YMCA. Stahl constructed roads on the acquired property to provide access to the donated property and to facilitate the development of the YMCA. As of May 7, 1976, approximately 50 percent of the parcel had been sold. The company had no plans to acquire or develop additional land.Holland Co. was acquired by Suburban in 1974. The company consisted of the following divisions: (1) The rail weld division which manufactured equipment used for 87 T.C. 349">354 welding rail on railroads and also provided welding services on a contract basis, and (2) the railroad equipment division which designed, patented, and sold products that extend the useful life of railroad cars and parts used by the railroad industry. 1986 U.S. Tax Ct. LEXIS 68">78 Holland, Ltd., was formed as a subsidiary of Holland for the sole purpose of allowing Holland to engage in business in Canada.The consolidated balance sheet for CCC and subsidiaries on December 31, 1975, was as follows:ASSETSCurrent assetsCash$ 3,009,486Accounts receivable, etc.2,892,800Inventories 762,710Prepaid expenses and other current assets 156,808Refundable income taxes 106,375Total current assets 6,928,179Other assetsNotes receivable (long term)12,384Cash surrender value of life insurance (net) 213,112Real estate investments 1,018,265Total other assets 1,243,761Deferred income taxes 14,000Property, plant and equipment 3,584,974Goodwill 642,248Total assets 12,413,162LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable 1,380,195Accrued liabilities 893,278Other current liabilities 13,563Current maturities (long-term debt) 635,820Total current liabilities 2,922,856Long-term debt 916,757Other liabilities 29,000Stockholders' equityPreferred stock ($ 10 par) 77,860Class A voting common ($ 10 par) 240Class B nonvoting common ($ 1 par) 9,200Additional paid-in capital 1,409,379Retained earnings 7,047,870Total shareholders' equity 8,544,549Total liabilities and shareholders' equity 12,413,1621986 U.S. Tax Ct. LEXIS 68">79 87 T.C. 349">355 The net sales and net earnings for CCC, Stahl, and Kaneland from 1971 through 1975 were as follows:Net earningsYearNet sales(before taxes)1971$ 7,501,000$ 1,150,00019724,332,000211,00019735,912,0001,252,00019749,078,0001,601,000197511,363,0002,308,000The net sales and net earnings for Holland and its subsidiary, Holland, Ltd., from 1971 through 1975 were as follows:Net earningsYearNet sales(before taxes)1971$ 4,418,000$ 499,00019724,341,000544,00019734,096,000923,00019745,745,000897,0001975 (11 mos.)5,911,0001,125,000On May 7, 1976, John, William, Judy, and Cecilia each simultaneously created a trust (hereinafter referred to as a 76-1 trust) to which they transferred their respective, 6 shares of class A voting common stock of CCC. On the above date, John, William, and Cecilia also each created a second trust (hereinafter referred to as a 76-2 trust) to which they transferred their respective 2,300 shares of class B nonvoting common stock of CCC. All of the trusts were irrevocable after 20 days from the date of creation or the death of the grantor, whichever occurred first. The gifts1986 U.S. Tax Ct. LEXIS 68">80 of the class A voting common stock were made to place initial control of CCC in the hands of John and William, and to place eventual control of the company in the hands of their descendants. The gifts of the class B nonvoting common stock were primarily made to place any future appreciation of CCC in the hands of the grantors' descendants.These gifts were made as part of petitioners' use of a familiar estate planning device known as an "estate tax freeze," by which the shareholders of a closely held corporation exchange their common stock in the corporation for new shares of common and preferred stock. (See United States v. Byrum, 408 U.S. 125">408 U.S. 125 (1972).) The shareholders retain the preferred stock and make gifts of the common 87 T.C. 349">356 stock. Because the preferred stock does not usually participate in the future growth of the company, the value of the preferred shares is "frozen" as of the date of the reorganization. The shareholders intend that any future appreciation in the value of the company will be reflected in the value of the common stock. 61986 U.S. Tax Ct. LEXIS 68">81 Each 76-1 voting common trust provided for the payment of net trust income to the descendants of the grantor. Each 76-2 nonvoting common trust provided for discretionary distribution of trust income and principal to the descendants of the grantor. Both types of trust provided for the distribution of all trust principal 21 years after the death of the last to die of: (1) The grantor, (2) the spouse of the grantor, (3) the grantor of each of the other trusts, (4) the spouses of the grantors of the other trusts, and (5) all of the descendants then living of John, William, Cecilia, and Judy. Each 76-2 trust contained a further provision prohibiting the trustee from making any transfer of CCC stock other than to: (1) A trust beneficiary in a partial or complete distribution upon termination of the trust, or (2) to CCC by way of a partial or complete redemption.Each 76-1 trust named John and William as the initial trustees and gave to each of them the right to designate a successor trustee who would act when both John and William ceased to act. After the initial successor trustee ceased to act, successor trustees were thereafter to be appointed by the beneficiaries of the four 76-11986 U.S. Tax Ct. LEXIS 68">82 trusts.Each 76-2 trust named the grantor's spouse as the initial trustee and gave such trustee the right, revocable while that trustee was still acting, to designate a successor trustee in the event that for any reason the initial trustee ceased to act. If and when the initial trustee and the designated successor trustee ceased to act, the children of each grantor were to act as co-trustees. Successor trustees were to be appointed thereafter by the grantor, or after the death of the grantor, by the beneficiary or a majority in 87 T.C. 349">357 interest of the beneficiaries to whom current trust income might then be distributed.Cecilia died on May 11, 1976. On February 4, 1977, CCC redeemed the shares of preferred stock held by the Estate of Cecilia Simon for $ 630 per share and the shares of class B common stock held by Cecilia's 76-2 trust for 63 cents per share. The redemption price was not the result of arm's-length bargaining, but rather represented an amount which John and William believed would generate sufficient income to pay the living expenses of Cecilia's husband.On gift tax returns filed for the calendar quarter ending June 30, 1976, petitioners valued CCC's class A voting1986 U.S. Tax Ct. LEXIS 68">83 common stock at $ 10 per share and class B nonvoting common stock at $ 1 per share. On amended gift tax returns filed for the calendar quarter ending June 30, 1976, petitioners valued the voting common stock of CCC at $ 6.30 per share and the class B nonvoting common stock of CCC at 63 cents per share. The values listed on the amended gift tax returns were also assigned to the common stock of CCC on the Federal Estate Tax Return filed for the Estate of Cecilia Simon. 7In a notice of deficiency mailed to the Estate of Cecilia C. Simon, respondent valued the class A voting common stock of CCC at $ 205,000 per share. Respondent further determined that the class B nonvoting common stock1986 U.S. Tax Ct. LEXIS 68">84 of CCC had no value.In separate notices of deficiency mailed to John Curran, Linda Curran, William Curran, and Patricia Curran, respondent valued CCC's class A voting common stock and class B nonvoting common stock at $ 534.02 per share.At trial, the Court received testimony with respect to the valuation of CCC's class A voting common stock and its class B nonvoting common stock from petitioners' expert, Roger J. Grabowski, and respondent's expert, Eugene M. Lerner. Grabowski valued the class A common shares at $ 470.33 per share and the class B common shares at $ 58.80 per share. Lerner valued both the class A common shares 87 T.C. 349">358 and the class B common shares at $ 454.99 per share. By amended answer filed subsequent to the trial of this case, respondent stated that the May 7, 1976, value of the class A and class B common stock held by the Estate of Cecilia C. Simon was $ 454.99 per share.The valuations placed on the two classes of common stock by the experts are reflected in the following table:Class A commonClass B commonAppraiserSharesValueTotalSharesValueTotalGrabowski24$ 470.33$ 11,287.929,200$ 58.80$ 540,960Lerner24454.9910,919.769,200454.994,185,9081986 U.S. Tax Ct. LEXIS 68">85 Thus, petitioners' expert valued the entire common stock at $ 552,247.92, while respondent's expert valued it at $ 4,196,827.70, the basic difference resulting from petitioners' deep discount of the class B common. The appropriateness of this discount is the essential focal point of this case.Grabowski AppraisalRoger J. Grabowski is a partner and co-founder of Valuation Strategies, a firm specializing in the valuation of closely held businesses and intangible assets. Petitioners retained Grabowski to value CCC's class A voting common stock and class B nonvoting common stock. Grabowski used two methods to value these stocks: (1) The market comparable approach, and (2) the discounted cash flow approach.Market Comparable ApproachUsing the market comparable approach, Grabowski set out to estimate the value of CCC by comparing it to publicly traded companies engaged in the same or similar lines of businesses as that of CCC and its subsidiaries. Because he was unable to find publicly traded companies which were engaged in the asphalt paving business, the rail welding business, and the heating oil distribution business, Grabowski divided CCC into its operational components1986 U.S. Tax Ct. LEXIS 68">86 and looked for publicly traded companies engaged in the same business as each component. He grouped CCC, Stahl, and Kaneland together and treated them as one company engaged in the asphalt paving business (we will hereinafter 87 T.C. 349">359 refer to CCC, Stahl, and Kaneland as C/S/K for purposes of our discussion of Grabowski's valuation). He treated Holland (including its subsidiary, Holland, Ltd.) as a separate company engaged in the railroad equipment business. Finally, he separately valued Suburban and the other nonoperating assets owned by CCC and its subsidiaries.Valuation of C/S/KGrabowski discovered three publicly traded companies that he believed were engaged in businesses that were subject to the same economic conditions as the road construction business of C/S/K. These companies were: (1) McDowell Enterprises, Inc., (2) Rexco Industries, and (3) Sukut Construction, Inc.McDowell Enterprises, Inc., located in Nashville, Tennessee, was engaged in diversified construction, including highway construction and real estate development. The company was also engaged in the development of material supply throughout the southeastern United States. In 1975, its revenues totaled1986 U.S. Tax Ct. LEXIS 68">87 $ 55 million.Rexco Industries, located in Puerto Rico, was primarily engaged in the construction of highways, bridges, hospitals, commercial buildings, industrial plants, and residential buildings. Its revenues totaled $ 56 million in 1975.Sukut was a general contracting firm engaged in the construction of sites for residential, commercial, industrial, and recreational developments and in the construction of roads, highways, and public works. Sukut performed most of its work in southern California. In 1975, its revenues totaled approximately $ 8 million.Having identified three publicly traded comparable companies, Grabowski next computed certain market multiples based on the comparable companies' earnings before deductions for interest, depreciation, and taxes (EBIDT) and debt-free cash-flow (DFCF). 8 Dividing the sum of the aggregate market value of the capital stock and long-term debt of each comparable company by its respective EBIDT and 87 T.C. 349">360 DFCF, Grabowski developed the following market multiples for the comparable firms:EBIDTDFCFFirmMarket valueEBIDTmultipleDFCFmultipleMcDowell$ 19,106,000$ 6,121,0003.12$ 4,381,0004.36Rexco18,894,0004,631,0004.084,073,0004.64Sukut1,166,000578,0002.02455,0002.561986 U.S. Tax Ct. LEXIS 68">88 Grabowski next computed C/S/K's EBIDT and DFCF. Relying on C/S/K's weighted earnings for the 5-year period preceding the valuation date, Grabowski determined that C/S/K had EBIDT of $ 1,929,000 and DFCF of $ 1,174,000. Applying the above market multiples to C/S/K's EBIDT and DFCF, Grabowski preliminarily valued C/S/K at $ 5 million.Grabowski next adjusted the market multiples to account for the differences in size between C/S/K and the comparable firms. To make these adjustments, Grabowski relied on an Internal Revenue Service study which listed average price/earnings ratios for companies traded on the New York Stock Exchange according to their fair market value. Based on this study, Grabowski concluded that publicly traded companies with values equal to C/S/K had average price/earnings1986 U.S. Tax Ct. LEXIS 68">89 ratios of 10.10. He further determined that publicly traded companies with values equal to McDowell and Rexco had average price/earnings ratios of 11.35. He finally concluded that companies with values equal to Sukut had average price/earnings ratios of 12.26. Based on these relative price/earnings ratios, Grabowski determined the following percentages to account for the market's reaction to the differences in size between C/S/K and the comparable firms:ComparableFactorMcDowell and Rexco10.10/11.35 = .89Sukut10.10/12.26 = .824Grabowski next weighted each market multiple based on the relative similarity of each comparable company to C/S/K. Finally, applying the market multiples as adjusted to C/S/K's EBIDT and DFCF, Grabowski valued C/S/K at $ 5,884,000 and $ 4,479,000, respectively, as follows: 87 T.C. 349">361 EBIDT MULTIPLEAdjustmentAdjustmentFirmMultiple for Size WeightmultipleMcDowell3.12 x .89 x .45 = 1.2496Rexco4.08 x .89 x .45 = 1.6340Sukut2.02 x .824 x .10 =.16653.0501x $ 1,929,000(EBIDT)Indicated value= $ 5,884,000(rounded)DFCF MULTIPLEAdjustmentAdjustmentFirmMultiple for Size WeightmultipleMcDowell4.36 x .89x .45 = 1.7462Rexco4.64 x .89x .45 = 1.8583Sukut2.56 x .824 x .10 =.21093.8154x $ 1,174,000(DFCF)Indicated value= $ 4,479,000(rounded)1986 U.S. Tax Ct. LEXIS 68">90 Taking an average of these two values, Grabowski valued C/S/K at $ 5,181,000 as of May 7, 1976. 9Holland Co.Grabowski selected six publicly traded companies which he believed were subject to the cyclical nature of the railroad industry and thus comparable to Holland (including its subsidiary, Holland, Ltd.). These companies were: (1) Amsted Industries, (2) Brenco, (3) Portec, (4) General Signal, (5) Pittsburgh Forgings, and (6) Stanray.Amsted Industries was engaged in numerous businesses, including the manufacture of component parts for railroad cars. 10 These components consisted of side frames and bolsters (commonly known as trucks), couplers, springs, yokes, brake beams, springs, steel railroad wheels, brake shoes for railroad cars and locomotives, and brass journal bearings. Its revenues totaled $ 489 million in 1975.1986 U.S. Tax Ct. LEXIS 68">91 Brenco manufactured and serviced roller bearings and bronze bearings for railroad cars and other industrial markets. Its revenues totaled $ 43 million in 1975.Portec designed, manufactured, and sold products for transportation and industrial markets, including rail anchors and lubricators and rail car auto shipping racks. It had sales of $ 107 million in 1975.General Signal produced cabs, wayside, and centralized traffic control components and systems, pushbutton interlocking controls, operational display subsystems, and other control systems for railroads. It also engaged in numerous other businesses. 11 The company's sales totaled $ 547 million in 1975.87 T.C. 349">362 Pittsburgh Forgings Co. was engaged in (1) the construction and repair of railroad freight cars, and (2) the castings business. Its sales totaled $ 179 million in 1975.Stanray Corp. manufactured metal roofs, coupling devices, wheel truing machines, and other items1986 U.S. Tax Ct. LEXIS 68">92 and equipment for use in the construction, repair, and rebuilding of railroad cars. The company was also engaged in various other businesses. 12 Its sales totaled $ 75 million in 1975.Following the same approach as described above, Grabowski developed market multiples based upon the EBIDT and debt-free cash-flow of the comparable firms. Applying these market multiples to Holland's EBIDT and DFCF, Grabowski valued Holland at $ 4,024,000 and $ 4,777,000, respectively. Grabowski's calculations may be summarized as follows:EBIDT MULTIPLEAdjustmentAdjustmentFirmMultiple for Size WeightmultipleAmsted3.44 x .635 x .15 =.3277Brenco5.98 x .735 x .20 =.8791Portec4.63 x .859 x .20 =.7954GeneralSignal 4.50 x .635 x .15 =.4286PittsburghForging 4.50 x .735 x .20 =.6615Stanray2.81 x .890 x .10 =.25013.3424x $ 1,204,000(EBIDT)Indicated Valuex $ 4,024,000(rounded)DFCF MULTIPLEAdjustmentAdjustmentFirmMultiple for Size WeightmultipleAmsted5.77 x .635 x .15 =.5496 Brenco10.18 x .735 x .20 =1.4965 Portec7.63 x .859 x .20 =1.31083GeneralSignal 11.68 x .635 x .15 =1.1125 PittsburghForging 7.31 x .735 x .20 =1.0746 Stanray4.80 x .890 x .10 =.4272 5.97123x $ 800,000(DFCF)Indicated Value= $ 4,777,000(rounded)1986 U.S. Tax Ct. LEXIS 68">93 Grabowski averaged these values to arrive at an indicated rounded value of $ 4,400,000 for Holland.Remaining SubsidiariesAs of the date of the gifts in issue, the board of directors of CCC had decided to dispose of Suburban's retail fuel oil business and have Suburban become a fuel broker. Grabowski therefore determined that Suburban's liquidation value was the most accurate estimate of Suburban's value as of the date of the gifts. Grabowski estimated the liquidation value of Suburban (net of estimated corporate taxes due on sale and estimated costs of sale including holding costs) as follows: 87 T.C. 349">363 Excess of current assets overcurrent liabilities $ 1,100,000Equipment20,000Land and buildings in Forest Park325,000(3 buildings and 1 vacant parcel) Retail home heating oil customer list25,000Land in Oak Brook, Illinois780,000Total 2,250,000Grabowski estimated the liquidation value of certain other nonoperating assets owned by CCC as follows:Farmland in Crystal Lake$ 175,000Land owned by Curran Development240,000Total 415,000To the above liquidation values, Grabowski added an amount representing the value of CCC's net1986 U.S. Tax Ct. LEXIS 68">94 working capital. 13Grabowski valued CCC's net working capital as of May 7, 1976, at $ 400,000.Because the gifts in issue represented minority interests in CCC, Grabowski reduced the value of CCC's net working capital and the asset liquidation value of its nonoperating assets by a minority position discount of 35 percent. 14Grabowski based this discount factor on a study conducted by Douglas Austin which found that in successful cash tender offers occurring during the period 1972 through 1975, investors paid an average premium of 35.75 percent for stock which represented a controlling interest in a company. Based on a minority discount factor of 35 percent, Grabowski determined a minority position equivalent value of $ 2,270,000 (($ 400,000 plus $ 2,665,000) divided by 1.35) for Suburban and the other nonoperating assets of CCC.1986 U.S. Tax Ct. LEXIS 68">95 Grabowski combined the above values he determined for C/S/K, Holland, Suburban, and the other nonoperating assets owned by CCC and its subsidiaries to arrive at a total value of $ 11,851,000 for CCC's long-term capital debt, preferred stock, and total common equity. To determine the value of CCC's total common equity, Grabowski reduced the above 87 T.C. 349">364 value by $ 1,339,000, the amount of CCC's outstanding long-term debt as of May 7, 1976, and by $ 4,983,040, the intrinsic value of CCC's preferred stock as of the valuation date.To value the outstanding shares of CCC's preferred stock, Grabowski looked to the average dividend yield for the following publicly traded preferred stocks as listed in Moody's Preferred Stock Yield Averages for May 1976:StockYieldHigh grade industrials7.59 percentMedium grade industrials7.86 percentSpeculative grade industrials8.48 percentBased on these yields, Grabowski concluded that a reasonable yield for the preferred stock of CCC would be 12.5 percent, pointing out that while CCC's preferred dividends were noncumulative, the company had sufficient resources to pay preferred dividends without impairing ongoing business operations. 1986 U.S. Tax Ct. LEXIS 68">96 Based on a dividend yield of 12.5 percent, Grabowski valued the 7,786 outstanding shares of CCC preferred stock at $ 4,983,040, or $ 640 per share. 15Subtracting $ 1,339,000, the amount of CCC's outstanding long-term debt, and $ 4,983,040, the value of CCC's issued and outstanding shares of preferred stock, from $ 11,851,000, the total value of CCC and its subsidiaries, Grabowski determined a value of $ 5,528,960 for CCC's total common equity. 161986 U.S. Tax Ct. LEXIS 68">97 Discounted Cash-Flow ApproachGrabowski used a second method to value the common stock of CCC. Under this second approach, Grabowski valued Suburban and CCC's other nonoperating assets using their previously determined liquidation values. Grabowski, however, used the discounted cash-flow approach to value 87 T.C. 349">365 C/S/K and Holland. This valuation method is based on the assumption that the price an investor will pay for a share of stock is the present value of the future stream of income he expects to receive from the investment.Under the discounted cash-flow approach, Grabowski determined a present value equivalent for: (1) The amount of cash that C/S/K and Holland could pay to their shareholders over a 10-year period without impairing business operations (we will hereinafter refer to this amount as available cash-flow), 17 and (2) the companies' residual value at the end of 10 years. Adding these two values together, Grabowski determined a second value for the common shareholders' equity in C/S/K and Holland.1986 U.S. Tax Ct. LEXIS 68">98 In computing C/S/K's projected 10-year cash-flow, Grabowski estimated that C/S/K's 1976 revenues would be 15 percent less than its 1975 revenues. He based this projection on C/S/K's sales experience for the first 4 months of 1976. Relying on C/S/K's average revenue trend for the period 1970 through 1975, Grabowski projected that C/S/K's net sales would increase 5 percent in each of the years 1977 through 1980 and 2 percent in each of the years 1981 through 1985. Grabowski estimated C/S/K's expenses for the 10-year period as a percentage of projected sales. These percentages were based on average trends experienced by C/S/K in prior years.Grabowski projected that Holland's 1976 revenues would be 30 percent greater than its 1975 revenues. He based this projection on Holland's sales experience for the first 4 months of 1976. Grabowski attributed this increase in sales to favorable provisions contained in the Railroad Revitalization and Regulatory Reform Act of 1976 which encouraged railroads to upgrade their track. Grabowski believed that these provisions would continue to benefit Holland's business in the future and therefore projected that Holland's net sales would increase1986 U.S. Tax Ct. LEXIS 68">99 20 percent in 1977, 15 percent in 1978 and 1979, 10 percent each year from 1980 through 1982, 87 T.C. 349">366 and 8 percent per year from 1983 through 1985. As with C/S/K, Grabowski estimated Holland's expenses for the 10-year period as a percentage of its projected sales. These percentages were based on average trends experienced by Holland in prior years. The table on page 367 summarizes Grabowski's computation of C/S/K's and Holland's available cash-flow:To determine a present value equivalent for these 10-year projected cash-flows, Grabowski was required to determine an appropriate discount rate. He used the following formula to arrive at the appropriate discount rate:K = R[f] + Beta (R[1]) + R[2]K = cost of equity capitalR[f] = current market rate on U.S. Government bondsR[1] = premium an investor would expect before he would invest in common stock rather than U.S. Government bondsBeta = relationship between the movement of stock prices for companies engaged in specific industries (i.e., construction business, and railroad supply business) and the movement of stock prices in generalR[2] = additional premium an investor would expect before he would invest in the common stock1986 U.S. Tax Ct. LEXIS 68">100 of C/S/K and HollandGrabowski determined that in May 1976, the current market yield on 10-year U.S. Government bonds was 6.96 percent. To this figure he added a risk premium which represented the additional return an investor would require before he would invest in common stocks of publicly traded companies engaged in the construction business and railroad supply business rather than U.S. Government securities. To determine this premium, Grabowski first determined that an investor would require an additional return of 6 to 8 percent before he would invest in common stocks in general, rather than U.S. Government securities. Grabowski based this figure on studies which found that investors in diversified portfolios of common stocks trading on the New York Stock Exchange realized yields which were 6 percent to 8 percent larger than yields on long-term U.S. Government securities. Grabowski then multiplied this risk premium 87 T.C. 349">367 ($ 000)1976(8 mos.)1977197819791980Operating incomeCCC/Stahl/Kaneland $ 2,457 $ 1,875 $ 1,800$ 1,900$ 1,870Holland 1,557 1,850 2,1302,7202,990Total 4,014 3,725 3,9304,6204,860Less: Interest expense33 90 70Equals: Pre-tax income3,981 3,635 3,8604,6204,860Less: Income taxes1,913 1,685 1,7802,1502,250Plus: DepreciationCCC/Stahl/Kaneland 272 405 425445470Holland 315 500 570660730Less: Increases in networking capital CCC/Stahl/Kaneland (250)70 808535Holland 200 170150180130Less: Capital expenseCCC/Stahl/Kaneland 430 460 480500530Holland 690 1,000 1,1601,3301,460Less: Principal paymentson debt 430 635 275Equals: Cash-flow beforepreferred dividends 1,155 520 9301,4801,655Less: Preferred dividends622 622 622622622Plus: Reductions in networking capital (102)500Equals: Available cash-flow533 0 3081,3581,0331986 U.S. Tax Ct. LEXIS 68">101 ($ 000)19811982198319841985Operating incomeCCC/Stahl/Kaneland $ 1,670$ 1,700$ 1,740$ 1,770$ 1,810Holland 3,2903,6203,9104,2204,560Total 4,9605,3205,6505,9906,370Less: Interest expenseEquals: Pre-tax income4,9605,3205,6505,9906,370Less: Income taxes2,2902,4502,6002,7602,930Plus: DepreciationCCC/Stahl/Kaneland 475485495505515Holland 8008809551,0301,110Less: Increases in networking capital CCC/Stahl/Kaneland 3535353540Holland 150160150160165Less: Capital expenseCCC/Stahl/Kaneland 540550560570580Holland 1,6101,7701,9102,0602,230Less: Principal paymentson debt Equals: Cash-flow beforepreferred dividends 1,6101,7201,8451,9402,050Less: Preferred dividends622622622622622Plus: Reductions in networking capital Equals: Available cash-flow9881,0981,2231,3181,42887 T.C. 349">368 by a "beta coefficient" which represented the relationship between the movement of stock prices for publicly traded companies engaged in the construction business and the railroad supply business and the movement of stock1986 U.S. Tax Ct. LEXIS 68">102 prices in general. Based on a sample of common stock of publicly traded companies engaged in construction, Grabowski estimated that such stocks had a beta of 1.3 (i.e., when stock prices in general increase or decrease 10 percent, the stock prices for publicly traded companies engaged in construction increase or decrease 30 percent). Based on a sample of common stocks of publicly traded companies engaged in the railroad supply business, Grabowski determined that such stocks had a beta of .95 (i.e., when stock prices in general increase or decrease by 10 percent, the stock prices for publicly traded companies engaged in the railroad supply business increase or decrease 9.5 percent).Finally, Grabowski added a risk premium to reflect the additional return an investor would require before he would choose to invest in the common stock of an unlisted company similar to C/S/K and Holland. He determined that a risk premium of 3 percent to 6 percent would be appropriate for Holland and a risk premium of 4 percent to 7 percent would be appropriate for C/S/K.Applying the formula K = R[f] + Beta (R[1]) + R[2] to the above variables, Grabowski determined that an investor would require an 1986 U.S. Tax Ct. LEXIS 68">103 expected average return of 21 percent on an investment in the common stock of C/S/K and Holland before he would decide to make such an investment. Grabowski applied the formula as follows:C/S/K: K = 6.96% + 1.3 (6%-8%) + (4%-7%)Holland: K = 6.96% + .95 (6%-8%) + (3%-6%)Based on a discount factor of 21 percent, Grabowski determined a present value equivalent of $ 3,159,000 for the 10-year projected cash-flows as follows:($ 000)1976(8 mos.)1977197819791980Cash-flow53303081,3581,033PV Factor at 21%.8807.7278.6015.4971.4108Present value469018567542487 T.C. 349">369 ($ 000)19811982198319841985TotalCash-flow9881,0981,2231,3181,428PV Factor at 21%.3395.2806.2319.1917.1584Present value3353082842532263,159Having determined the present value of the 10-year projected cash-flows for C/S/K and Holland, Grabowski next determined the present value of the companies' residual values at the end of 10 years. Estimating that future available cash-flows would grow approximately 4 percent per year after 1985 and applying a 21-percent discount factor, Grabowski determined1986 U.S. Tax Ct. LEXIS 68">104 a present value of $ 1,331,000 for the residual value of C/S/K and Holland at the end of 10 years.To determine the total value of the common shareholders' equity, Grabowski added together the values he determined for C/S/K and Holland using the discounted cash-flow approach and the previously determined liquidation values of Suburban and the other nonoperating assets owned by CCC. Based on the sum of these values, Grabowski valued CCC's common shareholders' equity at $ 7,155,000.Grabowski next discounted the above value by 35 percent to reflect the fact that the gifts in issue represented minority positions in CCC. Applying this minority discount factor to the above value, Grabowski determined a final value of $ 5,300,000 for CCC and its subsidiaries under the discounted cash-flow approach.Grabowski averaged CCC's market comparable value (rounded to $ 5,529,000) and discounted cash-flow value ($ 5,300,000) to arrive at a final value of $ 5,425,000 for CCC's total common equity. 181986 U.S. Tax Ct. LEXIS 68">105 Allocation of Common Shareholders' Equity Among Class A Voting Shares and Class B Nonvoting SharesHaving determined a total value of $ 5,425,000 for CCC's common shareholders' equity, Grabowski next determined that this amount should be allocated pro rata among CCC's outstanding shares of common stock, concluding that each 87 T.C. 349">370 share of class B nonvoting common was equal in value to each share of class A voting common. Grabowski based this conclusion on the fact that the holder of a minority interest in CCC's class A voting common stock would not possess voting control and therefore could not affect the company's dividend policies. Grabowski therefore believed that the class A shareholders would receive the same dividends per share as the class B shareholders in the event CCC paid common dividends. Grabowski thus valued the 24 shares of the class A voting common stock at $ 14,105 ($ 588 per share), which represented .26 percent of CCC's total common equity. Similarly, he valued the 9,200 shares of class B nonvoting common at $ 5,410,895 ($ 588 per share), which represented 99.74 percent of CCC's total common equity. 191986 U.S. Tax Ct. LEXIS 68">106 Discount for Lack of MarketabilityGrabowski next discounted the indicated stock values for lack of marketability. With respect to the class A common shares, Grabowski applied a discount of 20 percent for lack of marketability. In determining the appropriate discount rate, Grabowski noted that an investor could purchase 6 shares of CCC's class A common stock for a relatively small sum of money ($ 3,528). He also pointed out that an investor would be aware of CCC's ability to pay dividends to its common shareholders. On the other hand, Grabowski emphasized that an investor would know that the management of CCC did not intend to pay dividends and that the remaining 18 shares of class A common stock were held in trusts which placed control of the company in CCC's present management and their appointed successors for many years in the future.Grabowski reduced the value of CCC's class B common stock by a 90-percent discount for lack of marketability. Grabowski based this large discount on the fact that an investor would be required to pay $ 1,352,400 to acquire a block of 2,300 shares of class B common stock at a price of $ 588 per share. Grabowski concluded that an investor1986 U.S. Tax Ct. LEXIS 68">107 would not pay more than $ 135,240 for such shares given the small 87 T.C. 349">371 probability that the management of CCC would decide to pay common dividends, to redeem the stock, or to liquidate the corporation.Consequently, based on the analysis described above, Grabowski valued each block of 6 shares of CCC class A voting common stock at $ 2,822, or $ 470.33 per share, and each block of 2,300 shares of CCC class B nonvoting common stock at $ 135,240, or $ 58.80 per share.Lerner AppraisalEugene M. Lerner is a Professor of Finance in the Graduate School of Management at Northwestern University. He was retained by respondent to value the class A and class B common stock of CCC at issue in this case.Market Comparable ApproachLerner first valued CCC using a market comparable approach. He initially searched for publicly traded companies engaged in the asphalt paving business, the rail welding business, and the heating oil distribution business. However, because he was unable to locate individual companies engaged in all three businesses, Lerner looked for publicly traded companies with similar financial characteristics as CCC.Lerner determined that during the period 19711986 U.S. Tax Ct. LEXIS 68">108 through 1975, CCC had a return on equity of 15.56 percent, sales of approximately $ 20 million per year, and a debt/equity ratio of 45 percent. Using Compustat, a computer program containing the financial data of approximately 2,500 publicly traded companies, Lerner searched for companies with returns on equity ranging from 12 percent to 17 percent, sales of less than $ 25 million, and debt/equity ratios of less than 70 percent. Lerner discovered 17 publicly traded companies meeting all three financial criteria.Lerner next computed the price/earnings ratio, the price/book value ratio, and the dividend/price ratio for each comparable company. The averages for these ratios are set forth below:RatioAveragePrice/earnings7.9Price/book value1.075Dividend/price3.6%87 T.C. 349">372 Based on these ratios, Lerner valued CCC as follows:YearIncomeWeightWeighted income1971$ 838,0541 $ 838,0541972306,7492 613,49819731,176,5373 3,529,61119741,414,8014 5,659,20419751,861,0855 9,305,4255,597,0851519,945,792Weighted income$ 1,329,719Based on weighted income of $ 1,329,719 and a price/earnings ratio of 7.9, Lerner1986 U.S. Tax Ct. LEXIS 68">109 valued CCC at $ 10,504,780.Lerner next computed a book value of $ 8,544,549 for CCC. Based on a comparable price/book ratio of 1.075, Lerner valued CCC at $ 9,185,390.As a result of its strong financial condition, Lerner estimated that CCC could have paid annual dividends of $ 438,807 (33 percent of weighted earnings of $ 1,329,719). Based on a dividend/price ratio of 3.6 percent, Lerner valued CCC at $ 12,190,058.Using a weighted average of the above values, Lerner determined a final value of $ 10,211,521 for CCC and its subsidiaries as follows:RatioValuation20 Weight Weighted valuationPrice/earnings$ 10,504,78055$ 5,777,629Price/book value9,185,390353,214,886 Dividend/price12,190,058101,219,000 10,211,515 1986 U.S. Tax Ct. LEXIS 68">110 Second Valuation MethodIn addition to valuing CCC as one consolidated company, Lerner also separately valued CCC's operational components (i.e., the paving companies, Suburban, and Holland). He used the market comparable approach described above to value the three paving companies. He relied on Suburban's 87 T.C. 349">373 book value as a fair indication of that company's market value. Finally, Lerner valued Holland based on the sum of its 1974 purchase price and the company's post-acquisition earnings. Lerner's computations may be summarized as follows:Paving CompaniesWeightedRatioFactorsAmountValuationWeightvaluationPrice/earnings7.69$ 813,997$ 6,259,63755$ 3,442,800Price/book value.971 6,668,8056,475,410352,266,394Dividend/price4%268,6196,715,47510671,5486,380,742Suburban book value1,625,095Holland1974 purchase price $ 2,887,300Post-acquisition earnings 703,449 3,590,749Total value3,590,749 11,596,586Valuation of CCC's Common EquityHaving valued CCC at $ 10,211,515 using the market comparable approach and having valued CCC at $ 11,596,586 using 1986 U.S. Tax Ct. LEXIS 68">111 a combination of several different valuation methods, Lerner averaged these two values to arrive at a final value of $ 10,904,054 for CCC and its subsidiaries. To determine the value of CCC's common equity, Lerner subtracted $ 4,447,363, the value of CCC's preferred stock, from the company's overall value of $ 10,904,054.To value the preferred stock of CCC, Lerner looked to the return an investor could realize on the following alternative investments:InvestmentRate of returnU.S. Treasury securities3 years 7.49% 10 years7.99 Corporate bondsAAA8.83 BAA10.61 Medium grade industrials8.58 Based on the yield of these alternative investments and recognizing that an investor would perceive some additional risk in investing in the preferred stock of CCC, Lerner conservatively concluded that a potential investor would 87 T.C. 349">374 expect a return of at least 14 percent on the amount of cash he would be required to invest to purchase CCC's preferred stock. Based on a 14-percent dividend yield and assuming that CCC's preferred stock would pay its stated dividend of $ 80 per share, Lerner valued the preferred stock of CCC at $ 4,447,363 or $ 571.201986 U.S. Tax Ct. LEXIS 68">112 per share. Subtracting this amount from his aggregate valuation of CCC, Lerner valued CCC's common equity at $ 6,456,691.Lerner next allocated the value of CCC's common equity pro rata among the class A voting common stock and the class B nonvoting common stock. As did petitioners' expert, Lerner determined that each share of class A common stock was equal in value to each share of class B common stock. He therefore valued the 24 issued and outstanding shares of class A voting stock and the 9,200 issued and outstanding shares of class B nonvoting stock at $ 699.99 per share.Minority Discount and Discount for Lack of MarketabilityFinally, Lerner reduced the value of each share of common stock by a minority discount of 15 percent and a discount of 20 percent for lack of marketability. In determining the appropriate discounts, Lerner considered the fact that the stock of small, closely held corporations is generally difficult to sell. He believed, however, that this negative factor would be substantially offset by a potential buyer's awareness that CCC was a financially strong old-line company with excellent and aggressive management and the capacity to pay dividends. 1986 U.S. Tax Ct. LEXIS 68">113 After applying a minority discount and a discount for lack of marketability, Lerner determined a final fair market value of $ 454.99 for each share of CCC common stock.OPINIONAt issue in this case is the value for gift tax purposes of CCC's class A and class B common stock held by John Curran and William Curran on May 27, 1976, 21 the date of 87 T.C. 349">375 the gifts in issue and the value for estate tax purposes of CCC's class A and class B common stock held by Cecilia Simon on May 11, 1976, the date of her death.Under section 2035(a), the value of the gross estate includes (with certain exceptions not here1986 U.S. Tax Ct. LEXIS 68">114 applicable) the value of all property transferred by the decedent within 3 years of death. Since the executor of Mrs. Simon's estate did not elect alternative valuation under section 2032, the date of death (May 11, 1976) value applies as to the stock in her estate. Under section 2512(a), the value of property for gift tax purposes is determined on the date of the gift.For both estate and gift tax purposes, fair market value is defined as "the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts." Sec. 20.2031-1(b), Estate Tax Regs.; sec. 25.2512-1, Gift Tax Regs. The valuation of stock presents a question of fact, and the trier of fact has the duty to weigh all relevant evidence and to draw appropriate inferences therefrom. Hamm v. Commissioner, 325 F.2d 934">325 F.2d 934, 325 F.2d 934">938 (8th Cir. 1963), affg. T.C. Memo. 1961-347.Section 20.2031-2(f), Estate Tax Regs., and section 25.2512-2(f), Gift Tax Regs., set forth some of the relevant factors to be considered in determining the value of stock1986 U.S. Tax Ct. LEXIS 68">115 in a closely held corporation in the absence of actual sales prices and bona fide bid and asked prices. Those factors include the company's net worth, prospective earning power, dividend-paying capacity, and other relevant factors. The regulation states that "other relevant factors" include:the good will of the business; the economic outlook in the particular industry; the company's position in the industry and its management; the degree of control of the business represented by the block of stock to be valued; and the values of securities of corporations engaged in the same or similar lines of business which are listed on a stock exchange. However, the weight to be accorded such comparisons or any other evidentiary factors considered in the determination of a value depends upon the facts of each case. * At trial, petitioners and respondent each presented the testimony of an expert to establish the value of CCC's common stock. Petitioners' expert valued CCC's class A 87 T.C. 349">376 voting common stock at $ 470.33 per share, and CCC's class B nonvoting common stock at $ 58.80 per share. Respondent's expert valued both the class A and class B stock at $ 454.99 per share. We 1986 U.S. Tax Ct. LEXIS 68">116 recognize that expert testimony is peculiarly appropriate in cases dealing with the value of stock of unlisted, closely held corporations. Central Trust Co. v. United States, 158 Ct. Cl. 504">158 Ct. Cl. 504 (1962), 305 F.2d 393">305 F.2d 393. Nevertheless, for the reasons stated below, we do not fully agree with either expert's valuation determination.To summarize briefly, petitioners' expert, Grabowski, relied on the market comparable approach and the discounted cash-flow approach to value CCC, Stahl, Kaneland, and Holland. He relied on the liquidation values of the remaining subsidiaries as evidence of their intrinsic values. Respondent's expert, Lerner, used a modified market comparable approach to value CCC and its subsidiaries as one consolidated company as well as to individually value CCC, Stahl, and Kaneland. After valuing CCC, Stahl, and Kaneland by using a modified market comparable approach, Lerner valued Suburban based on its book value and Holland based on its 1974 purchase price increased by its post-acquisition earnings.First, we cannot accept Grabowski's market comparable valuation of CCC, Stahl, Kaneland, and Holland. Section 2031(b) provides1986 U.S. Tax Ct. LEXIS 68">117 that "the value of stock or securities of corporations engaged in the same or a similar line of business which are listed on an exchange" is a factor to be considered in valuing the stock of an unlisted corporation. In valuing CCC, Stahl, and Kaneland, Grabowski relied on market multiples based on the financial statistics of McDowell, Rexco, and Sukut, publicly traded companies engaged in the construction of highways, residential buildings, commercial buildings, and industrial plants. CCC, Stahl, and Kaneland, however, were Illinois companies engaged solely in the asphalt paving business. If the "other relevant factors" concept of section 20.2031-2(f) is to be meaningfully applied, then companies engaged in diversified construction are not sufficiently similar to companies engaged solely in asphalt paving to provide reliable comparisons for valuation purposes. This is particularly true in the instant case since the record contains no evidence of the 87 T.C. 349">377 percentage of revenues earned by the comparable companies from highway construction. Such revenues may be insignificant in relation to the total revenues of the companies compared.We also point out that Grabowski's expert1986 U.S. Tax Ct. LEXIS 68">118 report shows that sales for CCC, Stahl, and Kaneland increased 21 percent per year during the period 1971 through 1975, while sales for the comparable companies increased only 5 to 11 percent during this same period. Moreover, the capital structures of the comparable companies differed significantly from the capital structures of CCC, Stahl, and Kaneland.We are similarly unpersuaded by the comparable companies which Grabowski relied upon to value Holland. At the time of the transfers, a substantial portion of Holland's business consisted of the manufacture, assembly, and sale of rail welding equipment. Holland also provided welding services on a contract basis. The comparable companies which Grabowski relied upon were publicly traded companies engaged in the sale of various types of railroad equipment. These businesses were in no way similar to the rail welding business engaged in by Holland. Moreover, in his report, Grabowski stated that these companies were also engaged in numerous other businesses in addition to the railroad supply business. The record, however, does not disclose the nature of these businesses. Consequently, we conclude that Grabowski's comparable companies1986 U.S. Tax Ct. LEXIS 68">119 were not essentially engaged in the same or similar line of business as Holland. We therefore reject his market comparable valuation of Holland. We do not, of course, question that Grabowski used the best "comparables" he could find. We simply find that the market comparable approach is not available in this case in the absence of more reliable yardsticks.We are similarly unable to accept Lerner's use of a modified market comparable approach to value CCC and its subsidiaries. Because he was unable to locate publicly traded companies engaged in the same or similar lines of business as CCC and its subsidiaries, Lerner relied on publicly traded companies with financial statistics similar to those of CCC. In choosing these comparable companies, Lerner did not look at the particular businesses in which 87 T.C. 349">378 they were engaged. Rather, he believed that investors would similarly value companies with comparable sales, returns on equity, and debt to equity ratios, regardless of the type of business in which they were engaged. We, however, are unable to agree with this theory.It seems self-evident that every industry is characterized by its own peculiar risks and expectations. 1986 U.S. Tax Ct. LEXIS 68">120 As a result, financial statistics which may be considered outstanding for one industry may be considered disastrous for another. For example, a large debt to equity ratio might be very acceptable to a willing buyer of stock in a company engaged in a business characterized by stable earnings while a similar debt to equity ratio might be unacceptable to that investor if the company were engaged in a business subject to volatile earnings. For the same reason, an investor cannot determine what constitutes a reasonable return on equity or adequate sales volume without considering the particular business of the company. We also point out that a company's total sales volume provides little evidence of the attractiveness of an investment in the absence of evidence of the company's overall profitability. Consequently, we do not believe that Lerner's modified market comparable approach provides an adequate indication of the intrinsic value of CCC and its subsidiaries.On the record before us, we think that Grabowski's discounted cash-flow analysis provides a reasonable estimate of the intrinsic value of CCC, Stahl, Kaneland, and Holland. In Rev. Rul. 59-60, 1959-1 C.B. 2371986 U.S. Tax Ct. LEXIS 68">121 (which is applied by both Grabowski and Lerner), it is stated that earnings are the most important factor to be considered in valuing stocks of manufacturing or service corporations. In this revenue ruling and the above-quoted estate and gift tax regulations, the following factors are listed as also relevant in determining stock values: (1) The economic outlook in general and the condition and outlook of the specific industry in general; (2) the financial condition of the business; and (3) its dividend-paying capacity. Because Grabowski's discounted cash-flow analysis takes into account all of these factors, we think that such analysis provides an appropriate method to use in valuing the common stock of CCC.87 T.C. 349">379 Grabowski's discounted cash-flow analysis is based upon the theory that the price which an investor will pay for a share of stock is equal to the present value of the future stream of income which he expects to receive from the investment. Thus, as applied here, this valuation method relies primarily on the earnings of CCC and its subsidiaries, which, as Rev. Rul. 59-60 itself provides, is the most important factor to consider1986 U.S. Tax Ct. LEXIS 68">122 in valuing manufacturing and service companies like CCC, Stahl, Kaneland, and Holland. Moreover, in projecting the future income stream of these companies, Grabowski considered general economic conditions as well as the condition of the construction industry and railroad supply industry, the companies' financial conditions and their dividend-paying capacity. Consequently, because Grabowski's discounted cash-flow analysis emphasizes the companies' past and future earnings as well as other relevant factors listed in respondent's regulations and revenue rulings, we think that this valuation method is an appropriate method to use in determining the intrinsic value of CCC, Stahl, Kaneland, and Holland. 221986 U.S. Tax Ct. LEXIS 68">123 Respondent, nevertheless, attacks Grabowski's discounted cash-flow analysis on the ground that the projections of operating income are based on pure speculation. We demur. Rev. Rul. 59-60 states that:Potential future income is a major factor in many valuations of closely-held stocks, and all information concerning past income which will be helpful in predicting the future should be secured. Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five-or-ten-year averages without regard to current trends or future prospects will not produce a realistic valuation. If, for instance, a record of progressively increasing or decreasing net income is found, then greater weight may be accorded the most recent years' profits in estimating earning power. It will be helpful, in judging risk and the extent to which a business is a marginal operator, to consider 87 T.C. 349">380 deductions from income and net income in terms of percentage of sales. * * * [1959-1 C.B. 237, 241.]Thus, Rev. Rul. 59-60, itself, provides1986 U.S. Tax Ct. LEXIS 68">124 that potential future income is a major factor to consider in valuing the stock of a closely held corporation even though this factor cannot be established with certainty, but rather must be projected on the basis of prior earnings records. In the instant case, Grabowski made reasonable estimates of the future income of CCC, Stahl, Kaneland, and Holland based on their prior earnings. He also projected future expenses as a percentage of sales based on the companies' prior operating experience. Consequently, because projected future income is an essential factor to consider in valuing stock and because Grabowski's method of projecting future income satisfies the guidelines set forth in Rev. Rul. 59-60, we think that Grabowski's use of the discounted cash-flow method was appropriate in the instant case.Respondent also attacks Grabowski's use of the Capital Asset Pricing Method (CAPM) to determine the cost of capital for CCC, Stahl, Kaneland, and Holland, maintaining that this formula is based on speculation and conjecture. We are, however, satisfied that the CAPM provides an acceptable formula to use in calculating the cost of capital for1986 U.S. Tax Ct. LEXIS 68">125 CCC and its subsidiaries.The CAPM used by Grabowski is not based on unfounded speculation and conjecture, but rather requires the application of the appraiser's commonsense and informed judgment in weighing all the facts and circumstances in determining the cost of capital for a particular company. This approach to valuation is consistent with the statement in Rev. Rul. 59-60 that "A sound valuation will be based upon all the relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance." Indeed, we have repeatedly recognized that stock valuation is not an exact science, but rather is "inherently imprecise and capable of resolution only by a Solomon-like pronouncement." Messing v. Commissioner, 48 T.C. 502">48 T.C. 502, 48 T.C. 502">512 (1967). We also note that respondent's expert, Lerner, described the CAPM as a "formal statistical measure of risk" whose use has flowered since 1951. Although Lerner 87 T.C. 349">381 further stated that the CAPM is presently on the wane because of the instability of the so-called "beta1986 U.S. Tax Ct. LEXIS 68">126 coefficient" (see below), he nevertheless also stated that numerous companies presently use the CAPM to estimate their cost of capital when making investment decisions.Respondent also criticizes the CAPM on the ground that the appraiser's risk added by Grabowski is simply a different estimate of the same risk quantified by the beta coefficient. We disagree.The beta coefficient is a ratio which compares the movement of stock prices for publicly traded companies deemed comparable to the company in issue with the movement of stock prices in general. In the instant case, had CCC been a large, publicly traded company, the beta coefficients relied on by Grabowski would have accurately reflected the company's perceived risk. However, because CCC is an unlisted, closely held corporation, an additional premium is needed to reflect the fact that investors view such corporations as being more risky than large, publicly traded companies. Thus, Grabowski's appraiser's risk reflects the additional risk inherent in CCC, Stahl, Kaneland, and Holland because they are unlisted closely held corporations.In conclusion, after consideration of the entire record before us, we are satisfied that Grabowski's1986 U.S. Tax Ct. LEXIS 68">127 discounted cash-flow analysis accurately reflects the fair market value of the common equity of CCC, Stahl, Kaneland, and Holland before applying discounts for lack of control and lack of marketability. Consequently, based on Grabowski's discounted cash-flow analysis, we find that the total common equity of CCC had a value of $ 4,490,000 on the applicable valuation dates.As to the remaining subsidiaries, Grabowski valued Suburban's real estate holdings and other assets, together with the investment real estate owned by CCC and Curran Development, at $ 2,665,000, which represented the liquidation value of those assets. Lerner, on the other hand, valued Suburban at $ 1,625,095, which represented the book value of its assets. Lerner did not individually value the investment real estate owned by CCC and Curran Development.87 T.C. 349">382 Although a company's liquidation value on occasion has been found to be an appropriate indication of that company's value (see Estate of Lee v. Commissioner, 69 T.C. 860">69 T.C. 860 (1978)), on the record before us we find it more appropriate to rely on Lerner's valuation of Suburban based on the book value of its assets. At trial, 1986 U.S. Tax Ct. LEXIS 68">128 Grabowski stated that a substantial portion of his liquidation value determination was based on the assessed value of Suburban's real estate holdings as adjusted to reflect fair market value. Grabowski explained that he relied on the opinion of several local real estate appraisers to properly adjust the properties' assessed values to reflect their fair market value. Grabowski admitted, however, that the appraisers never viewed the property prior to determining the appropriate adjustments. Indeed, the record contains no evidence explaining the basis of these adjustments. Section 20.2031-1(b), Estate Tax Regs., states that "Property shall not be returned at the value at which it is assessed for local tax purposes unless that value represents the fair market value as of the applicable valuation date."We have recently held that assessed value may be considered when the relationship between assessed value and fair market value is demonstrated, but basically as a corroboration of fair market value determined by a more reliable method. Estate of Kaplin v. Commissioner, T.C. Memo. 1986-167. We apply this rule here. Since Grabowski has not shown the relationship1986 U.S. Tax Ct. LEXIS 68">129 between assessed value and fair market value, we think assessed values must be disregarded. We consequently rely on Suburban's book value of $ 1,625,095 as the fair market value of its stock.Respondent, however, failed to provide any estimate of the fair market value of the real estate held by CCC and Curran Development. In the absence of other evidence indicative of the properties' value, we accept these properties' liquidation values as determined by Grabowski. Consequently, we find that the investment real estate owned by CCC and Curran Development had a fair market value of $ 415,000 on the applicable valuation dates.For the reasons stated above, we conclude that the total fair market value of the common stock of CCC and its subsidiaries, before applying discounts for minority blocks 87 T.C. 349">383 and lack of marketability, was $ 6,530,095 on the applicable valuation dates. Our calculations may be summarized as follows:Curran, Stahl, Kaneland, and Holland$ 4,490,000Suburban1,625,095Investment real estate415,000Total 6,530,095We must next allocate $ 6,530,095 between CCC's class A voting common stock and class B nonvoting common stock. Petitioners and1986 U.S. Tax Ct. LEXIS 68">130 respondent agree that because the blocks of class A voting common represent minority positions, the class A voting shares are not more valuable than the class B nonvoting shares. Both parties therefore agree upon a pro rata allocation between the two classes of common stock. Consequently, we find that each share of CCC's class A voting common stock and class B nonvoting common stock had a value of $ 707.95 before applying a minority position discount and discount for lack of marketability. 23We now reach the point upon which the parties most strongly disagree. We must determine the appropriate discounts to apply for lack of control and lack of marketability. Petitioners contend that each 25-percent block of CCC's class A and class B common stock should be discounted 35 percent for lack of control. Petitioners rely on a study conducted by one Douglas Austin to support this figure. (The1986 U.S. Tax Ct. LEXIS 68">131 Austin study is not part of the record and we have not been asked to take judicial notice of its existence or contents.) Petitioners also maintain that the value of the class A and class B shares should be further reduced by discounts of 20 percent and 90 percent, respectively, for lack of marketability. They contend that a willing buyer of one 25-percent block of class A stock would discount the stock by 20 percent because the remaining 75 percent of the class A stock will be held by irrevocable voting trusts with an actuarially determined duration of 97 years. Petitioners also contend that a willing buyer would discount the class A stock because of CCC's failure to pay dividends in the past. Petitioners further maintain that the difference in size between each 25-percent block of class A stock (6 shares) 87 T.C. 349">384 and each 25-percent block of class B stock (2,300 shares) supports their contention that the class B shares should be discounted 90 percent.Respondent disagrees, maintaining that because CCC was a financially strong old-line company with excellent and aggressive management and the capacity to pay dividends, both classes of stock should be discounted by no more than1986 U.S. Tax Ct. LEXIS 68">132 15 percent for lack of control and 20 percent for lack of marketability. Respondent contends that the restrictions on transferability placed on 75 percent of the outstanding shares of the class A and class B stock by the terms of the trusts should not be considered in determining the value of each 25-percent block of stock in issue. Respondent further argues that no additional discount should be applied to the class B shares based on the difference in size between each 25-percent block of the class A shares and the class B shares. After a careful review of the record, we think that a minority position discount of 25 percent and a discount of 20 percent for lack of marketability are appropriate for both classes of stock.First, we point out that we can give little weight to Grabowski's reliance on the so-called Austin study, which is said to find that investors on average pay a premium of 35 percent in cash tender offers for stock representing a controlling interest in a company, to support a minority position discount of 35 percent in the instant case. The valuation of a closely held corporation, including the appropriate discount to apply to stock representing a minority position, 1986 U.S. Tax Ct. LEXIS 68">133 must take into account all of the relevant facts and circumstances of the particular corporation under scrutiny. Grabowski, by relying on a study based on a sample of various corporations, has failed to consider the particular facts and circumstances a willing buyer would consider when discounting a block of stock representing a minority position in CCC.We are similarly not convinced by respondent's assertion that a minority position discount of 15 percent is appropriate in this case. We do not think that this discount factor adequately reflects the amount a willing buyer would reduce the value of each 25-percent block of common stock for lack of control. Rather, based on all of the facts and circumstances 87 T.C. 349">385 contained in the record before us, we believe that a minority position discount of 25 percent would be appropriate in the instant case. In so holding, we have considered the fact that a purchaser of a 25-percent interest in CCC would not have sufficient voting power to elect members to CCC's board of directors and therefore would not be able to participate in the management of the company. 24 We have also considered, however, that under Delaware law, corporate officers1986 U.S. Tax Ct. LEXIS 68">134 and directors owe their corporation and its minority shareholders a fiduciary obligation of honesty, loyalty, good faith, and fairness. Singer v. Magnavox Co., 380 A.2d 969">380 A.2d 969, 380 A.2d 969">977 (Del. 1977). Moreover, we point out that a willing buyer would be aware of the history of success experienced by CCC's past and present management and the dividend paying capacity of the company. Thus, although we believe that a potential investor would apply some discount to a 25-percent stock interest in CCC for lack of control, we do not think that his minority position would unduly deter a prospective investor from buying the 25-percent block of stock, given an appropriate discount in his purchase price.Petitioners also contend that each 25-percent block of CCC's outstanding class B common stock must be discounted 90 percent for lack of marketability. They argue that a willing buyer of a 25-percent interest in the class B stock would discount that stock by 90 percent given the fact1986 U.S. Tax Ct. LEXIS 68">135 that the remaining 75 percent of the shares would be held in irrevocable trusts with an actuarially determined life of 97 years.We agree with respondent that Grabowski's 90-percent discount figure is based upon a misconception of the law. In his testimony Grabowski stated:Well, for example, valuing the Jack Curran block of stock I would be presented with the -- I was presented with the necessity of placing myself as a hypothetical investor as of May 7, 1976, presented with the opportunity to buy this stock. Looking at the form I see a very good historically sound financially stable firm. I also see though that we have a situation of 18 other shares of Class A common stock being held by three other trusts, the trustees of which are Curran Management. I also see 2,300 shares of Class B common stock held in another similar trust, two different trusts, Cecilia Simon's 76-2 trust, and for example, placing myself looking at the Jack Curran block of stock, Bill Simon's 76-2 trust. 87 T.C. 349">386 So I could -- I would analyze what are the types of returns that I might anticipate at that point buying a block of six shares of common stock that provides some -- the opportunity to vote, and1986 U.S. Tax Ct. LEXIS 68">136 2,300 shares of Class B common stock not providing the opportunity to vote. Given this circumstance that the other shares are housed in these trusts, given that, I would have to look at well, what are the likely scenarios, or what are the likely returns I might receive from making this investment.Grabowski was viewing each block of stock as a separate gift on the one hand and hypothetically valuing each block before the gift. On the other hand, he was assuming that the other gifts were a fait accompli. Grabowski perceived the trusts as a restriction on the stock when in fact the trusts were not in existence until the making of the gifts. The trusts were, of course, created simultaneously and in concert by the stockholders pursuant to the estate freeze plan. Respondent's expert, Lerner, with whom we agree on this point, considered the trusts irrelevant for valuation purposes because he looked at the value of the stock from the point of view of what the donor had given.Section 2511(a) states that the gift tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. 1986 U.S. Tax Ct. LEXIS 68">137 Section 25.2511-1(a), Gift Tax Regs., explains further that the gift tax is an excise tax on the transfer, and is not a tax on the subject of the gift. Section 25.2511-2(a), Gift Tax Regs. (entitled "Cessation of donor's dominion and control"), provides:The gift tax is not imposed upon the receipt of the property by the donee, nor is it necessarily determined by the measure of enrichment resulting to the donee from the transfer, nor is it conditioned upon ability to identify the donee at the time of the transfer. On the contrary, the tax is a primary and personal liability of the donor, is an excise upon his act of making the transfer, is measured by the value of the property passing from the donor, and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable. [Emphasis supplied.]With respect to the critical date for valuation purposes, section 2512 states that if the gift is made in property, the value thereof as the date of the gift shall be considered the amount of the gift. Section 25.2512-2(a) of the regulations addresses the method for determining the value of stocks and bonds. It states that the value of the stocks and1986 U.S. Tax Ct. LEXIS 68">138 bonds is the fair market value per share on the date of the gift.87 T.C. 349">387 Ahmanson Foundation v. United States, 674 F.2d 761">674 F.2d 761 (9th Cir. 1981), addressed this issue in the estate tax context. The court was faced with the question of the valuation of stock includable in the decedent's gross estate at his death. The taxpayer had argued that shares of stock should be partitioned into two blocks prior to valuation, that the 99 shares which went to a charitable foundation should be valued separately from the 1 share which had a private destination. The taxpayer argued that because the estate tax is a tax on the transfer of property, the valuation of the property in the gross estate must take into account any changes in value brought about by the fact of the distribution itself. The court acknowledged that valuation may take into account changes brought about by the death of the testator. Usually death itself does not alter the value of property owned by the decedent, although in exceptional cases, such as when a small business loses the services of a valuable partner, death does change the value of property. See United States v. Land, 303 F.2d 170">303 F.2d 170 (5th Cir. 1962).1986 U.S. Tax Ct. LEXIS 68">139 The court in Ahmanson stated:We must distinguish, however, the effect of "predistribution" transformations and changes in value brought about by the testator's death, from changes in value resulting from the fact that under the decedent's estate plan the assets in the gross estate ultimately come to rest in the hands of different beneficiaries. The estate tax is a tax upon a transfer as the Foundation contends. However, it is a tax on the privilege of passing on property, not a tax on the privilege of receiving property. * * [674 F.2d 761">Ahmanson Foundation v. United States, supra at 768. Emphasis supplied.]In Ahmanson, the court concluded that a hypothetical bifurcation of stock would be contrary to the policy underlying the Federal estate tax. This is because it would be easy to implement a tax avoidance scheme whenever an asset in the gross estate would have a diminished value if divided among two or more beneficiaries.Citing Ahmanson with approval, the Seventh Circuit Court of Appeals, in Estate of Curry v. United States, dealt with the post-transfer bifurcation theory in the following language:to permit the hypothetical bifurcation1986 U.S. Tax Ct. LEXIS 68">140 of an otherwise integrated bundle of property for valuation purposes would severely undermine the estate 87 T.C. 349">388 tax system and permit abusive manipulation by inviting an executor to invent elaborate scenarios of disaggregated disposition in order to minimize total value. For example, an estate in possession of all shares of a corporation, voting and non-voting, could, under the regime urged by the estate here, arbitrarily slice the voting share block so thinly as to deny attribution of a control premium to any resulting block. * * * [Estate of Curry v. United States, 706 F.2d 1424">706 F.2d 1424, 706 F.2d 1424">1428 (7th Cir. 1983).]See also Estate of Pudim v. Commissioner, T.C. Memo. 1982-606, affd. without published opinion 742 F.2d 1433">742 F.2d 1433 (2d Cir. 1983).We think the anti-bifurcation rationale explained in the estate tax context by the Seventh Circuit in Estate of Curry and by the Ninth Circuit in Ahmanson Foundation applies equally here in the gift tax context. The estate tax and the gift tax, both being excise taxes on transfers, are to be construed in pari materia. Sanford's Estate v. Commissioner, 308 U.S. 39">308 U.S. 39, 308 U.S. 39">44 (1939);1986 U.S. Tax Ct. LEXIS 68">141 Carson v. Commissioner, 71 T.C. 252">71 T.C. 252 (1978), affd. 641 F.2d 864">641 F.2d 864 (10th Cir. 1981). This case presents a paradigmatic example of the appropriateness of that rule of construction.Given petitioners' concerted estate freeze plan put in place by the simultaneous gifts in trust, we find their attempt to discredit respondent's reliance on Estate of Curry and Ahmanson Foundation to be, with all due respect, disingenuous. Petitioners attempt to draw a distinction based upon the fact that the two cited cases involved the stock of a single majority stockholder, whereas here none were in control. In the context of this case, this is a distinction without a difference, because even petitioners cannot deny that in creating the estate freeze plan they marched in lockstep. So marching, their position was no different than that of a single majority stockholder.After a careful review of all relevant facts and circumstances, we also find a discount of 20 percent for lack of marketability for both classes of common stock to be appropriate. In determining this discount factor, we recognize that the stock of unlisted, closely held corporations1986 U.S. Tax Ct. LEXIS 68">142 is generally difficult to sell. We also recognize that CCC had a history of paying little if any dividends. We believe, however, that these negative factors are substantially offset by the following positive factors: (1) The Curran companies had a stable or upward trend in earnings during the 5-year 87 T.C. 349">389 period 1971 through 1975, which trend was expected to continue in the future; (2) CCC was financially strong with excellent and aggressive management; and (3) CCC had a substantial dividend-paying capacity.In conclusion, after applying a minority position discount of 25 percent and a discount of 20 percent for lack of marketability, we find that each share of CCC's class A voting common stock and class B nonvoting common stock had a value of $ 389.37.To reflect the foregoing,Decisions will be entered under Rule 155. Footnotes1. Cases of the following petitioners are consolidated herewith: John H. Curran, docket No. 21439-80; William Curran, docket No. 21440-80; Patricia A. Curran, docket No. 21441-80; and Linda R. Curran, docket No. 21442-80.↩2. In the notice of deficiency issued to the Estate of Cecilia Simon, respondent determined a Federal estate tax deficiency of $ 184,388.90. On Feb. 20, 1985, respondent filed an amended answer in which he reduced the alleged estate tax deficiency from $ 184,388.90 to $ 154,683.45.↩3. John Curran and Linda Curran, husband and wife, and William Curran and Patricia Curran, husband and wife, made timely elections under sec. 2513(a) (gift by husband or wife to third party). Pursuant to sec. 2513(a), each gift is deemed to have been made one-half by the husband and one-half by the wife.↩4. The parties use the term "merger" in referring to the corporate combinations described herein, and we have accordingly, for convenience, adhered to that practice.↩5. Because of high transportation costs, CCC could competitively compete for jobs which were located no more than 30 to 35 miles from its asphalt production plant.↩6. See G. Cooper, A Voluntary Tax?: New Perspectives on Sophisticated Estate Tax Avoidance 13-20 (Brookings Institution 1979); Ehrlich, "Corporate Recapitalization as an Estate Planning Business Retention Tool," 34 N.Y.U. Institute on Federal Taxation 1661, 1662-1669 (1976)↩; and Burch & Hemmerling, "Estate Planning in an Inflationary Economy," 27 U.S.C. Tax Institute 489, 504-510 (1975).7. The value of Cecilia's common stock was includable in her gross estate under sec. 2035(a) as a gift made in contemplation of death.All section references are to sections of the Internal Revenue Code of 1954 in effect on the valuation date applicable to Mrs. Simon's estate or the date of the respective gifts, as the case may be.↩8. Grabowski defined debt-free cash-flow as the cash-flow generated by the operations of the company (net earnings plus non-cash expenses such as depreciation) adjusted to a debt free basis by adding back the after tax cost of interest.↩9. We note that the average of $ 5,884,000 and $ 4,479,000 is $ 5,181,500 rather than $ 5,181,000.↩10. The record does not disclose the other businesses engaged in by Amsted Industries.↩11. The record does not disclose the other businesses engaged in by General Signal.↩12. The record does not disclose the other businesses engaged in by Stanray Corp.↩13. Grabowski defined net working capital as the amount of cash which could be removed from the businesses without impairing their operations.↩14. Grabowski did not apply a minority position discount to the values determined for C/S/K and Holland because the market prices of the common stock of the comparable firms used to compute the market multiples represent minority positions in those companies.↩15. We note that in his valuation report, Grabowski stated that "To determine the Fair Market Value of the preferred stock one needs to reduce this amount by a discount for lack of marketability." In determining the market value of CCC's preferred stock, however, Grabowski did not discount its intrinsic value for lack of marketability. On brief, petitioners maintain that a discount of 20 percent for lack of marketability would have been appropriate. Based on a 20-percent discount, the value of CCC's preferred stock would be $ 3,986,432, or $ 512 per share.↩16. We note that had Grabowski valued CCC's preferred stock at $ 3,986,432, rather than $ 4,983,040, the value of CCC's total common equity would have been $ 6,525,568, rather than $ 5,528,960.↩17. Grabowski defined available cash-flow as: (1) Net income after taxes plus (2) depreciation/amortization minus (3) increases in net working capital needed to support sales minus (4) capital expenditures minus (5) repayments of principal on long-term debts minus (6) preferred stock dividends. In his actual computations of available cash-flow, Grabowski also made an addition and a reduction in net working capital for certain years. See table summarizing Grabowski's computation infra↩.18. We note that had Grabowski valued CCC's common equity at $ 6,525,568 using the market comparable approach, the average value for CCC's common equity would be $ 5,912,784.↩19. The aggregate values of the class A and class B common stock were rounded by Grabowski. We also note that had Grabowski valued CCC's common equity at $ 5,912,784, the value of each share of CCC common stock would have been $ 641.↩20. In determining the appropriate weight to assign to each value, Lerner concluded that investors, aware that CCC's management had historically paid low dividends, would have placed less emphasis on CCC's dividend/price ratio and more emphasis on its price/earnings ratio and price/book value ratio.↩21. On brief, both petitioners and respondent treat the appropriate valuation date as May 7, 1976, the date on which the trusts in issue were created. These trusts, however, were revocable until the earlier of May 27, 1976, or the death of the grantor. Consequently, the gifts were not complete for Federal gift tax purposes until May 27, 1976, when the trusts became irrevocable. Sec. 25.2511-2(c)↩, Gift Tax Regs.22. In Weinberger v. UOP, Inc., 457 A.2d 701">457 A.2d 701 (Del. 1983), the Delaware Supreme Court recognized the validity of the discounted cash-flow method in reversing a lower court's decision not to use the discounted cash-flow method in appraisal and other stock valuation proceedings. The court stated:"the standard 'Delaware block' or weighted average method of valuation, formerly employed in appraisal and other stock valuation cases, shall no longer exclusively control such proceedings. We believe that a more liberal approach must include proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court * *" [457 A.2d 701">457 A.2d at 712-713↩.]23. We determined this value as follows: total common equity of $ 6,530,095 divided by 9,224, the number of outstanding shares.↩24. [ILLEGIBLE FOOTNOTE]↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620755/	JOHN C. BRANCH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBranch v. CommissionerDocket No. 3351-92United States Tax CourtT.C. Memo 1994-191; 1994 Tax Ct. Memo LEXIS 187; 67 T.C.M. (CCH) 2822; April 28, 1994, Filed 187 Decision will be entered under Rule 155. John C. Branch, pro se. For respondent: Christopher A. Fisher. FAYFAYMEMORANDUM OPINION FAY, Judge: Respondent determined a deficiency in income tax due from petitioner for the year 1988 in the amount of $ 13,101 and an addition to tax attributable to negligence or intentional disregard of rules and regulations within the meaning of section 6653(a)(1)1 in the amount of $ 655.05. The issues for decision are: 2188 (1) Whether petitioner is entitled to the section 911 foreign earned income exclusion. We hold that he is not. (2) Whether petitioner is entitled to reduce his taxable income by Social Security benefits included in his 1988 income but which the Social Security Administration requested to be repaid. We hold that he is not. (3) Whether petitioner is entitled to a Schedule A theft loss deduction on the 1988 Federal tax return in relation to a theft which actually occurred in 1986. We hold that he is not. (4) Whether petitioner is entitled to the full $ 3,883 Schedule A miscellaneous expense deduction for job-seeking expenses claimed. We hold that he is entitled to a lesser amount. (5) Whether petitioner is liable for an addition to tax for negligence under section 6653(a)(1) for 1988. We hold that he is not. Some of the facts of this case have been stipulated, and by this reference they are so found. The stipulation of facts filed by the parties and attached exhibits are incorporated herein by this reference. BackgroundPetitioner resided in Houston, Texas, on the date that the petition herein was filed. Petitioner and his wife, Barbara A. Branch, executed a joint189 Federal income tax return for 1988 on May 11, 1989. Thereafter on November 27, 1989, and February 26, 1990, the Branches executed their first and second amended 1988 joint returns, respectively. The notice of deficiency, dated November 18, 1991, was addressed to "Mr. John C. Branch and Mrs. Barbara A. Branch." Due to marital problems between petitioner and Mrs. Branch, Mrs. Branch did not sign the petition and otherwise chose not to participate in this action. On April 2, 1992, respondent filed her Motion to Dismiss for Lack of Jurisdiction As To Barbara A. Branch and to Change Caption because the petition had not been executed by or on behalf of Mrs. Branch. The Branches were then notified of respondent's motion by the Clerk of this Court by notice of filing dated April 7, 1992, and given until April 27, 1992, to object to respondent's motion. On May 18, 1992, due to the failure to file any objection, this Court granted respondent's motion dismissing the case for lack of jurisdiction as to Mrs. Branch and changed the caption to show petitioner as the sole petitioner in this case. 1. Foreign Income ExclusionPetitioner was born on May 17, 1925, and was raised in Polk190 County, Texas. He obtained his bachelors degree in civil engineering from the University of Texas at Austin in 1951. Petitioner was then constantly employed as an engineer and, subsequently, an engineering manager for several companies from 1952 until the fall of 1986. Due to a downturn in the petroleum industry in Texas during the 1980s, petitioner traveled to Egypt to work for an Egyptian petroleum company, Egyptian National Petroleum Pipeline Industries (ENPPI). Petitioner then lived in Egypt from about June 1987 until January 1988. While in Egypt, petitioner discovered that the company he had worked for before working for ENPPI, Brown and Root, Inc., was working on a design and construction effort for a pipeline through Saudi Arabia for the Iraqi Government. Petitioner heard of, and applied for a job on, this project. Petitioner was subsequently hired, but, due to visa requirements, petitioner came back to the United States, where he then lived at his home in Houston, Texas, until he was able to obtain the necessary visa in late May 1988. The employment contract petitioner executed with Brown and Root Saudi Ltd. 3 (Brown and Root) provided for an initial 1-year term of191 employment, commencing May 25, 1988, with an optional extension at the end of the contract depending on certain variables. Petitioner departed the United States for Saudi Arabia on May 23, 1988, and arrived on May 25, 1988. He then remained there continuously until February 25, 1989, except for an 11-day visit to the United States from September 7, 1988, until September 18, 1988. In February 1989, petitioner suffered a debilitating back injury which forced him to return to the United States for surgery. Petitioner arrived home in Houston, Texas, on February 25, 1989, and remained there continuously at least through the time of the trial of this matter. Petitioner was subsequently declared disabled, and his employer would not allow him to return to Saudi Arabia to conclude his contract. 192 During 1988, while petitioner was overseas, petitioner owned a home in Houston, owned two vehicles, both of which were licensed and maintained in the State of Texas, and was registered to vote in Harris County, Texas. In fact, petitioner filed an absentee ballot in the November 1988 Presidential elections. Petitioner and Mrs. Branch also maintained checking and savings accounts during 1988 at Gibraltar Savings and Loan in Houston, one of such accounts being used for the direct deposit of petitioner's pay by petitioner's employer, Brown and Root. Petitioner received $ 44,560.61 in foreign earned income, as that term is defined in section 911(b)(1)(A), from Brown and Root during 1988. Petitioner elected to exclude this income, pursuant to section 911, on his 1988 tax return. Section 911 provides: (a) Exclusion From Gross Income. -- At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year -- (1) the foreign earned income of such individual, and (2) the housing cost amount of such individual. [Emphasis193 added.] Section 911(d), in pertinent part, provides: (1) Qualified individual. -- The term "qualified individual" means an individual whose tax home is in a foreign country and who is -- (A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, [the twelve month test] 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 330-day test.] [Emphasis added.] To be qualified for the section 911 exclusion, a taxpayer must meet a threshold inquiry of whether he or she has satisfied a foreign presence requirement, the 12-month test or the 330-day test, embodied in the statutory and regulatory framework. After a careful review of the factual record and application of the statutory and regulatory framework, we conclude that petitioner has failed to meet both foreign presence tests and, consequently, is not entitled to the section 911 foreign income exclusion 194 unless it is found that the section 911(d)(4) waiver provision applies to petitioner's case. Because we hold that petitioner did not meet either of the foreign presence tests, we do not reach the issue of whether petitioner established a tax home in a foreign country. Section 911(d)(4) provides: (4) Waiver of period of stay in foreign country. -- Notwithstanding paragraph (1) [the Qualified individual requirement], an individual who -- (A) is a bona fide resident of, or is present in, a foreign country for any period, (B) leaves such foreign country after August 31, 1978 -- (i) during any period during which the Secretary determines, after consultation with the Secretary of State or his delegate, that individuals were required to leave such foreign country because of war, civil unrest, or similar adverse conditions in such foreign country which precluded the normal conduct of business by such individuals, and (ii) before meeting the requirements of such paragraph (1) [the Qualified individual requirement], and (C) establishes to the satisfaction of the Secretary that such individual could reasonably have been expected to have met such requirements but for the conditions195 referred to in clause (i) of subparagraph (B),shall be treated as a qualified individual with respect to the period * * during which he was a bona fide resident of, or was present in, the foreign country, * * . [Emphasis added.] Section 1.911-2(f), Income Tax Regs., in pertinent part, provides: (f) Waiver of period of stay in foreign country due to war or civil unrest. Notwithstanding the requirements of paragraph (a) of this section, an individual whose tax home is in a foreign country, and who is a bona fide resident of, or present in, a foreign country for any period, who leaves the foreign country after August 31, 1978, before meeting the requirements of paragraph (a) of this section, may, as provided in this paragraph, qualify to make an election under section 911(a) and § 1.911-7(a). If the Secretary determines, after consultation with the Secretary of State or his delegate, that war, civil unrest, or similar adverse conditions existed in a foreign country, then the Secretary shall publish the name of the foreign country and the dates between which such conditions were deemed to exist. In order to qualify to make an election under this paragraph, the individual196 must establish to the satisfaction of the Secretary that the individual left a foreign country, the name of which has been published by the Secretary, during the period when adverse conditions existed and that the individual could reasonably have expected to meet the requirements of paragraph (a) of this section but for the adverse conditions. The individual shall attach to his return for the taxable year a statement that the individual expected to meet the requirements of paragraph (a) of this section but for the conditions in the foreign country which precluded the normal conduct of business by the individual. * * * [Emphasis added.] Petitioner argues that he is entitled to the benefit of the waiver provision described above because his sudden departure from Saudi Arabia, due to his career-ending back injury, was under "adverse conditions". Respondent argues that the waiver provision has not been met, and the section 911 exclusion is thus unavailable to petitioner because (1) petitioner's back injury was not the type of adverse condition contemplated by section 911(d)(4), and (2) because Saudi Arabia was not included on the list of countries eligible for section 911(d)(4)197 treatment until the issuance of Rev. Proc. 91-29, 1 C.B. 562">1991-1 C.B. 562, which provides that Saudi Arabia qualifies for periods beginning on or after January 17, 1991. We agree with respondent's contention that the section 911(d)(4) waiver is inapplicable here because, at the time petitioner left Saudi Arabia, it was not included on the list of countries eligible for section 911(d)(4) treatment. We hold that the basic requirements for the application of the section 911(d)(4) waiver provision have not been met; thus, petitioner is not entitled to use of the section 911 foreign earned income exclusion for 1988. Because of our holding here, we need not reach the question of whether petitioner's situation might otherwise qualify for the "adverse conditions" contemplated by the statute. 4 Finally, petitioner's contention that respondent impliedly granted petitioner's waiver request by sending him a document entitled "Correction Notice - Refund Due Taxpayer", is entirely without merit and will not be further addressed here. 198 2. Social Security IncomeOn the 1988 return, petitioner reported the receipt of $ 8,189 in Social Security benefits on line 21a. Pursuant to section 86, one-half of this amount, or $ 4,095, was properly included in gross income on line 21b. The first amended return, executed November 27, 1989, included a handwritten note claiming that these Social Security benefits should be excluded from gross income because the "Social Security Department [had] demanded the return of all 1988 Social Security Benefits * * * [due to the] money earned by * * * [petitioner] during 1988". The second amended return, executed February 26, 1990, repeated the claim for a refund of taxes attributable to Social Security benefits included in the original 1988 return. Respondent determined in her notice of deficiency that the taxable Social Security benefits should be $ 4,084 instead of $ 4,095 as originally reported. At trial, petitioner made reference to a canceled check in the amount of $ 1,320.94 dated March 27, 1990, initially raising the inference that it represented an amount paid back, from the 1988 benefits received, to the Social Security Administration. On cross-examination, however, 199 petitioner admitted that this particular check represented the repayment of "other Social Security benefits". In general, petitioner bears the burden of showing respondent's determination is erroneous. Rule 142(a). In the immediate case, not only has petitioner failed to produce any evidence which would tend to refute respondent's determination, but petitioner has testified that payments he did have evidence of, but failed to have admitted at trial, represented payments with respect to Social Security benefits received other than those involved here. Petitioner has failed to meet his burden; therefore, we sustain respondent's determination on this issue. 3. Theft LossPetitioner reported an $ 8,265 theft loss on Form 4684 of the 1988 return. After adjustments on Form 4684, pursuant to section 165(h), 5 petitioner claimed a $ 5,019 theft loss on line 18 of Schedule A attached to the 1988 return. Respondent initially discovered an error in petitioner's computation that was to petitioner's advantage and issued a correction notice, which is not dated, determining that the loss, after adjustments pursuant to section 165(h), should be $ 5,521 instead of the $ 5,019 claimed200 by petitioner. Respondent's notice of deficiency disallowed the loss in its entirety. Petitioner testified at trial and the record reflects that the theft causing the loss actually occurred in April 1986. On petitioner's 1986 return, petitioner claimed this theft loss but did not utilize it to reduce his taxable income. Instead, petitioner wrote the following at the top of his 1986 Schedule A, "Because of large tax credit carry over this * * * [casualty loss] is being carried forward and not included in 1986 Return." 6 At trial, in contrast to the reason set forth on his 1986 Schedule A, petitioner testified that he did not deduct the loss in 1986 because he believed that there was a reasonable prospect of recovery of the stolen items. 7 Petitioner also stated, however, 201 that there was no insurance coverage for the stolen items, but that the Houston Police Department hoped that some of the items would be recovered. We choose to202 disregard petitioner's after-the-fact reasons for not utilizing the theft loss deduction in 1986 and find that the contemporaneous statement written on the 1986 return is the more reliable explanation as to why petitioner did not use this deduction. Therefore, the issue which now must be resolved is whether petitioner properly elected to relinquish the 3-year carryback of this loss as provided by section 172(b)(3)(C). A theft loss suffered by an individual is deductible, subject to limitations under section 165(h), to the extent not compensated for by insurance or otherwise. Sec. 165(a), (c)(3). In general, the loss is allowable in the year it is sustained; 8 however, if section 165(c)(3) losses exceed adjusted gross income, they are treated the same as a net operating loss and may be carried back and carried over in accordance with section 172. Sec. 172(d)(4), (b); sec. 1.172-3(a)(3)(iii), Income Tax Regs. Under section 172, a net operating loss, in general, must be carried back to each of the 3 taxable years preceding the year of loss, and carried over to each of the 15 taxable years following the year of loss. Sec. 172(b)(1)(A) and (B). A taxpayer may, however, elect to203 "relinquish" the entire carryback period with respect to a net operating loss for any taxable year. Sec. 172(b)(3)(C). Section 172(b)(3)(C) also provides: Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer's return for the taxable year of the net operating loss for which the election is to be in effect. * * Section 7.0(d), Temporary Income Tax Regs., 42 Fed. Reg. 1470 (Jan. 7, 1977), entitled "Various elections under the Tax Reform Act of 1976", provides: (d) Manner of making election. Unless otherwise provided in the return or in a form accompanying a return for the taxable year, the elections described in paragraphs (a) and (c) * * * shall be made by a statement attached to the return * * * for the taxable year. The statement required when making an204 election pursuant to this section shall indicate the section under which the election is being made and shall set forth information to identify the election, the period for which it applies, and the taxpayer's basis or entitlement for making the election. Petitioner, in essence, contends that the quoted language from his 1986 return constitutes a valid election to relinquish the 3-year carryback period. Respondent contends that petitioner is not entitled to carry forward the 1986 casualty loss to 1988 because (1) petitioner failed to make a valid election to forego the 3-year carryback period, and (2) petitioner did not prove that he was entitled to a net operating loss carryover from 1986 for 1988 pursuant to section 172. The language on petitioner's 1986 return attempting to relinquish the 3-year carryback period does not constitute literal compliance with the applicable regulatory requirements set forth above. Young v. Commissioner, 783 F.2d 1201">783 F.2d 1201 (5th Cir. 1986), affg. 83 T.C. 831">83 T.C. 831 (1984); Branum v. Commissioner, T.C. Memo. 1993-8, affd. 17 F.3d 805">17 F.3d 805 (5th Cir. 1994).205 We do not, however, reach the question of whether the employed language constitutes substantial compliance because, assuming arguendo that it does, petitioner still must prove that he is entitled to the carryover deduction in 1988.9Rule 142(a). After review of the entire record, we conclude that petitioner has not done so. 4. Job-Hunting ExpensesPetitioner's trade is that of an engineer, having worked as an engineer, and engineering manager, for 34 consecutive years. Petitioner claimed $ 4,412 in expenses for seeking employment during 1988. After reduction of this amount by the 2-percent-of-adjusted -gross-income threshold, petitioner deducted $ 3,883 on Schedule A, line 24, of the 1988 return. Respondent contends that, under section 212, petitioner is not entitled to deduct this $ 3,883 amount for job-seeking expenses because it was spent in pursuit of206 a new trade or business. Petitioner contends the disputed amount was spent in pursuit of the same trade or business but concedes by his own written statement attached to the 1988 return that a portion of these expenses was attributable to a seminar which, inter alia, gave instruction on how to obtain employment in a new trade or business. Section 162 permits deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. This includes expenses paid in seeking employment in the taxpayer's trade or business. See, e.g., Primuth v. Commissioner, 54 T.C. 374">54 T.C. 374 (1970). These expenditures, to the extent substantiation exists, are deductible regardless of whether employment is obtained. Cremona v. Commissioner, 58 T.C. 219">58 T.C. 219 (1972). If the taxpayer is seeking a job in a new trade or business, however, the expenses are not deductible under section 162(a). Dean v. Commissioner, 56 T.C. 895">56 T.C. 895 (1971). Petitioner bears the burden of persuasion on this issue. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933).207 We believe that petitioner did in fact pay expenses in the pursuit of employment during the first half of 1988, despite the fact that he already had obtained employment in Saudi Arabia. Petitioner testified, and we believe, that the latter employment arrangements were not guaranteed, not having been reduced to writing and executed until May 25, 1988; therefore, petitioner was merely attempting to obtain local gainful employment without having to travel around the world to do so. The difficulty with this case, however, is in the proof. Mathematical exactness is not required. Georgescu v. Commissioner, T.C. Memo. 1992-597. Doing the best we can with the record here and applying the principle enunciated in Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 543-544 (2d Cir. 1930), of the $ 4,412 of expenses claimed, we can allow only an $ 800 deduction for job-hunting expenses because of the sketchy and inexact nature of petitioner's proof. 10 We do not allow a $ 2,800 deduction claimed by petitioner for the purchase of diving equipment because petitioner has failed to provide a nexus between such expense and his trade as an engineer. 208 It may well be that petitioner had more of this type of expense in 1988, but the proof in this record will not support any further allowance. 5. Addition to Tax for NegligenceOn the 1988 return, petitioner reported a $ 5,019 rental loss deduction, which he concedes was mistakenly claimed. Respondent contends that petitioner, pursuant to section 6653(a)(1), negligently claimed the $ 5,019 rental loss deduction, the $ 44,560.61 foreign earned income exclusion, and the theft loss carryover. Section 6653(a)(1)(A) provides for an addition to tax of 5 percent of the underpayment of tax if any part of the underpayment is due to negligence or intentional disregard of rules and regulations. Section 6653(a)(1)(B) imposes an addition209 to tax equal to 50 percent of the interest due on the portion of the deficiency attributable to negligence. Negligence is the lack of due care or the failure to do what a prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 937 (1985). Where a taxpayer, however, provides sufficient information concerning the deductions taken to apprise respondent of the nature and amount of the claimed deduction, the addition to tax for negligence may not apply. Belz Investment Co. v. Commissioner, 72 T.C. 1209">72 T.C. 1209, 1233-1234 (1979), affd. 661 F.2d 76">661 F.2d 76 (6th Cir. 1981); Cryder v. Commissioner, T.C. Memo. 1977-103. The amount claimed as a rental loss deduction corresponds with the theft loss deduction reported on petitioner's Schedule A. After review of the record, we are satisfied that this entry constitutes an innocent duplication and was merely an honest mistake. Therefore, we do not feel the negligence addition is warranted with respect to this deduction. With respect to the section 911 foreign earned income exclusion and the theft loss deduction210 claimed by petitioner, we are also satisfied that, upon thorough review of the entire record, the negligence addition does not apply. Petitioner, in preparing the 1988 return, identified, with what we now find was adequate disclosure, the mentioned exclusion and deduction in a very thorough and thoughtful manner. In fact, the disclosures embodied in the return and amended returns indicate petitioner's good faith and reasonableness, not to mention a true effort to comply with the laws. As such, respondent's determination with respect to the addition to tax, under section 6653(a)(1), will not be sustained. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩2. Respondent also made an adjustment to petitioner's medical expense deduction, and determined that petitioner is only entitled to the use of the $ 5,000 standard deduction for 1988. We do not address these two items because they are subject to a mathematical computation in light of our holdings herein.↩3. The record is vague on the corporate relationship between Brown and Root, Inc., and Brown and Root Saudi Ltd.; however, although not determinative of the outcome here, the record does reflect that they are separate entities.↩4. We do not, however, believe that the facts involved in this case would allow petitioner the benefit of this waiver provision.↩5. Sec. 165(h)(1) establishes a $ 100 minimum limitation per casualty loss. Sec. 165(h)(2)↩ further provides, in general, that the net casualty loss will be allowed only to the extent that such loss exceeds 10 percent of adjusted gross income.6. Respondent asserts, and the Court believes, that this was also done because petitioner was able to reduce his 1986 taxable income to zero, from an adjusted gross income of $ 63,583.66, without utilizing the reported theft loss.↩7. By so testifying, petitioner was attempting to avail himself of the application of sec. 1.165-1(d), Income Tax Regs., Sec. 1.165-1(d), Income Tax Regs., provides in pertinent part: (2)(i) If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165↩, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. * *8. Under sec. 165(e)↩ a theft loss is treated as sustained during the taxable year the loss is discovered.9. Petitioner failed to present any evidence that would indicate that the loss was not used in whole or in part for the intervening 1987 tax year.↩10. Despite our finding that petitioner is entitled to this amount as actual costs spent for job-hunting expenses during 1988, this finding may be of no avail to petitioner due to the 2-percent-of-adjusted-gross-income threshold that these job-hunting expenses are subject to. Sec. 67(a).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620756/	Theodore O. Wentworth and Shirley Morse Wentworth v. Commissioner.Wentworth v. CommissionerDocket No. 2564-63.United States Tax CourtT.C. Memo 1966-167; 1966 Tax Ct. Memo LEXIS 117; 25 T.C.M. (CCH) 869; T.C.M. (RIA) 66167; July 14, 1966117 Held: That net withdrawals of corporate funds by a corporation's president, charged to a withdrawal account, were intended as loans and therefore did not constitute taxable distributions of the corporation's funds to him. Paul W. Steer, 2215 Central Trust Tower, Cincinnati, Ohio, for the petitioners. W. Dean Short, for the respondent. HOYTMemorandum Findings of Fact and Opinion HOYT, Judge: Respondent determined the following deficiencies in income taxes against the petitioners: 1957$ 8,854.7219587,205.06195922,347.23Petitioners conceded that they received dividend income in 1958 and 1959 in the respective118 amounts of $3,261.05 and $3,552, as a result of personal usage of an airplane of Vulcan-Cincinnati, Inc. Respondent conceded that petitioners did not receive taxable income in 1959 for granting an option to Vulcan-Cincinnati, Inc., for the purchase of stock of Chemical Processes, Inc. The only issue remaining for decision is whether withdrawals by petitioner, Theodore O. Wentworth, from Vulcan-Cincinnati, Inc., during the years 1957, 1958, and 1959 constituted the receipt of taxable dividends under the provisions of sections 301 and 316 of the Internal Revenue Code of 1954, or whether the withdrawals constituted loans. Findings of Fact Some of the facts have been stipulated and are found accordingly and adopted as our findings. Petitioners are husband and wife and are residents of Cincinnati, Ohio. Their joint returns for the years involved were filed with the district director of internal revenue, Cincinnati, Ohio. Petitioner, Shirley Morse Wentworth, is a party herein only by reason of having filed a joint return with her husband, Theodore O. Wentworth, and the latter will hereinafter be referred to as the petitioner. During the years 1941 to April 1, 1964, petitioner119 served as president of Vulcan-Cincinnati, Inc., an Ohio corporation. Vulcan-Cincinnati, Inc., operated under the name of Vulcan Copper and Supply Company during the period before March 7, 1956. This business was originally founded by petitioner's father as a partnership in 1901 and was incorporated at a later date. Petitioner started working for the corporation in 1930 or early 1931. He organized the engineering division for the corporation which grew into a functioning department at some time before 1950. Petitioner's father died on March 10, 1941, and petitioner and his brothers, Paul W. Wentworth and Elliot E. Wentworth (hereinafter sometimes referred to as Paul and Elliot), then took over control of Vulcan-Cincinnati, Inc., and managed it until April 1, 1964. Petitioner was personally involved in every phase of the business, and, as president, presided at meetings of the stockholders and the directors. Petitioner performed more services for Vulcan-Cincinnati, Inc., than the other officers, and he also received substantially larger salaries and bonuses than the other officers of the corporation. During the period July 1941 to April 1, 1964, petitioner withdrew certain monies120 from Vulcan-Cincinnati, Inc. These withdrawals were recorded in an account entitled "Due From Officers - T. O. Wentworth." The year-end balances of the account for the years 1941 through 1964 are as follows: Year-EndYearBalance1941$ 14,577.80194215,921.00194330,150.30194432,193.26194530,122.28194631,106.49194751,482.76194851,803.80194968,425.47195080,921.24195191,845.451952104,270.421953110,929.311954111,184.271955111,115.391956108,335.211957123,944.671958131,995.841959154,208.861960157,623.371961164,412.321962194,584.741963210,498.861964108,712.15The net amounts of petitioner's withdrawals from Vulcan-Cincinnati, Inc., at the end of the years 1957, 1958, and 1959 were $15,609.46, $8,051.17, and $22,213.02, respectively. Petitioner's withdrawals during the years in issue were principally for personal living expenses. Most of the withdrawals occurred in the form of cash advances or payment of personal items purchased through the company. Excluding transfers among accounts and accounting entries, most of the credit entries in petitioner's withdrawal account during121 the litigated years pertain to payments by petitioner of specific bills soon after they had been charged to the account. Other credit entries, however, were larger in amount and resulted from payments made to petitioner by Vulcan-Cincinnati, Inc., for dividends, bonuses, confidential salary (salary other than regular salary which was received by all key employees), and the sale of stock and stock options, which were applied to the account at the time of receipt. In the three years here involved, credits in the total amounts following were made to the account: 1957$26,049.75 1195826,976.69 1195913,746.88No interest was ever paid on petitioner's withdrawals and no security was posted to insure repayment. No definite time was specified for repayment of withdrawals. Notes were not issued with respect to the years in issue. However, petitioner had executed six $15,000 notes on December 31, 1951, with one being payable on December 31 of each of the next six years. These notes were still outstanding during the years122 in question and the balance due on the account exceeded the amount due on the notes at all times during those years. The withdrawal account has been treated as a receivable account and indebtedness of the petitioner on the records of Vulcan-Cincinnati, Inc., since the creation of the account. Petitioner also signed audit slips prepared for independent auditors for each of the years in question as confirmation of his indebtedness to the corporation in the amounts of the balances due on his withdrawal account. The withdrawals were recognized as loans by petitioner's brothers. Paul and Elliot were officers of Vulcan-Cincinnati, Inc., and substantial shareholders. They also withdrew certain funds from the corporation, and no interest was charged on these withdrawals. The amounts withdrawn by Paul and Elliot were always considered as loans, and partial repayments occurred periodically. The year-end balances in the withdrawal accounts of Paul and Elliot for the years 1941 through 1964 were as follows: Year-End BalancesPaul W.Elliot E.YearsWentworthWentworth1941$ 2,429.05$ 1,914.6719428,639.591,902.0319438,677.752,066.05194405.7619457,406.2401946022.141947010,000.12194887.4414,509.551949220.9518,137.211950364.5617,942.58195176.2519,560.02195241.4718,362.5619537.2323,305.251954959.1826,309.7119553,771.7426,495.3919564,355.184,398.1019570257.31195845.4301959715.7610.0519605,885.4284.0919619,461.73102.6519624,072.1212,528.26196314,701.1312,234.1619649,074.3426,412.59123 Employees other than corporate officers could borrow money from the corporation upon approval by the executive committee or officers of the corporation and no interest would be charged. No formal borrowing restrictions were placed on the corporate officers, but the loans would be discussed by the members of the board of directors. Withdrawals and the repayment of them were the subject of discussions between petitioner and his brothers. Although the brothers expressed dissatisfaction with the amount of petitioner's withdrawals, petitioner was never ordered to repay because Paul and Elliot were aware of petitioner's financial condition. Although the petitioner may not have been able to repay the balance of his withdrawal account out of his resources at any given time, his income would have permitted repayment within a reasonable period. Moreover, during the years in question, petitioner's financial interest in the business was worth more than his indebtedness to the corporation. The ownership of the outstanding shares of stock of Vulcan-Cincinnati, Inc., for the years ending December 31, 1956, through December 31, 1959, was as follows: Shareholders12-31-5612-31-5712-31-5812-31-59Theodore O. Wentworth530 1/2405 1/2310 1/2310 1/2Shirley M. Wentworth (Wife of T. O.)150150150150Elise Wentworth Olds (Daughter of T. O.)15151515Prudence C. Wentworth (Daughter of T. O.)15151515Shirley E. Wentworth (Daughter of T. O.)15151515Linda E. W. LaBelle (Daughter of T. O.)15151515Paul W. Wentworth713 1/2672 1/2642 1/2622 1/2Martha E. Wentworth (Former wife of Paul)101010Jerry C. Wentworth (Present wife of Paul)2030Paul Van Wentworth (Son of Paul)4354555Elliot E. Wentworth515 1/2390 1/2390 1/2360 1/2Charlotte Ann Wentworth (Wife of Elliot)165165165165David A. Wentworth (Son of Elliot)15Ann A. Wentworth (Daughter of Elliot)15Outstanding stock owned by other persons52525252Treasury Stock1,109 1/21,359 1/21,454 1/21,454 1/2TOTALS3,3003,3003,3003,300124 At all times pertinent, petitioner held valid and enforceable proxies, giving him voting and some ownership rights with respect to the stock titled in his wife's and daughters' names. The dividends declared and paid as shown by the records of Vulcan-Cincinnati, Inc., for the years 1950 through 1962 are as follows: Dividend PerTotal Divi-YearSharedends1950$10.00$28,600.0019511.002,773.0019521.002,773.0019531.002,773.0019541.002,773.0019553.006,571.5019565.0010,952.5019575.5010,672.7519585.5010,150.2519591.001,845.5019601.001,845.5019611.001,845.5019621.001,845.50The amounts of earned surplus available for distribution as dividends for each of the years 1956 through 1959 are as follows: YearEarned Surplus1956$1,301,277.9019571,454,683.9819581,536,509.3519591,210,444.46During the years 1956 through 1961, it was necessary that Vulcan-Cincinnati, Inc., borrow funds for working capital. The corporation borrowed $250,000 from the Fifth Third Union Trust Company in 1956 at 5 percent interest and $585,000 in 1959 at 5 1/2 percent interest. Petitioner's125 withdrawal account was represented to the bank as an indebtedness of petitioner to the corporation. In negotiating the bank loan, petitioner acknowledged to the loan officer that the withdrawal account was an indebtedness of his. Petitioner and his brothers were urged by the bank to make every effort to repay their loans to the corporation as soon as possible. Moreover, the 1959 loan agreement contained a provision limiting the amount of withdrawals by officers as a condition of making the loan. On October 31, 1963, a request for a ruling regarding a proposed divisive reorganization of Vulcan-Cincinnati, Inc., was sent to the Commissioner of Internal Revenue. The primary reason for the proposed corporate division was a disagreement between the brothers as to how funds of the corporation should be expended. The petitioner wanted to concentrate on research and development while Paul wanted to upgrade the production end of the business. The amounts considered to be due the corporation from the brothers were a contributing factor to the desire for a corporate division. The request for a ruling contained corporate financial statements which reflected the withdrawals in an asset account126 titled "Due from Officers." Upon receipt of a favorable ruling, Vulcan-Cincinnati, Inc., was reorganized on April 1, 1964, into two corporations, Vulcan Manufacturing Company (hereinafter referred to as Manufacturing) and Vulcan-Cincinnati, Inc., (hereinafter referred to as Engineering). Petitioner and his immediate family became the owners of Engineering and Paul and Elliot and their families became the owners of Manufacturing. The asset account "Due from Officers" was divided between the new corporations in accordance with the new ownership rights. Therefore, the balance due on petitioner's withdrawal account became a receivable account of Engineering. Petitioner served as chairman of the board of directors of Engineering. On or about September 24, 1964, petitioner made a payment of $118,633.43 to Engineering in connection with his withdrawal account. This payment was made out of funds borrowed for such purpose at an interest rate of 4 percent. The payment occurred after receipt of the deficiency assessment involved in this case. Ultimate Findings of Facts At no time during the years in question did petitioner and his immediate family have sufficient stock interests in Vulcan-Cincinnati, 127 Inc., to allow the free exercise of dominion and control over corporate policies. It would have been detrimental to the financial interests of Paul and Elliot to allow petitioner to withdraw money from their jointly owned corporation with no intention of repaying. The net amounts withdrawn by petitioner from Vulcan-Cincinnati, Inc., during 1957, 1958, and 1959 were intended as and were in fact loans. Opinion Respondent contends that the net withdrawals from Vulcan-Cincinnati, Inc., charged to petitioner during the years in question were the equivalent of dividends and should therefore be taxed as dividend distributions under section 316, Internal Revenue Code of 1954. The petitioner contends that the net withdrawals were loans from the corporation and consequently were not taxable distributions. Whether withdrawals from a corporation represent loans or taxable distributions to a shareholder depends upon an analysis of all the facts and circumstances surrounding the subject transaction and the relationships between the stockholder, the corporation, and other stockholders. 128 Elliott J. Roschuni, 29 T.C. 1193">29 T.C. 1193 (1958), affd. per curiam 271 F. 2d 267 (C.A. 5, 1959), certiorari denied 362 U.S. 988">362 U.S. 988 (1960); Harry E. Wiese, 35 B.T.A. 701">35 B.T.A. 701 (1937), affd. 93 F. 2d 921 (C.A. 8, 1938), certiorari denied 304 U.S. 562">304 U.S. 562 (1938). There are numerous authorities to the effect that if a factual determination is made that it was the intention of the shareholder and the corporation at the time of the withdrawal to create a debtor-creditor relationship, then such withdrawals will not constitute taxable dividends. See Chism's Estate v. Commissioner, 322 F. 2d 956 (C.A. 9, 1963), affirming a Memorandum Opinion of this Court; William C. Baird, 25 T.C. 387">25 T.C. 387 (1955); Carl L. White, 17 T.C. 1562">17 T.C. 1562 (1952). Petitioner's testimony that the withdrawals were intended as loans was convincing, and the occurrence of limited repayments is corroborating evidence that permanent retention of corporate funds was not planned. The fact that the overall balance due on petitioner's withdrawal129 account was never reduced to zero by repayments during the existence of the account is not persuasive evidence of a contrary intent. During several of the years in which the account existed, petitioner actually repaid more than the amount withdrawn during the year. Respondent emphasizes the fact that the largest repayments were made from payments to petitioner by Vulcan-Cincinnati, Inc., for dividends, bonuses, confidential salary, and the sale of stock and stock options. These amounts were applied to the withdrawal account at the time of receipt. We draw no particular conclusions from this pattern of repayments. It only seems to indicate that petitioner borrowed money for current expenses in anticipation of repaying from future income. Vulcan-Cincinnati, Inc., was petitioner's primary source of income and application of a portion of the income received from the corporation to the withdrawal account would be expected in such a situation. Although the total amount due on the withdrawal account gradually increased to a substantial sum, the net withdrawals for any given year were not so excessive as to require a conclusion that such amounts were patently not loans. Petitioner was130 compensated for his corporate duties at a level which would have allowed total repayment of the account's balance within a reasonable time if the practice of withdrawing additional funds was terminated. Petitioner's testimony that the withdrawal account was a loan account was supported by his brothers. Paul testified at trial that withdrawals from the corporation by the brothers had always been considered as bona fide loans, and that they had always acknowledged this fact to each other. The testimony of persons related to a taxpayer by blood or marriage is not usually given special weight due to possible sympathy with the taxpayer and consequential partiality. Here, however, petitioner's brothers and their immediate families constituted the majority shareholders of the corporation. Their understanding that petitioner's withdrawal account was a loan is consistent with their financial self-interests in the conservation of corporate funds. We do not believe that Paul and Elliot would have consciously allowed petitioner the unequal benefit of unlimited withdrawals for personal purposes with no131 obligation of repayment. It was apparently recognized that petitioner performed more valuable services for the corporation and petitioner was compensated accordingly with the result that he received more compensation than the other brothers who were also employed by Vulcan-Cincinnati, Inc. It seems doubtful that the brothers would knowingly acquiesce in a plan whereby disguised compensation was received by petitioner when petitioner's higher level of compensation was already commensurate with the proportionately greater services rendered by him to Vulcan-Cincinnati, Inc. The preceding conclusion is supported by petitioner's lack of dominion and control over corporate policies. When withdrawals are challenged as dividend distributions, the question of whether the taxpayer has effective control of the corporation becomes important. Special scrutiny should be given to a situation in which the withdrawer is in substantial control of the involved corporation. See W. T. Wilson, 10 T.C. 251">10 T.C. 251 (1948), affd. 170 F. 2d 423 (C.A. 9, 1948), certiorari denied 336 U.S. 909">336 U.S. 909 (1949);132 Ben R. Meyer, 45 B.T.A. 228">45 B.T.A. 228 (1941). In the instant case, petitioner and his immediate family did not have a controlling stock interest in the corporation. Moreover, petitioner's brothers were active in conducting corporate affairs and it could not be found that petitioner exercised a dominating influence over the policies of Vulcan-Cincinnati, Inc. The financial interests of Paul and Elliot would have been adversely affected by petitioner's alleged plan to use corporate funds for himself with no intention of making reimbursements. Petitioner was not in a position of control whereby such a plan could have been exercised solely at his discretion, and the consent of the brothers, tacit or otherwise, would have been necessary. We believe that the requisite consent would not have been granted due to the adverse effect of such a plan on the financial interests of Paul and Elliot. While it is true that no formal action was ever taken by Vulcan-Cincinnati, Inc., to obtain complete repayment of petitioner's withdrawals, this inaction is understandable under the circumstances. Petitioner was instrumental to the continuing sucess of the corporation and his alienation would not133 have been beneficial to Vulcan-Cincinnati, Inc. Paul and Elliot were aware of petitioner's personal financial problems and evidently agreed that enforced repayment was not the solution so long as petitioner agreed to make repayments and treated the account as a debt. We are not concerned with whether this was a wise corporate policy, especially when the corporation itself was in need of working capital. We are only concerned with whether loans were in fact intended and so recognized by those persons involved. Moreover, the fact that petitioner may have been a bad risk as a borrower is of little consequence. The policy of allowing petitioner to make further withdrawals may have been a poor one, but this does not preclude the presence of loans. We believe that lack of enforcement of the debt obligation is not inconsistent with the existence of bona fide loans under the particular facts of this case. The petitioner's testimony that the withdrawals constituted loans is further supported by certain objective evidence. Dividends were declared and paid to the stockholders for the years 1950 through 1962. The withdrawal account was treated as an account receivable on the books and financial134 statements of Vulcan-Cincinnati, Inc. It is well settled that book entries may not be used to conceal realties as a means of relieving the taxpayer from liability for income taxes. Ben R. Meyer, supra, and cases cited therein. The book entries nevertheless constitute documentary evidence of a loan, and, although not conclusive of the issue, they must be considered. The weight to be given to such evidence will depend upon the surrounding circumstances. Additional evidence was presented on behalf of petitioner. The request for a ruling on the proposed reorganization of Vulcan-Cincinnati, Inc., classified the withdrawals as debt. The audit slips for the years in question signed by petitioner as confirmation of his indebtedness to the corporation in the amount of the withdrawal account's balance are objective manifestations of the alleged intent to borrow. The treatment of the withdrawal account by the bank in connection with corporate loans is particularly significant. Petitioner acknowledged to the bank's loan officer that the withdrawal account was an indebtedness. Petitioner135 was admonished by the loan officer about the excessive withdrawals, and he was urged to make every effort to repay his personal debt to the corporation. The 1959 bank loan to Vulcan-Cincinnati, Inc., contained a provision limiting the amount of withdrawals by officers as a condition of making the loan. The foregoing factors relating to the bank loan are strong indicia of the existence of a loan relationship between the corporation and petitioner. Respondent emphasizes the lack of notes issued with respect to withdrawals during the years in question, the indefinite time for repayment, the failure to post security to insure repayment, and the absence of interest charges. While these factors must be considered, a thorough consideration of their relative importance to the overall picture has left us unconvinced as to their persuasive merit in the total factual picture presented by the record here. Petitioner has always used his withdrawal account like a credit card for personal living expenses. There is no evidence indicating that the nature of the withdrawals ever changed during the existence of the account. The issuance of notes in nearly the amount of the withdrawal account's year-end136 balance in 1951 is indicative of petitioner's acknowledgment that withdrawals prior to the issuance of the notes on December 31, 1951, constituted debt. We are convinced from the evidence of record that petitioner's intent with respect to withdrawals after 1951 did not change and that the notes issued in 1951 constitute relevant evidence of a documentary nature tending to prove that the withdrawals were always considered debt obligations. The presence or absence of notes, however, is not controlling. Withdrawals have been held dividends in both situations. This observation is also true with respect to interest charges and posting of security. In Harry E. Wiese, supra, at 704, the following statement is made: It is obvious that a withdrawal by a stockholder of funds of a corporation does not necessarily constitute a distribution of profits, even if the corporation has an accumulation of profits in excess of the withdrawal; and such withdrawal may or may not, in the light of that fact alone, be said to be a dividend. A corporation may lend its funds, including earnings, with137 or without interest, on open account or upon notes, secured or unsecured; and such privilege is not restricted to the lending of its funds to persons other than stockholders. Therefore, whether the withdrawals of corporate funds by petitioner, here in controversy, constituted loans or dividends in the years when withdrawn must be determined from the facts in the record before us; * * Petitioner points to the fact that he paid no interest on the amounts withdrawn, nor was any charged, and that he executed no notes or other evidences of indebtedness to the corporation. But these facts are not necessarily controlling. The withdrawals may still have been bona fide loans. That there was no definite time for repayment of withdrawals is entirely consistent with the existence of debts incurred in an informal manner. Petitioner did not always make direct withdrawals of corporate funds. The amount of the withdrawals depended upon the amount of the various personal expense items charged to the account. It seems apparent from the evidence of record that we are not concerned here with a conscious plan to siphon off corporate funds in definite amounts determined prior to the withdrawals. 138 The existence of such a plan is further controverted by the fact that withdrawals from Vulcan-Cincinnati, Inc., by the stockholders were not in proportion to their stockholdings in the company. This factor is not determinative of whether withdrawals constitute loans or dividends. Ben R. Meyer, supra, at 241, and cases cited therein. Nevertheless, the existence of loans is certainly supported by the occurrence of substantially disproportionate withdrawals by a minority stockholder who does not control corporate policies. Petitioner attempts to substantiate the existence of loans by introducing evidence of his large payment to Engineering in 1964 which was applied to the balance due on the withdrawal account acquired by Engineering upon the reorganization of Vulcan-Cincinnati, Inc. We have accorded little weight to this evidence because the payment occurred after receipt of the deficiency assessment involved in this case and it was made out of funds borrowed for such purpose. Moreover, the payment was made to Engineering which is a corporation owned and controlled solely by petitioner and his immediate family. Viewing the totality of the circumstances as established139 by the evidence of record and giving proper weight to the many factors reflecting on the question of intent, it is our considered judgment and we have so found as an ultimate fact that the net amounts withdrawn by petitioner from Vulcan-Cincinnati, Inc., during 1957, 1958, and 1959 were intended as loans. The petitioner has sustained his burden of overcoming the presumption of correctness which was afforded respondent's deficiency determination with respect to the withdrawals. We hold that the net withdrawals in controversy did not constitute taxable distributions of corporate funds. A Rule 50 computation is necessary because of certain concessions by both parties. Decision will be entered under Rule 50. Footnotes1. These figures do not reflect credit entries in the total amounts of $41,500 in 1957 and $7,000 in 1958, which were subsequently reversed.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620757/	APPEAL OF A. WILHELM CO.A. Wilhelm Co. v. CommissionerDocket No. 6533.United States Board of Tax Appeals6 B.T.A. 1; 1927 BTA LEXIS 3626; February 1, 1927, Promulgated 3626 Taxpayer leased its property, the lessee agreeing to return the plant in the same condition as then existed and with assets of as great book value and actual value as then existed. During the taxable year the lessee made repairs and installed new equipment and machinery of a value in excess of depreciation. Held, that no error was committed in refusing a depreciation deduction to the taxpayer. H. A. Mihills, C.P.A., for the petitioner. Ellis W. Manning, Esq., for the Commissioner. PHILLIPS 1 This is an appeal from the determination by the Commissioner of a deficiency of $601.64 in income and profits tax for the year 1919. The Commissioner denied the taxpayer's contention that an additional depreciation of $37,860.78 should be allowed for the ten-month period from March 1, 1919, to December 31, 1919, during which its plant was leased, including the depreciable assets in question. FINDINGS OF FACT. The taxpayer is a Pennsylvania corporation with its principal office at Reading. By an instrument entitled "lease and option," dated February 21, 1919, the taxpayer leased its plant and all of the assets of the business as a going3627 concern, subject to its liabilities, which were assumed by the lessee, to the Glidden Company for a term of five years, beginning March 1, 1919, and granted the lessee an option, at any time during the term of the lease, to purchase same, subject to its liabilities, for $1,250,000. The lease provides in part - 1. The Lessee shall pay all expenses of the Lessor including wages, salaries and other compensation of its employes, officers and agents; all state, county, 2 municipal, school and other taxes upon its property, taxes upon its capital stock and corporate franchises, and upon the privilege of exercising the same, excess profits taxes, war profits taxes, income taxes, (except that the Lessor shall bear the income taxes upon its income to the extent of Eighty-seven Thousand Five Hundred Dollars ($87,500) per annum,) and all other taxes of every kind and description assessed or levied by any governmental or municipal authority whatsoever; all costs of manufacture, including the costs of materials, supplies, power, light, heat and water, all expenses of transportation; all office expenses, including branch offices, all selling commissions and other expenses; all obligations3628 and expenditures arising out of any contract, business, negligence of misfeasance or however otherwise arising, and whether the liability for the same now exists or be hereafter created in any way connected with the conduct and operation of the plant, business and assets of the said Lessor, and including damages to persons or property, legal expenses, (not including those properly chargeable to the individual stockholders of the Lessor), interest, discounts and all other expenses and losses in, or arising out of, the conducting and operating of the business of the Lessor and maintaining its organization, together with the expenses of maintaining its plant and assets according to the same standard and condition heretofore and at present existing, including the cost of new construction, new machinery, equipment, fixtures, furniture and other items of principal assets, where the same shall be necessary to replace depreciation and maintain said present existing standard and condition. The Lessee shall at its own cost keep said assets fully and properly insured against fire. 2. The Lessee shall pay to the Lessor in addition to the foregoing a yearly rental of Eighty-seven Thousand3629 Five Hundred Dollars ($87,500.) during each year of said term in monthly installments of Seven Thousand Two Hundred and Ninety-one Dollars, and Sixty-six Cents ($7,291.66) beginning on the first day of March, 1919. 3. The Lessee shall, at the expiration of said time, return to the Lessor its said plant, business and assets in the same condition as the same now exists, (except for such changes or replacements thereof as are necessary and usual to the normal conduct of its business) the aggregate of which assets, except the good will and trade marks, shall be of at least as great book value and actual value when so returned as the aggregate of such assets as at present existing, and the value of the aggregate of the assets described in each group thereof in the Lessor's balance sheet, when so returned, shall be not less than ninety per cent of the value of such group of assets at the present time. The lessee shall in good faith and with due diligence make every reasonable effort, by advertising to the extent usual with the Lessor, and by other means of cultivation and development, to preserve the value of the Lessor's good will and trade marks. The Glidden Company went into possession3630 under its lease on March 1, 1919, and operated under it for the remaining ten months of 1919. During the period from March 1, 1919, to December 31, 1919, the lessee erected new buildings and installed new equipment at a cost of $179,141.33. These expenditures were capitalized on the books of account of the lessee. None of them replaced depreciation on the lessor's original plant. During the period in question repairs in the maintenance of the lessor's plant were made and charged to the operations of the lessee. 3 In its return for 1919, the taxpayer deducted depreciation for the two-month period ending February 28, 1919, in the amount of $4,637.64. This amount was allowed by the Commissioner. The Glidden Company claimed a deduction of $37,860.78 for depreciation for the ten-month period ending December 31, 1919, which included depreciation on additions to the plant, but that deduction was denied to it by the Commissioner. The taxpayer now contends that it is entitled to an additional deduction from gross income for 1919 of $37,860.78, representing the depreciation for the ten-month period ending December 31, 1919. This was refused by the Commissioner in determining3631 the deficiency. OPINION. PHILLIPS: Substantially all of the facts are stipulated. Taxpayer leased its plant under an agreement by which the lessee covenanted to bear the "expenses of maintaining its plant and assets according to the same standard and condition heretofore and at present existing, including the cost of new construction, new machinery, equipment, fixtures, furniture and other items of principal assets, where the same shall be necessary to replace depreciation and maintain said present existing standard and condition" and, at the expiration of the lease, to return "said plant, business and assets in the same condition as the same now exists, (except for such changes or replacements thereof as are necessary and usual to the normal conduct of its business) the aggregate of which assets, except the good will and trade marks, shall be of at least as great book value and actual value when so returned as the aggregate of such assets as at present existing." The lease was to continue for five years, with the right to the lessee at any time to purchase at a stated price. The lessee made repairs in the maintenance of the plant and erected new buildings and installed new3632 equipment at a cost considerably in excess of the depreciation claimed. The Revenue Act provides that in computing net income a deduction may be taken of a reasonable allowance for exhaustion, wear and tear. What is a reasonable allowance must be determined from all the facts and circumstances. In the peculiar circumstances here involved, considering that the lessee was bound to make good all depreciation by replacements or additions, it is our opinion that no allowance could be justified as reasonable. Taxpayer lays stress upon the refusal of the Commissioner to allow such deduction to the lessee, taking the position that depreciation took place and is deductible by either the lessor or the lessee. *4 Since we are not called upon to determine the tax liability of the lessee in this proceeding, we express no opinion upon the ruling made with respect to it. Decision will be entered for the Commissioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620758/	Joseph M. and Minnie Mariani, Petitioners v. Commissioner of Internal Revenue, RespondentMariani v. CommissionerDocket No. 4905-66United States Tax Court54 T.C. 135; 1970 U.S. Tax Ct. LEXIS 220; February 5, 1970, Filed 220 Decision will be entered for the respondent. Petitioner's lawsuit against his father's estate, and the executor, devisees, and legatees of said estate, was settled for $ 70,000. The suit was based on his performance of services for his father as ranch superintendent, the claimed promise of his father to leave him one-third of his property when he died for his performance of said services, and the breach of said agreement by his father who specifically disinherited him by his will and codicil. Held, the net amount petitioner received in the settlement, $ 39,666.66 (after paying attorney's fees and investigating fees), was not excludable from petitioner's gross income under sec. 102, I.R.C. 1954, as property acquired by gift, bequest, or inheritance. B. W. Minsky, for the petitioners.Stephen W. Simpson, for the respondent. Mulroney, Judge. MULRONEY 135 Respondent determined a deficiency in petitioners' income tax for the year 1962 in the amount of $ 14,943.28.The issue is whether $ 39,666.66, the net amount received by petitioner Joseph M. Mariani in 1962 in settlement of a suit against his father's estate, is excludable from gross income as a gift or inheritance under section 102, I.R.C. 1954. 1FINDINGS OF FACTSome of the facts are stipulated and they are found accordingly.Joseph M. Mariani, who will be called petitioner, and his wife Minnie Mariani, resided in Los Angeles County, Calif., at the time they filed their petition in this case. They filed their joint income tax return222 for 1962 with the district director of internal revenue in Los Angeles.When petitioner was discharged from the Army in 1945 he went to work for his father as foreman of his father's fruit ranch. He worked for his father and was paid a salary for such services until sometime in 1954, when he left his father's employment.Petitioner's father died testate December 3, 1958, and his estate was probated in Santa Clara County, Calif. Decedent's will, executed April 6, 1954, contained the following clauses:FIFTH: I hereby give, devise and bequeath, share and share alike to my three children JOSEPH M. MARIANI, NICHOLAS J. MARIANI and MARIAN PAULA MARIANA my one-half community property interest in and to my estate.SIXTH: I hereby give, devise and bequeath to my three children, JOSEPH M. MARIANI, NICHOLAS J. MARIANI and MARIAN PAULA MARIANI, share 136 and share alike, all of my separate property of every kind or nature and wheresoever situate.A codicil to this will, executed September 25, 1954, which was admitted to probate along with the will, contained the following clauses:1. For reasons best known to myself, it is my positive intention to leave my son JOSEPH M. MARIANI nothing223 and in the place and stead of paragraph "Fifth" in my said Will of April 6th, 1954 I hereby give, devise and bequeath, share and share alike to my two children NICHOLAS J. MARIANI and MARIAN PAULA MARIANI my one-half community property interest in and to my estate.2. In the place and stead of paragraph "Sixth" in my said Will of April 6th, 1954 I hereby give, devise and bequeath, share and share alike to my two children NICHOLAS J. MARIANI and MARIAN PAULA MARIANI all of my separate property of every kind or nature and wheresoever situate.On June 26, 1959, petitioner filed what is termed a "Creditor's Claim" in the amount of $ 275,000 in his father's estate based on three asserted claims. Petitioner's First Claim alleged he had gone to work for his father in 1945 in the management of the latter's ranch and that it was agreed between his father and him that, in addition to a portion of the income of the ranch properties, "claimant would be compensated at the death of deceased by being the legatee and devisee of one-half (1/2) of the estate of said deceased." The claim goes on to allege that later in April of 1954 he was asked by his father to reduce his interest to one-third of 224 his father's estate and he agreed and his father executed the will (of April 1954), leaving him a one-third interest in his estate. The claim alleges petitioner fully performed all of the conditions of his agreement with his father but in violation of said agreement "deceased revoked the bequest and devise to claimant and left claimant nothing."The Second Claim alleged claimant's rendition of services for deceased for which decedent agreed to pay and an unpaid balance of $ 275,000 on the sum due claimant for said services.The Third Claim sought $ 275,000 for work and labor done for decedent which was due and owing to claimant.The Creditors' Claim was rejected by the executor of the estate and petitioner filed suit in the Santa Clara County Superior Court against the estate with the executor and the heirs and legatees named as defendants. The complaint in this suit sets forth causes of action substantially the same as the claims described above which were contained in the Creditor's Claim filed in the estate and rejected by the executor.The above lawsuit was settled on or about April 18, 1962, by petitioner being paid $ 70,000. The said $ 70,000 that was paid to petitioner came225 in equal portions from the distributive shares of Marian and Nicholas who were petitioner's sister and brother. In the settlement proceedings petitioner executed a release of any and 137 all claims he might have against the estate as an heir or devisee or legatee or creditor or in any other capacity.From the $ 70,000 received, petitioner paid legal fees of $ 23,333.34 and investigating fees of $ 7,000, leaving a net of $ 39,666.66 which petitioner received which was not included by him in his taxable income in 1962. Respondent's notice of deficiency determined the $ 39,666.66 "taxable as ordinary income."OPINIONRespondent's position is that the $ 39,666.66, the net amount petitioner received in settlement of his suit against his father's estate, constitutes taxable "gross income" under section 63(a).Petitioner argues that the net sum he received in settlement of his suit was excludable from his gross income under section 102. In general, that section provides that gross income "does not include the value of property acquired by gift, bequest, devise, or inheritance."Petitioner's suit was nothing more than a claim against the estate. It was based on an alleged agreement226 with decedent, petitioner's performance of the agreed services, and the breach of the agreement by the decedent. The money received in settlement of the suit was not acquired by gift, bequest, devise, or inheritance within the provisions of section 102. Ethel West Cotnam, 28 T.C. 947">28 T.C. 947, affirmed on this point 263 F. 2d 119; John Davies, 23 T.C. 524">23 T.C. 524. Petitioner argues on brief that "in the last analysis, it was his position as an heir that brought about the settlement." But the suit did not contest the validity of the will or codicil. The record shows petitioner's two children received bequests under the will. Petitioner did not receive the settlement sum as an inheritance and since he was specifically excluded by the will and its codicil he could not receive anything in the nature of a bequest or devise. He does not argue that he received the settlement sum as a gift from any living donor. Respondent was right in holding the net amount received in settlement of the suit in 1962, or $ 39,666.66, was not excludable from petitioner's taxable gross income.Petitioner concludes his argument on 227 brief with a few lines to the effect that if the amount received is not held excludable he should have "the benefit of averaging his back-pay over the entire period that he worked." He cites section 107 (d), I.R.C. 1939, as amended 1943, section 1302 and he also cites section 1303 (a), I.R.C. 1954, as in effect in 1962. 2 Petitioner also cites section 1.1301-1, Income Tax Regs., but he does not point out how any of these statutes or the regulation are applicable to the facts of this case. It is enough to point out that the 138 statutes generally limit income averaging to those situations where services were performed in prior years and payment was not made in those years because of certain intervening events. There was no intervening event here. Petitioner's position as claimant was not that he became entitled to payment during the years prior to his father's death. Under this record the $ 39,666.66 could not be allocated to prior years on any theory that it would have been received during those years except for some intervening event.228 Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. Prior to the amendment of sec. 1303↩ by the Revenue Act of 1964 which revised it completely.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620759/	GENE H. BAIRD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBaird v. CommissionerDocket No. 11177-79.United States Tax CourtT.C. Memo 1982-220; 1982 Tax Ct. Memo LEXIS 526; 43 T.C.M. (CCH) 1173; T.C.M. (RIA) 82220; April 26, 1982. 526 Charles E. Hammond, for the petitioner. James T. Million, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined the following deficiencies in the petitioner's Federal income tax: Taxable YearDeficiency1972$ 56.9619731,661.04197417,063.56197598,867.38Due to concessions, the only issue before us is whether certain disbursements from a corporation to its sole stockholder were loans or dividends to the extent of earnings and profits. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioner's Federal income tax return for the taxable years 1972 to 1975, inclusive, were filed with the Internal Revenue Service Center at Austin, Texas. At the time he filed his petition herein, petitioner resided in Merriam, Kansas. Petitioner has been involved in the wholesale liquor business in Kansas for many years. Prior to 1953, he worked as a salesman. In 1953, State Distributors, Inc., a wholesale liquor distributor (hereinafter "State") hired527 petitioner as a salesman in a newly established territory in and around Hayes, Kansas, and sold him a small amount of Treasury stock. The new warehouse in petitioner's territory was poorly managed and had difficulty in delivering the goods which petitioner sold. He found himself actually helping to manage the warehouse, in addition to selling State's products. Consequently, Mr. Shicktanz, State's president, appointed petitioner branch manager of the Hayes territory, which position he held until 1970. During this time, he purchased more State stock, increasing his interest to about 7 percent. He was elected to State's board of directors and became a vice president. In 1970, petitioner learned that Eastern Distributing Company (Eastern), a larger company based in Kansas City, might be for sale. He persuaded State's stockholders to purchase Eastern, which he then managed after moving to Kansas City. Petitioner soon discovered serious employee morale problems in Eastern's work force which had not been disclosed by the sellers. Due to these problems, Mr. Schicktanz indicated that acquiring Eastern had been a mistake and that he would like State to sell its Eastern stock. After528 obtaining outside financing, petitioner and Eastern's four principal salesmen purchased that company from State in 1973 and have operated it ever since. Petitioner, now owning a company in his own right, embarked upon an ambitious scheme of acquiring liquor distributorships which would, he hoped, make him a giant of the wholesale liquor business in Kansas. Due to the state law which prescribed wholesale liquor prices, the wholesale liquor distributorship business in Kansas was very costly and inefficient. Distributors competed for orders on the basis of non-price factors, such as product availability and quick delivery. Thus, it was necessary that every wholesaler stock every product (necessitating excessive inventory investments) and rush delivery trucks to the retailers ahead of the competition in hopes of securing an order. Small firms were having difficulty surviving and consequently the industry was marked by oligopolistic tendencies. Although petitioner lobbied for changes, he was a practical enough businessman to know that while prices remained fixed, an adequate return on invested capital could be obtained only by consolidating the operations of small companies and529 eliminating excess inventories and personnel, and, thus, conforming to the oligopolistic pressures caused by state price control. This rationale undergirded petitioner's grand design. Petitioner first acquired Sunflower Sales Company in July 1974 and placed its assets in a new corporation, Southeastern Distributors. Petitioner then set his sights on C-K Distributors, Inc., which was the strongest wholesale business in Junction City, Kansas. Its president and one of its stockholders was a Mr. Rosewarren, who was highly respected in the community and was a very capable manager. The possibility of acquiring his services was a major reason for petitioner's interest in C-K. Petitioner negotiated the purchase of C-K with Mr. Rosewarren, who considered himself the representative of the other shareholders and was strongly protective of their interests. However, prior to consummating the purchase of C-K, petitioner purchased State in July 1974 after receiving an offer from and negotiating with Mr. Schicktanz. State then became a wholly owned subsidiary of Eastern. After the purchase of State, petitioner owned 82 percent of Eastern's common stock and 76 percent of Southeastern Distributors' 530 common stock. Eastern in turn owned 100 percent of State. Mr. Rosewarren was not pleased when he learned of petitioner's purchase of State, as State and C-K had historically been bitter rivals. It was petitioner's intention, however, to combine the operations of State and C-K under C-K's name in Junction City and achieve greater operating efficiency by eliminating excess inventory and personnel. After the combination, petitioner planned to have Rosewarren manage the entire Junction City operation. Petitioner was able to convince Rosewarren of this and thus secure his cooperation. In August 1974 petitioner and Mr. Merrill Werts, then the president of the First National Bank in Junction City, reviewed various alternatives for financing petitioner's purchase of C-K's stock. Mr. Werts offered to lend petitioner the necessary funds. Werts at the time was intimately familiar with the financial condition of C-K and was also familiar with petitioner's personal financial situation, with his character, and with his ability to perform. He had reason to believe that the assets of C-K would stand behind the loan. Based upon all of these factors, as well as the possibility of acquiring531 the banking business of both companies, the Bank would have been more than willing to make such a loan. Petitioner decided, however, to obtain the cash required for the purchase from the corporation. Immediately prior to September 1974, the stock ownership of C-K was: NUMBER OFNAMESHARESGene Baird1.00James H. RosewarrenJunction City, KS54.53Mrs. Irvin L. CowgerTopeka, KS31.62E. V. LutzManhattan, KS70.87C. L. HooverJunction City, KS77.41Robert A. ShermerhornMesa, Arizona109.03D. D. DreilingJunction City, KS183.18Robert FeganJunction City, KS31.62Mary LutzManhattan, KS70.87TOTAL630.13On or about September 30, 1974, petitioner entered into separate agreements with each of the other eight shareholders. These agreements, each five pages in length and captioned "STOCK PURCHASE AGREEMENT" were identical except for the number of shares, purchase price and name of the seller listed on page one of said documents and the signature of the seller on page six. The number of shares shown in each agreement is the same as that listed beside the seller's respective names listed above. Petitioner agreed to a purchase532 price of $ 406.91 per share, payable as follows: NAME OF SELLERNUMBER OF SHARESSALE PRICEJames H. RosewarrenJunction City, KS54.53$ 22,188.80Mrs. Irvin L. CowgerTopeka, KS31.6212,866.50E. V. LutzManhattan, KS70.8728,837.71C. L. HooverJunction City, KS77.4131,498.90Robert A. ShermerhornMesa, Arizona109.0344,365.40D. D. DreilingJunction City, KS183.1874,537.77Robert FeganJunction City, KS31.6212,866.50Mary LutzManhattan, KS70.8728,837.71TOTAL629.13$ 255,999.29Petitioner was not related to any of the selling shareholders of C-K financially, by blood, or in any other manner. Pursuant to paragraph 4 of the Stock Purchase Agreement, petitioner paid the total purchase price plus interest to the selling shareholders according to the following schedule: ScheduledPaymentDatePrincipalInterestTotal10/15/74$ 25,599.92$ 25,599.92(down payment)11/15/7423,039.88757.5023,797.3812/15/7423,039.881,363.4624,403.341/15/7530,719.931,195.1431,915.072/15/7530,719.931,009.9731,729.903/15/7530,719.93807.9831,527.914/15/7530,719.93605.9831,525.915/15/7530,719.93403.9931,123.926/15/7530,719.9330,719.93TOTAL$ 255,999.26$ 6,144.02 $ 262,143.28533 The agreements gave the selling shareholders the option to terminate them, in the event that petitioner defaulted in making any of the installment payments, by written notice to the First National Bank of Junction City, which was acting as escrow agent. Upon termination, all installment payments previously made by petitioner were to be forfeited as liquidated damages, the stock held by the escrow agent was to be returned to the sellers, and petitioner was to have no further rights in the stock nor any claims against the sellers. Paragraph 6 of each agreement provided that petitioner could vote the escrowed shares so long as he was not in default on the installment payments. Until the purchase price was fully paid, however, all dividends and distributions on the stock deposited with the escrow agent were to be paid over to and held by such agent. Only then were they to be distributed to petitioner, along with the purchased stock. Petitioner was obligated to maintain the net worth of the corporation during the term of the agreements at least at an amount equal to the then-unpaid balance534 of the purchase price. Petitioner paid the purchase price with funds he received from C-K in the form of the following checks drawn on C-K's account at the First National Bank: Date of CheckAmount11/14/74$ 49,397.3012/17/7424,403.341/10/7531,915.072/14/7531,729.903/15/7531,527.914/2/7531,325.915/6/7531,123.926/9/7530,719.93Adjusting Journal Entry1 6,975.65TOTAL$ 269,188.93The co-signers on each of the above checks were petitioner and Mr. Rosewarren. Prior to each scheduled payment date, Mr. Rosewarren, who continued535 as C-K's general manager and as the representative of C-K's selling shareholders, would send petitioner a notice that a payment was due on such date. Petitioner's secretary would then type a document entitled "Promissory Note." The document bore the date of the scheduled payment and stated that petitioner promised to pay to C-K within one year of such date the full amount (purchase price plus interest) of the scheduled payment plus interest at the rate of 10 percent per annum. At the time these disbursements were made, C-K's accumulated earnings and profits were $ 257,537.34. Petitioner would sign the document and send it to Mr. Rosewarren, who would then prepare and sign one of the checks listed supra and send it to petitioner. Petitioner would counter-sign the check, as was required, and deposit it to his personal account. His secretary would then prepare his personal checks to each of the selling shareholders, which he would sign and mail to Mr. Rosewarren. Mr. Rosewarren would then distribute the checks to the selling shareholders. Mr. Rosewarren would not have issued the check without first receiving the "note" from petitioner. The "notes" were executed and delivered536 to Rosewarren in order to comply with the stock purchase agreement's requirement that C-K's net worth be maintained at the unpaid balance of the purchase price. Petitioner used the entire amount of the proceeds which he received from C-K to make the installment payments required under the stock purchase agreements. Monthly operating statements were prepared for C-K by its certified public accountant, John A. Strain. The statements were used for internal management purposes and for securing credit. Copies were provided to banks and suppliers upon request. These statements listed an asset account denominated "Accounts Receivable - Stockholder" in the following amounts at the following dates: Amount in "Accounts Receivable-Stockholder"DateAccount4/30/75$200,299.435/31/75231,423.357/31/75269,118.938/31/75269,118.939/30/75269,118.9310/31/75269,118.93As mentioned previously, the accounting records of C-K included in the July 31, 1975, debit balance of this account $ 6,975.65 of accrued interest on the cash disbursements from C-K to petitioner, as well as the aggregate amount of such disbursements. The interest accrual was made at a 6537 percent rate of interest, whereas the notes executed by petitioner bore a stated interest rate of 10 percent. The discrepancy occurred because the accrual was prepared in the offices of John Strain, C-K's CPA, before copies of the notes had been sent there. The employee who performed the calculations was told to use an assumed rate of 6 percent pending determination of the true rate. A financial statement of petitioner dated April 8, 1975, and filed with various banks with which he dealt indicated a "Notes Payable" liability of $ 215,300, which represented the amounts disbursed by C-K to petitioner pursuant to the notes.The statement reported petitioner's net worth to be $ 1,012,965 and the value of his stock holdings in the liquor distributorships at $ 1,212,615, which was petitioner's rough estimate. The estimate took into account anticipated operating economies resulting from consolidation. Petitioner's gross income for the years 1972 through 1976, as reported on his Federal income tax returns filed for those years, was as follows: 197219731974Wages$ 15,206.00$ 22,275.00$ 36,333.31DividendsInterest376.19140.28Rental Income3,330.001,840.008,000.00Other Income2,132.181,492.218,479.78Capital Gains: From liquidation of C-KOther14,719.5031,601.7415,324.31TOTAL GROSS INCOME REPORTED$ 35,387.68$ 57,585.14$ 68,277.68538 19751976Wages$ 66,412.96$ 68,791.46Dividends134.80327.20Interest110.001,383.29Rental Income24,000.0073,107.68Other Income522.548,467.95Capital Gains: From liquidation of C-K64,573.15Other5,000.0013,864.00TOTAL GROSS INCOME REPORTED$ 96,180.30$ 230,514.73The following table shows the net worth of the corporations directly or indirectly owned by petitioner at the indicated dates: Eastern & StateDate(Consolidated)Southeastern7/31/7412/31/74$ (41,866)2/28/75$ 68,336.194/30/755/31/757/31/758/31/759/30/7510/31/7512/31/75(92,708)2/29/7649,705.00C-KAs Reported onExcluding LoanReturns &to ShareholderDateOperating Stmts.Account7/31/74$ 280,073.01$ 280,073.0112/31/742/28/754/30/75292,206.8091,907.375/31/75300,860.8669,437.517/31/75296,410.8527,291.928/31/75305,014.0135,895.089/30/75306,274.4737,155.5410/31/75317,160.2048,041.2712/31/752/29/76On its July 31, 1975, fiscal year corporate income tax return, C-K reported accrued interest income of $ 6,975.65, representing539 the interest accrual made upon C-K's disbursements to petitioner. Schedule L, line b, of this return also reported an asset entitled "Loans to stockholders" in the amount of $ 269,118.93 at year end. This amount was also reflected on C-K's July 31, 1976, return, schedule L, at the beginning of the year. No amount was shown as "Loans to stockholders" on such schedule at year end. The annual report filed by C-K with the secretary of state of Kansas for its fiscal year ending July 31, 1975, reflects loans to shareholders in the amount of $ 269,118.93. During his taxable year 1975, petitioner received a salary from C-K of $ 13,500. The net after-tax earnings of C-K for its fiscal years ended July 31, 1975 and 1976 were $ 39,667.59 and $ 39,605.50, respectively; the net after-tax earnings of State for its fiscal years ended February 28, 1975 and February 29, 1976, were $ 58,799.65 and $ 21,884, respectively. C-K paid dividends of $ 9,436.95 and $ 6,291.30 during its fiscal years ending July 31, 1974 and 1975, respectively. Petitioner's plan to consolidate the operations of State and C-K under Mr. Rosewarren's direction encountered unforeseen obstacles. The minority shareholder-salesmen540 of Eastern disliked the idea of dismantling State, which they indirectly owned, and transferring all of its assets and personnel to C-K, in which they had no interest. State had a sizeable sales volume and profits in which they desired to participate. Also, petitioner's common ownership of State and C-K did not end the intense rivalry between their personnel. Because State had a larger warehouse than C-K, petitioner moved C-K's inventory there. State employees continued to operate the warehouse and intentionally made errors in orders which C-K's salesmen turned in. Mr. Rosewarren was very unhappy with this situation. Furthermore, the customers continued to identify strongly with the firms and salesmen with whom they were accustomed to dealing. Thus, for example, the same customer would continue to purchase part of his inventory from C-K salesmen and part from State salesmen. Petitioner had wholly failed to foresee this phenomenon and concluded that completing his original plan to consolidate operations solely under C-K's name would lead to the loss of a substantial number of State's customers, especially in view of the fact that competitors were seeking entry into the Junction541 City market. He, therefore, decided to continue operating the two companies as separate entities. Rosewarren was unable to live with this situation, however. Petitioner had promised and convinced Rosewarren that the operations would be combined under Rosewarren's supervision. When Rosewarren realized that this scheme would not be immediately carried through, he felt betrayed and complained bitterly to petitioner. Moreover, his health was failing. He subsequently died March 1, 1976, of uremic poisoning and pneumonia. He had undergone investigative surgery for cancer. During the summer of 1975, these problems combined to create something of a crisis. Rosewarren informed petitioner that he planned to retire, and the minority shareholders of Eastern were growing increasingly restive over petitioner's plan to eliminate State. Petitioner, who had always viewed Rosewarren's services to be the most important of C-K's assets, and desiring to appease the Eastern shareholders, considered liquidating C-K. Without Rosewarren there was no reason to continue its existence, and he could domonstrate to the Eastern shareholders his intent to maintain State as a viable entity. On October 13, 1975, C-K's542 directors and shareholders adopted a plan of complete liquidation. Under the plan, the liquidation was to be completed by July 31, 1976. However, C-K was to pay petitioner on October 14, 1975, an initial liquidating distribution of $ 269,118.93 by cancelling the notes he had executed and delivered to it in connection with the cash disbursements, as well as the interest accrued thereon. The plan was subsequently amended by moving the completion date to October 19, 1976. The liquidation transaction was not reflected on petitioner's 1975 Federal income tax return; it was reported, however, on his 1976 return as a long-term capital gain. Petitioner also claimed a deduction for interest paid to C-K of $ 18,854.46 on this return. Petitioner knew that the liquidation had to be effected before the first note came due on October 15, 1975, for $ 25,599.92 plus interest. On schedule L of its FYE July 31, 1976, Federal income tax return, C-K reported a partial liquidation distribution of $ 269,118.93 and attached to such return a copy of its Plan of Liquidation, described below. It reported no "loans to stockholders" on the schedule L as of July 31, 1976. When petitioner was considering543 alternatives for financing his purchase of C-K's stock, he did not plan the mechanics of repayment in any detail. He realized that he would be able to liquidate excess inventory upon consolidating C-K and State, that he had a big equity interest in State, and that these assets would somehow furnish him the wherewithal to retire any purchase debt he might incur. Petitioner considered it possible that the loan financing his purchase of C-K would have been renewed upon payment of accrued interest. It is not uncommon for banks to renew loans in the $ 250,000 range. Petitioner operated C-K as a sole proprietorship for approximately two years after the conclusion of the liquidation proceedings in October 1976. The Commissioner determined that the disbursements to petitioner from C-K were not loans but were rather dividends to the extent of earnings and profits. OPINION The facts, set forth above, may be briefly summarized as follows. Petitioner, having been engaged in the wholesale liquor business in Kansas for many years, embarked upon a grand scheme of corporate acquisitions, in the course of which he became interested in purchasing C-K Distributors, Inc. (C-K). A primary544 motivation for his interest was to acquire the services of C-K's president, Mr. Rosewarren, who was also one of its shareholders. Petitioner's plan was to combine the operations of C-K with those of State Distributors, Inc. (State), under C-K's name. State was a wholly owned subsidiary of Eastern Distributing Company (Eastern). Petitioner hoped to thereby effect certain economies of scale. Eastern's stock was owned by petitioner (82 percent) and several of Eastern's salesmen (18 percent). In September 1974, petitioner entered into stock purchase agreements with each of C-K's shareholders, under which he agreed to purchase their stock by paying monthly cash installments beginning October 15, 1974, and ending June 15, 1975. The stock was to be held in escrow by the First National Bank of Junction City until final payout, although petitioner was permitted to vote it. All distributions on the stock likewise were to be held by the escrow agent until the stock was paid for. C-K's corporate checking account was the source of each cash installment. Petitioner would execute and deliver to Mr. Rosewarren, who was the representative of the selling shareholders, one-year promissory notes545 payable to C-K, in the amount of the purchase installment coming due. The notes bore stated interest at 10 percent. Mr. Rosewarren would then issue a C-K check to petitioner in the amount of the installment coming due. Petitioner would deposit the check to his personal account from which he would then make the required payments to the selling shareholders. These disbursements from C-K to petitioner were treated as loans to shareholders on C-K's books and records and were so reported on its Federal income tax returns, financial statements, and annual registration statements filed with the secretary of state of Kansas. C-K paid petitioner a salary of $ 13,500 during calendar year 1975, and paid dividends of $ 9,436.95 and $ 6,291.30 during its fiscal years ending July 31, 1974 and 1975, respectively. During the summer of 1975, petitioner resolved to liquidate C-K for several reasons. First, State's employees (who were in charge of the warehouse operations for both C-K and State) discriminated against C-K's salesmen in filling orders. Second, because of customer identification with the firm names and personnel of State and C-K, petitioner decided to maintain them as separate546 entities rather than combine them under C-K's (and therefore Mr. Rosewarren's) aegis. Thus, Rosewarren became very unhappy with the situation. He had also begun to complain about his health, and was threatening to leave. Third, the salesmenstockholders of Eastern were uneasy about petitioner's plan to eliminate State, which they partially owned indirectly, and place its operations under C-K, which was completely owned by petitioner. Rosewarren's departure removed any incentive to combine operations under C-K, and by liquidating that corporation, petitioner could demonstrate his good faith to the minority shareholders of Eastern. Thus, on October 13, 1975, a plan of liquidation was adopted by C-K's shareholders and directors, to be completed by October 1976 (as later amended). The plan provided, however, that on October 14, 1975, one day before the first promissory note which petitioner executed in favor of C-K in connection with the stock purchase came due, a partial liquidating distribution was to be made to petitioner in the form of C-K's cancellation of his stock-purchase debt. The Commissioner determined, and respondent contends, that the disbursedments made to petitioner547 were dividends to the extent of C-K's accumulated earnings and profits as of July 31, 1974, which we have found to be $ 257,537.34. Petitioner maintains that the disbursements were bona fide loans. Whether the disbursements from C-K to petitioner, detailed supra at 9, were loans or dividends to the extent of C-K's earnings and profits is a factual question to be determined upon consideration of all surrounding facts and circumstances. ; . For the disbursements to constitute loans, there must hae been, at the time of the transfers, an unconditional intention on the part of the transferee to repay them, and an unconditional intention on the part of the transferor to secure such repayment. . Our task is thus to determine whether, at the times he received the disbursements, petitioner intended to repay them and C-K intended to enforce repayment. Petitioner has the burden of proving that he received the548 disbursements with such intent. ; . As the state of a taxpayer's mind at a given time in the past is not directly ascertainable, we must consider objective evidence. We have traditionally treated certain factors as having particular (although not exclusive) relevance in distinguishing loans from dividends, which we proceed to discuss and apply to the facts of the instant case. (1) Corroborated, Credible Testimony of Taxpayer.--The taxpayer's credible, corroborated testimony that he intended to repay the advances when made is entitled to substantial weight. . Here, of course, petitioner testified that the disbursements were actually loans. Furthermore, his testimony was corroborated by objective acts, such as the execution and delivery of promissory notes and C-K's recording of the disbursements on its books as loans. See . This factor549 accordingly supports petitioner's contention. (2) Execution of Debt Instruments.--Taxpayer's execution and delivery to the corporation of promissory notes or other debt instruments in connection with, and in close temporal proximity to, the corporate disbursements is evidence that they are loans. ; ; . Where, however, the execution of a note and provision of security therefore occur much later than the disbursement, they are not persuasive evidence of a loan, as the intent at the time of disbursement governs. . Here, the petitioner executed and delivered promissory notes to Mr. Rosewarren for safekeeping prior to receiving the checks. This is strong evidence of debt. (3) Securing the Debt.--Taxpayer's provision of security for a550 debt instrument also supports the characterization of a given disbursement as a loan. ; . Here, the notes to C-K were unsecured, and this factor accordingly does not favor petitioner. (4) Recording of the Disbursements on the Corporate Books and Records.--The corporation's accounting treatment of the disbursements is an important factor. When it records and carries them in its accounts as "loans receivable" or "accounts receivable," a loan is indicated, as is the case where its financial statements and income tax returns similarly reflect the disbursements. ; ; . In the instant case, C-K carried the disbursements in its records and operating statements as "Accounts Receivable--Stockholder." Petitioner's April 8, 1975, financial statement which he filed with banks indicated a liability of $ 215,300551 in respect of the disbursements which were also reported as "Loans to stockholders" on C-K's July 31, 1975 and 1976 fiscal year corporate income tax returns and on C-K's annual report for its fiscal year ended July 31, 1975, filed with the secretary of state of Kansas. Thus, C-K's treatment of the disbursements on its books and records was consistent with their characterization as loans. Citing , respondent maintains that in the context of a closely held corporation, self-serving bookkeeping entries must be examined with special scrutiny, and correctly points out that treatment of withdrawals on the corporate books and records and on tax returns as notes receivable is not controlling. . 1Nonetheless, such treatment is entitled to some evidentiary weight, which we accord it, favorably to petitioner. (5) Repayments Made.--Where the alleged corporate loans are repaid in full or in part from552 time to time, a true loan is indicated. Failure to ever repay a mounting loan balance, however, points to constructive dividends. ; ; . In our case, there were no repayments made to C-K prior to liquidation. Respondent contends that, when integrated, the entire sequence of events is nothing more than a flagrant tax avoidance scheme. Petitioner bailed cash out of C-K in the guise of "loans," which he never intended to repay, and managed to report such emoluments as long term capital gains. Viewed in isolation, the disbursements followed rather quickly by the liquidation/debt cancellation would lend credence to respondent's position. However, petitioner's credible testimony has persuaded us that valid business reasons undergirded his decision to liquidate C-K. Petitioner was engaged in a program of acquiring liquor distributorships. Prior to purchasing C-K, he had managed to gain control of Eastern, State (his former employer), and finally Southeastern. His goal was to become a giant of the Kansas wholesale553 liquor industry. He was attracted to C-K because of Rosewarren's successful management. C-K is thus properly seen as one of petitioner's acquisitions in the course of building a distributorship empire, and accordingly his motives with regard to it were much more permanent than respondent would have us believe. He testified at length about his plans to consolidate State's operations with C-K's, plans which were partially executed but encountered unforeseen difficulties. We are persuaded that at the time he acquired C-K through the use of the disbursements, he intended it as a permanent possession, and that subsequent events--infighting between personnel, customer firm-name identification, suspicion on the part of Eastern's minority shareholders, and Rosewarren's threatened departure--caused petitioner to consider liquidating C-K. , is apposite to the case at bar. In Benjamin, the stock-holders of a corporation received cash from it which they used to repay a bank loan financing their purchase of the corporation's stock. They executed appropriate debt instruments and the corporation recorded the disbursements554 as loans on its books of account. Prior to repayment, however, the corporation was liquidated. The loans receivable were treated as corporate assets received by the stockholders in liquidation. We found as facts that the liquidation had not been considered until some time after the loan was made, and that its purpose was to facilitate the sale of some of the corporation's properties. We concluded as follows: It is recongnized that * * * [the Corporation] was dissolved before * * * [the stockholders] made any payment of principal or interest on account of the 1949 withdrawal. The dissolution of * * * [the Corporation] served a business purpose, namely, to facilitate separate sales of the two properties owned by that corporation.This aspect of subsequent events does not affect our conclusion. At the time the withdrawals from * * * [the Corporation] took place in 1949, there was not any plan or contemplation of dissolving and liquidating * * * [the Corporation]; and at the time the withdrawals were made, it was intended that they were loans. [.] Respondent claims that this version was implausible555 because petitioner continued to operate C-K as a sole proprietorship for two years after liquidation. Thus, maintains respondent, C-K continued to compete with State and make money at its expense. However, petitioner's testimony makes clear that what the minority shareholders of Eastern feared was losing their indirect interest in State, a profitable concern, as a result of petitioner's plan to transfer all of State's assets to C-K. C-K had been a competitor of State for many years and there is no indication that the shareholders objected to its continuation as such. The liquidation of C-K was thus effective to assuage any apprehension that it would take over State. (6) Taxpayer-Shareholders' Ability to Repay Corporate Loan.--Whether the shareholder, at the time of the disbursement, has a realistic ability to repay it is a factor which sheds light on his intentions. ; ; . Petitioner presented556 substantial evidence of his ability to repay the advances. His April 8, 1975, financial statement indicated a net worth of $ 1,012,965, and included in the assets category his stock in the liquor distributorships at a value of $ 1,212,615. Respondent bitterly disputes the accuracy of this figure. At trial, petitioner attempted to explain his method on direct examination, although not completely clearly. Respondent did not elicit further clarification on cross-examination. From the record, the most we can find is that petitioner valued the stock himself using some method which took into account anticipated economies resulting from consolidation. Respondent, fancifully interpreting petitioner's testimony, derives a method which he assumes petitioner was describing, applies the method to data respondent assumed that petitioner must have used, and arrives at a value for the stock of $ 190,507.28. None of respondent's interpretations or assumptions finds any support in the record. Argument on brief is no substitute for effective cross-examination which might have elicited a clearer explanation of, or defects in, petitioner's method. Petitioner arrived at his estimate of value557 based upon his knowledge of the facts and submitted the financial statement to banks for purposes of securing and/or maintaining credit. This is at least one indicium of accuracy. Further indications of ability to pay are found in the petitioner's rather substantial gross income during the years 1972 through 1976, set out supra at page 12, and in the fact that Merrill Werts, the president of the First National Bank of Junction City, would have been willing to lend petitioner the necessary funds to acquire C-K on the assumption that the corporate assets would have secured the loan. Respondent urges, however, that we ignore these facts, citing , cert. denied . In Dolese, the taxpayer had his corporations pay his personal living expenses beginning in 1948. They treated the advances to taxpayer as loans on their books. After 1964, the taxpayer executed notes each year at 4 percent interest for the balance of the advances. When a note came due the interest was paid and a new note executed for the balance then owing. Some repayments were made, but the balances continued558 to mount and totaled $ 1,817,133 as of March 31, 1968. Taxpayer had only $ 125,000 per year of gross income. He did not have sufficient assets outside of the three corporations he controlled to liquidate this debt. He did have sufficient borrowing power to procure a loan from a bank to do so, however. The court held that although some loan factors were present, the size of the total advancements as compared to taxpayer's income and assets not tied up in the corporation showed that the advancements were dividends. The court observed that interest alone on the $ 1,817,133 balance owed March 31, 1968, at 4 percent would be in excess of $ 72,000 per year, whereas taxpayer's gross income was only $ 125,000 per year. The court found as a fact that he was unable to liquidate the debt without sale or liquidation of one of the corporations or borrowing from a bank which loan would in turn have to be repaid by liquidating one of the corporations or receiving greatly increased dividends. Respondent reads Dolese to stand for the proposition that advances to a shareholder who intends to repay them from corporate assets are in every case dividends and argues that petitioner could not have559 repaid the advances from C-K without liquidating one or more of his corporations or borrowing from a bank, which loan in turn would have to have been repaid by corporate liquidations or by receiving greater dividends. Thus, concludes respondent, petitioner comes within the perse rule of Dolese.We take exception to respondent's proffered logical sequence. First, Dolese established no such perse rule. After pointing out taxpayer's inability to pay the debt without liquidating, refinancing, or increasing dividends, the court in Dolese went on to say: Had [taxpayer] borrowed this large sum in one or two lump amounts after developing a plan to sell or liquidate [one of the corporations] with the specific intent to repay from the proceeds of the disposition, a true loan situation might have existed. But the timing and pattern of the advances * * cannot be ignored. [The above-quoted language makes it clear that a taxpayer can plan to repay advancements from corporate assets and still be560 treated as the recipient of a loan rather than a dividend. The court emphasized the size, timing, and pattern of the advances, not the fact that they likely would have been repaid from proceeds of liquidation or dividend. Second, the facts of our case differ quite markedly from those of Dolese. Petitioner's gross income 2 relative to the interest at 10 percent on the principal balance due C-K (approximately $ 25,000 per annum) is very obviously higher than was the case in Dolese. For example, his gross income for 1975, the first year in which any interest would have come due, was almost $ 100,000. In addition, the timing and pattern of the corporate disbursements here were much more consistent with a loan than were those in Dolese. Here, petitioner received each month, for eight months, the amount of the installment payment due to the selling shareholders. All advancements were completed within one year. 561 We further note that C-K had after-tax earnings of almost $ 40,000 for its July 31, 1975 and 1976 fiscal years; State had after-tax earnings of approximately $ 60,000 in its February 28, 1975, fiscal year and $ 20,000 in its February 29, 1976, fiscal year. Also, petitioner's plan to combine the two was designed to produce economies. Thus, their combined net incomes were another source of repayment. 3 It is, thus, not at all apparent that petitioner would have had to liquidate C-K or any other corporation in order to repay the debt. Our case is plainly distinguishable from Dolese.The table on page 13 shows that at all times C-K itself had substantial equity. If petitioner had financed the stock purchase with a bank loan secured by the stock, there would have been sufficient equity in the corporation to repay it. Petitioner could have liquidated the corporation, received the proceeds at capital gains rates, and used them to pay off the bank. 562 We thus conclude that petitioner had the ability to repay C-K's advancements to him. (7) Control over Decision to Enforce Obligation.--This Court strictly scrutinizes transactions between a corporation and its sole shareholder. ; . The fact that the shareholder in effect has the sole authority to enforce the debt against himself certainly raises questions about the substantive significance of formal debt instruments and book entries. . In our case, however, the facts are not so adverse to petitioner. Prior to receiving any disbursements from C-K, petitioner was required to deliver promissory notes to Mr. Rosewarren, himself a selling shareholder, for sale keeping. Without receipt of the notes, Rosewarren would not have issued the checks. Rosewarren regarded himself as the representatives of the selling shareholders and as the protector of their interests. We do not believe that he would have insisted upon such formality if he and his principals had no intention of enforcing563 the debt. The agreement provided that over its term petitioner had to maintain the net worth of the corporation at least equal to the outstanding principal balance of the purchase price, and that upon default, the selling shareholders could recover the stock and retain all of petitioner's previous payments as liquidated damages. Petitioner testified that he executed the notes in order to maintain C-K's net worth at the required amount. Respondent points out that at April 30 and May 31, 1975 (the only dates during the term of the agreement on which there is evidence in this regard), C-K's net worth, even excluding the loan account, exceeded the remaining purchase price balance. When the agreements were executed, however, neither petitioner nor the selling shareholders could foresee what the net worth would be at any given point in the future. For all they knew, petitioner could manage C-K's business poorly, default on the payments, and leave them to recover only a corporate shell. Unless they could realize on the notes, they might very well have been in far worse condition than at the time of sale, even taking into account prior payments. Further, if the notes were not regarded564 as creating an enforceable debt, the liquidated damages provision would have been meaningless--all of the "forfeited" payments would have come from corporate assets and accordingly would have produced no benefit to the selling shareholders. Thus, over the term of the agreements, at the time the notes were executed, parties adverse to petitioner had at least a contingent power to enforce the notes.(8) Existence of Fixed Time and Plan for Repayment.--Where repayment of the advances is to be made within a fixed time and a plan of repayment has been worked out, it is more likely that the advancements are loans. Conversely, the lack of such arrangements is more consistent with dividend treatment. . In the instant case, each of the notes which petitioner executed became due and payable one year from their respective dates. The fact that petitioner stated at trial that he "knew" the liquidation had to be effected before the first note came due shows that he regarded these time constraints seriously. Thus, there was a fixed time of repayment. Petitioner565 testified at trial, and we have found, that he did not plan the mechanics of repayment in any detail. He did, however, have a broad and somewhat hazy "working model" of debt retirement. He knew that he would be able to liquidate excess inventory upon consolidating C-K and State, had a big equity interest in State, and that these assets would somehow furnish him the wherewithal to repay. He also considered it possible that the loan might be renewed upon payment of interest. It would not be uncommon for a bank to renew a $ 250,000 loan. The possibility of renewal is thus not inconsistent with the existence of a loan. We conclude that there was a fixed time for, and some plan--not well defined--of, effecting repayment.(9) Correspondence between Distributions and Stock Interests.--In a multi-shareholder context, the correspondence between proportional amounts of so-called "loans" and the stock ownership interests of the "borrowers" is a strong indication of dividends. . Respondent argues that because all "loans" 566 were made to petitioner, who was also the sole shareholder, this correspondence exists here. However, it should be obvious that this factor is meaningless in the sole-shareholder situation--any corporate distribution, whether loan, dividend, or redemption, will always be made in proportion to the shareholder's interest. Hence, this factor does not apply to our analysis. (10) Existence of Earnings and Profits at the Time of Disbursements.Where the corporation has little or no earnings and profits at the time of the shareholder's withdrawals, it is not likely that he or she is using the corporation's loan account to disguise dividends. Plentiful earnings and profits at the time of withdrawals of course point the other way. ; .In our case, C-K's earnings and profits at the time the disbursements were made were $ 257,537.34, which was somewhat less than the total amount of disbursements. As there were substantial earnings and profits in comparison to the disbursements567 made, this factor weighs against petitioner. (11) Accrual and Payment of Interest.--These acts are consistent with a loan, whereas their absence may be indicative of dividend distributions. ; . 4 In the instant case, interest was accrued on C-K's books at year-end. Respondent points out that the accrual was made at a 6 percent rate whereas the notes bore interest at 10 percent. This discrepancy was adequately explained at trial, however, as merely a failure to communicate the proper data to the independent accountant who prepared C-K's financial statements. See our Findings, supra at page 11. (12) Payment of Dividends.--A history of failure to pay dividends in the face of earnings and profits available for that purpose tends to show that "loans" are camouflaged dividends. 5 The record shows that C-K did pay dividends during its fiscal years ending July 31, 1974 and 1975 in568 the amounts of $ 9,436.95 and $ 6,291.30, respectively. However, it appears that none of these were paid to petitioner. See supra at 12. Further, it is not clear whether or not the cash position and needs of C-K permitted any greater dividend payments. This factor accordingly is neutral in its import. (13) Shareholder-Borrower's Receipt of Salaries.--Where a sole shareholder receives no salary from a corporation it is possible that other disbursements, represented as "loans," may in reality constitute salary substitutes. Receipt of salaries denominated as such, on the other hand, supports the characterization of other disbursements as loans. . During his 1975 taxable year, petitioner received a $ 13,500 salary from C-K. This factor accordingly favors petitioner. As stated previously, these factors are not exhaustive. One circumstance, not discussed above, of particular relevance to this case is the purchase agreements' requirement that during their term569 any dividends on the C-K stock be paid to and held by the escrow agent.If the disbursements were actually dividends, then, petitioner would have been in breach of the agreement. What is more, Rosewarren and the selling shareholders were fully aware of and participated in petitioner's mode of payment. It seems implausible that they would have stood idly by had they not intended that the disbursements were in fact loans and thus aided in the breach of a provision designed for their own protection. Based upon the foregoing analysis, we hold that the disbursements were in fact loans and not constructive dividends, and that the respondent erred in determining otherwise. Because of our holding, we need not consider petitioner's argument that petitioner's purchase of C-K's stock was in substance a redemption of the selling shareholders' stock. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes*. The parties stipulated to this sum; however, the figures actually total $ 262,343.28.↩1. This amount was not disbursed to petitioner by check but was accrued on C-K's books as interest due from petitioner on the previous disbursements as of July 31, 1975. The disbursements and accrual were all debited on C-K's books to an account entitled "Accounts Receivable--Stockholder." Thus, the $ 269,188.93 sum, to which the parties stipulated, represents the balance of this account at July 31, 1975, rather than the actual sum of cash disbursements. We note, however, that the figures actually total $ 269,118.93, which was also the amount reflected on C-K's Federal income tax return, see below.↩1. .↩2. According to , cert. denied , gross income is the relevant figure for comparison, not, as respondent would invite us to believe, taxable↩ income.3. Respondent concedes as much but claims that repayment in this mode would have required State and C-K to pay dividends to petitioner, and that petitioner never mentioned this possibility. True, but neither did he rule it out.↩4. .↩5. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620761/	HAROLD B. & JEAN C. DAHL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDahl v. CommissionerDocket No. 5121-73.United States Tax CourtT.C. Memo 1974-190; 1974 Tax Ct. Memo LEXIS 130; 33 T.C.M. (CCH) 813; T.C.M. (RIA) 74190; July 25, 1974, Filed. Harold B. Dahl, pro se. Thomas N. Tomashek, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent has determined a $699.17 deficiency in petitioner's income tax for the calendar year 1970. The sole issue relates to the applicability of section 483 1 to payments131 received by petitioner in 1970. FINDINGS OF FACT Harold B. Dahl and Jean C. Dahl are husband and wife who resided in Enumclaw, Washington, during the taxable year in issue. In 1955 petitioners acquired a parcel of real estate (approximately 20 acres) located in Washington. Their basis in this property was $2,766.66. On or about January 10, 1968, petitioners contracted to sell this land to Wood Development Co. (hereinafter Wood) for $65,000. Wood agreed to subdivide the land approximately 65 residential lots and construct houses thereon. Petitioners were to be paid $1,000 on the closing of the sale of each of the first 65 lots or eight months after the start of construction, whichever occurred first. Wood agreed to commence construction on 15 lots by April 30 of 1968, 1969, 1970, and 1971. It further agreed to commence construction on the remaining lots by April 30, 1972. Because Bill Wood, president of Wood, was a close friend of petitioners and because they were satisfied with their profit on the sale, petitioners provided that the purchase132 was to be completely interest-free. As security, petitioners retained a mortgage on the land. For tax purposes, petitioners elected to report the capital gain realized on the sale on the installment method. Applying a 95.7-percent "profit rate" to their receipt of $6,477.43 in 1968, petitioners reported taxable gain of $6,198.90 on their 1968 tax return. On their 1970 return, they applied the same rate to the $45,000 received in that year and reported long-term capital gain of $43,065. On the ground that section 483 applied to the payments received by petitioners in 1970, respondent determined that $4,895.25 of the payments received in 1970 represented imputed interest income, not long-term capital gain. OPINION Section 483(a) provides: Amount Constituting Interest. - For purposes of this title, in the case of any contract for the sale or exchange of property there shall be treated as interest that part of a payment to which this section applies which bears the same ratio to the amount of such payment as the total unstated interest under such contract bears to the total of the payments to which this section applies which are due under such contract. Section 483(b) provides133 the method for computing "total unstated interest" and specifies that - the present value of a payment shall be determined, as of the date of the sale or exchange, by discounting such payment at the rate, and in the manner, provided * * by the Secretary or his delegate. Those regulations appear as sections 1.483-1 and 1.483-2, Income Tax Regs. There is no question but that the amount of imputed interest income set forth in respondent's deficiency notice has been calculated in accordance with the statute and the regulations. 2Petitioners' primary attack is on the constitutionality of section 483. One prong of their attack is the due process clause of the Fifth Amendment, but that claim has been categorically rejected, even where the retroactive application of section 483 was involved. David O. Rose, 55 T.C. 28">55 T.C. 28, 30 (1970); Raymond Robinson, 54 T.C. 772">54 T.C. 772, 776 (1970), affirmed per curiam, 439 F.2d 767">439 F.2d 767 (C.A. 8, 134 1971); Shanahan v. United States, 315 F. Supp. 3">315 F. Supp. 3, 6 (D. Colo. 1970), affd. 447 F.2d 1082">447 F.2d 1082 (C.A. 10, 1971). Petitioners also seem to suggest that the enactment of section 483 violates the prohibition against the impairment of the obligation of contracts contained in the United States Constitution, article I, section 10, clause 1. Aside from the fact that this constitutional provision on its face applies only to the states (see Century Arms, Inc. v. Kennedy, 323 F. Supp. 1002">323 F. Supp. 1002, 1014 (D. Vt. 1971), affirmed per curiam, 449 F.2d 1306">449 F.2d 1306 (C.A. 2, 1971)), the fact of the matter is that the application of section 483 leaves the contractual arrangement between petitioners and Wood totally unimpaired. Compare Continental Bank v. Rock Island Ry., 294 U.S. 648">294 U.S. 648, 680 (1935). What petitioners are seeking is the grant of a vested right to report their entire profit at capital gains rates rather than at rates applicable to ordinary income. This is nothing more than a plea for a guarantee of rates of taxation, which is obviously without merit. Petitioners also argue that respondent is not authorized to examine the 1968 sale, under135 the guise of auditing their 1970 return, because 1968 was previously audited and closed by respondent. In support of their argument, petitioners cite section 7605(b). This argument misses the mark, however, for, even if we assume, without deciding, that respondent is now barred from redetermining petitioner's tax liability for 1968, that is of no consequence. The instant case involves an audit and determination of deficiency for the taxable year 1970. Respondent's reference to 1968 was merely to ascertain facts and figures relevant to the treatment of their 1970 income and was clearly proper. Norda Essential Oil & Chemical Co. v. United States, 230 F.2d 764">230 F.2d 764 (C.A. 2, 1956). Nor can we find any basis in the facts presently before us to estop respondent from determining the existence of imputed interest for 1970 or later years. David O. Rose, supra, 55 T.C. at 32. Finally, petitioners' argument that they had no tax avoidance motive is of no avail. Their desire to do a favor for their friend by not charging him interest cannot justify a department from the clear statutory mandate. Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954 as amended and in effect for the taxable year in issue. ↩2. The seemingly large amount of imputed interest in relation to the amount paid in 1970 stems from the fact that the calculation covers a period of approximately two years from the date of the sale to the date of payment. ↩	01-04-2023	11-21-2020
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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). Circuit Court, 3rd Circuit 1 2 3 … 7 Next » Site Search eCourt Kokua* For access to traffic cases; District Court, Circuit Court, and Family Court criminal; District Court and Circuit Court civil; Land Court and Tax Appeal Court; and appellate case information Hoʻohiki For access to Family Court civil case information Jobs Search for jobs at the Judiciary Efiling Case information Placeholder Language Services Language Access Services Home 廣東話 / 广东话 \| Cantonese Kapasen Chuuk \| Chuukese Ilokano \| Ilokano 日本語 \| Japanese 한국어 \| Korean Kosrae \| Kosraean 國語 / 普通话 \| Mandarin Kajin Majôl \| Marshallese Pohnpei \| Pohnpeian Gagana Samoa \| Samoan Español \| Spanish Tagalog \| Tagalog Lea faka-Tonga \| Tongan Tiếng Việt \| Vietnamese for Public Oral Arguments Schedule Contact Information Pay Fines Court Forms Scam Alerts Bar Examination Results Divorce Law Seminar Press Releases Volunteer Volunteer Court Navigators at Maui District Court Child Custody Evaluators Registry Judicial Performance Reviews Judicial Financial Disclosure Statements Feedback Form for Litigants Court Forms Pay Fines Search Court Records Law Library Internet Legal Resources Attorney Information Bilingual Attorneys Child Custody Evaluators Registry Feedback Form for Attorneys General Information Efiling Civil JEFS Info Bar Application Billingual Attorneys Oral Arguments Jury Instructions Membership Status Continuing Legal Education Hawaii Lawyers’ Fund Hawaii State Bar Association Office of Disciplinary Counsel Child Custody Evaluators Registry Feedback Form for Jurors Jury Service Information Court Information Contact Information Feedback Form Language Access Language Assistance Policy Language Access Services List of Interpreters Request a Court Interpreter Sign Language Interpreters Use a Court Interpreter Become a Court Interpreter Contact Information for Media Media Guidelines Press Releases Search Court Records Contact Information Opinions and Orders Judicial Performance Reviews Judicial Financial Disclosure Statements ADA Assistance ADA Accommodations Request an Accommodation Sign Language Interpreters Service Animals Contact Information Access to Justice Access to Justice Commission Access to Justice Initiatives Access to Justice Rooms Hawaii Self-Help Interactive Forms Hawaii Legal Services Portal Hawaii Online Pro Bono Judiciary’s 20/20 Vision Small Claims Court Q&A Volunteer Court Navigators at Maui District Court General Information General Information Contact Information Pay Traffic Fines Online Scam Alerts Job Opportunities Jury Service Judiciary Overview Court Administration Business with Judiciary Sealing Court Records News & Reports Press Releases Legislative Update Reports In the Media Oral Arguments Media Guidelines Speeches Judicial Financial Disclosure Statements Self-Help Court Forms Pay Traffic Fines Online Traffic Cases Request Court Records – Oahu Collection Agency (MSB) Self-Help Centers Victim Services Protective Orders Mortgage Foreclosure Sealing Court Records Small Claims Regular Claims Divorce Landlord-Tenant Claims Tips on Going to Court Services ADA Court Interpreting Language Assistance Law Library Mediation/ADR Children’s Justice Centers Victim Services Volunteer Court Navigators at Maui District Court Volunteer Settlement Master Process Vehicle Tracker Courts Supreme Court Intermediate Court of Appeals Circuit Court District Court Family Court Land and Tax Appeal Courts Administrative Adjudication Commission on Judicial Conduct Judicial Performance Reviews Judicial Selection Commission Judicial Financial Disclosure Statements Legal References Search Court Records Proposed Rules Changes Supreme Court Various Orders Opinions Court Rules Internet Resources Community Outreach Courts in the Community Civics Education Volunteer Opportunities Judiciary History Center Divorce Law Seminar Court Tours Special Projects & Events Appellate Pro Bono Program Courts in the Community Criminal Pretrial Task Force DWI Court Environmental Court Girls Court Hawaii Courts Mobile App HOPE Probation Kona Judiciary Complex Project Mental Health Court STAE (Steps to Avoid Eviction Veterans Treatment Court Contact Us Administrative Offices of the Courts Courts of Appeal Oahu – First Circuit Maui – Second Circuit Hawaii – Third Circuit Kauai – Fifth Circuit District Court Addresses We Value Your Opinion Survey Follow us on Twitter Follow us on Facebook Follow us on Youtube © 2020 Hawaii State Judiciary. 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https://www.courtlistener.com/api/rest/v3/opinions/4537510/	Judiciary \| Opinions Skip to Content Follow us on Twitter Follow us on Facebook Follow us on Youtube General Information General Information Contact Information Pay Traffic Fines Online Scam Alerts Job Opportunities Hawaii Courts Mobile App Jury Service Judiciary Overview Court Administration Business with Judiciary Sealing Court Records News & Reports News & Reports Press Releases Legislative Update Reports In the Media Oral Arguments Media Guidelines Speeches Judicial Financial Disclosure Statements Self-Help Self-Help Court Forms Pay Traffic Fines Online Collections Agency (MSB) Victim Services Request Court Records Traffic Cases Self-Help Centers Protective Orders Mortgage Foreclosure Sealing Court Records Small Claims Regular Claims Divorce Landlord-Tenant Claims Tips on Going to Court Services Services ADA Court Interpreting Language Assistance Law Library Mediation/ADR Children’s Justice Centers Victim Services Volunteer Court Navigators at Maui District Court Volunteer Settlement Master Process Vehicle Tracker Courts Courts Supreme Court Intermediate Court of Appeals Circuit Court District Court Family Court Land and Tax Appeal Courts Administrative Adjudication Commission on Judicial Conduct Judicial Performance Reviews Judicial Selection Commission Judicial Financial Disclosure Statements Legal References Legal References Search Court Records Proposed Rule Changes Supreme Court Various Orders Opinions and Orders Court Rules Internet Resources Community Outreach Community Outreach Courts in the Community Civic Education Volunteer Opportunities Judiciary History Center Divorce Law Seminar Court Tours Special Projects & Events Special Projects & Events Appellate Pro Bono Program Courts in the Community Criminal Pretrial Task Force DWI Court Environmental Court Girls Court Hawaii Courts Mobile App HOPE Probation Kona Judiciary Complex Project Mental Health Court STAE (Steps to Avoid Eviction) Veterans Treatment Court Home For Public Oral Arguments Schedule Contact Information Pay Traffic Fines Online Court Forms Scam Alerts Bar Examination Results Divorce Law Seminar Press Releases Volunteer Volunteer Court Navigators at Maui District Court Child Custody Evaluators Registry Judicial Performance Reviews Judicial Financial Disclosure Statements Feedback Form For Litigants Court Forms Pay Fines Search Court Records Law Library Internet Legal Resources Attorney Information Billingual Attorneys Child Custody Evaluators Registry Feedback Form For Attorneys General Information Civil JEFS Info Page Efiling Bar Application Billingual Attorneys Oral Arguments Jury Instructions Membership Status Continuing Legal Education Hawaii Lawyers’ Fund Hawaii State Bar Association Office of Disciplinary Counsel Child Custody Evaluators Registry Feedback Form For Jurors Jury Service Information Court Information Contact Information Feedback Form For Media Media Guidelines Press Releases Search Court Records Contact Information Opinions and Orders Judicial Performance Reviews Judicial Financial Disclosure Statements Facilities Use Application Language Access Language Assistance Policy Language Access Services List of Interpreters Request a Court Interpreter Sign Language Interpreters Use a Court Interpreter Become a Court Interpreter Contact Information ADA ADA Accommodations Request an Accommodation Sign Language Interpreters Service Animals Contact Information Access to Justice Access to Justice Commission Access to Justice Initiatives Appellate Pro Bono Program Access to Justice Rooms Hawaii Self-Help Interactive Forms Hawaii Legal Services Portal Hawaii Online Pro Bono Judiciary’s 20/20 Vision Small Claims Court Q&A Volunteer Court Navigators at Maui District Court Contact Us Home » Hawaii Appellate Court Opinions and Orders » Opinions COVID-19 & the COURTS: FOR UPDATES, CLICK HERE Opinions For 2009 and older, Case Number link will display content as an html page. 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). Circuit Court, 3rd Circuit 1 2 3 … 7 Next » Site Search eCourt Kokua* For access to traffic cases; District Court, Circuit Court, and Family Court criminal; District Court and Circuit Court civil; Land Court and Tax Appeal Court; and appellate case information Hoʻohiki For access to Family Court civil case information Jobs Search for jobs at the Judiciary Efiling Case information Placeholder Language Services Language Access Services Home 廣東話 / 广东话 \| Cantonese Kapasen Chuuk \| Chuukese Ilokano \| Ilokano 日本語 \| Japanese 한국어 \| Korean Kosrae \| Kosraean 國語 / 普通话 \| Mandarin Kajin Majôl \| Marshallese Pohnpei \| Pohnpeian Gagana Samoa \| Samoan Español \| Spanish Tagalog \| Tagalog Lea faka-Tonga \| Tongan Tiếng Việt \| Vietnamese for Public Oral Arguments Schedule Contact Information Pay Fines Court Forms Scam Alerts Bar Examination Results Divorce Law Seminar Press Releases Volunteer Volunteer Court Navigators at Maui District Court Child Custody Evaluators Registry Judicial Performance Reviews Judicial Financial Disclosure Statements Feedback Form for Litigants Court Forms Pay Fines Search Court Records Law Library Internet Legal Resources Attorney Information Bilingual Attorneys Child Custody Evaluators Registry Feedback Form for Attorneys General Information Efiling Civil JEFS Info Bar Application Billingual Attorneys Oral Arguments Jury Instructions Membership Status Continuing Legal Education Hawaii Lawyers’ Fund Hawaii State Bar Association Office of Disciplinary Counsel Child Custody Evaluators Registry Feedback Form for Jurors Jury Service Information Court Information Contact Information Feedback Form Language Access Language Assistance Policy Language Access Services List of Interpreters Request a Court Interpreter Sign Language Interpreters Use a Court Interpreter Become a Court Interpreter Contact Information for Media Media Guidelines Press Releases Search Court Records Contact Information Opinions and Orders Judicial Performance Reviews Judicial Financial Disclosure Statements ADA Assistance ADA Accommodations Request an Accommodation Sign Language Interpreters Service Animals Contact Information Access to Justice Access to Justice Commission Access to Justice Initiatives Access to Justice Rooms Hawaii Self-Help Interactive Forms Hawaii Legal Services Portal Hawaii Online Pro Bono Judiciary’s 20/20 Vision Small Claims Court Q&A Volunteer Court Navigators at Maui District Court General Information General Information Contact Information Pay Traffic Fines Online Scam Alerts Job Opportunities Jury Service Judiciary Overview Court Administration Business with Judiciary Sealing Court Records News & Reports Press Releases Legislative Update Reports In the Media Oral Arguments Media Guidelines Speeches Judicial Financial Disclosure Statements Self-Help Court Forms Pay Traffic Fines Online Traffic Cases Request Court Records – Oahu Collection Agency (MSB) Self-Help Centers Victim Services Protective Orders Mortgage Foreclosure Sealing Court Records Small Claims Regular Claims Divorce Landlord-Tenant Claims Tips on Going to Court Services ADA Court Interpreting Language Assistance Law Library Mediation/ADR Children’s Justice Centers Victim Services Volunteer Court Navigators at Maui District Court Volunteer Settlement Master Process Vehicle Tracker Courts Supreme Court Intermediate Court of Appeals Circuit Court District Court Family Court Land and Tax Appeal Courts Administrative Adjudication Commission on Judicial Conduct Judicial Performance Reviews Judicial Selection Commission Judicial Financial Disclosure Statements Legal References Search Court Records Proposed Rules Changes Supreme Court Various Orders Opinions Court Rules Internet Resources Community Outreach Courts in the Community Civics Education Volunteer Opportunities Judiciary History Center Divorce Law Seminar Court Tours Special Projects & Events Appellate Pro Bono Program Courts in the Community Criminal Pretrial Task Force DWI Court Environmental Court Girls Court Hawaii Courts Mobile App HOPE Probation Kona Judiciary Complex Project Mental Health Court STAE (Steps to Avoid Eviction Veterans Treatment Court Contact Us Administrative Offices of the Courts Courts of Appeal Oahu – First Circuit Maui – Second Circuit Hawaii – Third Circuit Kauai – Fifth Circuit District Court Addresses We Value Your Opinion Survey Follow us on Twitter Follow us on Facebook Follow us on Youtube © 2020 Hawaii State Judiciary. All rights reserved. Privacy Policy \| Terms of Use \| Accessibility Information *The Hawaii Judiciary is not affiliated with Sustain Technologies, Inc. or with eCourt, which is a registered trademark of Sustain Technologies, Inc	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620764/	Estate of W. D. Murphy, Deceased, Vera Murphy, Surviving Spouse, and Vera Murphy v. Commissioner.Estate of Murphy v. CommissionerDocket No. 90976.United States Tax CourtT.C. Memo 1962-143; 1962 Tax Ct. Memo LEXIS 166; 21 T.C.M. (CCH) 753; T.C.M. (RIA) 62143; June 13, 1962166 William T. Holloran, Esq., for the respondent. FAYMemorandum Opinion FAY, Judge: The respondent determined deficiencies in income tax and additions to tax under section 6653(b) of the Internal Revenue Code of 1954 against petitioners as follows: Additions to TaxYearDeficiencySection 6653(b)1956$12,678.08$ 6,339.04195734,573.2217,286.61195810,176.465,088.23The petitioners are the estate of W. D. Murphy, deceased, Vera Murphy, surviving spouse, and Vera Murphy. The income tax returns for the years in question were filed with the district director of internal revenue at Kansas City, Missouri. This case was called from the trial calendar at Kansas City, Missouri, on April 16, 1962, pursuant to notice. There was no appearance by or on behalf of petitioners and no evidence or argument was presented on their behalf. On June 2, 1961, respondent filed a motion under Rule 18 of this Court for an order that the undenied affirmative allegations of fact in his answer alleging fraud be deemed admitted. Upon due notice of hearing, this Court on July 12, 1961, entered an order granting respondent's said167 motion under Rule 18. The facts taken as admitted under this Court's order of July 12, 1961, establish that during the taxable year 1956 W. D. Murphy and Vera Murphy (hereinafter referred to as the petitioners) understated sales in the amount of $32,820.82 and claimed unallowable deductions for loading costs and loss due to breakage in the respective amounts of $600 and $416.50, resulting in an understatement of taxable income (after allowance for additional sales tax and standard deduction) in the amount of $32,938.06; that during the taxable year 1957 the petitioners understated sales and net wins from gambling operations in the respective amounts of $37,763.99 and $26,824.29 and claimed unallowable deductions for loss due to robbery and legal fees in the respective amounts of $1,651 and $300, resulting in an understatement of taxable income (after allowance for additional sales tax and supplies expense) in the amount of $62,575.18; and that during the taxable year 1958 the petitioners understated sales and net wins from gambling operations in the respective amounts of $7,231.68 and $18,664.15 and claimed an unallowable deduction for automobile expense in the amount of $1,800, 168 resulting in an understatement of taxable income (after allowance for additional sales tax, telephone expense and supplies expense) in the amount of $23,319.57. The understating of sales for the years 1956, 1957 and 1958 and the understating of net wins from gambling operations for the years 1957 and 1958 are admitted under the provisions of Rule 18 of this Court to have been done knowingly, willfully and fraudulently with intent to evade tax. As to the deficiencies in income taxes, upon motion duly filed by respondent, this case must be dismissed for want of prosecution, and decision will be entered for respondent for the years 1956, 1957 and 1958 in the respective amounts of $12,678.08, $34,573.22 and $10,176.46. As to the additions to tax for fraud under section 6653(b), the facts taken as admitted present undisputed and clear and convincing evidence of fraud. Accordingly, we find that respondent has met his burden of proof of fraud, and decision will be entered for respondent for additions to tax under section 6653(b) for the years 1956, 1957 and 1958 in the respective amounts of $6,339.04, $17,286.61 and $5,088.23. Decision will be entered in accordance with the foregoing. 169	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620768/	New Jersey Bank and Trust Company v. Commissioner.New Jersey Bank & Trust Co. v. CommissionerDocket No. 4741-66.United States Tax CourtT.C. Memo 1968-38; 1968 Tax Ct. Memo LEXIS 259; 27 T.C.M. 175; T.C.M. (RIA) 68038; February 29, 1968. Filed 1968 Tax Ct. Memo LEXIS 259">259 John W. Hand, 129 Market St., Paterson, N. J., and John J. White, for the petitioner. Leo A. Burgoyne, for the respondent. 176 TANNENWALDMemorandum Findings of Fact and Opinion TANNENWALD, Judge: Respondent determined a deficiency in petitioner's income tax for 1961 in the amount of $12,173.52. The only issue for decision is whether petitioner may claim a loss on the demolition of a building located on a portion of a property acquired by it for the purpose of erecting a branch office. Findings of Fact Some of the facts are stipulated and are found accordingly. Petitioner is a corporation with its principal place of business in Clifton, New Jersey, at the time of filing its petition herein. It filed its Federal income tax return for 1961 with the district director of internal revenue, Newark, New Jersey. Some time in 1959, petitioner's board of directors decided to locate a branch office in the town of Delawanna, New Jersey. The board appointed a special committee to find a suitable site. The site selected by the committee was a lot with approximate dimensions of 185 feet by 205 feet. The only structure on the lqt was a 2 1/2-story frame dwelling which, 1968 Tax Ct. Memo LEXIS 259">260 because of its location, would have to be moved or removed to make room for the branch office and parking lot. The special committee recommended the purchase of the site for $46,000. Petitioner's executive committee felt that the price was excessive but was advised by a real estate operator that the house and a portion of the land, to which the house could be moved, might be sold. The executive committee was aware that a zoning variance would have to be obtained and that a buyer had to be located. On January 19, 1960, petitioner's board of directors had authorized an application for permission to establish a branch office at the proposed site. On June 23, 1960, petitioner acquired the proposed site for a total cost of $46,421.63. On October 11, 1960, the board accepted an offer to acquire a 40-foot by 205-foot section of petitioner's lot, together with the house, which was to be moved to a position partly on the 40-foot section and partly on a 10-foot strip of the adjoining land already owned by the prospective buyer. The contract, entered into on November 28, 1960, stated a price of $15,000 and was contingent on obtaining the approval of the zoning board to a subdivision of the1968 Tax Ct. Memo LEXIS 259">261 petitioner's property and the adjoining property in order to accommodate the moved house. On February 2, 1961, the zoning board denied approval of the plan to subdivide. Petitioner made no further effort to sell the house or any part of its lot, and, on or about April 1, 1961, petitioner demolished the house at a cost of $1,380. Based on the demolition cost and what petitioner determined to be the basis of the house, it claimed a demolition loss on its return of $24,885.82. Respondent determined that no loss was allowable and that the entire acquisition price and the cost of demolition constituted petitioner's basis in the land. Petitioner and respondent now agree that if petitioner sustains its burden of proving a demolition loss, it shall be in the amount of $13,064.19. After the demolition, petitioner erected a branch office on the site. The 40-foot strip is not now used by the bank, except for decorative purposes. Opinion Petitioner claims that it acquired the site with the intention of using a part for its branch office, moving the house to the 40-foot strip on the north side, and selling the house and the strip. Several months after the acquisition, petitioner in fact1968 Tax Ct. Memo LEXIS 259">262 found a prospective buyer in an adjoining landowner but was unable to get the necessary approval of the zoning board. Respondent, on the other hand, contends that petitioner's sole purpose was to acquire the site for a branch office and that the manner of dealing with the house was incidental and inconsequential. We agree with respondent. The record is clear that petitioner acquired the site in question, knowing that the house would have to be moved or removed to make room for the proposed branch office. One of petitioner's officers testified that the executive committee would not have acquired the site unless the house could be moved to the 40-foot strip and sold. However, no minutes reflect this attitude. Against this testimony are the following circumstances: (a) Petitioner knew, at the time it proposed to acquire the site, that special permission for subdividing would have to be obtained from the zoning board before the house could be moved and sold. Nevertheless it made no attempt to condition its purchase of the site on obtaining such permission or even to check in advance on the 177 likelihood that such permission would be granted. (b) There is no evidence that petitioner1968 Tax Ct. Memo LEXIS 259">263 had other sites under consideration as a hedge against possible failure to sell the house. (c) Except for a general statement that the house was habitable at the time of its acquisition by the bank, there is nothing in the record to indicate the age or condition of the house. (d) There is no evidence that the petitioner made any effort to sell the house and 40-foot strip prior to receiving the ill-fated offer in October 1960. Even after that proposed sale fell through, petitioner made no effort to find another purchaser for the house without any land. 1We think that at best petitioner's state of mind at the time of the site acquisition as to the possible sale of the house and accompanying strip was the same as that of a person who orders raw oysters in a restaurant with respect to the possibility of finding a pearl. Petitoner has failed to prove that it is not subject to the well-settled rule that, where property is purchased with the intent to remove the buildings thereon and either erect a new1968 Tax Ct. Memo LEXIS 259">264 building or use the property without improvements, the removal of the buildings does not give rise to a deductible loss. ; cf. (C.A. 6, 1967); ; , affirmed on other issues (C.A. 9, 1965). Decision will be entered for the respondent. Footnotes1. The real estate operator who allegedly advised petitioner at the time the site acquisition was authorized was available to testify but petitioner did not see fit to call him.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620770/	HAROLD L. LEWIS and BERTEL LEWIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLewis v. CommissionerDocket No. 4979-77.United States Tax CourtT.C. Memo 1980-334; 1980 Tax Ct. Memo LEXIS 255; 40 T.C.M. 1049; T.C.M. (RIA) 80334; August 25, 1980, Filed Melvin A. Coffee and Richard B. Robinson, for the petitioners. Jeff P. Ehrlich, for the respondent. FEATHERSTONMEMORANDUM FINDING OF FACT AND OPINION FEATHERSTON, Judge: Respondent1980 Tax Ct. Memo LEXIS 255">257 determined deficiencies in petitioners' Federal income taxes for 1969, 1/ 1972, and 1973 in the amounts of $3,175.37, $17,081.04, and $16,171,39, respectively. Due to concessions by petitioners, the issues remaining for decision are: 1. Whether petitioners are entitled to deduct as ordinary losses under section 1652 losses incurred in 1973 from trading in cattle futures contracts. 32. Whether petitioners are entitled to deduct as ordinary losses under section 165 losses related to certain limited partnership agreements. 3. Whether petitioners are entitled to investment credits under sections 38, 46, and 48 for qualifying property of $16,883 and $1,953.09 in 1972 and 1973, respectively. 1980 Tax Ct. Memo LEXIS 255">258 FINDINGS OF FACT At the time their petition was filed petitioners Harold L. Lewis and Bertel Lewis, husband and wife, were legal residents of Sioux City, Iowa. They filed their joint Federal income tax returns for 1969, 1972, and 1973 with the Internal Revenue Service Center, Kansas City, Missouri. 1. Cattle Futures Trading IssueSince 1951, petitioner Harold L. Lewis (petitioner) has been employed by Max Rosenstock & Co. (Rosenstock), 4/ which operates farmland, feedlots, feed machinery, and grain elevators and holds cattle inventories for resale to cattlefeeders. In 1973, petitioner worked in a management capacity in which he was involved in decisions on purchases and sales of cattle. During 1973, petitioner was a 3/7 partner in the A & L Ranch Partnership (A & L), which owned and operated feedlots, fed cattle on its own account, and sold cattle to packers. A & L also participated in ranching operations and in the business of commodity future sales. The1980 Tax Ct. Memo LEXIS 255">259 partnership placed cattle on feed for its own account. In 1973, it sold fat cattle 5/ on the following dates and in the following numbers: Date of SaleNo. of Cattle 1/April 2523July 7542July 1387July 1690July 23314A & L purchased no feeder 6/ cattle in 1973. Petitioner has also purchased, fed, and sold cattle individually since 1956. On January 1, 1973, petitioner had on hand 4,482 cattle. During 1973, petitioner sold fat cattle on the following dates and in the following numbers: Date of SaleNo. of CattleJan. 222Feb. 151271162 192172 125588Apr. 10512242 2042513726295262 1391,287May 22 708453523June 221522615028195497Aug. 25432061441321302305191,494Sept. 444,3951980 Tax Ct. Memo LEXIS 255">260 In 1973, petitioner purchased cattle on the following dates and in the following numbers: Date of PurchaseNo. of CattleMay 11 76July 162 820Aug. 27183Oct. 3782Nov. 272 207Nov. 271,9003,968Petitioner generally held feeder cattle for a period of more than 6 months. Due to factors such as the petroleum embargo, consumer beef boycotts, meat price freezes, volatile grain prices, and the Food and Drug Administration ban of DES (a feed additive hormone), the cattle market was very uncertain in 1973. In general, cattle prices rose during the first three quarters of the year and fell in the last quarter.The volume of trading in the feeder cattle futures market was very small. In 1973, petitioner opened and closed approximately 1,228 cattle futures contracts, all of which provided1980 Tax Ct. Memo LEXIS 255">261 for delivery either in February, April, June, August, October, or December of that year or in February, April, June, or August, 1974. Only one of these transactions was a short sale. Approximately 62 percent of these transactions were completed within 30 days; approximately 8 percent or 101 were day trades, or trades opened and closed the same day. With few exceptions, transactions closed before late August 1973 produced profits and those closed later produced losses.Petitioner closed out all futures contracts by the end of 1973. 2. Margin Account Losses IssueUntil its liquidation in 1972, Business Services Unlimited, Inc. (BSU), an Iowa corporation, operated a commodity futures sales office in Denver, Colorado, under the name of Weinberg Brothers and Company. After BSU's liquidation, A & L and, at times, John J. Surette (Surette) operated this office. In 1973, BSU was a Colorado partnership. In 1973, Commodity Traders Ltd. (CTL) was a joint venture qualified to do business in Missouri. Weinberg Brothers and Company agreed to pay petitioner a portion of commission income for commodities futures trades he solicited. In order to obtain additional customers for his1980 Tax Ct. Memo LEXIS 255">262 trade or business of selling commodities futures contracts, he decided to form limited partnerships to trade in commodities futures. By a limited partnership agreement dated March 1, 1973, BSU as general partner, Surette as special general partner, and specified limited partners formed a partnership called BSU No. 102, account No. 40104 (BSU No. 102). By an agreement dated July 6, 1973, BSU as general partner, petitioner as special general partner, and specified limited partners formed a limited partnership called BSU No. 104, account No. 40603 (BSU No. 104). By agreements dated July 30, 1973, and August 11, 1973, CTL as general partner, petitioner as special general partner, and specified limited partners formed partnerships named Commodity Trading Partnerships No. 101 and No. 102 (CTP Nos. 101 and 102), respectively. Petitioner signed each of the agreements on behalf of either BSU or CTL as an authorized officer. He also formed partnerships named BSU Nos. 101, 103, and 105. As stated in the agreements, the purpose of each partnership was to deal in commodities futures and related securities. Each agreement provides for capital contributions solely from the limited partners.1980 Tax Ct. Memo LEXIS 255">263 Except for BSU No. 102, each agreement allocates 20 percent of partnership profits to the general partner and 80 percent to the limited partners; BSU No. 102 provides that all net partnership profits be allocated to the limited partners. With respect to salaries, drawings, and interest on capital contributions, the agreements provide in part: The General Partner shall * * designate the trading agent of the partnerships, shall execute all transactions for the partnership, and shall be entitled to all normal commissions arising in the course of the business activities of the partnership. The agreements provide that the general partners bear no partnership losses except as follows: The General Partner and the Special General Partner hereby undertake to pay all margin account balances, as and when they become due, without reimbursement therefor from any of the Limited Partners, to the extent that there are insufficient undivided profits in the partnership to cover the margin calls or unpaid margin accounts. * * * Under each of the agreements, a limited partner was liable for no losses in excess of his contribution to capital. Petitioner guaranteed payment of the margin account1980 Tax Ct. Memo LEXIS 255">264 balances and all losses in excess of the initial investment made by each limited partner in order to attract investors in the limited partnerships. Petitioner wrote letters dated December 16, 1973, to certain limited partners of CTP Nos. 101 and 102 and letters dated December 17, 1973, to certain limited partners of BSU No. 105. Each letter contains the following sentence: This letter will fulfill my guarantee to you against any loss to you beyond the [dollar amount] original margins advanced by you on commodity transactions entered into in 1973 for our joint account at my suggestion, for which I advanced funds or made commitments on your behalf on the strength of my guarantee to you. 3. Investment CreditIn 1972, petitioner paid $16,883 for installation of a concrete driveway with manholes at the O Street gasoline filling station which he owned in Lincoln, Nebraska. Two-thirds of the concrete driveway covered the buried gasoline tanks and approaches, the pumps, and the islands. In 1973, petitioner paid $1,953.09 for labor, material, and use of equipment to remove a portion of the old driveway and install a new driveway between pumps at a gasoline filling station1980 Tax Ct. Memo LEXIS 255">265 which he owned on Cornhusker Highway, Lincoln, Nebraska. All of this driveway covered the gasoline tanks; the gasoline tanks contained submersible pumps, electrical conduits, and electrial connections. The pavement was removed and replaced in order to replace the gasoline tanks which had deteriorated through normal wear and tear. A manhole was constructed to service the gas tanks and equipment in them. Petitioner chose concrete rather than a less permanent substance, such as asphalt, to reduce the frequency of paving the driveway. He used concrete for the one-third of the O Street driveway which did not cover equipment in order to provide a uniform appearance. On a worksheet for their 1973 income tax return, petitioners listed the following amounts as losses: BSU 101$ 90,349.55BSU 102117,186.70BSU 103101,295.00BSU 104199,410.00$508,241.25BSU 105$166,155.00CTP 101124,597.50CTP 10285,657.00$376,409.50On Schedule D of their 1973 Federal income tax return petitioners listed as a short-term capital loss $814,938.81 for "Loss on Comodity Futures Contracts" and $440,226.06 for net loss from partnerships and fiduciaries. These1980 Tax Ct. Memo LEXIS 255">266 amounts were derived from the worksheet as follows: $334,370.25"commodity losses as shown by ledger"508,241.25($842,611.50)27,672.69"commission income received on above accounts"($814,938.81)($376,409.50)( 63,816.56)"loss thru A & L Ranch"($440,226.06)Petitioners reported $80,327.31 as commission income on their 1973 Federal income tax return. On their 1972 return, petitioners listed $45,519.53 as qualified new investment credit property with a life of 7 years or more. Of that amount, respondent determined that $16,883 was spent for pavement which constituted nonqualifying property. On their 1973 return, petitioners listed $9,388.66 as qualified new investment credit property with a life of 7 years or more. Respondent determined that $1,953.09 of that amount was attributable to pavement, which constituted nonqualifying property. OPINION 1. Cattle Futures Trading IssueIn 1973, petitioner engaged in the cattlefeeding business and traded in live cattle futures contracts. According to petitioner, he traded in live cattle futures in order to hedge against cost increases in feeder cattle, the principal raw material in his cattlefeeding1980 Tax Ct. Memo LEXIS 255">267 business. Relying on Corn Products Co. v. Commissioner,350 U.S. 46">350 U.S. 46 (1955), and its progeny, he argues that losses realized upon the disposition of the live cattle futures contracts are ordinary losses. If this Court finds that some of the contracts were not hedges, he contends in the alternative that at least that portion equivalent to the 3,892 feeder cattle actually purchased are properly treated as hedges. Respondent, on the other hand, argues that petitioner traded in cattle futures for investment purposes and that attendant losses are, therefore, capital losses. We agree with respondent. Under section 165(a) and (c), 7/ an individual may deduct losses incurred either in a trade or business or in a transaction entered into for profit. Subsection (f) limits the extent to which losses from sales or exchanges of capital assets are allowed."Capital asset" is defined in section 1221 as "property held by the taxpayer (whether or not connected with his trade or business)." Certain types of property are specifically excluded from capital asset status by that section. 1980 Tax Ct. Memo LEXIS 255">268 In 350 U.S. 46">Corn Products,supra, the Supreme Court held that corn futures purchased and sold by the taxpayer were not capital assets even though the futures were not covered by the exclusions set forth in the predecessor of section 1221. The taxpayer sold items made from corn primarily under contracts providing for sale at the lower of a fixed or date-of-delivery market price. When the price of spot corn increased, the taxpayer, who had limited storage facilities, purchased corn futures as a means of assuring future supplies less expensive1980 Tax Ct. Memo LEXIS 255">269 than constructing additional storage facilities. It took delivery of corn as necessary to its manufacturing operations and sold the remainder. Emphasizing that the taxpayer's sales policy rendered it vulnerable to corn price rises and that the futures purchases assured a cheap source of supply, the Supreme Court found the futures transactions closely geared to the company's manufacturing business and resultant gains taxable as ordinary income. The Court relied in part on lower court fact findings that the futures transactions were an integral part of the manufacturing business and testimony that these were initiated in order to protect against price rises in the raw material and to assure a partial supply of the raw material. The Corn Products doctrine has been applied, and ordinary losses allowed, where the taxpayer traded in commodities which were not materials used in its business if, due to price correlations, such trading could be used to protect against adverse price fluctuations in a material used in the business. Kurtin v. Commissioner,26 T.C. 958">26 T.C. 958 (1956)1980 Tax Ct. Memo LEXIS 255">270 (short sales of butter futures to protect against cheese price decline).Petitioner argues that he traded in fat cattle futures in order to protect against increases in the price of feeder cattle. Even assuming that fat cattle futures trades provide an appropriate means of protecting against price increases in feeder cattle 8/ petitioner traded about 1,228 fat cattle futures contracts. Depending on the method of equating one fat cattle futures contract to feeder cattle, 9 the contracts traded are equivalent to between approximately 45,000 and 76,000 feeder cattle. The volume of trading represented by either figure far exceeds not only the 4,482 cattle on hand at the beginning of the year or the 3,892 which he in fact purchased but even the 10,000 to 12,000 cattle petitioner testified he anticipated purchasing in 1973.Such a discrepancy is indicative of speculation. Sicanoff Vegetable Oil Corp. v. Commissioner,27 T.C. 1056">27 T.C. 1056, 27 T.C. 1056">1070 (1957), revd. on other grounds 251 F.2d 764">251 F.2d 764 (7th Cir. 1958). 101980 Tax Ct. Memo LEXIS 255">271 Moreover, there is no relation between the delivery dates in the contracts and the dates on which petitioner purchased feeder cattle. Contracts were purchased for February, April, June, August, October, and December, 1973, and February, April, June, and August, 1974, whereas no significant cattle purchases were made until midyear. Similarly, although the general holding period for feeder cattle was more than 6 months, that of the majority of contracts was less than 30 days. Such discrepancies have been cited by courts upholding capital asset treatment. Battelle v. Commissioner,47 B.T.A. 117">47 B.T.A. 117, 47 B.T.A. 117">127 (1942). Indeed, petitioner's pattern of trading suggests that he traded in the cattle futures market simply to make profits on the transactions themselves. His practice of almost invariably taking long positions was natural in a rising market, such as the fat cattle futures market was until late August 1973. By closing out these contracts after relatively brief holding periods, petitioner almost uniformly profited prior to the late summer price decline. Furthermore, while terming his cattle futures trades "hedges" or "protection" against increases in the price1980 Tax Ct. Memo LEXIS 255">272 of feeder cattle, petitioner in his testimony revealed that he defines those terms as making a profit on his cattle futures trades and using that gain in another operation, a purpose which does not entitle the taxpayer to ordinary loss treatment. United States v. Rogers,286 F.2d 277">286 F.2d 277, 286 F.2d 277">282 (6th Cir. 1961). Thus, he testified: Q. And therefore, you use your long position in the live cattle future market to do what with relation to the replacement feeder cattle? A. Well, you used them to protect yourself in that you have the profit from the trade of the live cattle futures. You use that money to put into the actual live cattle that you have to buy to go into your feed lots.From subsequent references to certain contracts bought and sold the same day, it again appears that petitioner equates "protection" with "profits." He testified: "They made profits. They made protection." Relying on the testimony of Forrest E. Walters (Walters), petitioners argue that holding contracts as long as petitioner held feeder cattle would have impaired his flexibility in dealing with a changing market. He maintained such flexibility, they explain, by frequent trading and thus1980 Tax Ct. Memo LEXIS 255">273 he traded a large volume of contracts. According to petitioners, the relevant number of contracts with which purchases should be compared is, therefore, the net amount open on a given date. The greatest number of contracts open, they claim, were the 115 held on October 2, 1973. Assuming 60 cattle per contract, the equivalent number of feeder cattle held was 6,900, less than the amount which according to his testimony he intended to purchase in 1973. In our view, flexibility such as petitioners describe is necessary only for one attempting to profit on the futures trades themselves, in other words, a speculator. Indeed, what Walters described in the name of "discretionary hedging" appears to be simply an investment strategy aimed at earning profits. Stating that "an individual is justified in holding positions as hedges for a shorter period of time and turning them when it's appropriate to do so," he defined appropriateness as "when market trends turn against you." Or again he explained his general approach as follows: And so, you try, in order to protect the value of your inventory, to sell into a declining market or to buy into an up trending market.Petitioners distinguish1980 Tax Ct. Memo LEXIS 255">274 two types of hedges, what they term the "partial" hedge, as used in Corn Products, and the "classical" hedge. They define the latter as the maintenance of an equal but opposite position in the futures market in order to minimize the effects of unanticipated price fluctuations and to lock in a profit. According to petitioners, respondent argues that the transactions at issue here do not constitute hedging because he fails to acknowledge any but the latter type of hedge. Petitioner's trading was, in their view, used as a partial hedge. However, as we have stated, petitioner traded, unlike the taxpayer in Corn Products, not to protect against the costs of a related business but for an independent investment purpose. Petitioners further rely on the fact that the futures contracts were for a commodity, fat cattle, related to their cattlefeeding business and that petitioner was able, and did, with respect to at least some contracts, actually take delivery of fat cattle. Yet after taking delivery, petitioner quickly sold the cattle. He did not use them in his cattlefeeding business. Although the Corn Products line of cases does not require that the commodity in which futures1980 Tax Ct. Memo LEXIS 255">275 are traded in fact be delivered and used in the related business ( Kurtin v. Commissioner,26 T.C. 958">26 T.C. 958 (1956), ability to take delivery is relevant, we believe, only if coupled with use in that business. Arguing that the trading at issue was not speculative, petitioners note the relatively low percentage of day trades, and the absence of switches, i.e., rapid changes from short to long positions, and of straddles or spreads, i.e., a simultaneous placing of long and short positions in the same commodities futures market. They compare the holding periods favorably with those in Oringderff v. Commissioner,T.C. Memo. 1979-93, in which 28 percent were day trades and only one contract held as long as a month. As we have discussed, the holding periods for the futures were generally much shorter than those for the actual cattle. Therefore, the fact that day trades are relatively fewer and holding periods generally longer than in Oringderff is without legal significance. In the context of a rising market, such as the fat cattle futures market throughout most of 1973, a failure to sell short hardly belies a speculative motive.For a speculator could, 1980 Tax Ct. Memo LEXIS 255">276 as petitioner did, profit simply by buying cattle futures contracts and selling when the price rose. Although their petition apparently placed in issue the characterization of futures contracts in other commodities, petitioners neither introduced evidence at trial nor contend on brief that such contracts were not held as capital assets. Yet patterns which they cite to establish that the cattle futures trading was used as a hedge are equally characteristic of the trading in other commodities. For instance, only 5 of 37 oil, 5 of 60 hog, and 10 of 285 corn futures contracts were day trades. The relative proportion of the corn futures is even smaller than those of the fat cattle futures. Similarly, petitioner consistently took long positions in these commodities. Thus, as with his fat cattle futures, there are no spreads or straddles. Alternately, petitioners rely on Walters' "nearest equivalent position" analysis to establish that some, if not all, of the futures contracts were hedges. Their expert witness noted three dates on which feeder cattle were purchased, July 16, October 3, and November 27. Walters then determined the number of contracts which petitioner received as1980 Tax Ct. Memo LEXIS 255">277 hedges, that number equal to the amount of cattle which petitioner reasonably intended to purchase on the first date, 64 to 75, and which he actually purchased on the two later dates, 13 and 35 contracts, respectively. In Walters' view, petitioner reasonably intended on July 16 to purchase feeder cattle equal to either his January 1 inventory or total purchases for the year. Finally, he noted the nearest prior date on which petitioner held the same number or more futures contracts. With respect to the October and November purchases, he considered only October and December contracts, respectively. These are July 5 with 69 contracts, September 17 with 25 contracts, and October 29 with 105 contracts. He then aggregated total gains and losses for contracts purchased on each date and concluded that the portion allocable to hedges was an ordinary loss. We do not find this analysis persuasive. The record contains no basis for a conclusion that petitioner intended to be, as Walters puts it, fully hedged on any of these three dates. In fact, there is no evidence before us that petitioner bought some futures contracts for speculation and others as protection against the cost of his1980 Tax Ct. Memo LEXIS 255">278 replacement feeder cattle. Also Walters' methodology is inconsistent. He compares the number of contracts held on July 5 not with actual July purchases of 820 head, or 13 to 14 contracts, but with total purchases for the year, explaining that petitioner purchased fewer cattle than he had anticipated in July. Although petitioners claim that, due to market conditions, their purchases were unexpectedly low, there is no evidence that petitioner intended to purchase a full year's inventory in July. Moreover, amounts actually purchased on each of the three dates were the equivalent of 13 or 14, 13, and 35 contracts, respectively. Yet the contracts, which petitioner held and to which purchases were compared were much more numerous--69, 25, and 105, respectively. A disparity between contracts purchased and actual needs is an indication of speculation. Sicanoff Vegetable Oil Corp. v. Commissioner,27 T.C. 1056">27 T.C. 1070. 11/ Indeed, the discrepancies would be still greater had Walters included contracts held on those dates which provided for delivery in 1974 and, for September1980 Tax Ct. Memo LEXIS 255">279 17, those which provided for delivery in December 1973. According to Walters, he disregarded contracts with 1974 delivery dates on the grounds that such contracts are properly matched against 1974 feeder cattle purchases. We note, however, that with respect to the July contracts and purchases, he otherwise made no attempt to match contract delivery dates against actual purchases. 2. Margin Account Losses IssueOn their 1973 Federal income tax return, petitioners reported as capital losses amounts paid with respect to commodities futures contracts traded by seven limited partnerships. They now maintain that such amounts were incurred in petitioner's trade or business of selling commodities futures contracts and therefore constitute ordinary losses. Because the commodities futures contracts on which the losses were sustained are capital assets, respondent argues, the losses were correctly reported as capital losses. Moreover, even if the losses were integral to the trade or business of selling commodities futures contracts, petitioners have not, in respondent's view, established that such trade1980 Tax Ct. Memo LEXIS 255">280 or business was that of petitioner. We find for petitioners on this issue. Section 165(a) and (c), quoted in pertinent part in footnote 7, supra, generally allows an individual to deduct losses incurred either in a trade or business or in a transaction entered into for profit. Under subsection (f), losses from sales or exchanges of capital assets are allowed only as provided in sections 1211 and 1212. Respondent concedes that petitioner in fact paid the amounts in issue. Petitioner testified that he paid such amounts pursuant to guarantees, and that the guarantees were made solely in order to obtain customers, and thus commission income, from his commodities futures trading. Consistent with this characterization of the guarantees as a personal obligation, letters which he wrote to certain limited partners after the losses were incurred refer to "my guarantee to you." Moreover, the agreements submitted in evidence provide that the general partner and the special general partner pay margin account balances to the extent that such balances exceed undivided partnership profits. The agreements for BSU No. 104 and for CTP Nos. 101 and 102 name BSU or CTL as general partner,1980 Tax Ct. Memo LEXIS 255">281 petitioner as special general partner, and specified individuals as limited partners. Thus petitioner was personally obligated to pay margin account balances with respect to these three agreements. In the BSU No. 102 agreement, Surette rather than petitioner is the special general partner. However, petitioner signed this agreement, as he did each of the others, as authorized officer of the general partner. Furthermore, the parties agree that BSU was operated by A & L, a partnership in which petitioner was a member owning a 3/7 interest. Although petitioner was not personally obligated by the written agreements to pay losses with respect to BSU No. 102, he in fact made such payments. Moreover, there is no evidence that Surette or anyone else paid any amounts pursuant to the guarantees. Accordingly, we hold that the losses were incurred in petitioner's trade or business of selling commodities futures contracts and are, therefore, deductible under section 165. Hogan v. Commissioner,3 T.C. 691">3 T.C. 691, 3 T.C. 691">694-695 (1944). Under all but one of the agreements introduced in evidence, petitioner would, respondent notes, share in profits from sales of the futures contracts, 1980 Tax Ct. Memo LEXIS 255">282 which are capital assets within the meaning of section 1221. Apparently viewing the amounts at issue as part of the investment in such capital assets, he states that the payments are deductible only as capital losses. The existence of a substantial business motive for engaging in the transactions, such as receipt of commissions, does not, in respondent's view, transform the payments into ordinary losses. To be sure, under three of the agreements, the general partner--BSU or CTL--was entitled to 20 percent of net profits. As a member of BSU, a partnership, and CTL, a joint venture, petitioner apparently would have shared in this 20 percent. It is, we think, unrealistic to suppose that petitioner would have guaranteed the full amount of the margin account balances in order to derive a portion of the general parther's 20-percent share of profits. Rather we think he made the guarantees solely in order to obtain commission income. Hence the amounts at issue are, we believe, not part of an investment in the commodities futures contracts. Respondent also argues that it was the general partner who was liable for the losses under the agreements. Despite petitioner's testimony that1980 Tax Ct. Memo LEXIS 255">283 the limited partners looked to him for payment of losses, petitioner has not, in respondent's view, established that he was personally obligated to make the payments. As discussed above, it is clear that petitioner was personally liable for losses under three agreements. Furthermore, he testified that the limited partners expected him to make such payments with respect to all of the partnerships and we found his testimony credible. Even if the payments are deemed integral to the trade or business of selling commodities futures contracts, such trade or business was, respondent maintains, that of the general partner, not that of petitioner. Petitioner may not deduct under section 165 losses of a partnership solely on the grounds that he was a partner in it. Rosenthal v. Commissioner, 48 T.C. 515">48 T.C. 515 (1967), affd. 416 F.2d 491">416 F.2d 491 (2d Cir. 1969). As respondent correctly states, an individual may not deduct under section 165 the business losses of a partnership merely because he is a member in it. However, we have found that petitioner was himself in the trade1980 Tax Ct. Memo LEXIS 255">284 or business of selling commodities futures contracts and that he paid the amounts at issue in connection with that trade or business. We note that petitioners' 1973 Federal income tax return reports $80,327.31 as commission income. In the notice of deficiency, respondent included an additional $27,672.69 in ordinary income, an adjustment which petitioners do not dispute. The latter amount is attributed on petitioner's worksheet to contracts traded by BSU Nos. 101-104. 3. Investment CreditIn 1972 and 1973, petitioners claimed investment credits in the amounts of $16,883 and $1,953.09, respectively, which represent expenses of installing concrete pavements in gasoline filling stations which they owned. Respondent disallowed the credits on the grounds that the property did not qualify for the investment credit. We agree with respondent. Section 38 allows a tax credit for investment in certain property. The amount of the credit is determined under sections 46 through 50. See sec. 46(a)(1)(B), (a)(2), and (c). The credit is available for, in part, certain "tangible personal property.1980 Tax Ct. Memo LEXIS 255">285 " Sec. 48(a)(1)(A). 12/ Whether property qualifies as "tangible personal property" is not determined by State law. Sec. 1.48-1(c), Income Tax Regs. Rather the regulations state that such property includes-- any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). An example of nonqualifying property is "paved parking areas." Sec. 1-48-1(c), Income Tax Regs. Tangible personal property specifically includes "all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structure)." Hence, a gasoline pump, albeit annexed to the ground, constitutes tangible personal property.1980 Tax Ct. Memo LEXIS 255">286 Sec. 1.48-1(c), Income Tax Regs.In our view, the concrete driveways constitute not tangible personal property within the meaning of section 48 but rather property in the nonqualifying category of "land and improvements there-to" within the meaning of section 1.48-1(c), Income Tax Regs. That regulation explicitly mentions a similar item, paved parking areas, as an example of nonqualifying property. As petitioners note, respondent has held that tanks and related piping constitute tangible personal property eligible for the investment credit (Rev. Rul. 74-602, 1974-2 C.B. 12) and that concrete foundations which are specially designed to meet the needs of stamping presses and which also serve as floor space are treated as part of the machinery. Rev. Rul. 79-183, 1979-1 C.B. 44. Petitioners state that concrete paving protects the gasoline tanks and related equipment better than asphalt paving, which would deteriorate more rapidly from dripping gas and from the pressure of heavy trucks driving on it. Hence petitioners argue that the concrete paving is an integral part of the tanks and related equipment, 1980 Tax Ct. Memo LEXIS 255">287 which are eligible for the investment credit, and should itself qualify as tangible personal property. Petitioners' reliance on Rev. Rul. 79-183, supra, is mistaken. In concluding that a portion of the concrete mat for stamping presses qualified for the investment credit, the ruling described the mat's use as floor space as "strictly incidental to the use that necessitated its special design," i.e., support of the stamping presses. Rev. Rul. 79-183, supra, at 45. To the extent that the foundation did not support this equipment bur served only as a floor, the investment credit was denied. In contrast to the concrete foundation or mat described in the ruling, the paving in issue here is not specially designed to meet the needs of the underground equipment. Petitioners concede that only two-thirds of the O Street station driveway covers equipment and that concrete was used for the remaining one-third in order to provide a uniform appearance. There is no evidence that the remaining one-third is in any way dissimilar in its construction. The greater durability of concrete as compared to asphalt may aid in protecting underground equipment; however, 1980 Tax Ct. Memo LEXIS 255">288 it is also useful in maintaining the driveway itself.Clearly, the driveway's function as a driveway is not strictly incidental to any use which it may have as protection for the underground equipment. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. /↩ The deficiency for 1969 is attributable to disallowance of an investment credit carryback from 1972.2. /↩ All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted. 3. On their 1973 Federal income tax return, petitioners treated these losses as capital losses. In accordance with their present position, they claim that they overpaid taxes in 1973 in the amount of $22,505.08.↩4. /↩ Although the parties have stipulated that petitioner's employment at Rosenstock began in 1951, petitioner stated at trial that the stipulation should have referred instead to the year 1952.5. /↩ Cattle ready for slaughter are called "fat" or "live" cattle. In the testimony and in the briefs filed by the parties, these terms have been used interchangeably.1. /↩ In addition, 32 of A & L's cattle died in 1973.6. /↩ Cattle placed on an intensive feeding program in feedlots are called "feeder" cattle.1. /↩ These are heifers. All others are steers. 2. Date of purchase unknown. All others were purchased in 1972.↩1. /↩ Petitioner testified that these cattle were delivered pursuant to cattle futures contracts and sold by month end. All others were sold in 1974. 2. These are heifers. All others are steers.↩7. /SEC. 165. LOSSES. (a) General Rule.--There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. (c) Limitation on Losses of Individuals.--In the case of an individual, the deduction under subsection (a) shall be limited to-- (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. * *↩8. / Petitioner's expert witness, Forrest E. Walters, testified that, during the period from Jan. 1970 through July 1972, 72 or 73 percent of the variation in the price of feeder steer, 500-700 1bs., Omaha, was associated with the price of choice steer, average weight, Omaha. Noting the low volume of trading in feeder cattle futures during 1973, he maintained that trading in fat cattle futures could be used to protect against price increases in feeder cattle. On the other hand, respondent's expert witness, Joseph C. Johnston, opined that a cattlefeeder may not hedge by purchasing fat cattle futures since he would thereby increase his risk in the finished product of his business. Also, he challenged petitioner's price correlation methodology in that it matched prices of fat cattle to those of feeder cattle for the same month rather than for 6 months earlier. In his view, the two types of contracts have no true price correlation. ↩9. Petitioner equated a fat cattle futures contract to 37 or 60 feeder cattle and respondent to 47 or 62.The first in each set of numbers is equal to the number of fat cattle in the contract and the second is derived by dividing the number of pounds in the contract, about 40,000 1bs., by the approximate weight of one such animal. ↩10. Meade v. Commissioner,T.C. Memo. 1973-46↩.11. /Meade v. Commissioner,T.C. Memo. 1973-46↩.12. / Petitioners do not argue that the paving qualifies as "other tangible property" within the meaning of sec. 48(a)(1)(B). Clearly, the pavement is not used as an integral part of any activity specified in subparagraph (B) and does not constitute any type of facility specified in the subparagraph. Thus it does not satisfy the requirements of sec. 48(a)(1)(B)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620773/	Blanche N. Hallowell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Howard T. Hallowell, Petitioner, v. Commissioner of Internal Revenue, RespondentHallowell v. CommissionerDocket Nos. 4903, 4904United States Tax Court5 T.C. 1239; 1945 U.S. Tax Ct. LEXIS 25; December 12, 1945, Promulgated 1945 U.S. Tax Ct. LEXIS 25">25 Decision will be entered for the respondent in Docket No. 4903, and decision will be entered under Rule 50 in Docket No. 4904. 1. Howard T. Hallowell created two irrevocable trusts under which the entire income was payable to his wife Blanche during her life, upon her written request to the trustee, provided she made request within 30 days after the expiration of the fiscal year of the trust. Undistributed income shall be added to trust principal. Upon the death of the wife, the trustee shall continue to hold the trust and shall pay the income to such persons as directed by the will of Blanche. The trustee reported the income of the trusts on a fiscal year basis. Blanche Hallowell reported her income on a calendar year basis. The fiscal year of each trust ended during a calendar year of Blanche Hallowell. Held, that the income of each trust accumulated during the respective fiscal years of the trusts is taxable to the petitioner Blanche Hallowell, not as income "to be distributed currently" under code section 162 (b), but by reason of the power given to the beneficiary to receive such income each year upon request, which must be regarded as the equivalent of ownership1945 U.S. Tax Ct. LEXIS 25">26 of the income under section 22 (a). Although there are some differences between the provisions of the trusts created by Hallowell and of the trust in Mallinckrodt v. Nunan, 146 Fed. (2d) 1, the differences do not distinguish the trusts from the Mallinckrodt trust.2. Respondent's determination in Docket No. 4904 that petitioner Howard Hallowell is taxable under section 22 (a) on the income of the same trusts is reversed. Early1945 U.S. Tax Ct. LEXIS 25">27 L. Gilbert, C. P. A., for the petitioners.William D. Harris, Esq., for the respondent. Harron, Judge. Arundell, J., dissents. HARRON 5 T.C. 1239">1239 The respondent determined deficiencies in income tax against the petitioners as follows:Blanche N. HallowellHoward T. HallowellDocket No. 4903Docket No. 49041938$ 2,723.381938$ 4,889.091939757.2319391,883.63194013,035.74194022,600.94194127,233.69The only question at issue is whether either of the petitioners is taxable upon the undistributed income of two trusts created by Howard T. Hallowell. Respondent has determined that such income is taxable to Howard T. Hallowell as the grantor of the trusts, or, in the alternative, to Blanche N. Hallowell by reason of the right given 5 T.C. 1239">1240 to her under the trust indentures to take part or all of the annual income.The petitioners filed their separate, individual returns for the taxable years with the collector for the first district of Pennsylvania.The facts have been stipulated.FINDINGS OF FACT.We adopt the stipulation of facts filed by the parties, and such stipulated facts are incorporated herein by reference. Only those1945 U.S. Tax Ct. LEXIS 25">28 facts essential to an understanding of the issue are set forth herein.The petitioners are married and reside together at Jenkintown, Pennsylvania. They have a son, H. Thomas Hallowell, Jr.; a daughter, Ruth Hallowell Gray; and three grandchildren, Howard T. Hallowell, III, Anne Willits Hallowell, and Merrit Willits Hallowell.On December 23, 1935, petitioner Howard T. Hallowell executed an irrevocable trust indenture under which he transferred 1,000 shares of the common stock of the Standard Pressed Steel Co. to his son, H. Thomas Hallowell, Jr., as trustee. Under the provisions of the trust, the net income was to be paid to the grantor's wife, Blanche N. Hallowell, during her life, and upon her death the corpus was to be divided into two equal parts, one of which was to be paid over outright to H. Thomas Hallowell, Jr., and the other to be held in trust for the grantor's daughter, Ruth N. Hallowell, with the income thereof to be paid to her during her life. Upon her death, the corpus was to be paid over to her children, and, in default thereof, to H. Thomas Hallowell, Jr. This was known as the No. 1 trust, and it is not in controversy in this proceeding.On September 27, 1937, 1945 U.S. Tax Ct. LEXIS 25">29 petitioner Howard T. Hallowell executed another irrevocable trust instrument, known as the No. 2 trust. The corpus consisted of 1,500 shares of the common stock of the Standard Pressed Steel Co., and the trustee was H. Thomas Hallowell, Jr. At that time, the grantor had two grandchildren. The trust instrument provided that the corpus was to be divided into two separate parts, representing the interests of each of the grandchildren, but the trustee was authorized, as additional grandchildren were born, to redivide the corpus into shares representing the individual distributive interests of the respective grandchildren. Paragraph 2 of the indenture provided, as follows:2. The said Trustee shall hold said shares of stock and any stock dividends paid thereon intact during the natural life of my wife, Blanche N. Hallowell, and collect the net income thereof. Within thirty days after the expiration of any fiscal year the beneficiary shall notify the Trustee in writing if she desires the income collected during the past fiscal year or any part thereof paid to her. Any part of said income retained shall be added to the principal of said trust estates. The Trustee shall have the right1945 U.S. Tax Ct. LEXIS 25">30 at the end of any year, in case there 5 T.C. 1239">1241 is no income or insufficient income has been received during the immediate past year, to provide for the comfortable support and maintenance of the beneficiary, to recognize and act upon said request, and pay out from principal or corpus on written notice from the beneficiary to the Trustee during said period of thirty days after the expiration of any fiscal year such sums as may be necessary for the comfortable support and maintenance of said beneficiary.Without in any way limiting the foregoing, the Trustee may if he deems it to be of benefit to the trust or the beneficiary pay out to the beneficiary all or such part of the income as received as he may from time to time deem advisable.Upon the death of the grantor's wife the trustee shall continue to hold the trust estate and shall pay the net income of the trust "to such person or persons now living as directed by the last will and testament of my said wife," and in default thereof in equal shares to the grantor's son, H. Thomas Hallowell, Jr., and to the grantor's daughter, Ruth N. Hallowell Gray, for their lives. Upon the death of both of the grantor's children the corpus was1945 U.S. Tax Ct. LEXIS 25">31 to be paid over to the grandchildren, per capita, share and share alike, with the children of any deceased grandchild to receive their parent's share. In the event that there were no grandchildren or their issue, life estates were created for two of the grantor's sisters, and upon their deaths the corpus was to be paid over to the trustees of the Philadelphia Yearly Meeting of Friends for the use of George School. Under the trust indenture the trustee was given broad powers of management, was authorized to appoint his successor trustee, and could file fiduciary income tax returns on either the fiscal or the calendar year basis. The grantor reserved the right to transfer additional securities or property to the trust. The trust also contained the provision that "it is recommended that during the lifetime of said Howard T. Hallowell, grantor herein, and during the continuance of this trust or any part thereof, the said Trustee or his successor shall appoint said Howard T. Hallowell as proxy to vote at any stockholders' meetings on any stock held by this trust." It was also provided that the transfer of the corpus by the grantor to the trust was absolute, without any reservation 1945 U.S. Tax Ct. LEXIS 25">32 of control over the corpus and without any interest in the income thereof.On November 25, 1939, petitioner Howard T. Hallowell executed a third irrevocable trust indenture, known as the No. 3 trust. The corpus consisted of 1,500 shares of common stock of the Standard Pressed Steel Co., and the trustee was H. Thomas Hallowell, Jr. The provisions of this trust were exactly the same as the provisions of trust No. 2, except that this trust contained the following additional provision:Said Trustee or his successors may, at any time he or they deem it to be proper and advisable so to do, hypothecate all or any part of the assets then constituting the corpus of the said trusts and use the proceeds of said pledge for the purpose of buying additional shares of stock of the Standard Pressed Steel Company, or for the purpose of protecting the interests of the trusts in the Standard Pressed 5 T.C. 1239">1242 Steel Company, or said Trustee or his successors may lend the said proceeds of said pledge or other funds of the trust to said company for its corporate use if said Trustee or his successors shall then deem it advisable so to do, and any such loan or loans or advances may be made on such terms1945 U.S. Tax Ct. LEXIS 25">33 of security and repayment as the Trustee or his successors in his or their discretion may deem to be sufficient and proper at the time. The purpose of said power being to enable the Trustee or his successors to be able to secure funds and use the same for the protection of the stock investments of the trusts under any contingencies that may happen which might jeopardize the value of the holdings of said stock.Petitioner Howard T. Hallowell filed gift tax returns in respect to trusts Nos. 1, 2, and 3.Petitioner Howard T. Hallowell now is and has been president of Standard Pressed Steel Co. since it was organized and incorporated under Pennsylvania law in 1903. Prior to the creation of trusts Nos. 2 and 3, Howard T. Hallowell owned 3,364 shares of the common stock of Standard Pressed Steel Co. After the creation of these trusts, he owned, and still owns, 364 shares. The total number of shares of the common stock of the company issued and outstanding during the years 1938 to 1941, inclusive, was 12,792 shares.During the period 1938 to 1942, inclusive, petitioner Blanche N. Hallowell received and reported in her individual income tax returns the following amounts of income:Income receivedYearfrom trustDividendsInterestNo. 11938$ 3,000.00$ 689.00$ 604.12193911,491.261,527.15194013,000.001,949.39360.00194113,000.002,025.37420.00194215,000.002,273.36422.381945 U.S. Tax Ct. LEXIS 25">34 No part of this income has been used for her support or the support of her husband, or for the maintenance of the home occupied by her and her husband. There is no agreement between the petitioners that any of the income of the trusts is in substitution of the responsibility of petitioner Howard T. Hallowell to support petitioner Blanche N. Hallowell or any member of their family.During the period 1936 to 1943, inclusive, Howard T. Hallowell received income which he reported in his individual income tax returns, as follows:YearDividends andSalariesTotalinterest1936$ 50,284.72$ 33,237.50$ 83,522.22193736,212.4033,046.8869,259.28193814,684.4614,194.1628,878.62193917,303.1732,549.8049,852.97194017,154.5662,601.2379,755.79194121,164.7790,496.47111,661.24194224,473.5790,436.85114,910.42194324,874.6690,516.25115,390.915 T.C. 1239">1243 The annual income of trusts Nos. 2 and 3 on a cash receipts and disbursements basis was as follows:YearTrust No. 2Trust No. 3Total1938$ 20,370.00$ 20,370.0019395,490.005,490.00194017,608.24$ 16,500.0034,108.24194119,957.9818,886.2738,844.25194221,190.3619,591.9640,782.321945 U.S. Tax Ct. LEXIS 25">35 The trustee of trusts Nos. 2 and 3 reported the income of said trusts for the years 1938, 1939, 1940, and 1941 on a fiscal year basis and included in the Federal income tax returns filed by the trustee of trusts Nos. 2 and 3 on a cash receipts and disbursements basis on behalf of the then possible beneficiaries of the then possible trusts, as follows:Trust u/dTrust u/dTrust u/d9/27/37 for9/27/37 for9/27/37 forHowart TAnne WillitsMerrit WillitsTotalHallowell,HallowellHallowell3rdFiscal year ended 8/31/38$ 10,185.00$ 10,185.00$ 20,370.008/31/392,745.002,745.005,490.008/31/405,869.425,869.41$ 5,869.4117,608.248/31/416,652.666,652.666,652.6619,957.98Trust u/dTrust u/dTrust u/d11/25/39 for11/25/39 for11/25/39 forHoward T.Anne WillitsMerrit WillitsTotalHallowell,HallowellHallowell3rdFiscal year ended 10/31/40$ 5,500.00$ 5,500.00$ 5,500.00$ 16,500.0010/31/416,295.436,295.426,295.4218,886.27The trustee for trusts Nos. 2 and 3 kept his books of account and filed his Federal income tax returns on a fiscal year basis. The petitioners1945 U.S. Tax Ct. LEXIS 25">36 kept their books and filed their returns on a calendar year basis.All income received by the trustee under trusts Nos. 2 and 3 has been accumulated, and none of such income has been paid by the trustee to any person.OPINION.Respondent's first contention is that the income of trusts Nos. 2 and 3 is taxable to petitioner Blanche N. Hallowell under section 22 (a), as that section has been construed in Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 Fed. (2d) 1; certiorari denied April 9, 1945; rehearing denied April 30, 1945. This contention is predicated upon paragraph 2 of the trust indentures, which gives Blanche the unrestricted right to demand the income of the trusts within thirty days after the expiration of the fiscal year of each trust. Since the fiscal year of trusts Nos. 2 and 3 ended on August 31 and October 31, respectively, respondent argues that petitioner, who was 5 T.C. 1239">1244 on a calendar year basis, had the unconditional power to receive the income of the trusts during each of her taxable years. We think this contention must be sustained.In Edward Mallinckrodt, Jr., supra,1945 U.S. Tax Ct. LEXIS 25">37 we held that a trust beneficiary who was entitled to receive the income of a trust upon his request was taxable upon such income, even though it was neither requested nor received by him during the taxable years. In support of our opinion we cited and relied upon Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, where it was pointed out that "if a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate it does not matter whether the permission is given by assent or by failure to express dissent * " and that "the income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not." It is true that in the Mallinckrodt case, supra, the beneficiary was also a trustee and was given a general power of appointment by will over the property comprising the trust estate. In addition, with the consent of the other trustee, he might during his lifetime receive portions of the corpus, and upon termination of the trust, which was in the discretion of the trustees, he would receive the1945 U.S. Tax Ct. LEXIS 25">38 entire corpus. However, despite these additional powers, which are not present in this proceeding, our decision was primarily based upon the concept that one may not avoid taxation by turning his back upon funds that are his for the asking. This was also the basis upon which this Court was affirmed by the Circuit Court of Appeals for the Eighth Circuit, for in its opinion the Circuit Court said:We agree with the majority of the Tax Court that implications which fairly may be drawn from the opinions of the Supreme Court in Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, 281 U.S. 376">378, supra, Helvering v. Clifford, 309 U.S. 331">309 U.S. 331, supra, and other cases relative to the taxability of trust income to one having command over it, justify, if they do not compel, the conclusion that the undistributed net income of the trust in suit, during the years in question, was taxable to petitioner under § 22 (a). This, because the power of petitioner to receive this trust income each year, upon request, can be regarded as the equivalent of ownership of the income for purposes of taxation. In Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, 312 U.S. 579">580,1945 U.S. Tax Ct. LEXIS 25">39 the Supreme Court approved "the principle that the power to dispose of income is the equivalent of ownership of it and that the exercise of the power to procure its payment to another, whether to pay a debt or to make a gift, is within the reach of the statute taxing income 'derived from any source whatever'." It seems to us, as it did to the majority of the Tax Court, that it is the possession of power over the disposition of trust income which is of significance in determining whether, under § 22 (a), the income is taxable to the possessor of such power, and that logically it makes no difference whether the possessor is a grantor who retained the power or a beneficiary who acquired it from another. See Jergens v. Commissioner, supra, (p. 498 of 136 F. (2d).). Since the trust income in suit was available to petitioner upon request in each of the years involved, he had in each of those years the "realizable" economic gain necessary to make the income taxable to him. See Helvering v. Stuart, 317 U.S. 154">317 U.S. 154, 317 U.S. 154">168-169; 5 T.C. 1239">1245 309 U.S. 331">Helvering v. Clifford, supra (pages 336-337 of 309 U.S.); Helvering v. Gordon, 8 Cir., 87 F. (2d) 663, 667.1945 U.S. Tax Ct. LEXIS 25">40 Here, as in the Mallinckrodt case, supra, Blanche, upon her request, could receive the entire income of the trusts during each of her taxable years. If she did not request such income, it became part of the corpus and eventually would go to her grandchildren. During the taxable years, and since the inception of the trusts, none of the income was distributed. However, the unrestricted right which Blanche had to receive the income is the equivalent of ownership of the income for purposes of taxation.Petitioner argues, however, that the principle of the Mallinckrodt case is not applicable here because she did not have the right to receive the income of the trusts during the fiscal years of the trusts. This argument is untenable.It is recognized that the Hallowell trusts contain a provision which was not present in the Mallinckrodt trust, namely, that the trustee may pay to Blanche Hallowell all or part of the income "as received as he may from time to time deem advisable," if he considers payment to be of benefit to the trust or the beneficiary. This provision gives the trustee a discretionary power to distribute trust income to Blanche Hallowell, but it does not1945 U.S. Tax Ct. LEXIS 25">41 limit in any way her right to request, at the end of a fiscal year, distribution to her of income which has been collected during a fiscal year and held by the trustee. Because the beneficiary has the power to receive trust income each year upon request, regardless of whether or not the trustee has exercised a discretionary power to distribute income to her, the conclusion must be that the undistributed income of the trusts in question for the taxable years involved was taxable to her under section 22 (a), under the rule of the Clifford case, as applied in the Mallinckrodt case. The power of the beneficiary to receive income at the end of a fiscal year is the controlling and ultimate power over the disposition of the trust income. In our opinion, in Edward Mallinckrodt, Jr., supra, at pp. 1133 and 1134, we gave consideration to the relationship in the Internal Revenue Code of sections 161 and 162 to section 22 (a) in the light of the Clifford case. The question here, as in the Mallinckrodt case, arises under section 22 (a), and it must be decided under the broad reach of that section. Petitioner Blanche Hallowell was the owner of1945 U.S. Tax Ct. LEXIS 25">42 the income from the Hallowell trusts for purposes of section 22 (a). It is the existence of a power in her which is determinative of the question, not the amount of income which goes to her under her exercise of the power. The only effect of any exercise of a discretionary power by the trustee during any fiscal year of a trust is upon the amount of income to be received by the beneficiary when she makes her request to the trustee in the exercise of her power. In any event, the 5 T.C. 1239">1246 beneficiary, rather than the trust, is taxable upon all of the annual income of the trusts under the principle of the Clifford and Mallinckrodt cases. The important factor is that during her taxable year she had the unconditional power to receive the trust income. That power justifies the taxability of the trust income to her, for it is command over income which warrants the imposition of the tax.Having decided the main question in respondent's favor, it is unnecessary to consider his alternative contention under Docket No. 4904 that Howard T. Hallowell, the grantor of the trusts, is taxable on the income of the trusts under the doctrine of the Clifford case. Respondent has 1945 U.S. Tax Ct. LEXIS 25">*43 determined that the income of the trusts is taxable to Howard T. Hallowell, and part of the deficiencies in Docket No. 4904 are due to that determination. Of course, respondent does not seek to tax the same income twice, to both Howard T. and Blanche N. Hallowell. Accordingly, in view of our holding in Docket No. 4903, the determination of respondent in Docket No. 4904 relating to the same income of the same trusts is reversed. However, there must be a recomputation of income tax liability in Docket No. 4904, under Rule 50, because certain other adjustments were not contested.Decision will be entered for the respondent in Docket No. 4903, and decision will be entered under Rule 50 in Docket No. 4904.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620774/	Joseph H. Konigsberg v. Commissioner.Joseph H. Konigsberg v. CommissionerDocket No. 4887.United States Tax Court1946 Tax Ct. Memo LEXIS 283; 5 T.C.M. 48; T.C.M. (RIA) 46024; January 22, 1946Paul N. Wiener, Esq., 285 Madison Ave., New York, N. Y., for the petitioner. Laurence F. Casey, Esq., for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $1,854.86 in the income tax of the petitioner for the calendar year 1941. The only issue is whether the petitioner is entitle4 to deduct $4,500 as interest paid in 1941. Findings of Fact The petitioner is an individual who filed his return for 1941 with the collector of internal revenue at Brooklyn, New York. It was upon a cash basis. He took out a single premium endowment policy of insurance on his life on September 8, 1941. This policy was for $60,000 and the premium, payable in advance, amounted to $39,403.80. He did not have sufficient funds available to pay1946 Tax Ct. Memo LEXIS 283">284 this premium and the insurance agent had arranged for him to secure a loan of $36,000 from the Guaranty Trust Co. on his personal note secured by the policy. The loan was for five years and the interest at the annual rate of 2 1/2 per cent was to be paid in advance when the loan was secured. The arrangement was carried out. The Guaranty Trust Co. loaned the petitioner $36,000 on his note and held the policy as security. The petitioner gave to the Guaranty his check for $7,903.80 on another bank where he had an account. The check was to pay the interest of $4,500 on the loan and to pay the balance of the premium. The Guaranty paid the premium of $39,403.80 and gave the petitioner a receipt for the payment in advance of the charges of $4,500 on the loan of $36,000. The petitioner's check for $7,903.80 was paid on September 9, 1941. The petitioner, on his return for 1941, claimed a deduction of $4,500 for interest paid. The Commissioner denied the deduction but gave no explanation therefor. Opinion MURDOCK, Judge: The respondent makes but one argument. It is that the petitioner did not obtain a loan of $36,000 from the bank on which he paid interest in advance of $4,500 but instead1946 Tax Ct. Memo LEXIS 283">285 "discounted" a note for $36,000 and obtained from the bank only $31,500, so that the "discount" will not be paid until the note is paid off. The evidence is the exact opposite of the facts necessary to the respondent's argument. The bank agreed to lend $36,000 provided the petitioner paid it $4,500 in advance for the use of the money during the period of the loan. The petitioner paid the bank $4,500 from his own funds on deposit in another bank and received a receipt showing that he had paid the charge for the use of the money during the period of the loan. All this was in the ordinary course of business. That was a payment of interest within the meaning of section 23 (b), I.R.C.John D. Fackler, 39 B.T.A. 395">39 B.T.A. 395. It is immaterial that the bank called the payment "discount". It is also immaterial how the bank reported its income from the loan. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620775/	Peter Boatsman and Bertha Boatsman v. Commissioner.Boatsman v. CommissionerDocket No. 48595.United States Tax CourtT.C. Memo 1957-93; 1957 Tax Ct. Memo LEXIS 161; 16 T.C.M. 385; T.C.M. (RIA) 57093; May 31, 1957Peter Boatsman, 51 Fourteenth Street, Fond du Lac, Wis., for the petitioners. Lee C. Smith, Esq., for the respondent. TURNER Memorandum Findings of Fact and Opinion TURNER, Judge: The respondent determined deficiencies in income tax and additions to tax for negligence, under section 293(a) of the Internal Revenue Code of 1939, against the petitioners as follows: Addition toTax underYearDeficiencySec. 293(a)1945$ 630.00$31.5019461,633.4181.671947188.009.401948656.8832.841949387.0019.351957 Tax Ct. Memo LEXIS 161">162 The questions for decision are whether (1) any of the deficiencies for the years 1945, 1946, 1947 and 1948 are barred by the statute of limitations upon assessment and collection set forth in section 275 of the Internal Revenue Code of 1939; (2) the respondent was justified in increasing the petitioners' income for each of the taxable years in question, and determining deficiencies based thereon; and (3) the respondent was correct in determining additions to tax for each of the taxable years for negligence, under section 293(a). Findings of Fact Petitioners are husband and wife, and resided in Fond du Lac, Wisconsin, during the years in question. They filed joint income tax returns for the taxable years 1945 to 1949, inclusive, with the collector of internal revenue for the district of Wisconsin. Peter Boatsman, sometimes referred to herein as petitioner, a chiropractor and naturopath, has practiced his profession since 1916, and was so engaged in Fond du Lac during all of the taxable years herein. During the years 1916 to 1936 petitioner practiced his profession in the following cities: Mezonomie, Wisconsin; Midway, Minnesota; Princeton, Minnesota; Glenwood City, Wisconsin; 1957 Tax Ct. Memo LEXIS 161">163 Mauston, Wisconsin; Port Washington, Wisconsin; and Columbus, Wisconsin. In the fall of 1936, petitioner closed his office and went to Florida, where he remained until May of 1937, at which time he left Florida on a visit to Latvia in Europe. During his stay in Latvia he met his wife-to-be, marrying her on August 15, 1937, three weeks after he had met her. In consideration of the marriage, petitioner gave his wife $1,000 to be used for her child by a former marriage and her mother whom she was supporting, and promised to give her an additional $14,000 on her arrival in the United States. The $1,000 was left with the mother. Petitioner and his wife returned to the United States in November of 1937, and shortly thereafter he gave his wife $14,000 in cash, a part of the savings he had accumulated prior to his trip to Florida in 1936. After giving the said $14,000 to his wife, petitioner had no more than $5,000 of his savings remaining. Later in 1937, he resumed his practice, in this instance, in Beaver Dam, Wisconsin. The petitioners moved to New Holstein, Wisconsin, in March of 1938, and thence to Fond du Lac in September of 1940, where they remained until 1953, at which time they1957 Tax Ct. Memo LEXIS 161">164 moved to Florida. As reported on their returns for 1945 through 1949, petitioners' net income from rents, dividends, professional practice, capital gains and miscellaneous items, but without any allowance for capital losses sustained, was as follows: ProfessionalCapitalYearRentsDividendsPracticeGainsMisc.Total1945$385.60$1,227.97$298.58$1,912.151946302.341,083.81922.222,308.371947490.70 1$150.00996.95(loss)1,637.651948422.65 1219.981,361.93(loss)2,004.561949411.30 1321.911,255.91(loss)$414.962,404.08Petitioner filed a nontaxable income tax return for the year 1920, and paid a tax of $12.07 and $4.98 for the years 1921 and 1922, respectively. For the years 1923 and 1924, nontaxable returns were filed, and no returns were filed for the years 1925 through 1934. Nontaxable returns were filed for the years 1935 and 1936, 1957 Tax Ct. Memo LEXIS 161">165 but a total tax of $70.90 was ultimately paid for the year 1936. No returns were filed for the years 1937 and 1938. A tax of $2.84 paid by petitioner for the year 1939 was refunded, and nontaxable returns were filed for 1940 and 1941, but a tax of $6.09 was assessed and paid for 1941. Total taxes of $1.70, $34.02 and $62 were paid for the years 1942, 1943 and 1944, respectively. During the period 1937 through 1944 petitioners earned no more than they required for normal living expenses. During the same period they purchased the following assets: AssetPurchase PriceFrame Bungalow$ 3,207.09Residence6,516.73Duplex3,923.32Automobile1,275.00Bond50.00Total$14,973.14As of January 1, 1945, the houses were subject to mortgages totaling $2,600, indicating that the petitioners expended $12,373.14 from 1937 through 1944. Aside from any transfers of money between themselves, the petitioners at no time received any money through gift or inheritance. The funds expended for the above-noted purchases were derived from petitioner's pre-1937 savings. Additional expenditures were made from the said savings for repairs on the houses. On January 1, 1945, the1957 Tax Ct. Memo LEXIS 161">166 opening date of the net worth computation, the petitioners had $4,000 in cash remaining from the pre-1937 accumulated savings. Petitioner in 1946 used the $4,000 in accumulated savings to speculate in the stock market. Petitioner's books and records were inadequate for the purpose of determining his tax liability for the years in question. The respondent determined deficiencies based on the following net worth computations, which, except for cash claimed as brought forward from prior years and the differences in adjusted gross income which would result from opening cash as claimed, are conceded by the petitioners to be correct: Description12/31/4412/31/4512/31/46ASSETS: Cash on Hand111Cash in BankChecking Account$ 87.43$ 1,180.01$ 1,001.24Savings Account (Mrs. Boats-man)Real Estate51 14th Street6,516.736,516.736,516.73499 South Marr Street3,207.09(sold)18 South Gould Street3,923.323,923.32(sold)124 East 13th Street3,400.00(sold)62 West 12th Street4,071.154,071.15Automobile1,275.001,275.001,275.00SecuritiesBond50.0050.0050.00Stocks and Options12,222.47Brokerage AccountsThomson and McKinnonBache and CompanyCommodity CreditOffice Equipment500.00500.00500.00TOTAL ASSETS$15,559.57$20,916.21$25,636.59LIABILITIES: Mortgages Payable$ 2,600.00$ 3,800.00Depreciation Reserves183.35302.02193.76TOTAL LIABILITIES$ 2,783.35$ 4,102.02$ 193.76NET WORTH$12,776.22$16,814.19$25,442.83Increase of Worth4,037.978,628.64Personal Expenditures1,087.251,744.11Capital Gain Adjustment( 298.58)( 955.52)Unallowable LossCapital Loss Carry-OverADJUSTED GROSS INCOME$ 4,826.64$ 9,417.231957 Tax Ct. Memo LEXIS 161">167 Description12/31/4712/31/4812/31/49ASSETS: Cash on Hand111Cash in BankChecking Account$ 489.83$ 312.38$ 622.66Savings Account (Mrs. Boats-man)270.00302.811,250.00Real Estate51 14th Street6,516.736,516.736,516.73499 South Marr Street18 South Gould Street124 East 13th Street62 West 12th Street4,071.154,071.154,071.15Automobile1,275.001,275.001,275.00SecuritiesBond50.0050.0050.00Stocks and Options3,277.237,882.1113,591.90Brokerage AccountsThomson and McKinnon658.92Bache and Company97.2217.16(2,845.19)Commodity Credit947.50Office Equipment500.00500.00500.00TOTAL ASSETS$17,206.08$21,874.84$25,032.25LIABILITIES: Mortgages PayableDepreciation Reserves304.49415.22525.95TOTAL LIABILITIES$ 304.49$ 415.22$ 525.95NET WORTH$16,901.59$21,459.62$24,506.30Increase of Worth(8,541.24)4,558.033,046.68Personal Expenditures1,744.001,352.481,335.49Capital Gain AdjustmentUnallowable Loss9,001.04248.29Capital Loss Carry-Over( 428.65)( 440.77)ADJUSTED GROSS INCOME$ 2,203.80$ 5,730.15$ 3,941.401957 Tax Ct. Memo LEXIS 161">168 The gross income and adjusted gross income as reported by petitioners, the adjusted gross income as determined by respondent and the amounts by which adjusted gross income as so determined exceeded adjusted gross income as reported are, for the years in question, as follows: Excess of AdjustedAdjustedNet WorthGross IncomeDetermined overGross IncomeAdjusted GrossComputed byAdjusted NetYearReportedIncome ReportedRespondentWorth Reported1945$4,180.58$1,912.15$4,826.64$2,914.4919464,304.822,308.379,417.237,108.8619473,165.001,100.002,203.801,103.8019484,054.431,324.005,730.154,406.1519493,847.871,291.783,941.402,649.62For the years 1945 and 1946 petitioner actually incurred and paid expenses in practicing his profession as claimed in the joint returns filed for those years. The amounts so claimed were $1,219.03 for 1945 and $1,146.19 for 1946. On February 13, 1951, petitioner executed waivers extending the period during which assessments might be made for the taxable years 1945 and 1947 to June 30, 1952. On May 7, 1952, this1957 Tax Ct. Memo LEXIS 161">169 period was further extended to June 30, 1953. On January 14, 1952, petitioners executed similar waivers for the taxable years 1946 and 1948 extending the period during which assessments might be made to June 30, 1953. The notice of deficiencies for the years in question was mailed to petitioners on February 25, 1953. In reporting their income for each of the years 1945 and 1946, petitioners omitted from gross income an amount properly includible therein which was in excess of 25 per centum of the gross income reported in the return. Opinion Respondent, on the basis of a net worth computation, determined deficiencies in income tax and additions to tax for negligence against petitioners for the years 1945 through 1949. Petitioners testified that they had at least $14,500 in cash on hand at the beginning of the period in controversy, which amount the respondent ignored in his net worth computation. Except for opening cash, the petitioners have conceded the correctness of respondent's net worth determinations, and in that connection it is to be noted that an acceptance of the claim of $14,500 as the amount of cash on hand at January 1, 1945, would still not account for or1957 Tax Ct. Memo LEXIS 161">170 explain $3,682.92 of the net worth increases as determined by the respondent. Furthermore, there are other respects in which this claim not only fails to find support, but is refuted of record. We are persuaded by the evidence that petitioners did have as much as $4,000 in cash on hand at January 1, 1945, and have made a finding to that effect. Also on the evidence, including the testimony of petitioners, we are satisfied that the said $4,000 was expended in 1946 in the stock speculations of petitioner, and effect should be given thereto in the recomputations hereunder. For the other years, the record supports the respondent's determinations. Petitioner testified at the trial that in 1936 he had $22,000 in cash savings which he had been accumulating since 1916. He further testified that when he left for a trip of nearly one year's duration to Florida and Europe, he left this cash hidden in a box of professional books, with a casual acquaintance, who was not told of the presence of the money. He also testified that the name of this acquaintance was Smith, but upon examination of a letter supplied by counsel for the respondent, stated that Miller was the name. His testimony as to1957 Tax Ct. Memo LEXIS 161">171 the giving of $14,000 to his wife upon his return from Europe is supported by his wife's testimony, but there is no corroboration for his claim that he had $8,000 in cash remaining thereafter. In fact, according to an affidavit executed by him prior to the trial, his statement was that he had $5,000 remaining after the gift or payment to his wife. While we are persuaded that petitioner did have some accumulated savings in 1937 and that he did turn over approximately $14,000 to his wife, we do not find convincing support for the proposition that he had remaining more than $5,000, as stated in the affidavit. Mrs. Boatsman testified that she had expended no more than $2,000 or $3,000 of her $14,000 prior to 1945 and that such amounts were used to make repairs on houses purchased prior thereto. She and petitioner testified that as of late 1945 or early 1946 she still had $11,000 or $12,000, which she gave to petitioner, who used it to speculate in the stock market. This testimony is inconsistent with an affidavit executed by Mrs. Boatsman prior to the trial, in which she stated that all but $500 of her $14,000 was spent in the purchase and repair of a residence and four rental houses. 1957 Tax Ct. Memo LEXIS 161">172 The Court, on the basis of the income reported in the returns filed by petitioners during the years 1937 through 1944, their normal living expenses as revealed in the stipulated net worth statement and the fact that they resided, and petitioner undertook to establish a practice of his profession in three different localities within three to five years following his return from Latvia, is convinced and has concluded and found as a fact that during 1937 through 1944, petitioners earned no more than they required to satisfy their normal personal living expenses. During this same period, however, the petitioners expended $12,373.14 in the purchase of three houses, an automobile and a bond. The only source shown for such funds was the pre-1937 accumulated savings. While Mrs. Boatsman testified that only about $2,000 or $3,000 of her money was expended on the houses purchased, the Court believes that her affidavit stating that substantially all of her money was so utilized is closer to the truth and in all probability she was confused as to the date or dates on which she returned the money to petitioner. Petitioner alleges that he had $3,500 in silver coins at the beginning of 1945, but1957 Tax Ct. Memo LEXIS 161">173 whether or not that much of the cash on hand at that date was in silver or currency does not change the over-all amount. Under these circumstances, we have found that all but $4,000 of petitioners' cash savings was expended prior to 1945. Petitioner's testimony, supported by that of his wife, indicates that these remaining savings were not utilized until late in 1945, or early in 1946. Petitioner further testified that such sums were expended in stock speculations, which commenced in 1946. On the basis of this testimony and the fact that the stipulated net worth statement showed no stock assets prior to 1946, and a net worth increase well in excess of $4,000 for 1946, we have found that the remaining $4,000 of accumulated savings was expended in the 1946 calendar year. The respondent's determination of additions to tax for negligence, which is presumptively correct, has not been rebutted by petitioner in any way other than his general denial of tax liability. The record convinces us that the deficiencies determined are, at the very least, the result of negligence. Since more than three but less than five years elapsed between the filing dates of petitioners' 1945 and 1946 income1957 Tax Ct. Memo LEXIS 161">174 tax returns and the dates on which petitioners executed waivers for those years, they are closed to assessment, unless petitioners omitted from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of the gross income stated in the returns. 11957 Tax Ct. Memo LEXIS 161">175 Petitioners reported gross income of $4,180.58 for 1945, of which 25 per centum would be $1,045.15. They reported gross income for 1946 in the amount of $4,304.82, of which 25 per centum would be $1,076.21. The parties are now agreed as to petitioners' adjusted gross income for each such year, except for such reductions as may be required as the result of our conclusions and findings as to the cash on hand at January 1, 1945. We have concluded and found that petitioner had $4,000 on hand on that date, for which no allowance has been made by the respondent in his determinations herein, but we have further determined that the $4,000 was all spent by petitioner in 1946, the year in which petitioner began speculating in the stock market. We have thus concluded, and our findings of fact show, that the petitioners' adjusted gross income for 1945 was $4,826.64, and for 1946, $5,417.23. The facts also show that petitioner actually incurred and paid expenses in the practice of his profession of $1,219.03 for 1945 and $1,146.19 for 1946, and that effect was given by the respondent in his determination to any expenses so paid during those years. In fact, it is inherent in a determination of1957 Tax Ct. Memo LEXIS 161">176 taxable income on the basis of the increase in the net worth of a taxpayer during the taxable year that all expenditures actually made by such taxpayer in such year are allowed as deductions, except those specifically shown as not allowed, such as living expenses and other nondeductible items. The addition of these amounts to adjusted gross income as herein determined indicates that the gross income of the petitioners for 1945 was at least $6,045.67, and that in reporting a gross income of $4,180.58 for that year, the petitioners understated their gross income by more than 25 per centum thereof; and further, that their gross income for 1946 was at least $6,563.42, and in reporting a gross income of $4,304.82 on their return for that year, they understated their gross income for such year by more than 25 per centum. We accordingly conclude and hold that assessment of the deficiencies for those years is not barred by the provisions of section 275(c) of the 1939 Code. For 1947 and 1948, the facts show that waivers were executed within the three year period prescribed under section 275(a) and (f) of the 1939 Code, and that the notice of deficiencies was mailed within the period prescribed1957 Tax Ct. Memo LEXIS 161">177 by such waivers or proper extensions thereof. It thus appears that assessment of the deficiencies for those years is not barred by the statute. As to the year 1949, there is no statute of limitations issue. Decision will be entered under Rule 50. Footnotes1. Although these are the amounts entered as net rents on the returns, they should have been $310.70, $243 and $401.30, respectively, if the amounts entered as gross rents, depreciation, repairs and other expenses were correctly stated.↩1. Items not agreed to by petitioner.↩1. Internal Revenue Code of 1939 - SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION. Except as provided in section 276 - (a) General Rule. - The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. * * (c) Omission from Gross Income. - If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed. * *(f) For the purposes of subsections (a), (b), (c), (d), and (e), a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620778/	EDITH HUGGARD SHARP, CHARLES C. NORRIS, JR., AND FIDELITY-PHILADELPHIA TRUST COMPANY, EXECUTORS, ESTATE OF WALTER P. SHARP, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sharp v. CommissionerDocket No. 48317.United States Board of Tax Appeals30 B.T.A. 532; 1934 BTA LEXIS 1304; April 27, 1934, Promulgated 1934 BTA LEXIS 1304">1304 1. Dividends declared on corporate stock before, but payable at a time after, the death of a stockholder, held, includable in the gross estate of the deceased stockholder for estate tax purposes. 2. Proceeds of an insurance policy in which no right of substitution of the beneficiary is reserved, but in which the insured has the right to surrender the policy and receive cash therefor, or to pledge it for loans equal to the surrender value, and in which the estate of the insured shall be the beneficiary, if the named beneficiary fails to survive the insured, held, includable in the gross estate of the insured for estate tax purposes. 3. Property transferred by completed gift, not in contemplation of death, held, not includable in the gross estate of decedent. 4. Property purchased for inclusion in a trust for the benefit of decedent's wife and children, but never so included or delivered as a gift or otherwise, held, to be includable in decedent's gross estate for estate tax purposes. W. B. Lex, Esq., for the petitioners. R. F. Staubly, Esq., for the respondent. SEAWELL30 B.T.A. 532">532 This proceeding is prosecuted for a redetermination1934 BTA LEXIS 1304">1305 of a deficiency in estate tax, estate of Walter P. Sharp, in the sum of $48,483.88. The errors alleged are: 1. Excessive valuation of corporate stock held by decedent by the inclusion of dividends thereon declared before, but paid after decedent's death. 2. The inclusion in gross estate of certain insurance policies. 3. The inclusion in gross estate of certain real property held by decedent and his wife as tenants by entireties. 4. The inclusion in gross estate of the corpus of five certain trusts created by decedent. 30 B.T.A. 532">533 5. The inclusion in gross estate of certain securities purchased by decedent to put in a trust for the benefit of his wife, Edith Huggard Sharp. Petitioner at the hearing withdrew the allegations of error under paragraph 2 above as to all policies of insurance except policy No. 81384 for $10,000 and No. 87437 for $8,000, and all allegations of error under paragraph 3 above. FINDINGS OF FACT. Walter P. Sharp, the decedent, a resident of Bryn Mawr, Pennsylvania, died testate on March 13, 1926. Petitioners are the executors duly appointed and acting under decedent's will. 1. Stephen F. Whitman & Son, Inc., hereinafter called1934 BTA LEXIS 1304">1306 the corporation, had outstanding 20,000 shares of its class A capital stock, of the par value of $100, or which decedent was the owner at the time of his death of 5,012 shares. On March 1, 1926, the corporation declared a dividend of 8 percent on said stock, payable March 15, 1926. This stock on March 13, 1926, under a stockholder's agreement made in decedent's lifetime, was of the fair market value of $123.11 per share, not including, however, a dividend of 8 percent theretofore on March 1, 1926, declared, and was so returned by petitioners in the estate tax return. Upon audit of the return, respondent added $8 per share so as to include the dividend. The 8 percent dividend was paid to petitioners, who returned it as income of the estate, but it was not returned as part of decedent's gross estate. The deficiency asserted under this issue arises solely from the inclusion in the gross estate of decedent of this dividend declared in his lifetime, but paid after his death. 2. In his lifetime decedent procured and at his death held eight policies of insurance upon his life. At the time of his death the aggregate amount of these policies, less loans thereon, was $173,964.87. No1934 BTA LEXIS 1304">1307 part of these insurance policies was included in the petitioners' return of the gross estate, but the Commissioner included the whole thereof except the $40,000 exemption under the statute. Petitioners now concede the taxability of this insurance except as to two policies issued by the State Mutual Life Assurance Co., numbered, respectively, 81384 and 87437. These two policies, issued before the effective date of the Revenue Act of 1918, the Commissioner included with the others in the gross estate in the respective amounts of $5,899.45 and $3,666.11, which represent their respective face values, less loans secured and outstanding thereon. Policy No. 81384 was issued August 16, 1904, on the life of Walter P. Sharp for $10,000, payable to Edith Huggard Sharp, wife of the insured, if she survived him, otherwise to his executors, administrators, or assigns. Policy No. 87437 was issued June 28, 1905, on the life of Walter P. 30 B.T.A. 532">534 Sharp for $8,000, payable "to the person whose life is hereby insured, or his assigns, on the twenty eighth day of June A.D. 1935, or in the event of his death prior to said date to pay said amount to Edith Huggard Sharp, wife of the insured, if then1934 BTA LEXIS 1304">1308 living, otherwise to the executors, administrators, or assigns of the insured." There was no right reserved to change the beneficiary in either policy. In the face of each policy the following statement occurs: "This policy * * * is issued and accepted subject to the benefits, privileges and conditions specified on the second page hereof, which are hereby made a part of this contract." On the second page under the heading, "Benefits, Privileges and Conditions referred to herein and made a part of this Contract," are the following: LOANS. Whenever the Cash Surrender Value as herein stated is payable under this policy, the Company will, upon a legal assignment and delivery ofthe policy as collateral security, loan up to the full amount of such Cash Surrender Value, with interest at a rate not to exceed six per centum per annum, payable in advance, reserving the right to require at the time of making a loan, the payment of any previous indebtedness, and the payment in full of the next annual premium becoming due; provided, however, that no loan will be made for an amount less than One Hundred Dollars; and that any existing loan must be paid in full before settlement in any form is1934 BTA LEXIS 1304">1309 made under this policy. * * ASSIGNMENTS. Any assignment of this policy must be made in duplicate and both sent to the home office, one to be retained by the Company, and the other to be returned. The Company by receiving or filing any assignment will not assume any responsibility for its validity, but the claim of any assignee shall be subject to proof of interest. There was also on the second page a table marked "Paid-Up and Cash Surrender Values," in which was set forth the amounts of "Cash Surrender Value" at the end of the third year and each succeeding year to the twentieth, when it was paid up. 3. As noted above, petitioners abandon the allegation of error in reference to property held by decedent and his wife as tenants by the entireties. 4. Upon the audit of the estate tax return, respondent included in the gross estate $178,220.50, which represented the five items making up the corpus of certain deeds of trust described on the return, said to have been executed by decedent on March 12, 1926, aggregating the sum of $203,220.50 less $25,000 exemptions for its five beneficiaries. Neither the trust instruments nor the estate tax return was produced or offered1934 BTA LEXIS 1304">1310 in evidence. (But see hereinafter as to a certain court proceeding which included as an exhibit copy of an alleged trust by decedent.) The five items making up the corpus of the alleged trusts are described only in amount. 5. Respondent also included in the gross estate at the valuation of $19,926.80 the following items: $10,000 par value, Pennsylvania30 B.T.A. 532">535 Power & Light 1st 5 percent bonds due in 1935; $10,000 Baltimore & Ohio R.R. ref. bonds due in 2000, for which, with accrued interest, decedent paid thereafter by check dated February 15, 1926, $19,855.56. Decedent at the time of the purchase of these bonds directed the brokers to hold them for and in the name of his wife, Edith Huggard Sharp, and to forward her notice and statement therefor, which they did. These bonds were intended by decedent to be included in a trust for the benefit of decedent's wife and children, but the evidence does not disclose that they were ever so included. Respondent also included in the gross estate, at the valuation of $15,093.75, bonds of the Metropolitan Edison Co., 5's 1953, of the par value of $15,000, plus accrued interest, purchased by decedent March 12, 1926, to be held by1934 BTA LEXIS 1304">1311 the brokers for and in the name of his wife, decedent agreeing personally to pay therefor. At the time of the purchase of these bonds decedent stated to the brokers that they were a gift to his wife, who would apply them to the corpus of a trust to which he had referred. At decedent's direction the brokers sent notice and statement of the sale of the bonds to decedent's wife. These bonds were not paid for by decedent, but later by his executors. The evidence does not disclose that they were ever included in a trust as intended. Certain other securities, stocks, and bonds, as shown in the 60-day notice, were purchased by decedent during the spring of 1926, with the intention that they should be included in a trust for the benefit of decedent's wife and children, but the evidence does not indicate that they were so included. As to these securities decedent expressly directed the vendors or brokers to hold them subject to his orders. The orders were never given, and the securities were still in possession of the brokers when decedent died. No trust instrument was produced or offered in evidence on the hearing in reference to any of the above items, and no trust instrument1934 BTA LEXIS 1304">1312 of any sort was produced on the hearing. In 1924 and continuing through 1925 and 1926 to the day before the death of decedent, he consulted with his attorney from time to time in reference to the creation of trusts for the benefit of his wife and children. Determination of all the details of the trusts was agreed on between decedent and his attorney except as to who should be the trustee. The actual drafting of the instruments was delayed, awaiting the enactment of the Revenue Act of 1926 to ascertain if decedent himself under the new act might be a trustee in a trust created by him. Decedent, in anticipation of the creation of these trusts, purchased many securities in the name of himself, or his wife Edith Huggard Sharp, as above stated, which were left with the brokers or 30 B.T.A. 532">536 vendors subject to the orders of decedent, which orders were never given by him. Decedent's attorney prepared five trusts dated March 1, 1926, for the execution by the testator and on March 12, 1926, decedent executed them. The trustees therein named were the testator himself and his wife, who as such also with the testator signed the instruments, accepting the trusts, on the same day. Respondent1934 BTA LEXIS 1304">1313 asserted that the items in the trusts executed and in those projected were includable in the gross estate under section 302(c) of the Revenue Act of 1926, and the contentions at the hearing between petitioner and respondent in reference thereto were as to whether the trusts were made in contemplation of death or to take effect in possession or enjoyment at or after death, and as to whether the items not actually placed in a trust should not under the circumstances be treated as if they had been. The facts in reference to these contentions are set forth as follows: The decedent at the time of his death, March 13, 1926, was 52 years of age. He had been married 24 years and was the father of 5 children. He had never had any serious physical ailment; his associates considered him a healthy man, and he never complained of any illness. He had been treated by his regular physician some half dozen times in the 10 years before his death for colds or like trouble. There had never been any indication of any trouble with his heart; his blood pressure was normal. He had been examined for life insurance shortly before his death and many times previous and always passed a satisfactory examination. 1934 BTA LEXIS 1304">1314 In 1925 on a visit to Paris he complained of some dizziness, which proved trivial and was attributed to a glass of wine he had taken. He was very energetic and successful in business. Some five or six years before his death he took thought for the future and was thereafter engaged in training men in the factory of which he had charge to later assume his place so that he might have leisure to travel and see the world. He said his mother attained the age of 90 years and he might live to be 70 or 80. He was devoted to his family and wished to provide for them in a way to secure them against any possible disposition which he might develop in old age to hazard his fortune in business deals. He often expressed to his lawyer a great horror that, while he had been successful in building up his business, he might reach an age when his judgment would become impaired and then, like some men he had known, he might be tempted into business ventures which would hazard his fortune. His desire was to place funds beyond his own control which would insure the financial protection of his wife and children. This was the primary object of the creation of the trusts and of making the transfers, 1934 BTA LEXIS 1304">1315 as he expressed himself to the lawyer who prepared the trust instruments 30 B.T.A. 532">537 for him. He also desired by this means to reduce his own income tax liability. Sometime before his death he was offered by responsible parties for the corporation which was in his control and of which he owned a majority of the stock a consideration which, if accepted, would have meant a profit to him personally of more than $1,000,000, but this he declined, because, as he explained to his lawyer, he would not know what to do. In all his contemplations with reference to his corporation he meant to retain control either in the active position of president or chairman of the board of directors. On the day of the execution of the five trusts, March 12, 1926, decedent telephoned to his attorney, asking to put off the execution of the trusts till the following week because of another engagement which he had overlooked, and it was only because of the insistence of the attorney, who himself had pressing engagements for the following week, that decedent broke his overlooked engagement to attend the execution of the trusts. At the same time decedent executed his last will and testament, prepared by the1934 BTA LEXIS 1304">1316 same attorney. Decedent on the evening of March 12, 1926, after the execution of the trusts and will, attended with his wife a dinner given by his sister. He was then suffering with what appeared to be indigestion and did not partake of the dinner. A physician was called and gave him a dose of soda. He continued to suffer, but returned home during the evening. His regular physician was called the next morning and advised him to remain quiet. Later in the day he signed some checks sent to him from the factory, but continued to suffer and died before getting back to his bed, at five o'clock in the afternoon, March 13, 1926. The cause of his death was a first attack of angina pectoris. Record of Court Proceedings.Petitioners on the hearing, over the objection and exception of respondent, introduced in evidence an exemplification of the records and proceedings of the Court of Common Pleas, No. 5, Philadelphia County, State of Pennsylvania, under Docket No. 7938, March term, 1927, in an action entitled: Fidelity-Philadelphia Trust Company, a Corporation, Charles C. Norris and Edith H. Sharp, Executors of the Will of Walter P. Sharp, Deceased, Plaintiffs, vs. Edith1934 BTA LEXIS 1304">1317 Huggard Sharp, Surviving Trustee Under Deed of Trust of Walter P. Sharp, dated March 1, 1926, and Integrity Trust Company, a Corporation of Pennsylvania. This document is incorporated here by reference, only material parts thereof being quoted. In the bill of complaint in that action it is alleged, inter alia, that "During February, 1926, and on March 4th, 1926, the Integrity Trust Company purchased on Mr [Walter P.] Sharp's order a number of securities, a list of which, with dates of the orders and 30 B.T.A. 532">538 of the purchase, is annexed to this Bill, marked Exhibit 'A,' and is hereby made a part hereof." Exhibit A so annexed is as follows: EXHIBIT A. $10,000. American Tel. & Tel. Co. 5 1/2 1943 10,000. Chicago & WesternIndiana R.R. Co. First Ref. 5 1/2 10,000. Penna. R.R. Co. Secured 5's 1964 100 shrs. American Tel. & Tel. Co. 200 shrs. Penna. R.R. Co. 150 shrs. Phila. Electric Co. 150 shrs. Electric Storage Bty. Co. 100 at 77 3/4 50 at 77 7/8 100 shrs. American Tel. & Tel. Co. 100 shrs. Penna. R.R. Co. 100 shrs. Phila. Electric Co. 100 shrs. Phila. Electric Co. 100 shrs. Penna. R.R. Co. 50 shrs. American Tel. & Tel. Co. $20,000. Phila. 1934 BTA LEXIS 1304">1318 Elec. Power Company 1st Mtge. 5 1/2's It is further alleged in the bill that in addition to the securities described in Exhibit A [copied above] the Integrity Trust Co. bought for Sharp on March 12, 1926, $20,000 par value Philadelphia Electric Power Co. first mortgage 5 1/2's which had not been paid for, but were being held by the Integrity Trust Co. subject to its claim for the purchase price; that the plaintiffs as executors under the will of Walter P. Sharp, copy of which will is annexed to the bill as Exhibit B, claim the securities; and that Edith Huggard Sharp, as surviving trustee under the deed of trust of Walter P. Sharp to Walter P. Sharp and Edith Huggard Sharp, as trustees, copy of which deed of trust is annexed to the bill and marked Exhibit C, also claims said securities; that the will of Walter P. Sharp (Exhibit B) provides for the creation of a trust with Charles C. Norris, Jr., and Fidelity-Philadelphia Trust Co. as trustees, under which trust the bulk of the securities would fall if the claim of the executors were valid; and that the deed of trust (Exhibit C) provides for the transfer by the creator (Walter P. Sharp) to Walter P. Sharp and Edith Huggard Sharp1934 BTA LEXIS 1304">1319 as trustees of certain listed property with additions thereto which the grantor (Walter P. Sharp) "may from time to time add to the property constituting the corpus of the trust * * * by delivery of property to the Trustees accompanied by a writing stating that such additional property is transferred to the Trustees * * "; that the Integrity Trust Co. is ready and willing to deliver the securities to "whomsoever shall be decided entitled thereto." Under the third item of the will of testator (Exhibit B annexed to the bill) provision is made and direction given for the formation of a trust with Charles C. Norris, 30 B.T.A. 532">539 Jr., and the Fidelity-Philadelphia Trust Co. as trustees, to which the residue of testator's estate (after bequests of jewelry, clothing, and household effects to his wife) is given. Under the deed of trust, Walter P. Sharp grantor to Walter P. Sharp and Edith Huggard Sharp as trustees, dated March 1, 1926, referred to in the bill, copy of which is annexed thereto as Exhibit C, the only property conveyed to the trustees is "973 shares of 'Class B,' stock of Stephen F. Whitman & Son, Incorporated." (This stock, under stockholder's agreement was of the value of1934 BTA LEXIS 1304">1320 $123.11 per share plus an 8 percent dividend declared thereon March 1, payable March 15, 1926, as is shown in section 1 of these findings of fact in reference to class A stock.) The defendants filed separate answers to the bill of complaint, which did not differ materially from the bill in reference to the facts. The answer of Edith Huggard Sharp alleged that while Exhibit C purported to have been executed March 1, 1926, it was not, for reasons stated, executed until March 12, 1926. The record further shows that the court on September 15, 1928, after hearing evidence, entered judgment decreeing that the "securities held by the Integrity Trust Company be delivered to Edith Huggard Sharp, Surviving Trustee; that the Executors of the Will of Walter P. Sharp, deceased, pay to the Integrity Trust Company the sum of $20,000, with interest from March 12th, 1926, and as well pay the costs of this suit." There was no appeal. OPINION. SEAWELL. 1. At the time of his death decedent had 5,012 shares of the Stephen F. Whitman & Son, Inc., class A stock. Under a stockholder's pooling agreement outstanding, certain parties to the agreement had the right to purchase the stock at its book1934 BTA LEXIS 1304">1321 value, which was ascertained to be $123.11 per share. At this value it was sold by petitioners and included by them in the estate tax return. This value, however, did not include an 8 percent dividend declared on the stock on March 1, 1926, payable March 15, 1926. The right to the dividend was a property right and belonged to decedent's estate and was taxable as such. Sec. 302(a), Revenue Act of 1926. , and cases therein cited. We sustain the respondent's ruling on this point. 2. Petitioners contest the inclusion in the gross estate of the proceeds of two of the insurance policies only, as shown in our findings of fact. The beneficiary named in these two policies is the widow of the deceased. There was no reservation of a right to substitute beneficiaries. The insurance was payable to "Edith Huggard Sharp, wife of the insured" if living at the time of the death of the insured, "otherwise to the executors," etc., of the insured. Each 30 B.T.A. 532">540 policy was "issued and accepted" subject to certain "benefits, privileges and conditions," among which were the right to receive a certain sum of money at the1934 BTA LEXIS 1304">1322 maturity of the policy, the right to surrender the policy before maturity and receive the cash surrender value thereof as set forth in the table of values attached to each policy, and, if the policy was not so surrendered, the right to pledge it before maturity for a loan or loans in amounts depending on the cash surrender value thereof. Each policy had been so pledged and at the time of the death of decedent was "legally assigned" to and held by the insurance company. It was recently held in cases wherein no power of substitution of beneficiaries was reserved that the proceeds of insurance policies "should be included in decedent's gross estate under section 302(g), since the decedent specifically reserved to himself the proceeds of the cash surrender value of this policy at maturity or upon surrender during his lifetime." , and . While the decedent lived there was always the possibility that the named beneficiary might predecease him, or that the policy be reason of nonpayment of premiums might lapse and become void, or1934 BTA LEXIS 1304">1323 it might be surrendered for its cash surrender value by the insured. In any such case the beneficiary would receive nothing. The insured might borrow money and pledge the policy, in which event the beneficiary's interest would be lessened to the extent of the loan. The death of the insured put an end to these possibilities and made complete the "shifting of the economical benefits of the property", and is the "identifiable event" which points to the transfer which is taxable. ; . Cf. (reversed in part, ). We conclude, under the conditions attached to the two contested policies, that they also should be included with those uncontested policies in the gross estate; and we accordingly sustain respondent's determination on this point. This ruling in no way conflicts with the court's decision in , or other authorities cited and relied on by petitioners. 3. Petitioners having abandoned, rightfully1934 BTA LEXIS 1304">1324 under the law, all allegations of error as to the third issue, the respondent is sustained as to that issue. 4. The determination of respondent that decedent transferred to five certain trusts property which, after the deduction of the value of $5,000 allowed in respect to each trust, aggregated the sum of $178,220.50, is prima facie correct. The witness Norris testified that 30 B.T.A. 532">541 there were six trusts made and executed March 12, 1926, one for Mrs. Sharp and one each for the five children. It is not difficult to understand, and it seems to be agreed, that the transfers here involved were those in the five trusts for the children. At least they were not the transfers by the trust copied in the equity suit as Exhibit C, referred to in the findings of fact, which purported to include only one item of property and that not of the value here involved, and in that instrument Mrs. Sharp was the primary beneficiary alone. The failure to introduce the trust instruments, or any of them, in evidence, may be immaterial, since the controversy under this issue was confined by the parties on the hearing and in the briefs to the sole question as to whether the transfers by the trusts1934 BTA LEXIS 1304">1325 were made in contemplation of or intended to take effect in possession or enjoyment at or after death. Sec. 302(c) of the Revenue Act of 1923, amended March 3, 1931. The trusts were made only one day before the death of the grantor. At the time the trusts were made decedent also made his last will and testament. These facts point to, but do not necessarily answer the issue. While the will necessarily falls within the provisions of the statute, since it takes effect at death, nowhere in the evidence was any other connection between the execution of the trusts and the will shown except in the point of time and the further fact that the same lawyer prepared them all. This incident of time and the circumstance of the execution of the will and trusts on the same day are not sufficient, we think, to overcome the other evidence in the case. The evidence was at considerable length, and it all pointed to the fact that motives and purposes other than the contemplation of death actuated the execution of the instruments, as shown succinctly in our findings of fact. Decedent was not then sick; he had not been seriously sick in years; he was busily engaged about his business and in making1934 BTA LEXIS 1304">1326 plans for business activity for the years ahead; for the immediate future he was to attend that evening a supper party. In the midst of life he was in the midst of death and knew it not. Even after the fatal malady seized him he signed the payroll checks of his business and expired before he could return to his bed, a victim of a first attack of angina pectoris. When decedent signed the trust deeds we are of the opinion he had reason to believe and did believe that he would not die until some fairly remote time thereafter. We are further of the opinion that decedent's motive in executing the trust instruments and making the transfers in question was not in contemplation of death and was not testamentary in nature. . Upon this issue we overrule respondent and sustain petitioners. 5. With reference to the items under this head in the amounts of $19,926.80 Pennsylvania Power & Light 1st 5 percent bonds and 30 B.T.A. 532">542 Baltimore & Ohio R.R. ref. bonds due in 2000, and $15,093.75 bonds of the Metropolitan Edison Co., 5's 1953, respondent in his brief concedes that they are not taxable unless the transfers were made in contemplation1934 BTA LEXIS 1304">1327 of death. We hold that the gifts were not made in contemplation of death, and that these items should not be included in the gross estate. As to the other items under this head, they were never included in any trust and never delivered by way of gift to any person, but they remained the property of decedent at the time of his death and should be included in the gross estate, and the respondent is sustained as to them. ; certiorari denied, . The action of the Court of Equity of Pennsylvania in adjudging certain bonds (assumed to be those here involved) to belong to Edith Huggard Sharp as surviving trustee of a trust of Walter P. Sharp, grantor, to Walter P. Sharp and Edith Huggard Sharp, trustees, is in no sense binding on the Board of Tax Appeals in the controversy here present. As said in ; affd., , "in determining whether or not there has been a transfer under the Federal statute we must look to the interpretations adopted by the Federal courts and tribunals." See 1934 BTA LEXIS 1304">1328 ; Reviewed by the Board. Judgment will be entered under Rule 50.VAN FOSSAN, MATTHEWS VAN FOSSAN, dissenting: I can not agree with the majority ruling that the transfer of property to the trusts was not made in contemplation of death as defined in United States v. Wells,283 U.S. 102">283 U.S. 102. On the same day the trust deeds were executed petitioner executed his will. The trusts were for the benefit of the wife and children, the natural objects of the decedent's bounty in a testamentary disposition. The only conclusion I can draw from such a situation is that decedent was putting his house in order in contemplation of his ultimate death. The fact that he did not contemplate early death is immaterial. He was doing those things normally done in a testamentary disposition by one desiring to control the disposition of his property at his death. Edgar A. Igleheart et al., Executors,28 B.T.A. 888">28 B.T.A. 888. The burden of proof was on the taxpayers. The failure to produce the deeds of trust in evidence gives rise to a proper1934 BTA LEXIS 1304">1329 inference that the language of the deeds would not have supported their contention. SMITH, LEECH, and ADAMS agree with this dissent. 30 B.T.A. 532">543 MATTHEWS, dissenting: I concur in the above dissent, that the gift was made in contemplation of death. I agree with the result reached as to the insurance policies, but not for the reasons stated. Both policies at the time of decedent's death had been assigned to the insurance company for loans. Decedent's wife was named beneficiary in each policy and there was no right to change the beneficiary. She had a vested interest in the policy, of which she could not be divested without her consent. ; ; . The fact that the policy also provided that in case of beneficiary's death prior to that of insured, the insurance was to be paid to the executors of the insured, did not prevent the vesting in the beneficiary from being complete. In , in which the settlor of a trust provided in the trust deed that, if the beneficiary should predecease him, the1934 BTA LEXIS 1304">1330 trust res should revert to him, we said "such possibility of reversion did not prevent the gift from being complete," citing . Our decision in the Duke case was affirmed by the , and affirmed per curiam by the Supreme Court (divided), . The Duke case was cited and followed in , with respect to an insurance policy having a similar provision in the case of an irrevocable beneficiary. Under the terms of each policy, which are set forth in the statement of facts, loans would be made only upon legal assignment of the policy. The terms do not provide that the insured could secure a loan upon assignment of the policy by him. It must be assumed, therefore, that the beneficiary, who had a vested interest in the policies of which she could not be divested without her consent, joined in the assignment, and for aught the record shows her consent may well have been sufficiently broad to permit the insured to surrender the policies for their cash surrender value. Until1934 BTA LEXIS 1304">1331 his death, therefore, the insured had control over the policies and their proceeds, and for this reason I think the proceeds are includable in gross estate. The majority opinion interprets the provision of the policy to provide that it might be surrendered for its cash surrender value by the insured, and that the insured might borrow money and pledge the policy. Under the terms of the policy no such powers are left in the insured alone. If such could be done at the date of his death, it was by virtue of the consent of the beneficiary to the assignment of the policies to the company for a loan, which consent, as stated above, might, for all the record shows, be broad enough to permit the 30 B.T.A. 532">544 insured to surrender the policy. The Ballinger case, , cited in the majority opinion, is not in point, since under the policy there in question the insured specifically reserved to himself the proceeds of the cash surrender value at maturity or upon surrender during his lifetime. In the instant case, the insured did not specifically reserve such right and a loan or the cash surrender value would be made only "upon a legal assignment and delivery of the1934 BTA LEXIS 1304">1332 policy."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620779/	APPEAL OF INDUSTRIAL COMPANY OF BINGHAMTON.Industrial Co. of Binghamton v. CommissionerDocket No. 2939.United States Board of Tax Appeals2 B.T.A. 360; 1925 BTA LEXIS 2446; July 14, 1925, Decided Submitted June 25, 1925. 1925 BTA LEXIS 2446">2446 Henry Herrick Bond, Esq., for the taxpayer. P. S. Crewe, Esq., for the Commissioner. 2 B.T.A. 360">360 Before JAMES and LITTLETON. This is an appeal from a determination of a deficiency in income and profits tax for the calendar year 1919, in the amount of $696.57, arising from the refusal of the Commissioner to permit taxpayer to file a consolidated return with Dunn & McCarthy for the calendar year 1919. FINDINGS OF FACT. Taxpayer is a New York corporation, organized in 1906 by the Chamber of Commerce of Binghamton, N.Y., for the purpose of acquiring land in that city and erecting thereon a factory for lease to Dunn & McCarthy, manufacturers of shoes. In September, 1906, Dunn & McCarthy, a corporation, with offices and place of business in the City of Auburn, N.Y., entered into an agreement with the Binghamton Chamber of Commerce to the effect that the Binghamton Chamber of Commerce would organize a corporation for the purpose of acquiring a site and erecting thereon buildings; that upon completion of the buildings Dunn & McCarthy would lease the land and buildings for a period of 10 years to carry on the business of manufacturing footwear, and would pay1925 BTA LEXIS 2446">2447 to such corporation an annual rental equal to 6 per cent of the cost of the land and buildings, together with all taxes, repairs, and insurance. Pursuant to this agreement the Binghamton Chamber of Commerce organized the Industrial Company of Binghamton, and, on November 7, 1906, it entered into a contract with the Binghamton Chamber of Commerce for carrying out the contract with Dunn & McCarthy. The original authorized capital stock of the taxpayer was $80,000. It began business with $30,000 paid in. 2 B.T.A. 360">361 Pursuant to the terms of the contract between the Binghamton Chamber of Commerce and Dunn & McCarthy, taxpayer completed the factory and leased the land and buildings to Dunn & McCarthy on July 1, 1907, for a period of 10 years, at an annual rental of 6 per cent of their cost. This lease was renewed on July 7, 1917, for a further period of 10 years. From time to time taxpayer sold additional stock for the purpose of making additions to the buildings, and during the year 1919 had outstanding 1,750 shares with a par value of $100 each. Dunn & McCarthy owned 1,294 shares of this number and the remaining 456 shares were owned by approximately ninety business men1925 BTA LEXIS 2446">*2448 of Binghamton who had no direct connection with Dunn & McCarthy. Subsequently, in 1922, Dunn & McCarthy purchased the entire holdings of the minority stockholders. The minority stockholders voted their stock in accordance with the desires of Dunn & McCarthy for the reason that the desires of that company coincided with the desires of the minority stockholders. During the year 1919 the vice president of Dunn & McCarthy was one of the directors of the taxpayer and that board took such action in respect to the leased premises as Dunn & McCarthy requested. DECISION. The determination of the Commissioner is approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620780/	W. Z. SHARP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sharp v. CommissionerDocket No. 10598.United States Board of Tax Appeals8 B.T.A. 399; 1927 BTA LEXIS 2902; September 29, 1927, Promulgated 1927 BTA LEXIS 2902">2902 The petitioner held to be entitled to deduct from gross income in his income-tax return for 1921, $3,900, representing the difference between the amount paid for a second mortgage note and the value of the equity represented by said note. Joseph H. Kirby, Esq., and P. J. Coffey, Esq., for the petitioner. James A. O'Callaghan, Esq., for the respondent. SMITH 8 B.T.A. 399">399 This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 of $1,323.43. The question in issue is the right of the petitioner to deduct from gross income in his incometax return for 1921, $3,900 representing a loss sustained by him on the purchase of a second mortgage note. FINDINGS OF FACT. The petitioner is a resident of Sioux Falls, S. Dak. In 1919, or prior thereto, one B. E. Adkins, of Howard, S. Dak., sold to D. Curvo 160 acres of land in Miner County S. Dak., at a price of $16,700. This land was subject to a first mortgage of $7,000, 8 B.T.A. 399">400 bearing interest at 5 per cent annum. The purchaser paid down no cash, but gave to Adkins a second mortgage note of $9,700 bearing interest at 6 per cent per annum. Adkins was then1927 BTA LEXIS 2902">2903 reputed to be worth $150,000. He requested the petitioner, who was president of a bank, to purchase the note at its face value. This the petitioner did upon the endorsement of Adkins, which the petitioner considered ample security therefor. Curvo, the maker of the note, went through voluntary bankruptcy in 1921 and Adkins became hopelessly insolvent during the year. The petitioner then made inquiry of persons familiar with the land in question and was advised that the land could not be sold for more than $12,800. Upon this information the petitioner charged off $3,900 on the note and deducted the same from gross income in his income-tax return for 1921. The deduction was disallowed by the Commissioner in determining the deficiency herein complained of. In 1922 Curvo informed the petitioner that he could not pay anything on the note; that the petitioner could either foreclose the mortgage or that Curvo would deed him the land in exchange for the note. Curvo then deeded the land to the petitioner and the petitioner surrendered the note to Curvo. The fair market value of the land in question in 1921 and in 1922 was not in excess of $12,800. At no time since then could the1927 BTA LEXIS 2902">2904 land have been sold for that price and the value at the present time is not in excess of $10,000. OPINION. SMITH: Section 214(a) of the Revenue Act of 1921 permits an individual to deduct from gross income in his income-tax return: (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business; (5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * (6) Losses sustained during the taxable year of property not connected with the trade or business * * * if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. Losses allowed under paragraphs (4), (5), and (6) of this subdivision shall be deducted as of the taxable year in which sustained unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period. * * * (7) Debts ascertained to be worthless and charged of within the taxable year * * * and when satisfied1927 BTA LEXIS 2902">2905 that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part. The evidence in the case at bar shows that the petitioner had, in 1921, a second mortgage note on land of a value of $12,800. The face of the note was $9,700 and the land was encumbered by a first mortgage of $7,000. The maker of the note and the endorser were 8 B.T.A. 399">401 both insolvent. The maker had gone through bankruptcy in 1921 and the endorser was found by the petitioner to be hopelessly insolvent and to have no property from which he might hope to recover any part of the face value of the note. In 1921 the petitioner determined that his loss upon the note was at least $3,900. The 1921 Act pemits an individual taxpayer to deduct from gross income the part of a debt ascertained to be worthless provided it has been charged off within the taxable year. The petitioner determined the uncollectible part of the debt due him in 1921 to be $3,900 and charged it off of his books of account. In , the Supreme Court held that under the Revenue Act of 1918 a loss of an American1927 BTA LEXIS 2902">2906 company represented by the amount of its investment in subsidiary German corporation was sustained and was deductible in 1918 when the entire property of the German corporation was seized by the German government as enemy property. In the course of its opinion the court stated: * * The statute [Revenue Act of 1918] obviously does not contemplate and the regulations (Art. 144) forbid the deduction of losses resulting from the mere flucturation in value of property owned by the taxpayer. ; cf. . But with equal certainty they do contemplate the deduction from gross income of losses, which are fixed by identifiable events. Such as the sale of property (Art. 141, 144), or caused by its destruction or physical injury (Art. 141, 142, 143) or, in the case of debts, by the occurrence of such events as prevent their collection (Art. 151). In our opinion the loss in the case at bar was "fixed by identifiable events" occurring in the year 1921. The petitioner is therefore entitled to the deduction from gross income in his income-tax return of 1921 of the1927 BTA LEXIS 2902">*2907 $3,900 claimed. Judgment will be entered for the petitioner after 15 days' notice, under Rule 50.Considered by LITTLETON and LOVE.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620782/	TRINOVA CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTrinova Corp. v. CommissionerDocket No. 2931-94United States Tax Court108 T.C. 68; 1997 U.S. Tax Ct. LEXIS 6; 108 T.C. No. 6; February 27, 1997, Filed 1997 U.S. Tax Ct. LEXIS 6">6 P, a corporation, filed a consolidated tax return with its affiliated companies. P operated a division with assets that included certain section 38 assets upon which investment tax credits (ITC) had been claimed. P transferred the division assets to a wholly owned subsidiary, G. P agreed to transfer its shares in G to another shareholder, H, in return for H's shares in P. The two transactions qualified for nonrecognition status under secs. 351, 355, and 368 (a) (1) (D), I.R.C. R determined a deficiency for P's failure to include ITC recapture in income under sec. 47(a), I.R.C., on its 1986 consolidated tax return, relying on Rev. Rul. 82-20, 1982-1 C.B. 6. Sec. 1.1502-3(f) (2) and (3), Income Tax Regs., particularly Example (5) thereof, provides for no recapture. Held:Rev. Rul. 82-20, 1982-1 C.B. 6, is an unwarranted attempt to limit the scope of the regulations; no ITC recapture is includable in P's income. Frederick E. Henry, Jeffrey M. O'Donnell, and Julie C. H. Walsh, for petitioners.Nancy B. Herbert and Reid M. Huey, for respondent. TANNENWALD, Judge TANNENWALD108 T.C. 68">69 OPINIONTANNENWALD, Judge: Respondent determined the following deficiencies in petitioner's Federal income taxes 1997 U.S. Tax Ct. LEXIS 6">7 and additions to tax:Addition To TaxYearDeficiency Sec. 6661 (a)1985$ 117,988--1986 11,630,928$ 1,429,68719874,924,255--1988834,875--After concessions, the issue for decision is whether petitioner is liable for recapture in 1986 of investment tax credits (ITC) claimed on certain section 381 assets that were transferred to a wholly owned subsidiary, the stock of which was then transferred out of the consolidated group in a tax-free transaction. If this issue is resolved in favor of respondent, then the issue of the addition to tax under section 6661(a), which relates only to the recapture issue, will have to be decided. 2BackgroundThis case was submitted fully stipulated under Rule 122. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference and found accordingly.Petitioner, an accrual 1997 U.S. Tax Ct. LEXIS 6">8 basis taxpayer, had its principal offices in Maumee, Ohio, at the time it filed its petition herein. Petitioner changed its name to Trinova from the Libbey-Owens-Ford Company (LOF) on July 31, 1986. Petitioner timely filed a consolidated Federal income tax return with certain of its subsidiaries for the years at issue with the Internal Revenue Service Center, Cincinnati, Ohio, or the Internal Revenue Service office in Toledo, Ohio. Petitioner was engaged in the fluid power and plastics businesses, and in the manufacture of glass. The glass business was referred to as the "LOF Glass Division".One of LOF's largest shareholders was Pilkington Brothers (Pilkington), an English company, which owned 29 percent of 108 T.C. 68">70 petitioner's common stock through its wholly owned U.S. subsidiary, Pilkington Holdings, Inc. (Pilkington Holdings). Two of petitioner's fourteen directors were associated with Pilkington. In late 1985, Pilkington approached LOF and began negotiations concerning the possibility of acquiring the glass business.Earlier that year, on July 25, 1985, the board of directors of LOF approved the transfer of the glass business to a wholly owned subsidiary for valid business reasons. On 1997 U.S. Tax Ct. LEXIS 6">9 February 19, 1986, LOF Glass, Inc. was incorporated as a wholly owned subsidiary of LOF. On March 6, 1986, a "Transfer and Assumption Agreement", amended on April 25, 1986, transferred to LOF Glass, Inc., all assets associated with the LOF Glass Division, including inventories and receivables, effective retroactively to February 19, 1986. These assets also included section 38 assets upon which LOF had previously claimed ITCs. Petitioner took no formal action contemplating the liquidation of LOF Glass, Inc., in the event that the acquisition by Pilkington did not take place.On March 7, 1986, LOF, Pilkington, and Pilkington Holdings entered into an agreement, amended on April 28, 1986, whereby LOF would transfer all of its shares of LOF Glass, Inc., to Pilkington Holdings in exchange for all of the shares of petitioner held by Pilkington Holdings. On April 28, 1986, Pilkington Holdings exchanged 4,064,550 shares of LOF for the shares of LOF Glass, Inc.LOF Glass, Inc., continued to operate the glass business as a subsidiary of Pilkington Holdings and used the section 38 assets in its trade or business.The parties have stipulated that petitioner recognized no gain or loss upon the transaction 1997 U.S. Tax Ct. LEXIS 6">10 whereby its glass business was transferred to LOF Glass, Inc., pursuant to the provisions of section 351 or sections 354, 355, and 368 (a) (1) (D) (except as required by such sections or section 357 (c)), and that pursuant to section 355 neither petitioner nor Pilkington Holdings recognized any gain or loss upon the exchange of LOF Glass, Inc., shares for the LOF shares.Before February 19, 1986, income, deductions, and credits with respect to the LOF Glass Division were included in petitioner's return. From February 19, 1986, through April 28, 1986, deductions and credits with respect to LOF Glass, Inc. (the subsidiary), were included as part of petitioner's consolidated return. After April 28, 1986, LOF Glass, Inc., was no 108 T.C. 68">71 longer part of petitioner, petitioner's affiliated group, or petitioner's consolidated Federal income tax return.On its 1986 consolidated return, petitioner did not include any amount of ITC recapture with respect to the LOF Glass, Inc., section 38 assets. Respondent determined that a $ 5,718,749 ITC recapture arose from the April 1986 transaction. Petitioner does not dispute the amount of the ITC recapture, should the Court hold petitioner liable for it.DiscussionThe 1997 U.S. Tax Ct. LEXIS 6">11 investment tax credit provisions, now repealed but in effect in respect of the taxable year 1986, provided for a tax credit to taxpayers purchasing certain types of property for use in their businesses. Whether petitioner is required to recapture its investment tax credit turns upon the impact of a revenue ruling on what other otherwise appears to be unqualified language of a consolidated return regulation. The issue is not new to this Court whose position has been rejected by two Courts of Appeals. By way of background to our resolution of this judicial conflict, we first turn to a description of the provisions in respect of the investment tax credit pertinent to our analysis.Section 47 (a) (1) provided for recapture of the investment tax credit:If during any taxable year any property is disposed of, or otherwise ceases to be section 38 property with respect to the taxpayer, before the close of the useful life which was taken into account in computing the credit under section 38 * * 31997 U.S. Tax Ct. LEXIS 6">12 Section 47(b) further provided:For purposes of subsection (a), property shall not be treated as ceasing to be section 38 property with respect to the taxpayer by reason of a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as section 38 property and the taxpayer retains a substantial interest in such trade or business.Section 47 sets out two prongs for the "mere change in the form" test--first, a continuing trade or business, and second, a retained substantial interest. The transactions herein 108 T.C. 68">72 clearly satisfy the continuing trade or business requirement. However, after the transaction in question, petitioner no longer had any interest in its former glass business; LOF Glass operated as a subsidiary of Pilkington Holdings. Thus, if section 47 were the only provision involved in this case, this lack of retained interest would be fatal to petitioner's position herein. Blevins v. Commissioner,61 T.C. 547">61 T.C. 547 (1974); Aboussie v. Commissioner,60 T.C. 549">60 T.C. 549 (1973), affd. without published opinion 504 F.2d 758">504 F.2d 758 (5th Cir. 1974); 1997 U.S. Tax Ct. LEXIS 6">13 Soares v. Commissioner,50 T.C. 909">50 T.C. 909 (1968); Purvis v. United States, 73-1 USTC par. 9157 (N.D. Ga. 1972).However, the transactions herein took place in the consolidated return context, which provides a different frame of reference. Paragraph (f) of section 1.1502-3, Income Tax Regs., deals with early dispositions of section 38 assets of a member of a consolidated group; subparagraph (2) of paragraph (f) provides:(2) * * a transfer of section 38 property from one member of the group to another member of such group during a consolidated return year shall not be treated as a disposition or cessation within the meaning of section 47(a) (1). If such section 38 property is disposed of, or otherwise ceases to be section 38 property * * * before the close of the estimated useful life * * , then section 47(a) (1) or (2) shall apply * Subparagraph (3) of paragraph (f) provides:(3) Examples. The provisions of this paragraph may be illustrated by the following examples:Example (1). P, S, and T file a consolidated return for calendar year 1967. In such year S places in service section 38 property having an estimated useful life of more than 8 years. In 1968, P, S, and T file a consolidated 1997 U.S. Tax Ct. LEXIS 6">14 return, and in such year S sells such property to T. Such sale will not cause section 47(a) (1) to apply.* * * Example (3). Assume the same facts as in example (1), except that P, S, and T continue to file consolidated returns through 1971 and in such year T disposes of the property to individual A. Section 47(a) (1) will apply to the group * ** * * Example (5) . Assume the same facts as in example (1), except that in 1969, P sells all the stock of T to a third party. Such sale will not cause section 47(a) (1) to apply.108 T.C. 68">73 It is clear that the mere transfer of section 38 assets within a consolidated group does not trigger recapture. Sec. 1.1502-3(f) (2), Income Tax Regs.; see also sec. 47(b); Tandy Corp. v. Commissioner,92 T.C. 1165">92 T.C. 1165 (1989); sec. 1.47-3(a), Income Tax Regs.It is equally clear from Example (3) of the regulations that a transfer of the section 38assets by LOF Glass, Inc., to Pilkington Holdings would have triggered the recapture of the investment tax credit. In the same vein, the language of Example (5) without more would dictate that the transfer of the stock of LOF Glass, Inc., to Pilkington Holdings would not trigger the recapture of such credit. In point of fact, 1997 U.S. Tax Ct. LEXIS 6">15 the application of Example (5) to the instant case is affected by a revenue ruling and the opinions of two Courts of Appeals approving that ruling. In order to facilitate an understanding of the positions of the parties and our views in respect thereto, we shall first discuss the ruling and the two Courts of Appeals opinions.In Rev. Rul. 82-20, 1982-1 C.B. 6, section 38 assets were, pursuant to a prearranged plan, transferred by the parent corporation to a subsidiary within a consolidated group in exchange for stock of the subsidiary. Immediately thereafter, the stock of the subsidiary was distributed to one of the two shareholders in exchange for his stock in the parent. It was assumed that the subsidiary would continue to use the section 38 assets in the same trade or business. Although the ruling recognized that the transactions qualified under sections 355(c) (1) and 368(a) (1) (D), it held that the ITC recapture provision of section 47(a) (1) applied on the ground that there was a planned transfer of the property outside the group. Without making any reference to Example (5), the ruling reasons:Although section 1.1502-3(f) (2) (i) of the regulations creates an exception for transfers 1997 U.S. Tax Ct. LEXIS 6">16 of section 38 property between members of a consolidated group that would otherwise be dispositions under section 47(a) (1), the exception is premised on the assumption that the property is remaining within the consolidated group. When there is no intention at the time of transfer to keep the property within the consolidated group, the transaction should be viewed as a whole and not as separate individual transactions. * * * [Rev. Rul. 82-20, 1982-1 C.B. 7.]A factual situation similar to that involved herein was subjected to scrutiny by this Court in Walt Disney Inc. v. 108 T.C. 68">74 Commissioner,97 T.C. 221">97 T.C. 221 (1991), revd. 4 F.3d 735">4 F.3d 735 (9th Cir. 1993). In holding that there was no ITC recapture upon the transfer of the shares of a subsidiary out of the consolidated group, we rejected respondent's argument that Example (5) was premised on the section 38 assets' remaining in the consolidated group and that there was no intention to observe this condition at the time the plans resulting in the transfer of the section 38 assets outside the consolidated group in Walt Disney Inc. were formulated. In so doing, we stated:Although the example (5) stock sale occurs in the year following the sale of the property 1997 U.S. Tax Ct. LEXIS 6">17 within the affiliated group, there is nothing in section 1.1502-3(f) (2) (i) and (3), Income Tax Regs., requiring a minimum waiting period. Indeed, as little as a 1-day wait would be literally consistent with the examples in the regulation: the sale from S to T in example (1) could occur on December 31, 1968, and the sale of the S[T] stock out of the affiliated group in example (5) could occur on January 1, 1969. Nor is there any express requirement that the idea for the stock transfer arise after the sale of the property within the affiliated group. Thus, respondent's contention that the regulation is premised on the property remaining in the affiliated group is not apparent from the regulation itself. [Walt Disney Inc. v. Commissioner,97 T.C. 221">97 T.C. 228.]Based upon this analysis, we held that the regulation controlled, stating "When the authority to prescribe legislative regulations exists, this Court is not inclined to interfere if the regulations as written support the taxpayer's position." Id. We adopted this view even though an "unwarranted benefit to the taxpayer" might exist ( 97 T.C. 221">id. at 229) and restated the position we had taken in Woods Investment Co. v. Commissioner,85 T.C. 274">85 T.C. 274, 85 T.C. 274">281-282 (1985), 1997 U.S. Tax Ct. LEXIS 6">18 that if respondent were dissatisfied with the import of a regulation, she should use her broad powers to amend the regulation and not look to the courts to do it for her. Although we made no specific reference to Rev. Rul. 82-20, supra, it is clear that we rejected its reasoning by adhering to Example (5). Indeed, we reinforced such rejection by a lengthy discussion and rejection of the role of the so-called step transaction doctrine upon which Rev. Rul. 82-20 rested. See Walt Disney Inc. v. Commissioner,97 T.C. 221">97 T.C. 231-236; see also 92 T.C. 1165">Tandy Corp. v. Commissioner, supra, wherein we rejected the application of the step transaction doctrine to the issue of an ITC recapture in a nonconsolidated return situation.108 T.C. 68">75 The next development in the scenario involved herein is the decision of the Court of Appeals for the Second Circuit in Salomon, Inc. v. United States,976 F.2d 837">976 F.2d 837 (2d Cir. 1992) . A factual situation substantially similar to that involved herein and in 97 T.C. 221">Walt Disney Inc. v. Commissioner, supra, confronted the Court of Appeals in Salomon.In deciding the case in favor of the Government, the Court of Appeals for the Second Circuit declared that the fact that, in Example (5), "the asset 1997 U.S. Tax Ct. LEXIS 6">19 transfer occurs in one year (1968) and the spinoff in the next year (1969)", 976 F.2d 837">Salomon, Inc. v. United States, supra at 842, constituted a significant difference from the situation dealt with in Rev. Rul. 82-20, supra, and the Court of Appeals concluded:The Revenue Ruling thus complements CRR Example 5 by dealing with transactions that occur rapidly and are intended at their onset to transfer section 38 property outside the consolidated group. The consolidated return regulations state that "the Internal Revenue Code, or other law, shall be applicable to the group to the extent the regulations do not exclude its application." Treas. Reg. § 1.1502-80 (emphasis added). Revenue Ruling 82-20 is within the ambit of such "other law." We accordingly believe that the two rulings are not in conflict, and may consistently be read together. Judge Freeh did not err when he viewed the two rulings as alternatives and then chose Revenue Ruling 82-20 based on EMC's intention "immediately" to spin-off EC following the asset transfer. [Salomon, Inc. v. United States,976 F.2d 837">976 F.2d at 842-843.]Having thus adopted the Government's position based upon its conclusion that Rev. Rul. 82-20, supra, was reasonable 1997 U.S. Tax Ct. LEXIS 6">20 and consistent with prevailing law, the Court of Appeals for the Second Circuit declined to discuss whether the step transaction doctrine as such would, in any event, apply. 976 F.2d 837">Salomon, Inc. v. United States, supra at 843-844.The final development in the scenario is the reversal of our decision in 97 T.C. 221">Walt Disney Inc. v. Commissioner, supra, by the Court of Appeals for the Ninth Circuit. Relying heavily upon 976 F.2d 837">Salomon, Inc. v. United States, supra, the Court of Appeals for the Ninth Circuit also concluded that Rev. Rul. 82-20, supra, and Example (5) were consistent and agreed with the Court of Appeals for the Second Circuit, with the further comment that Rev. Rul. 82-20 qualified as "other law" under section 1.1502-80, Income Tax Regs.Walt Disney Inc. v. Commissioner, 4 F.3d at 741 n.l0. The Court of Appeals for 108 T.C. 68">76 the Ninth Circuit made no reference to the step transaction doctrine.Against the foregoing background, we proceed to consider the positions of the parties. Relying on the position we took in 97 T.C. 221">Walt Disney Inc. v. Commissioner, supra, petitioner contends that the regulations, section 1.1502-3(f)(2) and (3), and Example (5) in particular, Income Tax Regs., are dispositive and that the 1997 U.S. Tax Ct. LEXIS 6">21 step transaction doctrine has no application herein. Respondent, relying on Rev. Rul. 82-20, supra, and the status accorded it by the Courts of Appeals for the Second and Ninth Circuits in 976 F.2d 837">Salomon, Inc. v. United States, supra, and 97 T.C. 221">Walt Disney Inc. v. Commissioner, supra, argues in effect that Rev. Rul. 82-20, supra, operates independently of Example (5) and should control and that, in any event, the application of the step transaction doctrine should result in the recapture by petitioner of the investment tax credit. We agree with petitioner.With all due respect, we disagree with both the result and the reasoning of the Courts of Appeals and adhere to the position we took in Walt Disney Inc. v. Commissioner,97 T.C. 221">97 T.C. 221 (1991). We think that the fact that the transfer of the assets and the transfer of the stock occurred in the same, rather than different, taxable years does not provide a meaningful basis for distinguishing Rev. Rul. 82-20, supra, from Example (5) of the regulations. Indeed, as we have already pointed out, see supra pp. 9-10, we specifically refused to give weight to this element in 97 T.C. 221">Walt Disney Inc. v. Commissioner, supra.Our continued adherence to this point of view 1997 U.S. Tax Ct. LEXIS 6">22 is reinforced by the fact that the time span element is also present in Example (3) where the section 38 assets are transferred in a different taxable year and the recapture of the investment tax credit is mandated. The contrast between these two examples highlights the fact that it is what is transferred and not when the transfer occurs that is significant. Indeed, if timing was a significant element in Example (5), one would think that respondent would have referred to Example (5) and this element in Rev. Rul. 82-20, supra, and thus provided the tax-paying public with notice of respondent's restrictive interpretation of Example (5) rather than leaving such interpretation to unarticulated alleged inference. We do not think the "assumption" referred to in 108 T.C. 68">77 the ruling, see supra p. 9, constitutes a meaningful signal to this effect.In the foregoing context, the conflict between Rev. Rul. 82-20, supra, and Example (5) becomes apparent. The question then becomes what, if any, weight we should give to Rev. Rul. 82-20, supra. We think the Courts of Appeals for the Second and Ninth Circuits accorded the ruling undue weight and that revenue rulings play a lesser role than the language of the 1997 U.S. Tax Ct. LEXIS 6">23 opinions of those Courts of Appeals seems to indicate. We see no purpose to be served in engaging in a detailed discussion of the differences in judicial articulation which can be found in this arena. We note, however, that the Court of Appeals for the Sixth Circuit, to which an appeal herein will lie, has stated:A Revenue Ruling, however, is not entitled to the deference accorded a statute or a Treasury Regulation. * * [Threlkeld v. Commissioner,848 F.2d 81">848 F.2d 81, 848 F.2d 81">84 (6th Cir. 1988), affg. 87 T.C. 1294">87 T.C. 1294 (1987).]As we see it, Example (5) and not Rev. Rul. 82-20, supra, provides the key to decision herein. It may well be that Example (5) provides an unwarranted benefit to the taxpayer, but such a consideration was not sufficient to tip the scales in Woods Investment Co. v. Commissioner,85 T.C. 274">85 T.C. 274 (1985). See supra p. 10. We think as we did in 97 T.C. 221">Walt Disney Inc. v. Commissioner, supra, that the same approach applies herein. Respondent's remedy is not to seek to modify the regulation by judicial action or administrative ruling, but to change the regulation itself. See Walt Disney Inc. v. Commissioner,97 T.C. 221">97 T.C. 229 (quoting at length from Woods Investment Co. v. Commissioner,85 T.C. 274">85 T.C. 281-2821997 U.S. Tax Ct. LEXIS 6">24 )); see also Honeywell Inc. v. Commissioner,87 T.C. 624">87 T.C. 624, 87 T.C. 624">635 (1986) (respondent had the right to amend the regulations but could not do so "by a revenue ruling or by judicial intervention"); Peninsula Steel Products & Equip. Co. v. Commissioner,78 T.C. 1029">78 T.C. 1029, 78 T.C. 1029">1052 (1982) (ruling disapproved in light of regulation); Sims v. Commissioner,72 T.C. 996">72 T.C. 996, 72 T.C. 996">1006 (1979) (rulings do not have the force of regulations).Our approach herein obviously also reflects our disagreement with that of the Courts of Appeals for the Second and Ninth Circuits in according Rev. Rul. 82-20, supra, the status of "other law" in order to apply section 1.1502-80, Income Tax Regs. See supra p. 11. See Norfolk S. Corp. v. Commissioner,108 T.C. 68">78 104 T.C. 13">104 T.C. 13, 104 T.C. 13">45-46 (1995) (revenue rulings "do not have the force of law"), supplemented by 104 T.C. 417">104 T.C. 417 (1995).Finally, we turn to respondent's attempt to salvage her position by arguing that the step transaction doctrine constitutes "other law" within the meaning of section 1.1502-80(a), Income Tax Regs., which provides:The Internal Revenue Code, or other law, shall be applicable to the group to the extent the regulations do not exclude its application. * * We rejected respondent's 1997 U.S. Tax Ct. LEXIS 6">25 attempt to invoke this provision in Walt Disney Inc. v. Commissioner,97 T.C. 221">97 T.C. 231-236. In our opinion in that case, we set forth a detailed analysis of a factual situation substantially similar to that involved herein and concluded that there were no "meaningless or unnecessary steps" that should be ignored as required by the step transaction doctrine. We emphasized that respondent had blessed a reorganization plan. See 97 T.C. 221">id. at 225. We see no need to repeat that analysis herein where the facts are at least as strong as those which were involved in Walt Disney. In this connection, it is significant that in this case respondent has stipulated that the requirements of section 355 were met. By so doing, respondent has stipulated that there was a business purpose, i.e., substance, to the transfer by petitioner to LOF Glass, Inc., a position which is inconsistent with her position herein that petitioner disposed of the assets by in effect transferring them to Pilkington Holdings. Under these circumstances, we think that the analysis of the Courts of Appeals for the Second Circuit in Salomon, Inc. v. Commissioner,976 F.2d 837">976 F.2d 837 (1992), and the Ninth Circuit in 97 T.C. 221">Walt Disney Inc. v. Commissioner, supra,1997 U.S. Tax Ct. LEXIS 6">26 based on "economic reality" and "substance", which are key elements of the step transaction doctrine, misses the mark in terms of the proper disposition of this case. See Ginsburg & Levin, Mergers, Acquisitions and Buyouts, sec. 1002.1.1.4 (July 1996).In sum, we hold for petitioner on the issue of the recapture of the investment tax credit. Such being the case, there is no addition to tax under section 6661. We again point out that this opinion resolves only the investment tax credit recapture issue and that an additional issue relating to the allocation of deductions is still before the Court. See supra note 2. 108 T.C. 68">79 Reviewed the the Court.COHEN, CHABOT, GERBER, PARR, WHALEN, COLVIN, CHIECHI, LARO, FOLEY, and GALE, JJ., agree with this majority opinion.HALPERN, J., did not participate in the consideration of this opinion. SWIFT, J. SWIFT J., respectfully dissenting: With the benefit of the analyses provided in the opinions of the Second and Ninth Circuit Courts of Appeals in Salomon, Inc. v. United States,976 F.2d 837">976 F.2d 837 (2d Cir. 1992), and Walt Disney, Inc. v. Commissioner,4 F.3d 735">4 F.3d 735 (9th Cir. 1993), we should recognize the error made in our opinion in Walt Disney, Inc. v. Commissioner,97 T.C. 221">97 T.C. 221 (1991),1997 U.S. Tax Ct. LEXIS 6">27 and sustain respondent's position in this case.The majority suggests that the issue herein turns primarily on whether a particular provision of the consolidated return regulations (namely, sec. 1.1502-3(f) (3), Example (5), Income Tax Regs.) controls over a revenue ruling (namely, Rev. Rul. 82-20, 1982-1 C.B. 6). The majority argues that the above Courts of Appeals, in the cited opinions, give undue weight to the revenue ruling and ignore what the majority regards as the clear mandate of the regulation under section 1502.The majority is correct in stating that revenue rulings do not generally constitute legal precedent or "other law". As the language quoted below, however, from each of the cited opinions indicates, neither the U.S. Courts of Appeals for the Second nor the Ninth Circuit rely exclusively on the conclusive effect of the revenue ruling. Rather, both rely heavily on "economic reality" and the "substance-over-form" doctrines, which are simply broader labels for, and which encompass, the step transaction doctrine.The Court of Appeals for the Second Circuit in 976 F.2d 837">Salomon. Inc. v. United States, supra at 842-843, explained as follows:In substance, if not in form, the direct and 1997 U.S. Tax Ct. LEXIS 6">28 the circuitous transaction are the same. See Commissioner v. Court Holding Co.,324 U.S. 331">324 U.S. 331, 324 U.S. 331">334, 65 S. Ct. 707">65 S. Ct. 707, 65 S. Ct. 707">708, 89 L. Ed. 981">89 L. Ed. 981 (1945). Each achieves a rapid transfer of section 38 property outside the group. To distinguish between them would deny economic reality. See Gregory v. Helvering,293 U.S. 465">293 U.S. 465, 293 U.S. 465">470, 55 108 T.C. 68">80 S. Ct. 266, 268, 79 L. Ed. 596">79 L. Ed. 596 (1935) (refusing to "exalt artifice above reality" in determining tax liability). Moreover, such a holding would allow the common parent of a consolidated group, such as * * [the parent], to move section 38 property outside the group without paying recapture taxes simply by first transferring the property to a member subsidiary and then distributing the subsidiary's stock to the third-party. * * ** * * The rapidity with which these components follow one another suggest that they are, in substance, parts of one overall transaction intended to dispose of the section 38 assets outside of the consolidated group. * * These factual circumstances, timing and intent * * . * * lead to the conclusion that the two components are steps in a larger transaction which, when viewed as a whole, constitutes a section 47 (a) (1) "disposition." * * 1997 U.S. Tax Ct. LEXIS 6">29 * * * Under these circumstances, the transaction is, in substance, a means of moving the assets outside the group. * The Court of Appeals for the Ninth Circuit in 4 F.3d 735">Walt Disney, Inc. v. Commissioner, supra at 741, relied heavily upon the analysis of the Court of Appeals for the Second Circuit, quoted from the above language, and stated the following --"in substance, if not in form, the direct and the circuitous transaction are the same" and "to distinguish between them would deny economic reality" and would allow the common parent of a consolidated group to circumvent easily the recapture requirement. * The position we adopted in our opinion in Walt Disney, Inc. v. Commissioner,97 T.C. 221">97 T.C. 221, failed to apply properly the substance-over-form doctrine and failed to give proper weight to section 1.47-3(f) (1), Income Tax Regs., which provides clearly that to the extent ownership of an affiliated transferee corporation changes hands as part of the transfer of property to the transferee corporation, a taxable disposition has occurred under section 47. See sec. 1.47-3(f) (1), (2), (6)Examples (2), (3), and (4), Income Tax Regs.The above regulations under section 1.47-3(f) (1), (2) (6), 1997 U.S. Tax Ct. LEXIS 6">30 should be read together with section 1.1502-3(f) (3), Income Tax Regs. Where a change in ownership of an affiliated transferee company is contemplated at the time of a transfer of section 38 property and where the change in ownership that occurs is, in substance, in economic reality, and/or under the step transaction doctrine, integral 108 T.C. 68">81 to the transfer of the property outside the affiliated group, the transfer should be treated, to the extent of the change in ownership of the transferee corporation, as a taxable disposition under section 47.The weight to be given a revenue ruling is not the issue in this case. Rather, the issue is the validity of the underlying rationale of Rev. Rul. 82-20, 1982-1 C.B. 6, -- namely, whether the transaction before us and its taxability under section 47 is controlled by the substance thereof. As is explained in the cited ruling: When there is no intention at the time of transfer to keep the property within the consolidated group, the transaction should be viewed as a whole and not as separate individual transactions. * Because the transfer * * is a step in the planned transfer of the property outside the group, section 1.1502-3(f) (2) (i) of the 1997 U.S. Tax Ct. LEXIS 6">31 regulations does not apply. [Rev. Rul. 82-20, 1982-1 C.B. 6; citations omitted.]In Tandy Corp. v. Commissioner,92 T.C. 1165">92 T.C. 1165 (1989), we held that, on the particular facts of that case, recapture under section 47 was not appropriate where a change in ownership of a transferee corporation occurred in a year after a transfer of property to the transferee corporation. With respect, however, to a fact situation similar to the instant case (where a transfer of property and an ownership change in the transferee corporation effectively occur during the same taxable year and as part of the same integral transaction), we explained in 92 T.C. 1165">Tandy Corp. v. Commissioner, supra, that section 47 recapture would be triggered, as follows:To treat * * [the taxpayer] as having relinquished during the year before the Court a "substantial interest" as contemplated by section 1.47-3(f) (1) (ii) (b), Income Tax Regs., would require a concomitant finding that such an interest passed to * * * [the taxpayer's] shareholders at the same time. * * * [92 T.C. 1165">Id. at 1171.]The majority op. pp. 15-16 implicitly acknowledges that the substance-over-form and step transaction doctrines have application as "other law" in the consolidated 1997 U.S. Tax Ct. LEXIS 6">32 return context under section 1.1502-80, Income Tax Regs. The majority, however, summarily dismisses the application of such doctrines to the specific facts of this case because each step of 108 T.C. 68">82 the reorganization plan adopted by petitioner had a business purpose.Both the Second and the Ninth Circuit Courts of Appeals in the above-cited opinions applied the substance-over-form doctrine in spite of the presence of a business purpose for each step of the reorganizations involved in those cases and, as stated above, concluded that the substance thereof, for purposes of section 47, constituted dispositions of property outside the consolidated group, thus triggering recapture under section 47. See also the District Court's opinion in Salomon v. United States, 92-1 USTC par. 50,155, 70 AFTR 2d par. 92-5872 (S.D.N.Y. 1992)In King Enters., Inc. v. United States,189 Ct. Cl. 466">189 Ct. Cl. 466, 418 F.2d 511">418 F.2d 511, 418 F.2d 511">516 n.6 (1969), the Court of Claims explained that various courts have --enunciated a variety of doctrines, such as step transaction, business purpose, and substance over form. Although the various doctrines overlap and it is not always clear in a particular case which one is most appropriate, their common 1997 U.S. Tax Ct. LEXIS 6">33 premise is that the substantive realities of a transaction determine its tax consequences.With regard more specifically to the question of the relationship between the step transaction doctrine and the business purpose aspect of a transaction and in the context of analyzing a section 332 liquidation, the Court of Appeals for the Tenth Circuit in Associated Wholesale Grocers, Inc. v. United States,927 F.2d 1517">927 F.2d 1517 (10th Cir. 1991), rejected the contention that a valid business purpose precludes application of the step transaction doctrine. The Court of Appeals explained as follows: Most cases applying the step transaction doctrine, far from identifying business purpose as an element whose absence is prerequisite to that application, do not even include discussion of business purpose as a related issue. In some cases, the existence of a business purpose is considered one factor in determining whether form and substance coincide. In others, the lack of business purpose is accepted as reason to apply the step transaction doctrine. We have found no case holding that the existence of a business purpose precludes the application of the step transaction doctrine. [Associated Wholesale Grocers, Inc. v. United States,927 F.2d 1517">927 F.2d at 1526-1527; 1997 U.S. Tax Ct. LEXIS 6">34 fn. refs. omitted.]The Court of Appeals for the Tenth Circuit in 927 F.2d 1517">Associated Wholesale Grocers., Inc. v. United States, supra at 1527 n.15, 108 T.C. 68">83 also cited our opinion in Vest v. Commissioner,57 T.C. 128">57 T.C. 128 (1971), revd. in part and affd. in part on other grounds 481 F.2d 238">481 F.2d 238 (5th Cir. 1973), and commented thereon as follows:After identifying a business purpose, the * * [Tax Court in Vest v. Commissioner] undertakes a thorough discussion of whether to treat a stock exchange as a step transaction. 57 T.C. 128">57 T.C. 145. The * * * [Tax Court] remarked "the fact that there were business purposes for the incorporation of V Bar is an indication that its formation was not a step mutually interdependent with the subsequent stock exchange" and continued to consider other factors, including the existence of a binding commitment, the timing of the steps, and the actual intent of parties. 57 T.C. 128">Id. at 145-46. (Emphasis added [by Tenth Circuit]). Far from precluding step transaction analysis, the business purpose was not even considered the most significant factor in Vest. * * In Yoc Heating Corp. v. Commissioner,61 T.C. 168">61 T.C. 168, 61 T.C. 168">177 (1973) (Court reviewed), we expressly commented on the relationship between the 1997 U.S. Tax Ct. LEXIS 6">35 step transaction doctrine and the business purpose aspect of a transaction, and we did so in the particular context of the reorganization provisions of the Code, which were also involved in that case, as follows:Our path to decision is framed within two cardinal principles, which apply in the reorganization area and which are so well established as not to require supporting citations. First, the fact that the form of the transaction conforms to the literal wording of the definition of a reorganization is not controlling. Second, when a transaction is composed of a series of interdependent steps, each undertaken to achieve an overall objective, the various steps should be viewed in their entirety for the purpose of determining its tax consequences--the so-called "integrated transaction" doctrine. * * * The fact that for valid business reasons there was a delay of several months before * * * [the new entity] came into existence and completed the acquisition does not militate against * * * [application of the step transaction doctrine]. [Citations omitted.]It is acknowledged that the Commissioner in Rev. Rul. 79-250, 1979-C.B. 156, suggested that, in the context of certain reorganization 1997 U.S. Tax Ct. LEXIS 6">36 transactions, preliminary and related transactions or steps will not necessarily be stepped together and ignored where each such preliminary step constitutes a permanent alteration of a previous bona fide business relationship. That general statement in Rev. Rul. 79-250, however, does not preclude application of the step transaction doctrine, the substance over form doctrine, or the integrated transaction doctrine to the facts of this case involving recapture of investment tax credit under section 47. 108 T.C. 68">84 See also 927 F.2d 1517">Associated Wholesale Grocers., Inc. v. United States, supra at 1526-1527; Rev. Rul. 96-29, 1996-24 I.R.B. 5.Based on the above authority, I believe that the majority herein errs in suggesting, majority op. p. 16, that the business purpose associated with the transfer of petitioner's glass division to a subsidiary and with the change in ownership of the subsidiary provides, for purposes of section 47 recapture, the sum and substance of the transaction before us and effectively precludes any meaningful analysis under the substance-over-form, the step transaction, or the integrated transaction doctrines.A brief analysis of the substance and steps of the transactions before us is 1997 U.S. Tax Ct. LEXIS 6">37 appropriate.The Court of Appeals for the Sixth Circuit, to which an appeal in this case would lie, has adopted the end result approach of the step transaction doctrine. In Brown v. United States,868 F.2d 859">868 F.2d 859, 868 F.2d 859">862-863 (6th Cir. 1989), the Court of Appeals for the Sixth Circuit stated as follows --the essence of the step transaction doctrine is that an "integrated transaction must not be broken into independent steps or, conversely, that the separate steps must be taken together in attaching tax consequences". * ** * * Under the end result test of the step transaction doctrine, "purportedly separate transactions will be amalgamated into a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result." King Enters. Inc. v. United States,418 F.2d 511">418 F.2d at 516. * Here the parties have stipulated the following facts with regard to the transfer of LOF's glass division and the change in ownership of LOF Glass.Late in 1985, representatives of Pilkington approached LOF concerning acquisition of LOF's glass division. During November of 1985 through early March of 1986, negotiations 1997 U.S. Tax Ct. LEXIS 6">38 regarding the possible acquisition took place.On March 6, 1986, LOF transferred the glass division to LOF Glass, the new subsidiary that had been formed for that purpose. One day later, on March 7, 1986, LOF entered into a 45-page agreement to transfer to Pilkington Holdings all of its stock interest in LOF Glass in exchange for Pilkington Holdings' stock interest in LOF.108 T.C. 68">85 The March 7, 1986, agreement to exchange stock expressly refers to the March 6, 1986, transfer of the glass division to LOF Glass and establishes the integrated nature of these transactions.Seven weeks later, on April 28, 1986, the exchange of stock that had been agreed to on March 7, 1986, was consummated.After April 28, 1986, LOF Glass was no longer part of LOF's affiliated group and no longer was included in LOF's consolidated Federal income tax return.It is apparent that the transfer of the glass division to LOF Glass and the agreement one day later to transfer the stock of LOF Glass outside the LOF affiliated group constituted an integrated transaction intended to move the glass division (and the related section 38 property) outside of LOF's affiliated group.Based on this stipulated factual record and on this 1997 U.S. Tax Ct. LEXIS 6">39 issue on which petitioner has the burden of proof (see Rule 142(a)), only one conclusion can be reasonably reached -- namely, that in spite of the qualification of the transaction as a reorganization under section 368(a) (1) (D) (allowing LOF to avoid recognizing taxable gain or loss on the transfer of the glass business and allowing LOF and Pilkington Holdings to avoid recognizing taxable gain or loss on their exchange of stock), the substance of the integrated transaction by which LOF's glass division in 1986 was transferred outside the LOF affiliated group constituted a disposition of property under section 47 and triggered recapture of investment tax credit on any section 38 property that was included with the property transferred.Section 1.1502-3(f) (3), Example (5), Income Tax Regs., simply is not applicable. That example involved, in year 1, only a transfer of property within the affiliated group. After the transfer, the property stayed within the affiliated group and was included in the consolidated return for the remainder of year 1. In year 2, no further transfer of property occurred. Rather, in an apparently unrelated transaction, a third party purchased the stock of the 1997 U.S. Tax Ct. LEXIS 6">40 transferee, and the transferee, which had received the property in year 1, left the affiliated group. For the first time in year 2, the property will not be included in the consolidated return of the affiliated group.108 T.C. 68">86 The transaction described in Example (5) of the above regulation bears little resemblance to that involved in this case (where a transfer of property and a change in ownership of the transferee corporation occur effectively within the same taxable year as part and parcel of a single plan and transaction under which the transferee corporation promptly leaves the affiliated group and is no longer part of the affiliated group for purposes of inclusion in the transferor corporation's consolidated tax return) . Example (5) of the above regulation under the consolidated return regulations should not be read to immunize the integrated transaction before us from recapture under section 47.It bears noting that the facts of the instant transaction are distinguishable from the facts of Salomon v. Commissioner,976 F.2d 837">976 F.2d 837 (2d Cir. 1992), and Walt Disney, Inc. v. Commissioner,4 F.3d 735">4 F.3d 735 (9th Cir. 1993). Although the spin-offs in those cases resulted in a change in the identity 1997 U.S. Tax Ct. LEXIS 6">41 of the corporate holder of the section 38 property, that property remained in the same economic family, with the same shareholders holding the stock of the new corporate owner of the section 38 property. In the instant case, at the inception of the transactions, Pilkington held only a 29-percent interest in the stock of LOF. As a result of the completion of the split off, Pilkington acquired a 100-percent interest in the stock of LOF Glass, reflecting a 71-percent shift in the ownership of the corporation owning the section 38 property after the split off.For the reasons stated herein and in the above opinions of the courts of appeals, I dissent.JACOBS, WELLS, RUWE, BEGHE, and VASQUEZ JJ. agree with this dissent.BEGHE, J., dissenting: Having joined Judge Swift's dissent, I add a few words in an effort to provide some further support and explanation. The case at hand is an appropriate occasion to apply the intent, end result, integrated transaction version of the step-transaction doctrine to support a finding of early disposition that results in ITC recapture.Petitioner's initial drop-down to LOF Glass of the glass business and its section 38 assets, which occurred on March 108 T.C. 68">87 6, 1986, 1997 U.S. Tax Ct. LEXIS 6">42 was followed 1 day later by the single-spaced, 45-page, March 7, 1986, agreement for the split-off exchange of shares of petitioner for shares of LOF Glass by Pilkington Holdings. The split-off occurred on April 28, 1986, pursuant to that agreement, as amended in immaterial respects. Although the parties stipulated that the drop-down occurred for valid business reasons, reasons that were presumably independent of the impending divestiture, there were no substantial conditions in the March 7, 1986, agreement to consummation of the split-off. 4The majority, uncritically following our opinion in Walt Disney, Inc. v. Commissioner,97 T.C. 221">97 T.C. 221 (1991), revd. 4 F.3d 735">4 F.3d 735 (9th Cir. 1993), assumes an unwarranted equivalence between the two events described in the section 1502 regulation examples and the LOF Glass divestiture transaction. 51997 U.S. Tax Ct. LEXIS 6">44 Contrary to the majority's assumption, the unadorned descriptions of the events in the regulation's 1997 U.S. Tax Ct. LEXIS 6">43 two examples indicate the lack of connection between the intragroup sale of section 38 assets in year 1 and the sale of the stock of the purchaser to a third party outside the group in year 2. The majority goes on to disregard the obvious connection--supplied by the intent, manifested contemporaneously with the drop-down to LOF Glass, to accomplish the end result of the split-off--that binds the steps in the case at hand in an integrated transaction.6The transactions in the case at hand are not just two unconnected sales. They evidence a flow of events that comprise a two-step divestiture, the second step of which is an exchange of shares under section 368(a) (1) (D) that qualifies 108 T.C. 68">88 for nonrecognition under section 355. The initial drop-down of assets into a subsidiary in exchange for its shares is essential to enable the intended divestiture to be accomplished by a share for share exchange that entitles the second step to nonrecognition of gain to both parties. The connection that binds the two steps, as in J.E. Seagram Corp. v. Commissioner,104 T.C. 75">104 T.C. 75, 104 T.C. 75">91-99 (1995), is manifested in the plan of reorganization, which embodies the intent to achieve the end result.7 Although the first step in the case at hand has 1997 U.S. Tax Ct. LEXIS 6">45 an independent business purpose in the sense that it would not have been fruitless in all events to take that step--after all, a corporation engaged in more than one business almost invariably has a business purpose for dropping a business into a subsidiary, if only to protect the assets of its other businesses from the liabilities and risks that are encapsulated by the drop-down--the independent business purpose of the first step in the case at hand is trumped by the more important business purpose of completing the divestiture by means of a tax-free exchange, which relegates the first step to a subordinate implementing role.The integrated transaction approach is a legitimate "weak" version of the step-transaction doctrine, as 1997 U.S. Tax Ct. LEXIS 6">46 contrasted with the "strong" requirements 81997 U.S. Tax Ct. LEXIS 6">47 that must be satisfied, under its binding commitment and interdependence versions, in order to disregard unnecessary intermediate steps. 9 The creation of and drop-down to LOF Glass were necessary to accomplish the divestiture (separating LOF Glass, the new holder of the glass business and its section 38 assets, from the affiliated group), which was the intended end result that followed the initial step. The intention to effect that end result suffices to 108 T.C. 68">89 justify application of the integrated transaction approach to conclude that the section 38 assets left the economic family of petitioner's affiliated group in a way that requires ITC recapture.JACOBS, J., agrees with this dissent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. An additional issue, relating to the allocation of deductions between subpart F income and non-subpart F income, will be decided later by a separate opinion.↩3. Sec. 47(b) (2) provided an exception for certain types of reorganizations which is not applicable herein (and the parties do not argue otherwise) because the assets transferred to LOF Glass, Inc., did not constitute substantially all of the assets of petitioner. See Baicker v. Commissioner,93 T.C. 316">93 T.C. 316, 93 T.C. 316">326↩ (1989).4. Expiration of all Hart-Scott-Rodino waiting periods, receipt of tax opinions that the split-off would be a tax-free exchange under section 355↩, and satisfaction of all other stated conditions, must have occurred or have been waived between March 6 and April 28, 1986.5. There are at least three significant differences between the facts of the examples in the section 1502 regulation and the facts of our case. In the examples, the sale of the section 38 assets and the sale of the purchaser's stock occur in different tax years, whereas in our case they occur in the same year; the first sale in the examples appears to be made to a preexisting member of the group, whereas in our case the transfer is made to a newly created subsidiary organized to do the deal, including the second step; and the examples concern two unrelated sales, whereas the first transaction in our case is a drop-down of assets that is an integral and necessary step of the plan to accomplish the agreed upon tax-free split-off exchange of shares that is intended to follow.6. Events should be deemed to have a connection for tax purposes when dictated by the logic of events that has to do with cause and effect relationships and necessary connections or outcomes. Under that formulation, there is no connection between the sales in the examples in the sec. 1502 regulation and there is a connection between the drop-down and the split-off in the case at hand.↩7. Contrary to the views of those who would read the intent, end result, integrated transaction version of the step-transaction doctrine out of the judicial arsenal, see, e.g., Ginsburg & Levin, Mergers, Acquisitions and Buyouts, secs. 208.4.5, 608.1, 608.3.1, 610.9, 1002.1.4 (July 1996); Bowen, The End Result Test, 49 Taxes 722↩ (1994), there is an appropriate role for this "weak" version of the step-transaction doctrine in situations such as the case at hand.8. The terms "weak" and "strong" are used here in the mathematical sense of "subject to less/more exacting or numerous conditions". See Oxford English Dictionary, Entries under "weak", l9.f(b) and "strong", 19.c (2d ed. 1995). Analogous usages occur in logic, physics, and cosmology. On "weakened" and "strengthened" moods of the syllogism, see Cohen & Nagel, An Introduction to Logic and Scientific Method 84, 86 (1934). On the "strong" force in elementary particle physics, which holds the nucleus together, and the "weak" force, which causes the decay of many of the elementary particles, see, e.g., 28 Encyclopedia Britannica, Subatomic Particles 239-240 (15th ed. 1993). On the "weak" and "strong" anthropic principles regarding the state of the universe, see Hawking, A Brief History of Time 124-126 (1988). See also Penrose, The Emperor's New Mind 17-23 (1989), on "strong" artificial intelligence.9. As in West Coast Mktg. Corp. v. Commissioner,46 T.C. 32">46 T.C. 32↩ (1966)	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620783/	W. M. Robertson v. Commissioner.W. Robertson v. CommissionerDocket No. 9613.United States Tax Court1948 Tax Ct. Memo LEXIS 250; 7 T.C.M. 62; T.C.M. (RIA) 48020; February 20, 19481948 Tax Ct. Memo LEXIS 250">250 Bad debt. - Claimed bad debt deductions disallowed. Loss. - Held, that petitioner sustained a long-term capital loss in 1942 upon the disposition of shares of beneficial interest acquired in January 1940 in a business trust which was an association taxable as a corporation. Robert S. Eastin, Esq., and W. E. Baird, C.P.A., 701 Fidelity Bldg., Kansas City 6, Mo., for the petitioner. Harlow B. King, Esq., for the respondent. TYSON Memorandum Findings of Fact and Opinion TYSON, Judge: The respondent determined deficiencies against the petitioner, in the amounts of $9,354.61 income taxes for the calendar1948 Tax Ct. Memo LEXIS 250">251 year 1941 and $2,355.98 income and victory taxes for the calendar year 1943, the latter year including the unforgiven part of petitioner's 1942 tax. The issues presented are whether respondent erred in failing to allow: (1) claimed bad debt deductions of $30,000 for 1941 and $15,036.52 for 1942, or, in the alternative if no debtor-creditor relationship existed, (2) a long-term capital loss in 1942 on an investment in shares of a business trust, or, (3) an operating loss on an enterprise operated by petitioner as a sole proprietor. Various other alternative assignments of error are considered as abandoned since no arguments are made in support thereof. In addition to the testimony and exhibits adduced at the hearing, the proceeding was submitted upon a stipulation of facts with exhibits attached thereto, which stipulation is adopted as a part of our findings of fact and included therein by reference. Findings of Fact The petitioner is a resident of Joplin, Missouri. During the years in question petitioner was the principal stockholder of, and actively engaged in managing, the business of several corporations, namely, two automobile sales companies, an automobile finance company, 1948 Tax Ct. Memo LEXIS 250">252 a public service company, and he was also a director of a bank and of a foundry. Petitioner's individual income tax returns for the calendar years 1941, 1942, and 1943 were made on the cash receipts and disbursements basis and were filed with the collector of internal revenue for the sixth district of Missouri. On his 1941 return petitioner claimed a deduction of $30,000 as a partially worthless debt of the Romo Mining Company, a business trust, which respondent disallowed in full. On petitioner's original return for 1942, filed on March 8, 1943, he claimed a deduction of $25,036.52 as a bad debt of Romo Mining Company, but on his amended return for that year, filed on March 15, 1944, he reduced that claimed deduction to $15,036.52 and respondent did not allow any portion of those amounts as a deduction. Those amounts claimed on the original and amended returns for 1942 were explained in schedules attached to those returns, respectively, as follows: Original ReturnAmended ReturnBad Debt: Romo Mining Company$65,036.52$65,036.52Less: Prior Years' Deduction$30,000$30,000Bid on Foreclosure10,00040,000.0020,00050,000.00$25,036.52$15,036.521948 Tax Ct. Memo LEXIS 250">253 On petitioner's 1943 return, filed on March 15, 1944, he reported on the schedule for long-term capital gains and losses that he acquired a lead and zinc mill in 1942 at a cost of $20,000 and sold the same in 1943 for $20,000 and realized no gain or loss thereon. That property was acquired from the Romo Mining Company on a foreclosure thereinafter set out. In determining the deficiency involved herein for the year 1943 respondent made no adjustment as to that item involving the lead and zinc mill and accepted petitioner's return as filed, except that he increased the amount of the unforgiven part of petitioner's 1942 tax from the sum of $2,445.89 as reported by petitioner to the sum of $4,801.87 as includible in his 1943 tax liability. Such increase in the unforgiven part of petitioner's 1942 tax was due to his disallowance of the claimed bad debt deduction. The respondent's disallowance of the claimed bad debt deductions for 1941 and 1942 was on the ground that petitioner had not established either the existence of a debt or the worthlessness thereof. In 1937 petitioner became interested in a lead and zinc mining venture in which Charles A. Malsbury and William L. Owen, both residents1948 Tax Ct. Memo LEXIS 250">254 of Joplin, Missouri, were jointly engaged. The latter two men had been jointly engaged in mining activities prior to 1937 and in that year they acquired onemining lease and options for other mining leases on certain abandoned mining properties situated in the Lincolnville district of Ottawa County which was one of the oldest lead and zinc mining fields in Oklahoma. They approached petitioner to join in their venture and to finance the dewatering of the old mines, the development costs and the prospective mining operations if ore deposits were found in paying quantities. Petitioner knew the proposition was a highly speculative venture, but thought it might prove profitable and so agreed to join in the venture. On October 30, 1937, Charles A. Malsbury and William L. Owen as first parties, and the petitioner herein as second party, entered into a written contract which is included herein by reference as part of the stipulation and which recites and provides in substance: (a) That the first parties had a contract dated April 20, 1937, with the Bureau of Catholic Indian Missions of Washington, D.C., for a mining lease covering certain described land in Ottawa County, Oklahoma (hereinafter1948 Tax Ct. Memo LEXIS 250">255 referred to as the Missions lease); that with the approval of the Secretary of the Interior the first parties had an agreement with Christine Shapp et al., owners of certain described restricted Quapaw Indian land also located in Ottawa County (hereinafter referred to as the Shapp land), which agreement provided for a permit for a period of 90 days from October 7, 1937, in which to dewater and inspect the mines thereon and determine whether a lease thereon was desired; that the first parties were negotiated for prospecting permits, leases and contracts on other adjoining land; that the first parties "are partners, having equal interests in such ventures and Second Party is desirous of acquiring an interest in the rights above described" and in such additional mining rights "as may be hereafter acquired" in that territory by first parties; (b) That the second party "shall commence and thereafter carry on de-watering operations" on the Shapp land and complete the same within a prescribed 90 day period; that thereafter all parties shall inspect the mine; that if all the parties "shall jointly agree that mining operations can be so conducted upon a profitable basis" then they shall proceed1948 Tax Ct. Memo LEXIS 250">256 to form a Missouri or Oklahoma corporation with an agreed authorized capital stock to be issued 3/8 to each of the first parties and 1/4 to the second party (petitioner); that upon organization of such corporation first parties shall transfer and assign thereto all their right, title and interest in and to contracts for leases, mining leases, licenses, options and agreements covering the properties which were in the Lincolnville district and thereafter all additional contracts, leases, and mining rights acquired in that district shall be acquired in the name of the corporation; (c) That upon completion of organization of the corporation and the transfer of the contracts and leases to it, the "Second Party shall immediately procure and furnish to said corporation all necessary and proper equipment to mine property so dewatered by him and shall furnish all necessary moneys to commence and continue such operations," such equipment to include "whatever may be necessary for economic and efficient mining operations" but not the erection of a concentrating plant; that second party "shall at all times keep accurate records of all sums of money expended by him in such mining operations, and1948 Tax Ct. Memo LEXIS 250">257 the said corporation shall obligate itself to reimburse Second Party for such expenditures from time to time out of the proceeds of mining operations until * * * fully repaid"; that all equipment, machinery and appliances furnished by second party shall be inventoried and valued at cost to him and be deemed to be expenditures to be reimbursed out of profits; that "All profits realized from such mining operations shall be devoted to the reimbursement of Second Party and said corporation shall have no right of claim to any such profits until Second Party shall have been wholly reimbursed for all expenditures so made by him"; that until then second party shall have "sole control and direction" of all the mining operations and none of the parties would be allowed any salary or compensation; (d) That "All equipment, machinery, appliances and personal property placed upon the said lands by Second Party shall become the property of said corporation as soon as Second Party shall have been reimbursed therefor"; (e) That the second party provide proper liability and workmen's compensation insurance and required surety bonds, the cost thereof to be included in expenditures to be reimbursed; 1948 Tax Ct. Memo LEXIS 250">258 that all books, records, and documents relating to the mining operations shall be open to inspection of first parties; and (f) That, "If Second Party shall at any time cease operations upon said lands or shall fail to carry out the terms and conditions hereof in good faith, then the stock so issued to him in said corporation shall be forfeited, and shall become the property of said corporation and Second Party shall have the right to remove from the premises all equipment appliances, and personal property placed thereon by him and which he shall not have been reimbursed; provided, however, that said corporation may at its election within ninety days from such forfeiture, elect to pay to Second Party the balance for which he shall not then have been reimbursed and thereupon title to all such equipment, appliances, and personal property shall vest in said corporation." The contract for a mining lease on the Catholic Indian Missions land referred to in the above-mentioned agreement of October 30, 1937, was actually a 10 year lease dated April 20, 1937, in which Malsbury and Owen were the lessees. Shortly after the execution of the October 30, 1937, agreement, William L. Owen transferred1948 Tax Ct. Memo LEXIS 250">259 one-half of his interest in the venture to his son, Luther C. Owen, who was employed at a fixed compensation as the superintendent of the actual development and mining operations. Pursuant to the agreement of October 30, 1937, petitioner furnished the necessary funds and equipment for dewatering the old mines, which operation was completed sometime prior to the end of 1937, and after an inspection thereof all the interested parties agreed to embark on the mining operations. However no steps were taken to organize a corporation as set out in the October 30, 1937 agreement and on January 15, 1938, Christine Shapp et al. as lessors and W. L. Owen, L. C. Owen, C. A. Malsbury and W. M. Robertson (petitioner) as lessees, executed an eight year mining lease on the Shapp land, which lease was approved by the Secretary of the Interior on February 10, 1938. Subsequently a third mining lease on certain adjoining land was executed on February 2, 1938, by those same four men as lessees and by certain bankers as lessors. No cash bonus or other payment was made to any of the owners of the land involved in those three leases which were acquired at on cost except for the time and expense involved1948 Tax Ct. Memo LEXIS 250">260 in the negotiations therefor by Malsbury and Owen. During 1938 and 1939 the mining operations on the leased premises were conducted, generally, in pursuance of the agreement of October 30, 1937, except that in the summer of 1939 and by agreement of all the parties on August 16, 1939, petitioner financed the erection of a concentrating mill and in consideration therefor the other three parties assigned and transferred to him "an additional one-fourth (1/4) interest in the holdings of The Romo Mining Company under the same conditions as set forth in our original contract." During those two years the leases remained in the names of the individual lessees and titled to the equipment and machinery on the properties remained in petitioner's name. During 1938 and 1939 the mining activities were conducted as a partnership business under the name of the Romo Mining Company and pursuant to the October 30, 1937 agreement petitioner furnished all of the funds required for such activities, including the dewatering, the development costs, the purchase of equipment, and the cost of production and sale of ore and also the cost of labor. The original dewatering costs were paid directly by petitioner1948 Tax Ct. Memo LEXIS 250">261 and thereafter petitioner deposited funds in a bank account in the name of the Romo Mining Company and drew checks thereon for all expenditures incurred in the development and mining operations. From the time the parties decided to carry on the mining operations, the costs were recorded in a set of accounting records maintained during those years, under the name of the Romo Mining Company, and such records showed, as of December 31, 1939, a credit balance of $39,041.88 to petitioner on account of all monies furnished by him from October 30, 1937 to December 31, 1939. The mining operations for those two years, after charging off some development expenses, showed losses amounting to $4,284.28 and $11,394.62, respectively, or a total of $15,678.90. Income received from the sale of lead and zinc ore was not sufficient to pay the operating costs and the funds furnished by petitioner were used to pay the operating deficits as well as for development work and purchase of equipment. In the partnership income tax returns filed under the name of the Romo Mining Company for each of the years 1938 and 1939, the losses for those years were divided or allocated to the individuals, as follows: 1948 Tax Ct. Memo LEXIS 250">262 19381939W. M. Robertson$1,071.07$ 5,697.31Charles A. Malsbury1,606.612,848.65William L. Owen803.301,424.33Luther C. Owen803.301,424.33Total loss per partnershipreturns, Form 1065$4,284.28$11,394.62 The petitioner included the losses of $1,071.07 and $5,697.31 in his individual income tax returns for 1938 and 1939, respectively. After completion of the concentration mill in the latter part of 1939, the four partners decided they should incorporated the business pursuant to their October 30, 1937 agreement, but they were advised by legal counsel to form instead on Oklahoma business trust. On January 22, 1940, W. L. Owen, L. C. Owen, C. A. Malsbury and W. M. Robertson as subscribers and W. L. Owen, C. A. Malsbury and W. M. Robertson as trustees, executed a declaration of trust, part of the stipulation and which provides in substance: (a) That the subscribers transfer, assign, and deliver to the trustees, under the designation of the Romo Mining Company, the three above-mentioned mining leases on lands located in Ottawa County, Oklahoma, and also the concentrating mill and all other personal property located thereon; that the trustees1948 Tax Ct. Memo LEXIS 250">263 issue to the subscribers negotiable certificates representing their beneficial interests or shares in the trust estate, to the amount of $40,000 common beneficial interests of the expressed par value of $100 per share, fully paid and nonassessable, and transferable on the books of the trustees; and that the trustees hold such property and any later acquired property together with the proceeds, income, and profits thereof, in trust, to manage and dispose of same, under the name of the Romo Mining Company, for the benefit of the holders of certificates. (b) That the trustees are authorized, empowered, and directed to use the trust estate to engage in the business of acquiring real property or mineral rights therein, of prospecting for lead, zinc, and other minerals and oil and gas, of developing and operating mines, of milling and selling ores, of acquiring machinery and equipment, and, further, to exercise all powers necessary or convenient in the conduct and management of the business. (c) That the board of trustees, elected annually, is authorized, inter alia, to adopt and use by-laws for the conduct of the business and to provide for a president, secretary, and treasurer; to1948 Tax Ct. Memo LEXIS 250">264 make and execute contracts in the name of the Romo Mining Company; to borrow money, give obligations therefor, and create liens upon the trust property; to collect interest, income, and profits from the business operations or stocks or securities owned by the trust and in general to do all things necessary to promote the business; and, further, that neither the trustees nor certificate holders shall be personally liable for any liability oo the trust whatsoever. (d) That the beneficial certificates be in a specified form setting forth the number of shares of $100 par value each, owned in the Romo Mining Company, a business trust, subject to the terms of the declaration of trust; that the owner is entitled to such distribution of the profits of the trust as the trustees may declare and to participate in the distribution of the trust estate upon termination thereof; that the trust capital and estate of the Romo Mining Company is fixed at $40,000 divided into 400 shares of the par value of $100 each; that the certificate owner is not liable for the debts of the trust and its shares are not subject to assessment; and that the certificate is transferable only on the books of the trust1948 Tax Ct. Memo LEXIS 250">265 on surrender of the certificate properly indorsed. (e) That the earnings and surplus accumulated by the trustees from the operation of the business shall become a part of the corpus of the trust, but the trustees may from time to time in their discretion make such distributions from earnings and surplus to the stockholders as they may deem expedient; such distributions to be made to the shareholders pro rata according to the number of shares held by each. (f) That the ownership of shares in the trust shall not vest in the shareholders any title in or to the trust property or right to call for a partition or for an accounting; that death of a shareholder shall not terminate the trust; and that all persons having any claims against the trustees shall look only to the funds and property of the trust for payment. (g) That the trust shall continue for a term of 20 years; that the company seal bear the words of "Romo Mining Company" and "A Business Trust"; and that the filing of the declaration of trust for record in the office of the County Clerk of Ottawa County, Oklahoma, shall be conclusive of the trustees' acceptance of the terms of the agreement under which the business trust1948 Tax Ct. Memo LEXIS 250">266 has been organized under the laws of the State of Oklahoma. The trust instrument was signed by the four subscribers and the three designated trustees on January 22, 1940, and was filed for record in the office of the County Clerk at Miami, Ottawa County, Oklahoma, on February 14, 1940. A general assignment of title, free of all liens or incumbrances, in and to the concentrating plant and all other personal property located on mining property involved, to the Romo Mining Company, a business trust, was executed by William L. Owen, Luther C. Owen, Charles A. Malsbury, and W. M. Robertson on January 22, 1940. On the same date, those same four parties executed an assignment of their right, title, and interest in mining leases for certain described property in Ottawa County, Oklahoma, to the Romo Mining Company, a business trust, which assignment was recorded on February 14, 1940. Also, on January 22, 1940, the board of trustees of the Romo Mining Company held a meeting at which Charles A. Malsbury was elected president, William L. Owen was elected vice-president, and W. M. Robertson was elected secretary-treasurer; the abovementioned assignments were accepted; and the issuance of shares1948 Tax Ct. Memo LEXIS 250">267 to the subscribers was authorized and directed. Such shares were subsequently issued in the following amounts and in proportion to each subscriber's prior partnership interest: W. M. Robertson1/2 interest, or 200 sharesCharles A. Malsbury1/4 interest, or 100 sharesWilliam L. Owen1/8 interest, or 50 sharesLuther C. Owen1/8 interest, or 50 sharesOn his 1940 return petitioner reported no gain or loss on that transaction. The interested parties treated the declaration of trust as having been effective as of January 1, 1940. As of that date and in financing the partnership business, petitioner had furnished a total of $39,041.88 in meeting deficits in expenses of operations and for the cost of capital assets consisting of equipment, etc., used in the business. The partnership operating losses for 1938 and 1939 amounted to $15,678.90 and the balance, or $23,362.98, of petitioner's expenditures represented the cost of the mining equipment, concentration mill, and other personal property to which petitioner held title and which he transferred to the business trust in January 1940. The petitioner's original cost in January 1940 of his 200 shares in the business1948 Tax Ct. Memo LEXIS 250">268 trust was at least $23,362.98. Immediately upon execution of the trust instrument the Romo Mining Company, a business trust, commenced business and it opened its books as of January 1, 1940. A summary of the closing balance sheet of the predecessor partnership known as the Romo Mining Company and the opening balance sheet of the Romo Mining Company, a business trust, is as follows: Romo Mining CompanyRomo Mining Company(a Business Trust)Closing 1939Beginning 1940ASSETSCurrent AssetsCash$ 174.34$ 174.34Accounts Receivable325.00$ 499.34325.00$ 499.34Fixed AssetsEquipment20,877.2720,877.27Development8,639.988,639.98DeficitYear 1938$ 4,284.28Year 193911,394.6215,678.90Leases: Capital stock$40,000.00Deficit15,678.9055,678.90Deferred Assets579.48579.48Total Assets$46,274.97$86,274.97LIABILITIESCapital$40,000.00W. M. Robertson$39,041.8839,041.88Notes and Accounts Payable7,233.097,233.09$46,274.97$86,274.97On February 21, 1940, and pursuant to an authorization voted at a meeting of the board of1948 Tax Ct. Memo LEXIS 250">269 trustees on the same date, the Romo Mining Company, an Oklahoma business trust, through its president, as the first party, and W. M. Robertson, as the second party, entered into a written agreement which is included herein by reference as part of the stipulation and which sets forth in substance: (a) That, whereas, the Romo Mining Company "previously operated as a Co-Partnership" under the agreement of October 30, 1937, "by the terms of which W. M. Robertson is advancing all the money to drain, develop and mine certain leases therein described, and the profits accruing from such operations are therein pledged by the Co-Partnership to reimburse W. M. Robertson for all moneys so advanced" before the other co-partners participate in such profits; whereas, Robertson "has advanced also the money to purchase, build and equip a mill" and where by mutual agreement of all the parties at interest, "an Oklahoma Business Trust has been formed to do business under the name of The Romo Mining Company, and as such, has taken over the assets and liabilities of the above mentioned Co-Partnership", it is agreed, (b) That second party shall keep accurate records of all sums of money expended by him1948 Tax Ct. Memo LEXIS 250">270 in such mining operations and the "First Party hereby obligates itself to reimburse Second Party for such expenditures from time to time out of the proceeds of mining operations" until fully repaid; that all equipment, machinery, and appliances shall be inventoried at cost for such reimbursement; that the "Business Trust shall have no right or claim to any such profits" from such mining operations until second party shall have been wholly reimbursed; that all such mining operations "shall be under the sole control and direction" of second party until he is fully reimbursed and that until such reimbursement none of the parties shall be allowed any salary or compensation. (c) That first party "affirms its continuation of the Co-Partnership pledge to Second Party of mining profits" for his reimbursement and agrees to further secure him therefor by execution and delivery of a chattel mortgage "covering concentrating plant and all other equipment belonging to The Romo Mining Company"; and that second party agrees that when fully reimbursed either from profits from mining or from proceeds of sale of any of the Romo Mining Company properties, "he will at that time cancel the said note & 1948 Tax Ct. Memo LEXIS 250">271 chattel mortgage". On February 28, 1940, the Romo Mining Company by its president, Charles A. Malsbury, executed a promissory note, payable to W. M. Robertson, in the principal sum of $50,000, on the 28th day of February 1942, with interest from maturity at 6 per cent per annum, and secured by a chattel mortgage executed by that company on all its personal property located on the leased premises of the trust. The note and chattel mortgage were given to petitioner as additional security for reimbursement of his advances in financing the venture because under the original agreement of October 30, 1937 he was to retain title to the equipment and other personal property until reimbursement, but, on January 22, 1940, title to all the equipment and personal properties had been transferred to the trust. On February 28, 1940, petitioner's advances in financing the venture totalled $41,484.88, but the note was made in the amount of $50,000 so as to include therein additional funds contemplated to be furnished by petitioner for the erection of a floatation plant. The petitioner remained obligated to finance the venture or forfeit his interest therein pursuant to the parties' original agreement1948 Tax Ct. Memo LEXIS 250">272 of October 30, 1937, which constituted the basic agreement between those parties and, except in such respects as it was modified by the instruments executed subsequent thereto, it continued in force throughout petitioner's participation in the venture. After the organization of the business trust in January 1940 the actual operation of the mines on the leased premises was continued in the same manner as it had been therefore conducted, including exploratory and development work, purchase of equipment, production of ore, etc., and during 1940, 1941, and part of 1942 petitioner continued to furnish the necessary funds for such operations. During petitioner's participation in the venture from October 30, 1937 to 1942, inclusive, he furnished funds in connection with the original exploratory dewatering of the old mines, the operation of the partnership business and the operation of the business trust, in the following amounts: October 30, 1937 to December 31, 1938$18,282.88January 1, 1939 to December 31, 193920,759.00Total to December 31, 1939$39,041.88January 1, 1940 to February 28, 19402,800.00Total to February 28, 1940, at which time a $50,000.00 note and mortgage wasissued to petitioner by The Romo Mining Company$41,841.88February 28, 1940 to December 31, 19408,775.00Total to December 31, 1940, carried in balance sheet of The Romo,mining Com-pany as note for $50,000.00 and advances by stockholder, W. M. Robertson,$616.88$50,616.88January 1, 1941 to May 31, 19419,000.00June 1, 1941 to December 31, 19411,350.00Total to December 31, 1941$60,966.88January, February, and March, 19422,800.00Total funds furnished by petitioner to March 31, 1942$63,766.88Funds furnished by petitioner from April to July 1942, regarding usingmilling equipment for custom milling, the facts regarding which will beshown by other evidence1,271.64Total funds furnished by petitioner$65,038.521948 Tax Ct. Memo LEXIS 250">273 For the years 1940 and 1941 the Romo Mining Company filed income tax returns, form 1120, as a business trust engaged in the business of lead and zinc mining and reported a net loss for each year. The financial operations of the Romo Mining Company as shown by its accounting records for the years 1940, 1941, and 1942 are summarized as follows: 194019411942Gross Receipts$51,675.11$42,803.88$5,525.84Cost of Operations, including labor, supplies, roy-alties, milling, exploration and development, etc.44,345.3641,265.407,262.28$ 7,329.75$ 1,538.48($1,736.44)Miscellaneous income, including royalties28.6648.89126.46Total Income or Loss$ 7,358.41$ 1,587.37($1,609.98)Deductions, including taxes, depreciation, depletion,office salaries and expenses, insurance, etc.11,373.198,603.30295.65Net Loss($ 4,014.78)($ 7,015.93)($1,905.63)The balance sheets of the Romo Mining Company as shown by its accounting records as of December 31, 1940, 1941, and 1942 are summarized as follows: Dec. 31,Dec. 31,Dec. 31,194019411942ASSETSCurrent Assets$ 2,260.48$ 723.57$ 1,408.79Equipment, less depreciation20,594.6224,458.0067.50Leases and development67,696.8669,053.2269,053.22Deferred assets616.56564.43169.86Total Assets$91,168.52$94,799.22$70,699.37LIABILITIESAccounts payable$ 3,646.00$ 4,079.76$ 2,417.03Mortgage payable50,000.0050,000.00Advances by stockholder616.8810,966.8815,038.52Tax reserve673.3992.7812.72Insurance reserve247.03690.51557.94Capital stock40,000.0040,000.0040,000.00Surplus or Deficit(4,014.78)(11,030.71)14,578.79Net Loss for 1942(1,905.63)Total Liabilities$91,168.52$94,799.22$70,699.371948 Tax Ct. Memo LEXIS 250">274 During 1939 a shaft developed on the Missions lease gave promise of a good body of ore and as a result the concentrating mill was erected in the summer of 1939 just prior to the organization of the business trust as of January 1, 1940. During 1940 the mining operations and development of bodies of ore seemed to justify the outlay of funds expended for a flotation plant. In February 1941 the Romo Mining Company entered into an agreement giving certain persons an option to sell its leases and equipment for a total sale price of $140,000, out of which a commission of $20,750 would be paid; however, no sale was made under that option. In September 1941, a fairly rich body of ore was mined out and exploratory drilling in various directions had not developed new deposits in commercial quantities; also a tunnel cave-in at one place made further mining operations at that place too expensive and too dangerous for the workmen for further operation. Also in September 1941 the price of lead and zinc ore was frozen by the Government at a price which, together with the then existing conditions at to the mining operations and the losses sustained in each year's operations from the beginning up1948 Tax Ct. Memo LEXIS 250">275 to that time, caused petitioner and the other interested parties to decide that the Romo Mining Company's properties could not be operated at a profit so operations ceased and the mines were closed. Thereafter the Romo Mining Company did not operate the mines again. In 1942 the Romo Mining Company received small amounts of royalties from some operators who conducted limited operations on the properties in shallow mines only 15 to 20 feet deep and above the level of the water which filled the deeper shafts and tunnels after the company ceased operating pumps. That company also conducted some custom milling operations at a loss. In March 1942 petitioner as required by Oklahoma Law published a notice of a chattel mortgage foreclosure and sale at public auction on March 19, 1942 of all the Romo Mining Company's equipment, mill, and other personal property for the purpose of satisfying the note secured by such chattel mortgage. At the auction sale there were no bidders other than the petitioner who bid such personal property in for $10,000. At that time such property had a total value of at least $20,000. The leases remained the property of the Romo Mining Company. The petitioner foreclosed1948 Tax Ct. Memo LEXIS 250">276 the chattel mortgage in order to secure title to the equipment, mill, and other personal property in his own name as originally agreed. Thereafter for a few months the mill was operated by the Romo Mining Company for custom milling and in connection therewith petitioner furnished funds totalling $1,271.64 during April to July 1942, but that operation resulted in a loss. During 1942 the Government adopted a policy of subsidy payments in place of any increase in the basic stabilized price then obtaining for lead and zinc and also made provision for loans for the operation of certain submarginal lead and zinc mines. Willian L. and Luther C. Owen were desirous of borrowing funds to dewater the mines on the Romo Mining Company leases and to attempt to operate the mines again. However, by December 1942 petitioner determined that he was through with the venture because of his losses thereon and, also, that his certificate of shares in the Romo Mining Company had no value. On December 11, 1942 he indorsed such certificate in blank and without any consideration therefor transferred it to William L. and Luther C. Owen and such transfer was considered by the parties to be in accordance with1948 Tax Ct. Memo LEXIS 250">277 the original agreement of October 30, 1937, that petitioner would forfeit his interest in the venture if he discontinued advancing funds for mining operations. At the same time Malsbury also transferred his certificate of shares in that company to the two Owens without consideration therefor. On the same date, petitioner and Malsbury resigned as trustees and as secretary-treasurer and president, respectively, of the Romo Mining Company. After such transfer of his certificate of shares in the Romo Mining Company petitioner agreed to rent to that company the concentration mill on a 20" a ton basis, and the two Owens or the company borrowed $5,000 and started dewatering the mines, but the company never got into mining operations. At some later date in 1943 the leases were sold to Cameron and Henderson, Inc., a mining company, for $10,000. In March 1943 petitioner sold all the mining equipment, mill, and other personal property acquired at the above-mentioned foreclosure to Cameron and Henderson, Inc., for $20,000, and on his individual return for 1943 he reported on the capital gains and losses schedule that he acquired such property in March 1942 at a cost or other basis of $20,0001948 Tax Ct. Memo LEXIS 250">278 and sold it in March 1943 at a price of $20,000 with no gain or loss on the transaction. Under the agreement of October 30, 1937, the petitioner and his associates intended to create and did create a relation of partners in a joint mining venture as to which petitioner agreed to furnish all necessary financing and to look only to the profits realized for reinbursement of his investment in the venture or if no profits were realized then only to the capital assets in the form of the equipment and other personal property acquired for use in the business but title to which was to be held in his name. Under that agreement no debtor-creditor relation was created between petitioner's associates individually or the partnership and the petitioner with respect to any portion of the $39,041.88 which he expended in financing the venture up to December 31, 1939. When the partnership ceased operation as of January 1, 1940, the petitioner's expenditures in financing it were represented by its operating losses sustained in the total amount of $15,678.90 and by the personal assets costing $23,362.98 and to which he then held title. Under the trust instrument of January 1940 the petitioner and1948 Tax Ct. Memo LEXIS 250">279 his associates intended to create and did create a trust to carry on the business of the mining venture in a form analogous to that of a corporation. The leases held in the names of individual lessees, the personal properties held in petitioner's name, and certain other partnership assets and liabilities were transferred to the business trust in exchange for shares of beneficial interest in proportion to the prior partnership interests. The trust instrument did not create, and was not intended by the parties to create, a debtorcreditor relation between the trust and petitioner on account of his prior financing of the predecessor partnership. The subsequent agreement of February 21, 1940 operated only to restore certain basic agreements of the interested parties as expressed in their original contract of October 30, 1937, namely, that petitioner was to continue financing the venture or forfeit his interest therein, was first to look to profits for reimbursement of his investment, and was to be given a chattel mortgage so that if no profits were realized he could acquire title to the equipment, mill, and other personal property for which his funds had been expended. Neither the trust1948 Tax Ct. Memo LEXIS 250">280 instrument nor the February 21, 1940 agreement created a debtor-creditor relation between the business trust and the petitioner. The 200 shares in the business trust had an original cost basis of $23,362.98 to petitioner when issued in January 1940. Thereafter, through financing the trust's business, he invested an additional $25,996.64 in the enterprise, but in March 1942 he foreclosed the chattel mortgage and acquired the equipment, mill, and other personal property which had a value of $20,000 at that time. Petitioner disposed of his 200 shares in the business trust on December 11, 1942 for no consideration and sustained a loss thereon of $29,359.62. Opinion The basic questions in the proceeding are what type of loss or other deduction petitioner is entitled to, the amount thereof, if any, and the year or years in which deduction, if any, should be allowed on account of petitioner's advancements totalling $65,038.52 in financing the mining venture conducted in the manner set out in our findings of fact. Petitioner argues that his claimed bad debt deductions in the amounts of $30,000 for 1941 and $15,038.52 for 1942 should be allowed on the ground that all his advances1948 Tax Ct. Memo LEXIS 250">281 constituted loans, first to the partnership and later to the business trust, but if not, then in the alternative, that his advances constituted an investment in the capital stock of the business trust or an investment of petitioner as a sole proprietor owning the equipment, mill, etc., and operating the Romo mines on the premises under lease to the business trust. On brief the respondent contends that his determination of disallowing the claimed bad debt deductions for 1941 and 1942 should be sustained on the ground that the petitioner's advances were not loans and no debtorcreditor relationship existed between petitioner and his associates or the partnership, or, between the petitioner and the business trust. However, respondent now admits that petitioner has sustained a loss on a mining venture entered into with the expectation of profit, but he questions the sufficiency of the evidence for a proper determination as to the amount, the year in which deductible, and whether allowable as a long-term capital loss or a loss resulting from a transaction entered into for profit not connected with petitioner's regular trade or business. Our conclusions herein must be controlled by the1948 Tax Ct. Memo LEXIS 250">282 legal relation intended to be created and actually created by the agreements of the interested parties to the mining venture. The written agreement of October 30, 1937 is admittedly the basic agreement between those interested parties and continued in force throughout petitioner's participation in the venture, except as modified by the subsequent agreements. In our opinion that agreement of October 30, 1937 as carried out was intended to and did create between petitioner and his associates the legal relation of partners in a joint undertaking whereby those associates made a capital contribution of the leases or contracts for leases which their efforts alone had obtained and petitioner agreed to risk, as his capital contribution to the venture, the funds required to finance that joint undertaking. Cf. United States v. E. A. Landreth, et ux, 164 Fed. (2d) 340 (5 C.C.A., Dec. 4, 1947). Under that agreement there was no unconditional obligation of any of petitioner's associates or of the partnership to repay petitioner the funds he advanced and it is clear that the parties did not intend to create and did not create a debtor-creditor relationship and we have so found as1948 Tax Ct. Memo LEXIS 250">283 a fact. What the parties did intend and so provided in their agreement, was that the profits, if any, of the venture would be used first for reimbursement of the petitioner's advances and thereafter the profits would be divided pursuant to each party's respective percentage interest in the venture. Further the parties intended that if there were no profits the petitioner would lose the capital he had risked in the venture, except for what he might recoup on the equipment and other personal property as to which he took title in his own name for that purpose. The joint venture conducted as a partnership continued through 1938 and 1939 resulting in a net loss for each year and by the end of the latter year petitioner had furnished a total of $39,041.88, of which $15,678.90 made up the operating deficits of the partnership which was not a taxable entity and the remaining $23,362.98 was invested in the equipment, mill, and other personal property used in the venture but to which petitioner held title. On January 22, 1940, but treated as being effective as of January 1, 1940, the interested parties executed an instrument setting up an Oklahoma business trust which constituted an association1948 Tax Ct. Memo LEXIS 250">284 taxable as a corporation since the trust was created as a medium for carrying on a business enterprise and sharing the profits in a form analogous to a corporate organization and since the trust indenture provided for a continuing body or entity during the term of the trust, for a centralized management, for continuity of the enterprise secure from termination or interruption by the death of owners of beneficial interests, for the transfer of beneficial interests represented by shares without affecting the continuity of the enterprise, and for the limitation of personal liability of the participants to the property risked in the undertaking. Morrissey v. Commissioner, 296 U.S. 344">296 U.S. 344. The mining leases, then in the names of the individual lessees, the mining equipment, mill, and other personal property to which petitioner then held title and certain assets and liabilities of the partnership were transferred to the business trust which issued beneficial shares to each participant in proportion to his former partnership interest. No particular value was ascribed to any of the property so transferred. The petitioner received a one-half interest or 200 shares representing his1948 Tax Ct. Memo LEXIS 250">285 capital investment in the undertaking and he reported no gain or loss for the year 1940 on that transaction. The trust did not assume an unconditional obligation to repay petitioner any portion of the funds he had furnished in financing the mining enterprise up to that time and no debtorcreditor relationship with respect thereto was created between the trust and petitioner and we have so found as a fact. However, the parties realized that the trust indenture had modified their primary intentions, as evidenced by the basic agreement of October 30, 1937, that petitioner should furinsh all the funds required to finance the venture or forfeit his interest therein, that he was to have first claim on the profits of the venture for reimbursement of his investment, and also that he was to hold title to the mining equipment and personal property until paid for out of profits. In rectification of that situation the trust and petitioner entered into the agreement of February 21, 1940, whereby petitioner agreed to continue to finance the undertaking carried on by the business trust and the trust affirmed its continuation of the former partnership agreement that any profits therefrom would be1948 Tax Ct. Memo LEXIS 250">286 used first to reimburse petitioner and the trust also agreed to further secure such reimbursement by executing a chattel mortgage covering the equipment, concentration mill, and other personal property on the leased premises. The agreements of record clearly evidence the fact that the trust's note for $50,000 secured by the chattel mortgage, both dated February 28, 1940, was not intended to create or evidence a debtorcreditor relationship between the trust and the petitioner in regard to the total amount of $41,484.88 which petitioner had furnished in financing the venture from October 30, 1937 up to the date of the note, plus additional funds it was then contemplated he would be required to furnish for a flotation plant the parties desired to erect. In the light of all the agreements of the parties we do not regard the giving of the note and chattel mortgage as a controlling fact in the disposition of this case, Cf. Wilbert Mineral Corporation, 38 B.T.A. 355">38 B.T.A. 355, 38 B.T.A. 355">365, for the intention of the parties was merely to put the petitioner in the position of being able to take title to the equipment, mill, and other personal property or the proceeds from the sale thereof as partial1948 Tax Ct. Memo LEXIS 250">287 reimbursement of his investment in the undertaking and in keeping with the terms of the original agreement of October 30, 1937. The agreement of February 21, 1940 did not create a debtor-creditor relation between the trust and petitioner and we have so found as a fact. The additional funds in the total amount of $25,996.64 furnished by petitioner after organization of the business trust in January 1940 and up to July 1942 constituted additional investment on his part in the mining venture and in our opinion may be ascribed only to an additional cost of his 200 shares in the business trust, as both parties herein contend either directly or alternatively. However, they are not in agreement as to petitioner's original cost of those 200 shares in January 1940, the respondent contending for a figure of $23,362.98 and petitioner contending for a figure of $24,318.88. We have found as a fact that petitioner's original cost was $23,362.98. Accordingly petitioner's cost basis of his 200 shares amounted to $49,359.62 less $20,000, representing the value of the personal property assets he acquired by foreclosure in March 1942, or $29,359.62. In December 1942 petitioner determined that his1948 Tax Ct. Memo LEXIS 250">288 shares had no value and that he would cease financing the venture and, pursuant to his agreement with his associates that in the latter event he would forfeit his interest in the venture, he transferred his shares to the two Owens without consideration on December 11, 1942. Such transfer closed the petitioner's transaction with respect to such shares which he had acquired in January 1940 and he sustained a loss thereon in the amount of $29,359.62. Since no debtor-creditor relation existed between the business trust and petitioner during either 1941 or 1942 on account of the funds furnished by petitioner to finance the mining business of the predecessor partnership or the trust, we sustain the respondent's determination in disallowing the claimed bad debt deduction of $30,000 for 1941 and $25,036.52 for 1942. However, respondent erred in failing to allow petitioner a proper deduction on account of his loss sustained in the amount of $29,359.62 upon his disposition in 1942 of 200 shares of beneficial interest in the business trust, Romo Mining Company, which was an association taxable as a corporation. We hold that such shares, which were acquired by petitioner in January 1940 constituted1948 Tax Ct. Memo LEXIS 250">289 a capital asset within the meaning of section 117 (a) (1), Internal Revenue Code, that such capital asset having been held for more than six months the loss sustained upon the disposition thereof on December 11, 1942 constituted a long-term capital loss, and that the deduction for such loss (under section 23 (g) of the Code) is limited to the extent provided in section 117 of the Code and more particularly subsections (b); (d) (2); and (e) (1) thereof. Having concluded that the mining venture was in the first instance that of the partnership and thereafter of the business trust, it necessarily follows that it was not conducted by petitioner as a sole proprietor, as alternatively contended by him. Petitioner's tax liability for the years 1941, 1942, and 1943 will be recomputed in accordance herewith in a Rule 50 recomputation. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620784/	GENE FORREST, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentForrest v. CommissionerDocket No. 861-77.United States Tax CourtT.C. Memo 1978-239; 1978 Tax Ct. Memo LEXIS 275; 37 T.C.M. 1033; T.C.M. (RIA) 78239; June 27, 1978, Filed Gene Forrest, pro se. Michael A. Mayhall, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the calendar year 1974 in the amount of $ 812.44. The issues for decision are: (1) Whether petitioner is entitled1978 Tax Ct. Memo LEXIS 275">278 to have his tax computed on a basis other than that of a married person filing a separate return, and (2) Whether the Commissioner is estopped to deny petitioner the right to compute his tax other than on the basis of a married person filing a separate return. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner, who resided in Fort Lee, New Jersey at the time of the filing of the petition in this case, timely filed an income tax return for the taxable year 1974 which he signed on April 14, 1975. On this return he checked the filing status of "Unmarried Head of Household" and computed his tax accordingly. During the taxable year 1974, petitioner was married to Marcia Forrest and until July 1 of that year they resided together in East Brunswick, New Jersey with their minor son, David. Petitioner and Marcia Forrest were legally divorced in October 1975. The judgment of divorce filed October 24, 1975, provided for the payment by petitioner of alimony and child support and for Mrs. Forrest to have custody of the child. The judgment also provided: FURTHER ORDERED that the defendant shall save the plaintiff harmless from any and1978 Tax Ct. Memo LEXIS 275">279 all income taxes due the Internal Revenue Service to and including the date of the signing of this Order, for which the parties may become obligated now or in the future, whether said income tax obligation is as a result of earnings from working, or earnings from stocks, bonds, or bank accounts, or earnings of any nature whatsoever; FURTHER ORDERED that the defendant shall be entitled to claim the infant child on his income tax return as a dependent; On July 9, 1974, the Superior Court of New Jersey, Chancery Division, Middlesex County, entered an order for pendentelite support, requiring petitioner to pay support and maintenance to his wife, and on August 21, 1974, entered an order for an increase in pendentelite support. The original order for pendentelite support contained the following provisions: ORDERED, that the defendant shall pay to the plaintiff for the support and maintenance of the plaintiff and the parties' son, David Forrest, (unallocated) pendentelite, the sum of $ 350.00 per month commencing as of May 31, 1974, until further Order of this Court; and it is further ORDERED, that the plaintiff shall sign the 1973 Joint Federal1978 Tax Ct. Memo LEXIS 275">280 Income Tax Return prepared by the defendant, a copy of which has already been supplied by the defendant to the plaintiff and the defendant shall indemnify and hold the plaintiff harmless from any liability in connection with the signing of the aforesaid Joint Income Tax Return; * * After petitioner and Mrs. Forrest ceased to reside together in 1974, the principal place of abode of petitioner's minor son, David, for the balance of 1974 was the residence of Mrs. Forrest. Petitioner did not share the residence with his wife and child after July of 1974. In March 1975 petitioner called the Internal Revenue Service office in Newark, New Jersey and requested to be advised how he should file his 1974 income tax return. He was advised that he could either choose to file a joint return with Mrs. Forrest or to file as head of a household. Petitioner computed his tax both ways and determined that less tax resulted from filing as head of a household. His return was audited and petitioner was told by the auditor that he had overpaid his tax by $ 100 and a refund would be made to him. Three months later petitioner received in the mail a document entitled "Revised Report." This document1978 Tax Ct. Memo LEXIS 275">281 was on a printed form entitled "Report of Individual Income Tax Audit Changes." On the report, dated December 1, 1975, petitioner's filing status was shown as "single." Two small adjustments, one increasing and one decreasing petitioner's income as reported, with the net adjustment being a decrease in the amount of $ 333.50, were made and petitioner's tax was computed on the basis of a filing status of "single," resulting in an additional tax shown of $ 215.20. On the second page of the "Revised Report" furnished to petitioner the following appeared under "Explanation of Adjustments:" B. Head of Household status has been disallowed. Your unmarried child must live together with you for the entire year in the household you maintain as the principal residence of both you and the child. Petitioner went over the report and obtained the advice of an accountant. Thereafter he agreed to the adjustment and signed a document agreeing to pay the $ 215.20. In February of 1976 petitioner received a statement from the Internal Revenue Service in the amount of $ 812.44 with the notation that he could not file as single but must file as a married person filing a separate return. Petitioner1978 Tax Ct. Memo LEXIS 275">282 expressed a disagreement with this statement and was told to file a request for a review by a conferee of the Internal Revenue Service. On April 6, 1976, petitioner had a meeting with a member of the Conference Section of the Internal Revenue Service in Newark and submitted evidence he had brought with him to the conferee. After the discussion between petitioner and the conferee, the conferee conferred with attorneys for the Internal Revenue Service and thereafter petitioner and the conferee agreed that petitioner's correct additional tax liability was only in the total amount of $ 142.05, and the conferee asked petitioner to give him a check in this amount. Petitioner drew a check, dated April 6, 1976, made payable to the Internal Revenue Service in the amount of $ 142.05 and handed it to the conferee.On April 13, 1976, petitioner's check was returned to him with no explanation. Petitioner then telephoned the conferee and was advised that the conferee had been overruled by the Appellate Division of the Internal Revenue Service and that his tax liability was $ 692. Petitioner was sent a written notice to this effect. Petitioner then requested and had set up a meeting with1978 Tax Ct. Memo LEXIS 275">283 the Appellate Division. At this meeting he was told that the Appellate Division did not have the jurisdiction to overrule the decision made with respect to his tax liability and that the next step he would have to take would be to take the matter to the United States Tax Court.The total amount of tax paid by petitioner with his return and Mrs. Forrest with her return for the year 1974 is equal to the tax which would be properly reportable by Mr. and Mrs. Forest on a joint return for the year 1974. On January 6, 1976, a statutory notice of deficiency showing a deficiency in petitioner's income tax in the amount of $ 812.44 was issued to petitioner. Two adjustments were made in this notice which are not here in issue and the following explanation was given with respect to petitioner's filing status: Explanation of Change in Filing StatusIt is determined that you were still legally married at the completion of the taxable year ended December 31, 1974. Since you and your wife filed separate returns, you are not entitled to compute your tax using the rate schedules for single or head of household for the taxable year ended December 31, 1974. Your tax should be computed1978 Tax Ct. Memo LEXIS 275">284 using the rate schedule for married taxpayers filing separate returns. Accordingly, your tax has been increased in the amount of $ 812.44. Petitioner, on January 27, 1977, addressed a letter to this Court which was filed as a petition, and on February 10, 1977, filed an amended petition in which he placed in issue $ 670.39 of the deficiency determined by respondent, stating "Amount I believe owed - $ 142.05." In this amended petition petitioner alleged that he was told by the Internal Revenue Service to file as head of a household rather than joint and also alleged inconsistent and improper handling by the Internal Revenue Service of his return because of the numerous changes in position taken by employees or agents of the Internal Revenue Service.Petitioner further alleged in his petition that he should be entitled to file as a single individual since he was legally separated from his spouse under a decree of divorce or of separate maintenance. At the trial petitioner contended that he should be entitled to file as a single individual or in the alternative, if he was wrong in this contention that "if I was advised correctly by the IRS that * * * I could not file head of household,1978 Tax Ct. Memo LEXIS 275">285 I would certainly have elected to file jointly for I'm not a stupid person and am not willing to throw away $ 1,000.00, because that's the difference." Petitioner did not specifically contend that he should be entitled to file a joint return with his former wife, stating that he had discussed the matter with respondent's attorney and told him "If you allow me to file the way I would have elected to file at the beginning, if it was told to me that the proper way -- I'll file that way now," and that "they advised me that I can't file that way now, because I've elected to come to this Court." 11978 Tax Ct. Memo LEXIS 275">286 OPINION Section 1(a), (c) and (d), I.R.C. 1954, 2 provides the tax rates for married individuals filing joint returns, unmarried individuals and married individuals filing separate returns, respectively. Each of these subsections refers to "married individual (as defined in section 143.)" Section 1(b) provides for the tax rates for the head of a household as defined in section 2(b). Section 2(c) provides that for the purposes of section 2(a) and (b) a person who is not considered married under section 143(b) shall be considered as unmarried. Section 1433 provides that the determination of whether an individual is married shall be made as of the close of the taxable year, and that "An individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married." This section further provides, with respect to married individuals living apart, that if such an individual maintains a household which constitutes for more than one-half of the taxable year the principal place of abode of a dependent who is a son or daughter and with respect1978 Tax Ct. Memo LEXIS 275">287 to whom such individual is entitled to a deduction for the taxable year under section 151, and such individual furnished over half the cost of maintaining such household during the taxable year, and "during the entire taxable year such individual's spouse is not a member of such household," such individual shall not be considered as married. 1978 Tax Ct. Memo LEXIS 275">288 Clearly, under New Jersey law petitioner was not legally separated from his wife at the end of 1974.In fact, petitioner and respondent stipulated that "The petitioner and his former wife were not legally separated during the taxable year 1974." Since this is a stipulation of law and not of fact, we would not be bound to accept it if it were legally incorrect. However, this stipulation is a correct interpretation of the New Jersey law. See Capodanno v. Commissioner, 69 T.C. 638">69 T.C. 638 (1978), in which we held that an order for pendentelite support in New Jersey did not effect a legal separation. See also Lavino v. Lavino,23 N.J. 635">23 N.J. 635, 130 A.2d 369">130 A.2d 369 (1957); Weinkrantz v. Weinkrantz,129 N.J. Super. 28">129 N.J. Super. 28, 322 A.2d 184">322 A.2d 184 (1974). As we pointed out in the Capodanno case, for Federal tax purposes the marital status of a taxpayer is determined by the law of the state of the marital domicile. We therefore conclude, independent of the stipulation of1978 Tax Ct. Memo LEXIS 275">289 the parties, that petitioner was not legally separated from his wife at the end of 1974 and was not entitled to file his return as a single individual. The parties also stipulated that petitioner was not entitled to file as head of a household for the year 1974. Again, this is a stipulation of a legal conclusion but also a correct one. The facts here clearly show that during the first half of 1974 petitioner's spouse was a member of the household in which petitioner and his son, David, resided. Therefore, even though David was the dependent of petitioner for the year 1974 within the meaning of section 152 and resided in petitioner's household for more than one-half of the taxable year, petitioner fails to meet the qualification of section 143(b)(3) and therefore cannot be considered as not married at the end of 1974. See section 143(b)(3), quoted in Footnote 3. However, it is clear that since petitioner was legally married at the end of 1974 he was entitled to file a joint return with his wife. See Eccles v. Commissioner,19 T.C. 1049">19 T.C. 1049 (1953), affd. per curiam 208 F.2d 796">208 F.2d 796 (4th Cir. 1953); Rev. Rul. 75-536, 1975-2 C.B. 462. From1978 Tax Ct. Memo LEXIS 275">290 the facts in this record, it appears that since petitioner filed a separate return from his wife he would have been entitled under section 6013(b)4 at any time before April 15, 1978, to elect with his wife to file a joint return, except that he could not make the election to file a joint return with his wife after a deficiency notice was mailed to him and he filed a petition with this Court. Section 6013(b)(2)(C). 1978 Tax Ct. Memo LEXIS 275">291 Since petitioner was appearing without counsel, it was difficult to follow the contentions he was making. Petitioner did not file a brief. However, the Court assumed his complaints with respect to the various types of information he received from agents or employees of the Internal Revenue Service were his attempt to allege and prove estoppel. At the trial the Court stated it would consider that petitioner properly alleged that respondent was estopped to require him to file as an unmarried individual filing a separate return. Although petitioner did not specifically allege that he should now be permitted to file a joint return, from the statement he made at the trial his petition has been considered as if this issue were raised. It is difficult to conceive that one individual would receive as much misinformation and poor consideration of his tax liability for one year from various employees of the Internal Revenue Service as petitioner received. However, we have not only petitioner's testimony, which was straight forward and believable, but also documentary evidence to show the total lack of expertise of the employees of the Revenue Service who handled petitioner's tax liability1978 Tax Ct. Memo LEXIS 275">292 and the fact that misrepresentations of law were consistently made to petitioner. It appears that petitioner was not aware until after he filed a petition with this Court that once having filed separate returns he and his wife could elect to file jointly. Even though the failure of employees of the Internal Revenue Service at any level, and particularly at the level of the Appellate Division, to inform petitioner of the statutory provisions for an election to file a joint return after having filed separate returns is not to be condoned, in our view it does not estop the Commissioner from determining a deficiency against petitioner on the basis that the deficiency in this case is determined. The right of a taxpayer to elect to file a joint return after having filed separate returns is clear.Section 6013(b) sets forth the right of individuals to make a joint return for a taxable year after having filed a separate return. Subparagraph (b)(2) of section 6013 states the limitations for making the election. The facts here indicate that at the time the deficiency notice in this case was issued1978 Tax Ct. Memo LEXIS 275">293 to petitioner none of these limitations applied to him. However, after he filed a petition with this Court he failed to meet the limitation contained in subparagraph (C) of section 6013(b)(2). All of petitioner's conferences with Internal Revenue Service employees and officials were prior to April 15, 1978, so the statutory period for making the election to file a joint return had not expired when any of these conferences were held. The final decree of divorce, which was filed on October 24, 1975, required petitioner to be responsible for all income taxes prior to the date of the entry of that decree. Most of petitioner's conferences with Internal Revenue Service employees were subsequent to the date of the entry of the final decree of divorce. Therefore, Mrs. Forrest would have had no contrary interest to petitioner's with respect to the filing of a joint return for the year 1974.Probably she would have been required to consent to filing such an election if she otherwise was unwilling. She was directed by the court to sign a joint return for 1973. See also Weinkrantz v. Weinkrantz,supra,322 A.2d 184">322 A.2d at 189. The law is clear that 1978 Tax Ct. Memo LEXIS 275">294 a taxpayer's reliance on mistaken legal interpretations given to him by agents of respondent does not estop respondent from making a correct determination of that taxpayer's tax liability. Demirjian v. Commissioner,54 T.C. 1691">54 T.C. 1691, 54 T.C. 1691">1701 (1970), affd. 457 F.2d 1">457 F.2d 1 (3d Cir. 1972). See also Automobile Club of Michigan v. Commissioner,353 U.S. 180">353 U.S. 180 (1957); Norden-Ketay Corp. v. Commissioner,319 F.2d 902">319 F.2d 902 (2d Cir. 1963), affirming a Memorandum Opinion of this Court. Even if the failure of the Internal Revenue Service employees, including officials of the Appellate Division, to inform petitioner of the law with respect to an election to file a joint return after having filed separate returns could be considered as an official act of the Commissioner, 5 estoppel would not exist here. As we pointed out in Estate of Emerson v. Commissioner,67 T.C. 612">67 T.C. 612, 67 T.C. 612">617-618 (1977): The essential elements of estoppel are not present in the instant case. These elements are: (1) There must be a false representation or wrongful misleading silence; (2) the error must be in1978 Tax Ct. Memo LEXIS 275">295 a statement of fact and not in an opinion or a statement of law; (3) the person claiming the benefits of estoppel must be ignorant of the true facts; and (4) he must be adversely affected by the acts or statements of the person against whom an estoppel is claimed. Morris G. Underwood,63 T.C. 468">63 T.C. 468 (1975), affd. 535 F.2d 309">535 F.2d 309 (5th Cir. 1976). * * In Underwood v. Commissioner,63 T.C. 468">63 T.C. 468, 63 T.C. 468">477 (1975), we quoted substantially the same elements of estoppel from the opinion in Van Antwerp v. United States,92 F.2d 871">92 F.2d 871, 92 F.2d 871">875 (9th Cir. 1937). The one case which we found that, on first reading, might indicate that a mistake by the Commissioner which bordered on a mistake of law could cause equitable estoppel to apply to the Commissioner is Schuster v. Commissioner,312 F.2d 311">312 F.2d 311 (9th Cir. 1962), affirming in part and reversing in part 32 T.C. 998">32 T.C. 998 (1959). In our view, in the Schuster case the Court in1978 Tax Ct. Memo LEXIS 275">296 effect considered the audit of the Federal estate tax return which was furnished to the trust beneficiary concluding that the trust corpus was not includable in the taxable estate of the decedent to be a misrepresentation of fact rather than law. If 312 F.2d 311">Schuster v. Commissioner,supra, merely holds that a factual misrepresentation made by the Commissioner to a taxpayer, on which the taxpayer acts to his detriment, is cause for applying equitable estoppel against the Commissioner, it is in line with a number of other cases. If, in fact, the only misrepresentation made by the Commissioner in the Schuster case were to be considered an incorrect interpretation of law, it would be encumbent on us to independently determine whether we would follow that portion of the case which partially reversed our holding.See Schwartz v. Commissioner,40 T.C. 191">40 T.C. 191, 40 T.C. 191">193 (1963), where we indicated that we would not do so. In any event, the facts in the instant case do not fall within the situation which the Circuit Court concluded existed in the Schuster case. At all times when petitioner was discussing his tax liability with representatives of the Internal1978 Tax Ct. Memo LEXIS 275">297 Revenue Service the law was clear that the fact he and Mrs. Forrest had previously filed separate returns would not bar them from electing to file a joint return. Had petitioner consulted someone highly informed with respect to tax law, this fact would have been brought to his attention. Even though in our view representatives of the Commissioner, and particularly of the Appellate Division, should make every effort to inform a taxpayer during the course of numerous conferences of the opportunity afforded by the statute to file a return in such a manner as to legally pay a lesser tax, as a matter of law we consider it incorrect to conclude that failure to do so amounts to estoppel. Decision will be entered for the respondent. Footnotes1. Although petitioner did not specifically testify to the fact, in his opening statement to the Court he stated that in March of 1975 he was separated from his wife and when he was preparing to file his 1974 return he talked to her attorney on the telephone. He stated that his wife's attorney asked him how he would suggest or how he was intending to file his tax return and suggested that he and his wife file a joint return. Petitioner told his wife's attorney he would let him know later if he desired to file a joint return with his wife and that it was following this conversation with his wife's attorney that he called the Internal Revenue Service and received the information that he could choose either to file as head of household or a joint return. Petitioner, after getting this information and computing his tax both on the basis of head of a household and a joint return, telephoned his wife's attorney and told him that he had decided to file as head of a household and not file a joint return. Petitioner put in evidence a computation showing that the tax liability on the joint return with his wife for 1974 would be $ 4,070.04 as compared to a tax liability of $ 4,751.26 computed on the basis of a married person filing a separate return.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted. ↩3. SEC. 143.DETERMINATION OF MARITAL STATUS. (a) General Rule.--For purposes of this part-- (1) The determination of whether an individual is married shall be made as of the close of his taxable year; except that if his spouse dies during his taxable year such determination shall be made as of the time of such death; and (2) An individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married. (b) Certain Married Individuals Living Apart.--For purposes of this part, if-- (1) an individual who is married (within the meaning of subsection (a)) and who files a separate return maintains as his home a household which constitutes for more than one-half of the taxable year the principal place of abode of a dependent (A) who (within the meaning of section 152) is a son, stepson, daughter, or stepdaughter of the individual, and (B) with respect to whom such individual is entitled to a deduction for the taxable year under section 151, (2) such individual furnishes over half of the cost of maintaining such household during the taxable year, and (3) during the entire taxable year such individual's spouse is not a member of such household, such individual shall not be considered as married.↩4. SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE. * * *(b) Joint Return After Filing Separate Return.-- (1) In general.-- Except as provided in paragraph (2), if an individual has filed a separate return for a taxable year for which a joint return could have been made by him and his spouse under subsection (a) and the time prescribed by law for filing the return for such taxable year has expired, such individual and his spouse may nevertheless make a joint return for such taxable year. A joint return filed by the husband and wife under this subsection shall constitute the return of the husband and wife for such taxable year, and all payments, credits, refunds, or other repayments made or allowed with respect to the separate return of either spouse for such taxable year shall be taken into account in determining the extent to which the tax based upon the joint return has been paid. If a joint return is made under this subsection, any election (other than the election to file a separate return) made by either spouse in his separate return for such taxable year with respect to the treatment of any income, deduction, or credit of such spouse shall not be changed in the making of the joint return where such election would have been irrevocable if the joint return had not been made.If a joint return is made under this subsection after the death of either spouse, such return with respect to the decedent can be made only by his executor or administrator. (2) Limitations for making of election.--The election provided for in paragraph (1) may not be made-- (A) unless there is paid in full at or before the time of the filing of the joint return the amount shown as tax upon such joint return; or (B) after the expiration of 3 years from the last date prescribed by law for filing the return for such taxable year (determined without regard to any extension of time granted to either spouse); or (C) after there has been mailed to either spouse, with respect to such taxable year, a notice of deficiency under section 6212, if the spouse, as to such notice, files a petition with the Tax Court of the United States within the time prescribed in section 6213; or (D) after either spouse has commenced a suit in any court for the recovery of any part of the tax for such taxable year; or (E) after either spouse has entered into a closing agreement under section 7121 with respect to such taxable year, or after any civil or criminal case arising against either spouse with respect to such taxable year has been compromised under section 7122↩.5. It is to be noted that the deficiency notice in this case issued in the name of the Commissioner was issued by the Assistant Chief, Appellate Branch Office, Newark, New Jersey.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620785/	William Pestcoe and Selma Pestcoe, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentPestcoe v. CommissionerDocket Nos. 93597-93600United States Tax Court40 T.C. 195; 1963 U.S. Tax Ct. LEXIS 137; April 30, 1963, Filed 1963 U.S. Tax Ct. LEXIS 137">137 Decisions will be entered under Rule 50. A corporation, in which petitioners were stockholders, resolved on November 14, 1958, to elect to be taxed as a small business corporation under subchapter S of the 1954 Code. The corporation met all requirements to qualify and the last days for making the election were December 1, 1958, for 1958, and January 31, 1959, for 1959. Under section 1372(c)(1) of the 1954 Code, the Secretary, or his delegate, is specifically authorized to prescribe by regulation the manner of making the election. The regulations adopted and applicable here required the filing of Form 2553 and written consents by stockholders by the due date. Nothing was filed by the electing corporation until February 27, 1959, when the election was made as prescribed by the regulations. Held: The regulations are authorized by section 1372(c)(1) to prescribe the manner of making an election. Despite the corporate resolution to make an election, no effective election was made until the petitioners complied with these regulations. Since the election was not within the time limits provided in sections 1372(c)(1) and 1372(c)(2), it was invalid as to both years. Morris Prince, for the petitioners.Dennis C. DeBerry, for the respondent. Hoyt, Judge. HOYT40 T.C. 195">195 The respondent determined deficiencies in petitioners' income taxes for the years 1958 and 1959, as follows:AmountDocket No1958195993597$ 2,186.48$ 979.07935982,454.19936001,916.16723.05Jan. 1-Nov. 1, 19593599$ 836.62Losses of Pestcoe Clothing Co., Inc., for 1958, of which petitioners claimed their proportionate parts, were conceded on brief. It is agreed that Mercer Clothing Manufacturing Co., Inc. (hereafter called1963 U.S. Tax Ct. LEXIS 137">140 Mercer), meets the requirements of a small business corporation under section 1371 of the 1954 Code. The sole issue to be decided is whether a valid election was made by Mercer to be treated as a small 40 T.C. 195">196 business corporation under section 1372 of the Internal Revenue Code of 1954, so as to entitle petitioners to use proportionate losses in their individual returns for 1958 and 1959.FINDINGS OF FACTThe petitioners William and Selma Pestcoe are husband and wife and resided at 24 Newell Avenue, Trenton, N.J., during the years in question. Petitioners Sydney and Sylvia Pestcoe, are husband and wife whose residence was at 110 Cornwall Avenue, Trenton, N.J. The petitioners Marvin and Nancy Pestcoe were husband and wife living at 9 Diane Drive, West Trenton, N.J. In November 1959, Marvin Pestcoe died, and a return was filed for Marvin Pestcoe, deceased, for the taxable year from January 1 to November 1, 1959. All of the petitioners filed their Federal income tax returns with the district director of internal revenue at Camden, N.J.The petitioners Marvin, William, and Sydney each held one-third of the stock and were the sole shareholders and officers of Mercer and, also, of1963 U.S. Tax Ct. LEXIS 137">141 the Pestcoe Clothing Co., Inc. (hereafter referred to as Pestcoe). Both of these corporations were located at Olden and Breunig Avenues, Trenton, N.J. Their operations were integrated in the manufacture and sale of boys' clothing. Pestcoe was the selling company and purchased top cloth material. Mercer was the manufacturer for itself and also on a contract basis for others, and purchased the materials needed to trim and finish the garments.Both of these corporations had sustained losses for about 5 years prior to the years involved here. The losses for which the petitioners claimed their proportionate shares under section 1374 of the 1954 Code, were as follows:19581959Mercer -- Loss($ 24,667.32)($ 28,733.32)Pestcoe -- Loss($ 11,699.92)None claimedThe petitioners conceded on brief that the Pestcoe losses for 1958 were not allowable, so no further facts will be found with respect to that corporation. Mercer filed its income tax returns on a calendar-year basis.On October 31, 1958, the sole Mercer stockholders -- William, Marvin, and Sydney Pestcoe -- held a stockholders meeting at their lawyer's office in Trenton, N.J., at which they discussed the 1963 U.S. Tax Ct. LEXIS 137">142 advisability of electing to file as a small business corporation, as defined in subchapter S of the Internal Revenue Code of 1954. Sidney Stark, counsel for the company, and Morris Prince, a certified public accountant, 40 T.C. 195">197 were also present at this meeting. It was decided to continue the discussion at a second meeting in 2 weeks.At the second meeting, on November 14, 1958, the same persons were present. It was resolved that Mercer would elect to report its income as a small business corporation under subchapter S. Morris Prince was designated to prepare and submit the necessary forms and papers. Since the subchapter S provisions were new, Prince decided to telephone both the Camden, N.J., and Washington, D.C., offices of the Internal Revenue Service in order to determine the proper procedures. However, he was not able to elicit any definite answer or information. The record does not disclose what further efforts were made to effect the election, either prior to December 1, 1958, with respect to the year 1958 or prior to January 31, 1959, with respect to 1959.Morris Prince was stricken with a coronary occlusion on January 7, 1959, and was confined in hospital until January1963 U.S. Tax Ct. LEXIS 137">143 28, 1959. He then remained at home for several weeks. While at home he obtained Form 2553 which is the form required to be used in making an election to be taxed as a small business corporation under subchapter S. This form, together with the necessary shareholder consents, was sent on February 27, 1959, to the Commissioner of Internal Revenue on behalf of Mercer and Pestcoe.The elections and shareholder consents were received by the district director of internal revenue at Camden, N.J., on March 4, 1959. These were the only elections filed by the petitioners, and their receipt was acknowledged by the Commissioner in a letter dated March 5, 1959. No consent has been filed by the estate of Marvin Pestcoe, deceased.OPINIONUnder the provisions of subchapter S (secs. 1371-1377) of the 1954 Code, a corporation may elect to be taxed in essentially the same manner as a partnership. Section 1372(c)(1) states that the election must be made during the first month of the taxable year or during the immediately preceding month. It also provides that the manner of making the election shall be prescribed by regulations of the Secretary or his delegate. In accordance with this provision, 1963 U.S. Tax Ct. LEXIS 137">144 T.D. 6317, 1958-2 C.B. 1096, was filed on September 25, 1958, and published the following day in the Federal Register. In section 18.1-1(b)(1) of the regulations adopted therein, it is provided that the election under section 1372(a) should be made by filing Form 2553, or the equivalent information contained in a statement, together with consents by the shareholders.In accordance with section 1372(c)(2), which provides for elections for taxable years beginning after December 31, 1957, and before the 40 T.C. 195">198 date of enactment of subchapter S, the last day for Mercer's filing an election for 1958 was December 1, 1958. The election for 1959 was due to be filed in December of 1958 or January of 1959, as provided by section 1372(c)(1). Since Mercer did not file Form 2553 or any equivalent statement until February 27, 1959, it is apparent that this filing was too late to be a valid election for 1958 or 1959. The fact that the petitioners resolved to elect to be taxed as a small business corporation on November 14, 1958, was not an election but only an agreement to elect, and it certainty was not in compliance with the regulations which Congress1963 U.S. Tax Ct. LEXIS 137">145 specifically authorized the Commissioner to adopt. We hold that Mercer did not file the proper form or information until February 27, 1959, at the earliest, and, consequently, made no election until that date.The petitioners point to many areas where the Internal Revenue Code provides for lenient treatment. Here, sections 1372(c)(1) and 1372(c)(2) are both demanding and explicit. There is no such provision for leniency with respect to the filing of elections under subchapter S.It is true that the result may be harsh, but the Court cannot grant an extension in the face of such definite time limits. Simons v. United States, 208 F. Supp. 744">208 F. Supp. 744 (D. Conn. 1962). Subchapter S was placed in the Code as a complement to section 1361 (which allows a partnership to be taxed as a corporation) so that businesses could select their form of organization without having to take into account the tax consequences. 2 The election is optional, but if a taxpayer wishes to take advantage of these provisions he must also comply with their requirements. The equitable appeal of petitioners for relief by the Court is somewhat blunted by the facts. Petitioners' accountant1963 U.S. Tax Ct. LEXIS 137">146 became ill in January of 1959 but by that time the date for filing for 1958 was over a month past. Also, with respect to 1959, more time had already elapsed for timely filing than remained. Thus it is apparent that the illness relied upon in petitioners' equitable appeal was not the sole or principal cause of the late filing. In any event, whatever the equities or the harsh results, we do not feel that we can grant an extension of time where the Congress has specifically set the time for the making of the election required by the Code if the privilege of special tax treatment is to be enjoyed by certain small business corporations. 208 F. Supp. 744">Simons v. United States, supra; cf. J. E. Riley Investment Co. v. Commissioner, 311 U.S. 55">311 U.S. 55 (1940), affirming 110 F.2d 655 (C.A. 9, 1940) and a Memorandum Opinion of this Court.Petitioners1963 U.S. Tax Ct. LEXIS 137">147 argue that the Commissioner has power and authority to extend the time for filing subchapter S elections under the general provisions of section 6081(a) of the Code. The Commissioner has taken the position that he cannot grant such an extension, Rev. Rul. 40 T.C. 195">199 60-183, 1960-1 C.B. 625, and urges that therefore petitioners' argument be rejected. This issue is not before us since there is no evidence in this record that the Commissioner refused to grant an extension or even that Mercer ever requested one.We hold that Mercer did not elect to be taxed as a small business corporation until February 27, 1959, and that such election is untimely as to both 1958 and 1959 under sections 1372(c)(1) and 1372(c)(2) of the Internal Revenue Code of 1954 and the regulations adopted by specific authorization thereof.Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners were consolidated: Estate of Marvin Pestcoe, deceased, William Pestcoe, Broad Street National Bank of Trenton, and Sydney Pestcoe, coexecutors, and Nancy Pestcoe, surviving spouse, Docket No. 93598; estate of Marvin Pestcoe, deceased, William Pestcoe, Broad Street National Bank of Trenton, and Sydney Pestcoe, coexecutors, Docket No. 93599; and Sydney Pestcoe and Sylvia Pestcoe, Docket No. 93600.↩2. S. Rept. No. 1983, 85th Cong., 2d Sess., p. 87 (1958), 1958-3 C.B. 1008↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620788/	Peeler Hardware Company, Petitioner, v. Commissioner of Internal Revenue, RespondentPeeler Hardware Co. v. CommissionerDocket No. 5849United States Tax Court5 T.C. 518; 1945 U.S. Tax Ct. LEXIS 114; July 28, 1945, Promulgated 1945 U.S. Tax Ct. LEXIS 114">114 Decision will be entered under Rule 50. 1. Petitioner contended that in computing its equity invested capital for excess profits tax purposes it had acquired certain assets in a tax-free reorganization and that the base of its investment therein should be determined accordingly. Respondent contended contra. Held, that the assets in question were not so acquired.2. Petitioner contended that certain salaries which it paid and deducted in its tax returns, which were in part disallowed as deductions by respondent, were reasonable. Held, that such salaries were reasonable and were deductible in full. C. Baxter Jones, Esq., and L. D. Baggs, Jr., C. P. A., for the petitioner.Edward L. Potter, Esq., for respondent. Hill, Judge. HILL 5 T.C. 518">518 The Commissioner determined deficiencies as follows:DeclaredFiscal year ended --Income taxvalue excessExcessprofits taxprofits taxMay 31, 1940$ 2,605.87$ 72.74May 31, 19411,016.35May 31, 1942224.41$ 13,757.191945 U.S. Tax Ct. LEXIS 114">115 The first issue is whether petitioner's equity invested capital for the fiscal year ended May 31, 1942, should be reduced by the amount of $ 109,508.77. This involves the question of whether petitioner acquired certain assets in a tax-free reorganization. The second issue is whether petitioner is entitled to deductions for salary paid to T. B. Peeler in the following amounts:1940$ 11,625.00194110,091.49194210,225.00Other items entering into the composition of the deficiencies have been conceded by petitioner.5 T.C. 518">519 Issue I.FINDINGS OF FACT.Petitioner is a Georgia corporation, with its principal office at Macon, Georgia. It filed its income tax returns for the years in question with the collector of internal revenue for the district of Georgia. In 1930 A. M. Peeler was the sole stockholder of the petitioner, with the exception of 4 qualifying shares in the hands of the directors. The Dunlap sisters were the sole stockholders of the Dunlap Hardware Co., hereinafter referred to as Dunlap, a competitor of the petitioner. Desiring to retire, the Dunlap sisters offered to sell the business to A. M. Peeler and the offer was accepted. By a contract of 1945 U.S. Tax Ct. LEXIS 114">116 sale entered into May 23, 1930, A. M. Peeler agreed to purchase from the Dunlap sisters all of the outstanding stock of Dunlap, consisting of 800 shares, for the purchase price of $ 180,000. A. M. Peeler personally borrowed $ 100,000 which he placed in a Macon bank as escrow for ultimate payment to the Dunlap sisters for their stock pursuant to the contract. The 800 shares of Dunlap were then issued in the name of A. M. Peeler and were deposited in the bank in escrow, the Dunlap sisters retaining a security interest therein until the purchase price was paid in full. Thereupon the $ 100,000 was paid over to the Dunlap sisters.Pursuant to the contract A. M. Peeler exercised an optional method of paying the remaining $ 80,000 of the purchase price. He caused the petitioner to issue $ 80,000 par value preferred stock in the name of the Dunlap sisters within 60 days, as required by the contract. Under this optional method Peeler Hardware Co. amended its charter by changing its name to Dunlap-Peeler Hardware Co. The name was subsequently changed back to Peeler Hardware Co. At a stockholders' meeting of petitioner on June 25, 1930, the following resolutions were adopted:The following1945 U.S. Tax Ct. LEXIS 114">117 resolution was unanimously adopted: Resolved that the corporation accept the amendment to its charter granted by the Superior Court of Bibb County on the 25th day of June, 1930, changing the name of the corporation from Peeler Hardware Company to Dunlap-Peeler Hardware Company.On motion the following resolution was unanimously adopted: Resolved that the common capital stock of the company be increased from $ 150,000.00 to $ 200,000.00 and that 500 additional shares of common stock of the par value of $ 100.00 per share be issued.On motion the following resolution was unanimously adopted: Resolved that an issue of preferred stock in the amount of $ 80,000.00 par value be authorized, such stock to be first preferred 7% cumulative stock and to be issued in shares of the par value of $ 100.00. Such stock shall be issued upon the terms and conditions set forth and contained in the specimen stock certificate hereto attached and by reference made a part of this resolution. 5 T.C. 518">520 Such specimen stock certificate as prepared and as submitted to this meeting is hereby approved as to all its terms and conditions.On Motion the following resolution was unanimously adopted: 1945 U.S. Tax Ct. LEXIS 114">118 Whereas, A. M. Peeler, the President of Peeler Hardware Company and the sole stockholder of Peeler Hardware Company, except for four qualifying shares issued to directors of said company, has acquired all of the assets of Dunlap Hardware Company subject to the liabilities of said company, andWhereas, said A. M. Peeler has proposed to turn said assets of said Dunlap Hardware Company over to this corporation, subject to the liabilities so assumed by him, andWhereas, it appears that the assets of Dunlap Hardware Company, after deducting the liabilities of said company, are reasonably worth an amount equal to or in excess of the value of the common and preferred stock heretofore authorized by resolution of the stockholders at this meeting, andWhereas, it is to the best interests of this company to acquire the assets of Dunlap Hardware Company subject to its liabilities.Now, Therefore, be it resolved that the said assets be accepted and that the liabilities of Dunlap Hardware Company be assumed and that the additional shares of common stock and all of the preferred stock to be issued in accordance with the resolution heretofore adopted by the stockholders of this company be issued1945 U.S. Tax Ct. LEXIS 114">119 and delivered to said A. M. Peeler or his nominee or nominees in exchange for the assets of said Dunlap Hardware Company.By this resolution A. M. Peeler was recognized by petitioner as personally being the owner of the assets formerly belonging to Dunlap. These assets were carried forward on the books of the petitioner at the same value that they had had on the books of Dunlap. Dunlap took no action in transferring its assets. It took no formal corporate action of any sort after the issuance of its stock in the name of A. M. Peeler.In addition to issuing $ 80,000 par value of preferred stock to the Dunlap sisters as the nominees of A. M. Peeler, the petitioner issued an additional $ 50,000 par value common stock to Peeler in return for the assets so conveyed to it. The preferred shares were redeemed by petitioner at a discount on December 15, 1930.A. M. Peeler caused Dunlap to be liquidated and personally took over the assets prior to conveying them to the petitioner. The fair market value of these assets, subject to Dunlap's liabilities at the date of liquidation, was $ 180,000.OPINION.The issue is as to the proper valuation of the assets originally belonging to Dunlap1945 U.S. Tax Ct. LEXIS 114">120 in determining petitioner's equity invested capital for the fiscal year ended May 31, 1942. Petitioner seeks to have the value carried as it would have been in the hands of Dunlap. Respondent reduced that amount by $ 109,508.77 so as to carry the assets at a valuation of $ 180,000, the purchase price paid by A. M. Peeler for the stock of Dunlap. Section 718 of the Internal Revenue Code provides that, in the determination of the equity invested capital for the excess profits credit, property paid in for stock or as paid-in 5 T.C. 518">521 surplus or as a contribution to capital shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. 11945 U.S. Tax Ct. LEXIS 114">121 It is petitioner's contention that once A. M. Peeler had purchased the entire stock of Dunlap he caused a tax-free reorganization between the petitioner and Dunlap. If we were to consider the various steps as a part of one plan of reorganization, we could not begin the consideration of those steps after the acquisition by A. M. Peeler of the Dunlap stock as urged by petitioner. The conveyance of the assets to petitioner was required by the Dunlap interests in the contract of sale in the event that A. M. Peeler should decide to cause the balance of the purchase price for their stock to be met by causing petitioner to issue preferred stock to them. Thus, if there were a reorganization, it would have to commence with the Dunlap sisters having the sole proprietary interest in Dunlap. Their requisite proprietary capacity did not continue into the reorganized company.The Commissioner determined that the assets were acquired by petitioner from A. M. Peeler as an individual and that A. M. Peeler acquired the assets in the complete liquidation of Dunlap. The evidence tends to support the Commissioner's determination.It would appear that at the time of the transaction in 1930 A. 1945 U.S. Tax Ct. LEXIS 114">122 M. Peeler and the petitioner had no interest in bringing about a tax-free reorganization. On brief the petitioner states that the Dunlap sisters had no such interest. In short, there is no showing that there was any plan of reorganization to which petitioner and Dunlap were parties or that what was done was pursuant to a plan of reorganization. On the contrary, Peeler simply liquidated Dunlap. Then, in his capacity as sole stockholder and director, he caused the petitioner to recognize him as the individual owner of the assets and to take over the assets from him personally. This may be seen from the resolution of the petitioner in accepting the assets:5 T.C. 518">522 Whereas, A. M. Peeler, the President of Peeler Hardware Company and the sole stockholder of Peeler Hardware Company, except for four qualifying shares issued to directors of said company, has acquired all of the assets of Dunlap Hardware Company subject to the liabilities of said company, andWhereas, said A. M. Peeler has proposed to turn said assets of said Dunlap Hardware Company over to this corporation, subject to the liabilities so assumed by him, and* * * Now, Therefore, be it resolved that the said assets be1945 U.S. Tax Ct. LEXIS 114">123 accepted and that the liabilities of Dunlap Hardware Company be assumed and that the additional shares of common stock and all of the preferred stock to be issued in accordance with the resolution heretofore adopted by the stockholders of this company be issued and delivered to said A. M. Peeler or his nominee or nominees in exchange for the assets of said Dunlap Hardware Company.A further indication that A. M. Peeler considered Dunlap as liquidated may be seen in his statement at the trial that the shares of Dunlap were canceled. He was questioned further as to this by his counsel as follows: Q. When you made the statement a few minutes ago that they were cancelled, I take it you were not referring to any active cancellation.A. No. That was just a slip -- I mean, you say a thing was cancelled, and given back to you. Something like that.Peeler considered the situation to be the same as though there had been such a cancellation.Thus, with no reason to bring about a tax-free reorganization at the time, A. M. Peeler did not seek to do so. Although there was no formal cancellation of the shares of Dunlap, his testimony and the resolutions of the petitioner made under his1945 U.S. Tax Ct. LEXIS 114">124 guidance indicates that Dunlap was liquidated, and that A. M. Peeler personally became the owner of the assets and thereafter conveyed those assets to petitioner. The taking of formal action to liquidate the corporation was not essential. Kennemer v. Commissioner, 96 Fed. (2d) 177, 178; Tootle v. Commissioner, 58 Fed. (2d) 576. It is only now, 12 years later, when the equity invested capital credit of the excess profits tax makes it tax wise for the earlier transaction to have been carried out by means of a tax-free reorganization that petitioner seeks to force the steps there taken into conformity with the requirements of section 112 of the Revenue Act of 1928. The petitioner may not reconstruct now what was done 12 years earlier in order to gain a tax benefit. No formal corporate action of any sort was taken by Dunlap. The fact that the petitioner corporation took the proper formal action in its resolution to take over the assets of Dunlap indicates that A. M. Peeler knew the proper method of having Dunlap convey its assets to petitioner had he desired to effect the transaction in that way. Instead, he caused1945 U.S. Tax Ct. LEXIS 114">125 petitioner, through its resolutions, to recognize him as the individual owner of the assets formerly belonging to Dunlap.5 T.C. 518">523 The Dunlap sisters wanted to sell their business. When they set a price of $ 180,000, the purchaser assuming all liabilities of that company, it was immaterial to them whether it be the assets themselves that were sold for that price or whether the sale be of the shares of stock. When A. M. Peeler liquidated Dunlap and received the assets, they took on a basis in his hands of $ 180,000, their fair market value at that date. Gloyd v. Commissioner, 63 Fed. (2d) 649; certiorari denied, 290 U.S. 633">290 U.S. 633; Anna L. Dirkson, Executrix, 24 B. T. A. 1152; Benjamin H. Read, 6 B. T. A. 407. When A. M. Peeler then conveyed these assets to petitioner in return for the issuance of stock to himself and to his nominees, the transaction came within the provisions of section 113 (a) (8) of the Revenue Act of 1928. 2 The petitioner's basis for the assets became $ 180,000. We accordingly hold for the respondent on this issue.1945 U.S. Tax Ct. LEXIS 114">126 Issue II.Petitioner paid T. B. Peeler, its vice president and secretary-treasurer, salaries of $ 11,625, $ 10,091.49, and $ 10,225, respectively, for its fiscal years 1940, 1941, and 1942. Respondent has disallowed any deductions for this item over $ 6,120.60 for 1940, $ 6,387.60 for 1941, and $ 7,444.80 for 1942.T. B. Peeler is the son of A. M. Peeler, the president and only other executive officer of petitioner. Petitioner has been allowed deductions of $ 25,000 for each of the three years in question for salary paid to A. M. Peeler. T. B. Peeler owns 259 of the outstanding 1,625 shares of capital stock of petitioner. The remaining shares, except qualifying shares in the hands of the directors, are owned by his father.Since completion of his education in 1933, at the age of 21, T. B. Peeler has devoted his entire time to the business. Prior to that time and since childhood he had been working in the business during his vacations. Starting at a salary of $ 10 a week in 1933, he was transferred from one department to another in order that he might learn the business, both wholesale and retail, and be prepared eventually to take over its management. As he moved from one1945 U.S. Tax Ct. LEXIS 114">127 department to another 5 T.C. 518">524 he retained supervision over each of the departments in which he had worked. In 1935 he was made a director of the company and in 1936 its vice president. In 1936 he revised the operating methods in petitioner's retail store, putting in many new lines of merchandise, which resulted in an increase in sales volume, and instructed the salesmen in the best method of demonstrating and selling the new lines. He improved the company's relationship with its customers by repricing all the merchandise and eliminating the earlier practice of permitting the salesmen to compete with each other for customers by setting lower prices. In 1940 he was given the additional duty of assigning priority ratings to all priority merchandise, this constituting a majority of all goods handled. It was also his function to allocate scarce merchandise between the wholesale and retail departments and between particular customers. Since 1938 he has been in charge of all of petitioner's advertising. In addition to supervising all of petitioner's buying, both wholesale and retail, he directly made 25 percent of the purchases.The secretary-treasurer was unable to perform his 1945 U.S. Tax Ct. LEXIS 114">128 designated functions during 1940 due to ill health. These duties were taken over at that time by T. B. Peeler, who was elected to the office in 1941 and for the subsequent years in question.Since 1934 the total annual compensations paid T. B. Peeler by the petitioner have been as follows:1934$ 1,068.3019353,782.0019364,570.00193711,765.00193811,600.001939$ 11,625.00194011,625.00194110,091.49194210,225.00194310,225.00During the years in question petitioner paid five of its salesmen the following amounts:194019411942A. P. Tucker$ 7,175.68$ 8,158.31$ 11,036.88A. J. Johnson8,090.898,541.7812,022.84W. C. Slocumb10,267.9711,984.8915,545.75C. E. Hermitage6,239.997,629.7211,531.43G. M. Yates13,117.7314,266.8419,889.14These were gross amounts, out of which the salesmen paid their own expenses. The net pay of the salesmen was not more than 20 percent below these figures. T. B. Peeler was capable of earning more as a salesman than he was actually paid, but his services were more valuable to petitioner in relieving A. M. Peeler of managerial responsibility and so he was not permitted to go out on 1945 U.S. Tax Ct. LEXIS 114">129 the road.5 T.C. 518">525 The growth in petitioner's business and the comparative growth in the retail department following the improvements made therein by T. B. Peeler may be seen from the following:PercentYearGrossRetailWholesaleof retailto total1936$ 734,189.45$ 226,416.33$ 507,773.1230.81937987,887.09285,172.88702,714.2128.91938771,209.40262,889.41508,319.9934.11939711,349.45272,131.30439,218.1538.31940866,633.34303,988.81562,644.5335.119411,004,324.32377,901.40626,422.9237.619421,423,810.45543,697.93880,112.5238.219431,501,310.35559,334.61941,975.7437.3The net income before officers' salaries and officers' salaries during the years in question was as follows:Officers'YearNet incomesalaries1940$ 64,909.05$ 42,010.00194159,620.8735,283.121942101,398.2335,200.00Total225,928.15112,493.12The growth in surplus was as follows:Year ended --SurplusMay 31, 1939$ 248,260.87May 31, 1940267,941.11May 31, 1941286,497.94May 31, 1942329,171.59For the last two years under consideration, T. B. Peeler's compensation1945 U.S. Tax Ct. LEXIS 114">130 was fixed by the board of directors of the corporation. We find that the salaries paid to T. B. Peeler for the years in question were reasonable.Decision will be entered under Rule 50. Footnotes1. SEC. 717. DAILY INVESTED CAPITAL.The daily invested capital for any day of the taxable year shall be the sum of the equity invested capital for such day plus the borrowed invested capital for such day determined under section 719.SEC. 718. EQUITY INVESTED CAPITAL.(a) Definition. -- The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts, reduced as provided in subsection (b) --* * * (2) Property paid in. -- Property (other than money) previously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. If the property was disposed of before such taxable year, such basis shall be determined in the same manner as if the property were still held at the beginning of such taxable year. If such unadjusted basis is a substituted basis it shall be adjusted, with respect to the period before the property was paid in, in the manner provided in section 113 (b) (2):↩2. SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.(a) Property Acquired After February 28, 1913. -- The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -- * * *(8) Same -- corporation controlled by transferor. -- If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620789/	Marwais Steel Company, a California Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentMarwais Steel Co. v. CommissionerDocket No. 91236United States Tax Court38 T.C. 633; 1962 U.S. Tax Ct. LEXIS 100; August 15, 1962, Filed 1962 U.S. Tax Ct. LEXIS 100">100 Decision will be entered under Rule 50. A parent corporation which in earlier years used the net operating losses of its subsidiary as a basis for claiming a bad debt and worthless stock deduction is not permitted to carry over under sec. 381, I.R.C. 1954, the net operating losses of the subsidiary, which had been dissolved in the interim, since such action would enable the parent corporation to receive directly or indirectly the equivalent of a double deduction. Robert L. Farmer, Esq., and James N. Knecht, Jr., Esq., for the petitioner.Allan I. Blau, Esq., for the respondent. Fay, Judge. FAY38 T.C. 633">634 The respondent determined deficiencies in the income tax of petitioner in the amounts of $ 7,361.73 and $ 15,147.26 for the years ended January 31, 1957, and January 31, 1958, respectively.On February 12, 1962, respondent filed an amendment to answer and claimed increased deficiencies in the amounts of $ 2,514.41 and $ 85.58 for the years ended January 31, 1957, and January 31, 1958, respectively.The only issue left unsettled by the parties involves whether or not the petitioner may carry over and deduct the net operating losses of its subsidiary under the provisions of sections 332 and 381 of the Internal Revenue Code of 1954. 11962 U.S. Tax Ct. LEXIS 100">102 FINDINGS OF FACT.Some of the facts were stipulated, and they are included herein by this reference.The petitioner is a California corporation, incorporated on June 28, 1949, with its principal place of business in Los Angeles, California. It filed its Federal income tax returns for the years ended January 31, 1953, through January 31, 1959, with the district director of internal revenue, Los Angeles, California. During the taxable years involved herein petitioner was on the accrual basis of accounting and utilized the reserve method of accounting to provide for bad debts.Petitioner at all times since its inception engaged in the sale and distribution of secondary flat-rolled steel products, principally in the area of southern California. The term "secondary steel" connotes a broad category of flat-rolled steel which does not meet certain customers' requirements or specifications. At all times since petitioner's inception to the present, Marshall I. Wais, hereinafter referred to as Wais, has been its president, principal managing officer, director, and controlling shareholder. Since November 10, 1950, Wais has also been treasurer of the petitioner.Steel Processing and Distribution1962 U.S. Tax Ct. LEXIS 100">103 Company, hereinafter referred to as S.P.D., was a California corporation which was incorporated on August 20, 1950. S.P.D. originally engaged in the business of slitting coiled steel pipe stock and other steel processing. It also engaged in the sale of prime steel products and had its principal business activity in the San Francisco Bay area. At all times material herein Wais was the president, treasurer, principal managing officer, and a director of S.P.D.The originally issued and outstanding capital stock of S.P.D., consisting of 50 shares of $ 100-par-value common stock, was issued to and purchased by petitioner. On or about July 11, 1951, Wais purchased, 38 T.C. 633">635 at par, 94 percent of the issued and outstanding common stock of S.P.D. from petitioner. From July 14, 1952, Wais owned all the issued and outstanding common stock of S.P.D. On or about September 2, 1958, S.P.D. merged with petitioner.Wilmington Metal Manufacturing Company, hereinafter referred to as Wilmington, was a California corporation incorporated on August 27, 1951, with its principal place of business in Los Angeles, California. Wais was the president of Wilmington at all times from June 18, 1954, to1962 U.S. Tax Ct. LEXIS 100">104 August 22, 1956, and at all times prior to its dissolution he was a director thereof.The originally issued and outstanding capital stock of Wilmington consisted of 50 shares of no-par stock, which stock was issued to and purchased by petitioner in consideration of the cancellation of $ 5,000 of indebtedness owed by Wilmington to petitioner.Petitioner caused the formation of Wilmington for two principal reasons. In the short run, petitioner felt that existing market conditions would enable Wilmington to engage profitably in a steel fabricating operation. The long-range reason for the formation of Wilmington was petitioner's desire to engage in manufacturing operations related to its steel business which might offset the cyclical nature of the steel business generally.In September 1951, following its incorporation, Wilmington purchased for approximately $ 33,928 certain machinery, equipment, dies, inventories, and furniture and fixtures from Metal Stamping & Manufacturing Company, an unrelated California corporation, which had conducted an automobile accessory manufacturing business at 11215 S. Wilmington Avenue, Los Angeles, California. Wilmington also entered into a 2-year lease1962 U.S. Tax Ct. LEXIS 100">105 on or about September 1, 1951, pursuant to which Wilmington obtained occupancy of the manufacturing plant of Metal Stamping & Manufacturing Company and the use of certain machinery and equipment located in said plant. Wilmington thereupon commenced the manufacture and sale of automobile accessories with particular emphasis on wheels and fender skirts.Wilmington was not successful in the wheel-manufacturing business, and the volume of its wheel sales declined from approximately $ 117,000 for the year ended September 30, 1952, to approximately $ 31,000 for the year ended September 30, 1953.In 1953, due to Wilmington's poor sales volume and to the fact that its lease was due to expire on August 31, 1953, the possibility of liquidating Wilmington was considered by Wais. However, a contract was obtained with the Chevrolet Division of General Motors Corporation to manufacture original equipment automobile fender skirts, and Wais decided to allow Wilmington to remain in business.Upon the expiration of its lease in August 1953, Wilmington moved its plant to Lynwood, California. Thereafter, Wilmington discontinued 38 T.C. 633">636 the manufacture and sale of wheels and allocated a major portion1962 U.S. Tax Ct. LEXIS 100">106 of its business activity to the manufacture and sale of original equipment fender skirts. Wilmington, in addition, manufactured other miscellaneous automobile accessories in minor amounts at this time. Due to automobile model changes and Wilmington's inability to perform its contracts, the automobile fender skirt business also proved to be unprofitable, and it was discontinued in the year ended September 30, 1954.During the period from September 1951 to March 31, 1955, in which Wilmington was engaged in active business operations, it purchased steel from petitioner and S.P.D. In addition, during this period both petitioner and S.P.D. from time to time advanced various amounts of cash to Wilmington and incurred and paid expenses on behalf of Wilmington. At various times Wilmington made payments to petitioner and S.P.D. on account of these purchases, advances, and expense payments. At all times these intercompany transactions between Wilmington and petitioner and between Wilmington and S.P.D. were reflected as accounts payable on the books of Wilmington and as trade accounts receivable on the books of petitioner and S.P.D., respectively. 21962 U.S. Tax Ct. LEXIS 100">107 From its inception until March 31, 1955, when it ceased manufacturing, Wilmington's operations were financially unsuccessful. On its income tax returns for the period August 27, 1951, to September 30, 1951, and for the years ended September 30, 1952, through September 30, 1955, Wilmington reported the following net operating losses:Period 8/27/51-9/30/51$ 2,769.19Year ended 9/30/5224,022.77Year ended 9/30/5317,971.95Year ended 9/30/548,457.29Year ended 9/30/558,832.49Total losses62,053.69At September 30, 1951, to September 30, 1954, and at March 31, 1955, Wilmington's liabilities exceeded its assets by the following amounts:Sept. 30, 1951$ 2,969.19Sept. 30, 195221,792.96Sept. 30, 195339,774.91Sept. 30, 195448,251.70Mar. 31, 195555,898.97In the year ended January 31, 1953, petitioner determined that the Wilmington debt was uncollectible to the extent of $ 22,000. Accordingly, 38 T.C. 633">637 petitioner increased its reserve for bad debts by $ 22,000 and claimed a deduction for bad debts in said amount on its income tax return for the year ended January 31, 1953. Petitioner also determined that the stock of Wilmington was totally1962 U.S. Tax Ct. LEXIS 100">108 worthless in the year ended January 31, 1953, and claimed a worthless stock deduction on its income tax return for said year in the amount of $ 5,000.Commencing in 1954 Wilmington began to receive product liability claims as a result of a defectively manufactured trailer wheel. The claims originated with trailer owners who asserted damages against the trailer manufacturers, Wilmington's customers, who in turn made claim against Wilmington. The wheels were analyzed and it was determined that the defect in the wheels was due primarily to improper manufacturing, namely, the use of countersunk rivets to join various parts of the wheel. Once it was shown that Wilmington was the manufacturer of the claimed defective wheel, Wilmington acknowledged its liability on all wheel product liability claims.Prior to 1954 Wilmington was covered by product liability insurance under a policy issued by Lloyds of London. Product liability insurance covers personal injury and property damage claims arising during the policy period from defective products irrespective of the date of manufacture of the defective product. The Lloyds policy was terminated on April 22, 1954.From April 22, 1954, to June1962 U.S. Tax Ct. LEXIS 100">109 28, 1954, Wilmington did not carry any product liability insurance. On June 28, 1954, Wilmington and petitioner obtained product liability insurance coverage for one year with St. Paul Fire and Marine Insurance Company. However, upon the expiration of Wilmington's product liability policy on or about June 28, 1955, no agreement could be reached between Wilmington and St. Paul regarding the renewal of the policy. Accordingly, after June 28, 1955, Wilmington had no product liability insurance. Petitioner, however, continued to be covered during all times material herein by a St. Paul product liability policy.During the course of its wheel-manufacturing operations, Wilmington had manufactured and sold approximately 30,000 wheels, and as a result, Wais was very concerned about the potential liability of Wilmington for damages from defective wheels once the product liability insurance had lapsed. Since Wais still believed that a successful steel fabrication business could be developed if given enough time, it was decided that a new corporation should be formed to continue the fabricating business, which corporation would then be unhampered by claims arising from the defective wheels. 1962 U.S. Tax Ct. LEXIS 100">110 On January 21, 1955, the Moon Manufacturing Company, hereinafter referred to as Moon, was incorporated in the State of California. The originally issued and outstanding stock, consisting of 50 shares of no-par value, was issued to and purchased by Wais on or about 38 T.C. 633">638 April 1, 1955. From the date of Moon's incorporation through all times material herein, Wais was the president, treasurer, principal managing officer, director, and sole shareholder of Moon. On or about September 2, 1958, Moon merged with petitioner.By the time Moon was formed in January 1955 Wilmington had almost entirely discontinued business, and it was contemplated that Wilmington's business would soon be completely discontinued. On or about March 16, 1955, Wilmington entered into an agreement of sale with Moon whereby all the machinery, equipment, tools, dies, inventories, and supplies of Wilmington were sold to Moon at book value for cash in the amount of $ 9,867.76. On or about March 31, 1955, Wilmington ceased doing business, and on or about April 1, 1955, Moon commenced to manufacture and sell a wide variety of metal products almost entirely different from the products theretofore manufactured by1962 U.S. Tax Ct. LEXIS 100">111 Wilmington.Following the discontinuance of Wilmington's business and the sale of Wilmington's assets to Moon, it was decided by the management of Wilmington, upon the advice of its attorneys, that Wilmington should be left inactive and hold nominal assets for an indefinite period of time to determine if further claims for defective wheels would materialize. It was felt that this would discourage any potential claimant; whereas, a dissolution of Wilmingtion might cause such a claimant to trace the liability of Wilmington to petitioner. Thereafter, Wilmington proceeded to collect its trade accounts receivable and, to the extent of available funds, proceeded to pay its creditors. By October 31, 1955, Wilmington had assets of $ 284.16 and liabilities of $ 57,466.66. The principal liability was an account payable to petitioner in the amount of $ 57,197.52.During the year ended September 30, 1955, petitioner increased its reserve for bad debts account by $ 35,122.35, thereby reflecting on its reserve for bad debts the entire amount of the Wilmington account receivable. 31962 U.S. Tax Ct. LEXIS 100">112 On or about December 19, 1955, Wais had a meeting with his attorneys and accountants for the purpose of discussing the possible disposition of Wilmington. Both tax and non-tax aspects of Wilmington's proposed dissolution were discussed. From a non-tax standpoint, Wais was informed that when a corporation was dissolved in California it was necessary to file a certificate of winding up and dissolution with the secretary of state, stating, inter alia, whether or not the corporation's debts had been paid or adequately provided for. After being so informed, Wais expressed concern over the fact that as a result of this certificate he might appear as part of an organization that was dissolved in an insolvent condition. Wais was then 38 T.C. 633">639 advised by his attorneys that if he desired to avoid such a situation, petitioner could forgive the debt of Wilmington and thereby enable Wilmington to dissolve as a solvent rather than an insolvent corporation.From a tax point of view, the accountants advised Wais that a solvent dissolution of Wilmington might enable petitioner to carry over and deduct the net operating losses of Wilmington and also to obtain a bad debt deduction for advances1962 U.S. Tax Ct. LEXIS 100">113 made to Wilmington. At the conclusion of the discussion a decision was made that Wilmington would be dissolved as a solvent corporation. However, it was also determined that the actual dissolution of Wilmington would be postponed until such time as the potential defective wheel liability was no longer a source of concern.On December 28, 1955, petitioner wrote off the Wilmington account receivable by debiting its reserve for bad debts account in the amount of $ 57,122.35 and crediting its account receivable -- Wilmington account with the same amount. On its income tax return for the year ended January 31, 1956, petitioner deducted as a bad debt the amount of $ 40,544.91, of which $ 35,122.35 related to the Wilmington account receivable.In May 1956 the insurance company notified petitioner that it was in the process of closing out its Wilmington defective wheel claims and that it anticipated little activity from then on with regard to the file. Wais then decided that the dissolution of Wilmington should be undertaken.From November 1, 1955, until June 20, 1956, the financial position of Wilmington changed as follows:(a) In December 1955 the account payable to petitioner was adjusted1962 U.S. Tax Ct. LEXIS 100">114 by $ 75.17 to correct a previous journal entry.(b) In December 1955 an account payable in the amount of $ 165 to Forster & Gemmill, attorneys, was established.(c) In January 1956 an account payable in the amount of $ 320 to Peat, Marwick, Mitchell Co., accountants, was established.(d) In January 1956 the accrued taxes of $ 19.14 were paid.On June 30, 1956, petitioner assumed the following liabilities of Wilmington:(a) $ 250 due to Moon,(b) $ 165 due to Forster & Gemmill, and(c) $ 320 due to Peat, Marwick, Mitchell Co.The assumption of these liabilities was reflected as a debit balance of $ 735 in the Wilmington account receivable on petitioner's books.On July 16, 1956, a meeting of the board of directors of petitioner was held for the purpose of considering the cancellation of the $ 57,857.35 indebtedness due petitioner from Wilmington. The board of directors adopted the following resolution:38 T.C. 633">640 Resolved: That the indebtedness of Wilmington Metal Manufacturing Company in the amount of $ 57,857.35 to this company is hereby forgiven and cancelled.On July 18, 1956, the board of directors of Wilmington adopted the following resolution:Resolved: That this corporation1962 U.S. Tax Ct. LEXIS 100">115 shall voluntarily dissolve and wind up its affairs.On the same day petitioner, the sole stockholder of Wilmington, consented in writing to the winding up of the affairs of Wilmington and to its voluntary dissolution. On August 9, 1956, Wilmington filed a Certificate of Election to Wind Up and Dissolve with the secretary of state of California.As of August 15, 1956, Wilmington owned only the following assets:Cash$ 91.02Utility deposits19.00On August 20, 1956, Wilmington transferred said cash to petitioner and on the same day petitioner surrendered to Wilmington its Wilmington stock certificate for cancellation. (Wilmington's said utility deposits were retained by the utility companies and not entered on the books of petitioner.)By resolution of Wilmington's board of directors, Wilmington was dissolved as of August 22, 1956. The Certificate of Winding Up and Dissolution of Wilmington was filed with the secretary of state of California on September 5, 1956.On its Federal income tax return for the year ended August 22, 1956, Wilmington reported income of $ 110.02, representing the amount of Wilmington's assets after the forgiveness of indebtedness by petitioner. 1962 U.S. Tax Ct. LEXIS 100">116 Petitioner, purportedly in accordance with sections 332 and 381 of the Internal Revenue Code of 1954, carried over and deducted on its Federal income tax return for the year ended January 31, 1957, net operating losses of Wilmington in the amount of $ 23,967.52. For the year ended January 31, 1958, petitioner carried over and deducted on its Federal income tax return net operating losses of Wilmington in the amount of $ 35,807.35. As previously noted, the net operating losses of Wilmington for the fiscal years ended September 30, 1951, to September 30, 1955, inclusive, totaled $ 62,053.69.Respondent disallowed the net operating loss deductions claimed by petitioner for the years ended January 31, 1957, and January 31, 1958, on the ground that petitioner failed to establish that the deductions were allowable.38 T.C. 633">641 OPINION.On August 20, 1956, Wilmington transferred $ 91.02 to petitioner, and on the same day petitioner surrendered its Wilmington stock certificate to Wilmington for cancellation. On August 20, 1956, Wilmington had assets of $ 110.02 and no liabilities. The petitioner contends that as a result of the foregoing facts, it has satisfied the provisions of sections1962 U.S. Tax Ct. LEXIS 100">117 332 and 381 of the Internal Revenue Code of 19544 and, therefore, that it is entitled to carry over and deduct the net operating losses of Wilmington.1962 U.S. Tax Ct. LEXIS 100">118 The respondent takes the position that inasmuch as the petitioner has previously claimed deductions for losses resulting from the purported worthlessness of its loans to and capital investment in Wilmington, the effect of allowing petitioner to avail itself now of Wilmington's net operating losses would be to permit petitioner to use twice the losses of Wilmington for the reduction of petitioner's income. Such a result, respondent contends, is to be avoided where possible in construing laws passed by Congress.The question whether a taxpayer is permitted to obtain what has been commonly referred to as a "double deduction" has been before this and other courts in numerous cases with varying results. Ilfeld Co. v. Hernandez, 292 U.S. 62">292 U.S. 62 (1934); United States v. Lakewood Engineering Co., 70 F.2d 887 (C.A. 6, 1934); Chicago & N. W. R. Co. v. Commissioner, 114 F.2d 882 (C.A. 7, 1940), affirming 39 B.T.A. 661">39 B.T.A. 661 (1939), certiorari denied 312 U.S. 692">312 U.S. 692 (1940); Greif Cooperage Corporation, 38 T.C. 633">642 31 B.T.A. 374">31 B.T.A. 374 (1934),1962 U.S. Tax Ct. LEXIS 100">119 affd. 85 F.2d 365 (C.A. 3, 1936); Taylor-Wharton Iron & Steel Co., 5 T.C. 768">5 T.C. 768 (1945); Joe A. Dewsbury, 137 Ct. Cl. 1">137 Ct. Cl. 1, 146 F. Supp. 467">146 F. Supp. 467 (1956); Maysteel Products, Inc., 33 T.C. 1021">33 T.C. 1021 (1960), revd. 287 F.2d 429 (C.A. 7, 1961); Fabreeka Products Co., 34 T.C. 290">34 T.C. 290 (1960), revd. 294 F.2d 876 (C.A. 1, 1961). None of these cases involved the exact issue presented by the instant case and, therefore, we deem it unnecessary to discuss all of them at length. Suffice it to say, we have considered them all and relying upon 292 U.S. 62">Ilfeld Co. v. Hernandez, supra, have reached the conclusion that the issue in this case must be decided against the petitioner.In the Ilfeld case, a parent corporation had invested in the stock of and had made advances to its subsidiaries. Consolidated returns had been filed for the group in which losses of the subsidiaries had been deducted and had offset income of the parent. In a later period the subsidiaries were1962 U.S. Tax Ct. LEXIS 100">120 dissolved, and the parent sought to deduct from its income the losses resulting from its investment in the subsidiaries. In denying the parent corporation the right to deduct its investment loss, the Supreme Court stated, in part, as follows:The allowance claimed would permit petitioner twice to use the subsidiaries' losses for the reduction of its taxable income. By means of the consolidated returns in earlier years it was enabled to deduct them. And now it claims for 1929 deductions for diminution of assets resulting from the same losses. If allowed, this would be the practical equivalent of double deduction. In the absence of a provision of the Act definitely requiring it, a purpose so opposed to precedent and equality of treatment of taxpayers will not be attributed to lawmakers.In the instant case the petitioner in earlier years, at a time when Wilmington had substantial net operating losses, claimed deductions totaling $ 62,122.35 for losses resulting from the presumed worthlessness of its loans to and investment in Wilmington. 5 During the taxable years involved herein the petitioner reduced its income by deducting net operating losses of Wilmington totaling $ 59,774.871962 U.S. Tax Ct. LEXIS 100">121 pursuant to the provisions of sections 332 and 381. While the chronological sequence of deductions was different in Ilfeld, i.e., the net operating losses were deducted first, we think it is obvious that the petitioner in the instant case also seeks the practical equivalent of a double deduction. Although the petitioner concedes, at least to some extent, that this may be so, it argues, in effect, that the Ilfeld rule is applicable only in those situations where the double deduction is achieved, in part, by means of a consolidated return and that, consequently, it has no application to a situation where the double deduction sought by a parent corporation is achieved by other means.38 T.C. 633">643 We can find no merit to such an argument. The Supreme Court in its opinion gave no indication that it intended the Ilfeld case to have such a restricted application1962 U.S. Tax Ct. LEXIS 100">122 and we can see no reason for placing such a limitation on its scope. See and compare United States v. Lakewood, supra, where the Circuit Court held that the rationale of the Ilfeld case was applicable not only to situations in which a parent corporation liquidated its subsidiary but was also applicable to situations in which the parent corporation sold its subsidiary's stock to outsiders.Accordingly, we hold that in the absence of a provision in section 381 definitely permitting the allowance of a double deduction, the petitioner is precluded from carrying over the net operating losses of Wilmington in order to reduce its taxable income for the years ended January 31, 1957, and January 31, 1958.Decision will be entered under Rule 50. Footnotes1. The issue raised by respondent's adjustments in each of the taxable years with regard to petitioner's charitable contributions will automatically be resolved upon the basis of the foregoing issue.↩2. After July 31, 1953, in the case of S.P.D., and after September 30, 1953, in the case of petitioner, the intercompany transactions with Wilmington were reflected on the books of petitioner and S.P.D., respectively, in an account entitled "accounts-receivable -- Wilmington."↩3. The Wilmington account receivable totaled $ 57,122.35. As noted previously, in 1953 petitioner had increased its reserve for bad debts by $ 22,000.↩4. SEC. 381. CARRYOVERS IN CERTAIN CORPORATE ACQUISITIONS.(a) General Rule. -- In the case of the acquisition of assets of a corporation by another corporation -- (1) in a distribution to such other corporation to which section 332 (relating to liquidations of subsidiaries) applies, except in a case in which the basis of the assets distributed is determined under section 334(b)(2); * * ** * * the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c). * * (c) Items of the Distributor or Transferor Corporation. -- The items referred to in subsection (a) are: (1) Net operating loss carryovers. -- The net operating loss carryovers determined under section 172 * SEC. 332. COMPLETE LIQUIDATIONS OF SUBSIDIARIES.(a) General Rule. -- No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.(b) Liquidations to Which Section Applies. -- For purposes of subsection (a), a distribution shall be considered to be in complete liquidation only if -- * * (2) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; * *↩5. The record amply supports the fact that the bad debt and worthless stock losses were directly traceable to the net operating losses sustained by Wilmington.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620790/	PETER J. REDING, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentReding v. CommissionerDocket No. 35060-87United States Tax CourtT.C. Memo 1990-278; 1990 Tax Ct. Memo LEXIS 296; 59 T.C.M. 793; T.C.M. (RIA) 90278; June 4, 1990, Filed 1990 Tax Ct. Memo LEXIS 296">296 An order will be entered granting the petitioner's motion and denying the respondent's motion to dismiss for lack of jurisdiction. Kevin O'Connell and Christopher P. Vice, for the petitioner. 1990 Tax Ct. Memo LEXIS 296">297 John C. Meaney, for the respondent. GERBER, Judge. GERBERMEMORANDUM OPINION The parties have filed cross-motions, each seeking to dismiss this case for lack of jurisdiction. Petitioner's motion is based upon the contention that respondent did not mail a notice of deficiency to petitioner at his "last known address" as required by section 6212(b). 1 Conversely, respondent contends that a notice of deficiency was mailed to petitioner at his last known address and that dismissal should be premised on petitioner's failure to file a petition within 90 or 150 days under section 6213(a). Here we again consider the standards placed upon the parties in the area of "last known address." We must decide whether petitioner provided "clear and concise notification" of a change of address. We must also decide whether respondent exercised "reasonable care and diligence" in determining petitioner's last known address for purposes of mailing the notice of deficiency. If respondent mailed the notice of deficiency to petitioner's last known address, then the petition will be considered untimely. Petitioner was a resident of Tokyo, Japan, at the time his petition1990 Tax Ct. Memo LEXIS 296">298 in this case was filed. 2Petitioner and his former wife, on or about April 11, 1983, filed 3 a joint Federal income tax return for their 1982 taxable year (1982 return) with the Internal Revenue Service Center at Fresno, California. Petitioner's address shown on the 1982 return was 3413 Lomas Serenas Drive, Escondido, California (Lomas address). 1990 Tax Ct. Memo LEXIS 296">299 On August 14, 1984, respondent's Portland office received an Application for Extension of Time to File U.S. Individual Income Tax Return (Form 2688) for petitioner's 1983 taxable year. The Form 2688 contained the following statement: Taxpayer's [sic] are in process of dis[s]olving marriage and moving; all of the required data to file a complete and correct return is not available at this time. To the best of my knowledge, NO TAX IS DUE.The Form 2688 contained petitioner's Lomas address. Early in 1984 petitioner submitted an Employees Withholding Allowance Certificate (Form W-4) to his employer wherein he claimed to be exempt from withholding. In a July 26, 1984 letter, addressed to the Lomas address, respondent informed petitioner that the Form W-4 was inadequate. Petitioner's father (a certified public accountant, who serves as petitioner's accountant), in response to the July 26 letter, mailed a letter to respondent's Fresno Service Center. The letter was dated August 14, 1984, but was mailed September 6, 1984 (August 14 letter). Petitioner's father admitted in the letter that petitioner was not exempt from withholding, but maintained that he was1990 Tax Ct. Memo LEXIS 296">300 entitled to claim 53 withholding allowances. The following documents were forwarded with the August 14 letter: Powers of Attorney and Declaration of Representative (Forms 2848) for the 1983 and 1984 taxable years, respectively, photocopies of three different work papers reflecting petitioner's father's computations regarding certain matters for 1983 and 1984, and a W-4 reflecting the 53 claimed withholding allowances. The August 14 letter contained the following statement: Taxpayer's employer, the IVAC Corporation, has requested taxpayer, Peter John Reding, to relocate, that is, to transfer from San Diego to Tokyo; such transfer to occur during August/September 1984.This statement was made in connection with anticipated moving allowances from IVAC Corporation to petitioner, to demonstrate the need to claim 53 withholding allowances. The Forms 2848 for 1983 and 1984, respectively, contained the following: 1983: Statement. At this time, August 1984, the taxpayers are in the process of dissolving their marriage. Taxpayers will file 1983 returns using the 12/31/83 address, namely 3412 Lomas Serenas Dr., Escondido, CA 92025, however, when the1990 Tax Ct. Memo LEXIS 296">301 return is filed, that is, on or before 10/15/84, a statement will be attached to report the then current address of both taxpayers.1984: Statement. At this time (August 1984) the marriage of taxpayer-husband is in the process of dissolution. It is expected that taxpayers listed herein will marry on or before 12/31/84. Taxpayer-husband is also being relocated by his US employer. Subject to unforeseen circumstances, his address after relocation (approx. 9/1/84) will be as follows: Mr. & Mrs. Peter J. Reding Town House Akasaka, #407 5-25, Akasaka 8-Chrome Minato-Ku Tokyo 107, JapanIn addition to petitioner's signature, the Form 2848 for 1983 was signed by petitioner's former wife, Jane Reding, and the Form 2848 for 1984 was signed by petitioner's new wife, Kira Braden. Respondent, by means of a January 31, 1985, form letter, approved petitioner's claim for 53 withholding allowances which had been claimed in the W-4 attached to the August 14 letter. Petitioner and his former wife were divorced on November 30, 1984, petitioner's employer (IVAC Corporation) transferred him to Tokyo, and petitioner also married Kira Braden. 1990 Tax Ct. Memo LEXIS 296">302 The exact dates of petitioner's move to Japan and marriage to Kira Braden are not contained in the record. Early in 1985 petitioner received a Wage and Tax Statement (Form W-2) from his new employer, Eli Lilly and Company, reflecting petitioner's Tokyo address. On May 3, 1985, the Internal Revenue Service Center in Philadelphia received an Application for Extension of Time to File U.S. Income Tax Return ("For U.S. Citizens and Resident Aliens Abroad Who Expect to Qualify for Special Tax Treatment") (Form 2350) for petitioner's and his new wife's 1984 taxable year. The Form 2350 reflected the Tokyo address. On October 11, 1985, petitioner's father prepared and filed a U.S. Partnership Return of Income (Form 1065) for Reding Associates. The record is silent concerning with which of respondent's offices the partnership return was filed, but applications to extend the time to file that return were sent to and approved by the Internal Revenue Service Center at Ogden, Utah. The Form 1065 and attached Schedules K-1 identified petitioner and his former wife as partners of Reding Associates. Petitioner's Tokyo address was used in the Form 1065 and Schedule K-1. A Rancho Bernardo, California, 1990 Tax Ct. Memo LEXIS 296">303 address was shown for petitioner's former wife. Additionally, on August 15, 1985, petitioner's former wife sought to extend the time to file her 1984 return reflecting her Rancho Bernardo address on the form. Early in 1986, petitioner received a Form W-2 from Eli Lilly and Company reflecting his Tokyo address. On August 15, 1986, petitioner's father executed a Form 2688 on behalf of petitioner's former wife reflecting a Rancho Bernardo address for her on the form. On March 23, 1986, Eli Lilly and Company prepared petitioner's 1984 U.S. Individual Income Tax Return (Form 1040) which reflected petitioner's Tokyo address and new wife. The 1984 return was filed at some point after March 23, 1986, received by respondent on April 4, 1986, and processed by respondent on May 5, 1986. Petitioner's Tokyo address was placed into the computer updating the Lomas address on May 5, 1986. The Tokyo address was first used by one of respondent's employees when it was requested from the system on August 18, 1986. Prior to issuance of a notice of deficiency respondent attempted to obtain a consent to extend the period for assessment of 1982 tax. No consent was obtained (presumably due to lack1990 Tax Ct. Memo LEXIS 296">304 of contact with petitioner) and on April 11, 1986, respondent's Laguna Niguel District Office mailed a notice of deficiency for the 1982 taxable year to petitioner's Lomas address. The notice of deficiency for 1982 was never received by petitioner or his former wife. Petitioner was not aware of the 1982 notice of deficiency, the examination of his 1982 return, or the examination of the Reding Associates return until January 7, 1987, when he received a notice of unpaid 1982 tax from respondent. On December 1, 1986, the Internal Revenue Service Center at Philadelphia mailed a notice of unpaid tax to petitioner and his former wife at the Tokyo address. Responding in a January 29, 1987, letter, petitioner's father referred to the August 14, 1984, letter regarding the divorce, job transfer, and relocation to Tokyo. On June 15, 1987, the Philadelphia Service Center sent another notice of unpaid tax to petitioner and his former wife at the Tokyo address. Petitioner's father, by a July 1, 1987, letter, responded in a manner similar to his January 29, 1987, letter. A third notice of unpaid tax was mailed to petitioner's Tokyo address from the Philadelphia Service Center on July 27, 1987. 1990 Tax Ct. Memo LEXIS 296">305 On October 27, 1987, a petition was filed commencing this case more than 18 months after respondent mailed the notice of deficiency on April 11, 1986. A taxpayer's "last known address" is "the last known permanent address or legal residence of the taxpayer, or the last known temporary address of a definite duration or period to which all communications during such period should be sent." Weinroth v. Commissioner, 74 T.C. 430">74 T.C. 430, 74 T.C. 430">435 (1980); McCormick v. Commissioner, 55 T.C. 138">55 T.C. 138, 55 T.C. 138">141 (1970). Respondent has been permitted to treat the address on the return under examination as a taxpayer's last known address, absent "clear and concise notification" of an address change. Alta Sierra Vista, Inc. v. Commissioner, 62 T.C. 367">62 T.C. 367, 62 T.C. 367">374 (1974), affd. without published opinion 538 F.2d 334">538 F.2d 334 (9th Cir. 1976).The filing of a more current year's return with a new address is clear and concise notification of a new address. Abeles v. Commissioner, 91 T.C. 1019">91 T.C. 1019, 91 T.C. 1019">1034-1035 (1988).1990 Tax Ct. Memo LEXIS 296">306 When notified of a change of address, respondent must exercise reasonable care and diligence in determining the correct address for mailing of a notice of deficiency. Keeton v. Commissioner , 74 T.C. 377">74 T.C. 377, 74 T.C. 377">379 (1980); 62 T.C. 367">Alta Sierra Vista, Inc. v. Commissioner, supra at 374; O'Brien v. Commissioner, 62 T.C. 543">62 T.C. 543, 62 T.C. 543">550 (1974). Whether respondent has exercised reasonable care and diligence must be determined in light of all the facts and circumstances. The relevant inquiry is to respondent's knowledge of a taxpayer's last known address, rather than what may in fact be the taxpayer's most current address. Frieling v. Commissioner, 81 T.C. 42">81 T.C. 42, 81 T.C. 42">49 (1983); Weinroth v. Commissioner, 74 T.C. 430">74 T.C. 435; Keeton v. Commissioner, 74 T.C. 377">74 T.C. 382; 62 T.C. 367">Alta Sierra Vista, Inc. v. Commissioner, supra at 374. In this case petitioner argues that respondent received ample notification of petitioner's change of address before issuance of the notice of deficiency. Petitioner directs our1990 Tax Ct. Memo LEXIS 296">307 attention to the various documents received by respondent's agents and offices and states that each of them provided notification and that taken together they provided respondent with "clear and concise" notification of petitioner's new address. 4 Petitioner argues that each of the documents individually provided clear and concise notification of a new address. In the alternative, petitioner argues that all of the documents, when considered collectively and together may have provided notification of a change of address. We agree with petitioner that one of the numerous documents involved in this case provided respondent with "clear and concise" notification of a new address. It is accordingly unnecessary1990 Tax Ct. Memo LEXIS 296">308 to consider the remaining documents or petitioner's collective "Gestalt-type" contention. It was held in a recent memorandum opinion of this Court that an unsigned Form 1040-ES (estimated tax payment voucher), with the pre-addressed label address lined out and a different address written in, was "clear and concise" notification. See Chase v. Commissioner, T.C. Memo. 1990-139.See also Monge v. Commissioner , 93 T.C. 22">93 T.C. 22 (1989). The Form 2848 for 1984 concerns petitioner and his new wife and does reflect the Tokyo address. Although there is no request that respondent immediately change petitioner's address, the statement indicates that petitioner is in the process of marital dissolution, will remarry on or before December 31, 1984, and is being relocated by his employer. The statement contains the somewhat precatory language "Subject to unforeseen circumstances, [petitioner's] address after relocation (approx. 9/1/84) will be [Tokyo]." This Form 2848 was received under cover of the August 14 letter which petitioner's father mailed on September 6, 1984. 1990 Tax Ct. Memo LEXIS 296">309 Here, although petitioner has provided a Tokyo address, he set forth a subsequent date that the address was to take effect. Here petitioner clearly provided a new address, but added language indicating that because of possible unforeseen circumstances the new address may not become effective. Does that constitute a "clear and concise notification" of an address change? In these circumstances we find that petitioner's notification was " clear and concise" due to the direct statement that the Tokyo address would constitute petitioner's new address after a date certain. If the conditions subsequent (unforseen circumstances) occurred, it would have been petitioner's obligation to advise respondent of yet another new address. A taxpayer should be able to advise respondent that their address will change at a specific future date (in this case September 1 1984). Taxpayers should not be required to advise of an address change only after it has occurred. The circumstances of this notification compare favorably with the holding of Chase, supra.Accordingly, we find that petitioner, through the Form 2848 for 1984 did "clear[ly] and concise[ly]" notify respondent of a new address. 1990 Tax Ct. Memo LEXIS 296">310 5When notified of a change of address, respondent must exercise reasonable care and diligence in determining the correct address for mailing of a notice of deficiency. 74 T.C. 377">Keeton v. Commissioner, supra at 379; 62 T.C. 367">Alta Sierra Vista, Inc. v. Commissioner, supra at 374;1990 Tax Ct. Memo LEXIS 296">311 62 T.C. 543">O'Brien v. Commissioner, supra at 550.Respondent did not change or modify petitioner's address based upon the notification that petitioner would be moving to Tokyo. Therefore, respondent did not exercise reasonable care and diligence. To reflect the foregoing, An order will be entered granting the petitioner's motion and denying the respondent's motion to dismiss for lack of jurisdiction. Footnotes1. Section references are to the Internal Revenue Code, as amended and in effect for the period under consideration. ↩2. Although the parties seem to emphasize case precedent from the Court of Appeals for the Ninth Circuit, petitioner's Tokyo, Japan, address at the time of the filing of his petition would place the venue for appeal in the Court of Appeals for the D.C. Circuit, absent written stipulation to the contrary. See sec. 7482(b).↩3. This return is considered filed as of April 15, 1983 pursuant to section 6501(b)(1).↩4. This case was briefed prior to this Court's opinion in Chase v. Commissioner, T.C. Memo. 1990-139 and the issuance of Respondent's Rev. Proc. 90-18, 1990-13 I.R.B. 19↩. We have taken that case and ruling into consideration. Supplemental briefs were not sought from the parties.5. We are puzzled, in any event, why respondent is not able to maintain supplemental addresses for taxpayers for purposes of mailing duplicate originals of taxpayer correspondence to all addresses currently possible of delivery. Certainly, what seems to be a proliferating area of procedural issues on "last known address" may be somewhat obviated. In the facts of this case, with a straight forward statement that petitioner would have a new address (Tokyo address) after a date certain, even with the somewhat precatory language, it seems that respondent should have "played it safe" by sending duplicate originals to petitioner at the Lomas and Tokyo addresses.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620793/	VIOLA A. LaMOTHE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLa Mothe v. CommissionerDocket Nos. 15162-83, 12967-87United States Tax CourtT.C. Memo 1990-63; 1990 Tax Ct. Memo LEXIS 63; 58 T.C.M. 1358; T.C.M. (RIA) 90063; February 12, 1990; As Corrected February 14, 1990 John L. Sullivan and Joyce E. York, for the petitioner. James A. Kutten, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: In a notice of deficiency dated April 11, 1983, addressed to the Estate of Charles J. LaMothe, Deceased, Ms. Joan Bebee, Personal Representative, and Mrs. Viola A. LaMothe, Surviving Spouse, respondent determined a deficiency of $ 44,749 in the Federal income tax of Charles J. LaMothe, Deceased, and his Surviving Spouse, Viola A. LaMothe, for the year 1979. Thereafter separate timely petitions were filed with this Court by the Estate of Charles J. LaMothe, Deceased, Joan Bebee, Personal Representative, in docket No. 16982-83, and by Viola A. LaMothe in docket No. 15162-83. Pursuant to the agreement of the parties, a stipulated decision was entered on March 3, 1986, in docket No. 16982-83 to the effect that the correct income tax deficiency of the Estate of Charles J. LaMothe, Deceased, for the year 1979 is $ 18,060. 1990 Tax Ct. Memo LEXIS 63">65 The deficiency was assessed by respondent against the Estate of Charles J. LaMothe on April 28, 1986, and has not been paid. In a notice of transferee liability, dated April 22, 1987, respondent determined that Viola A. LaMothe was liable as a transferee of the assets of Charles J. LaMothe, Deceased, for the agreed but unpaid income tax deficiency of the Estate of Charles J. LaMothe for the year 1979 in docket No. 16982-83 of $ 18,060, plus interest as provided by law. Viola A. LaMothe, as the transferee of Charles J. LaMothe, timely filed a petition in this Court on May 15, 1987, in docket No. 12967-87. By order dated September 28, 1987, petitioner's cases at docket No. 15162-83 and docket No. 12967-87 were consolidated. After certain concessions set forth in the parties' stipulation of settled issues, the only issues remaining for decision are: (1) whether petitioner in docket No. 15162-83 qualifies for innocent spouse relief pursuant to section 6013(e)1 from the deficiency for 1979 which the parties agree is $ 18,060; and (2) whether petitioner in docket No. 12967-87 is liable as a transferee of the Estate of Charles J. LaMothe for the deficiency of $ 18,060 for 1979 plus1990 Tax Ct. Memo LEXIS 63">66 interest as provided by law. FINDINGS OF FACT Some of the facts have been stipulated by the parties and are so found. Their stipulation of facts, together with the attached exhibits, are incorporated herein by this reference. Petitioner was a resident of St. Louis, Missouri, when she filed her petitions in these cases. Facts Relating to the Innocent Spouse Issue. On February 17, 1976, petitioner married Charles J. LaMothe. In April of 1980 they filed a joint income tax return for the taxable year 1979. Mr. LaMothe died on June 5, 1980. He was survived by his widow, petitioner herein, and two children by a previous marriage, Joan LaMothe Bebee and Charles Rodney LaMothe. On the joint return for 1979 deductions for losses were claimed by Mr. LaMothe with respect to his interest in two partnerships, Colonial Partners, Ltd., and Gateway Partners, Ltd., which were subsequently included by respondent in an audit project known as the Cole-West Tax Shelter. The claimed deductions were as follows: PartnershipClaimed DeductionsColonial Partners, Ltd.$ 37,500.00Gateway Partners, Ltd.40,562.00Total$ 78,062.001990 Tax Ct. Memo LEXIS 63">67 In his notice of deficiency respondent disallowed the above deductions in their entirety. The Cole-West Tax Shelter (also known as Dallas Realty Tax Shelter) consisted of 285 tiered partnerships, including Colonial Partners, Ltd., and Gateway Partners, Ltd. The partnerships invested in commercial real estate. With respect to the Cole-West Tax Shelter, respondent audited 20 of its 285 partnerships pursuant to an audit plan to be based upon a statistical sampling which plan was agreed to in advance by respondent and the project's general partner. At the conclusion of his audit, the adjustments proposed by respondent to these 20 partnerships consisted of (1) adjustments to the depreciable basis of partnership real property and (2) adjustments to partnership expenses such as partnership fees, management fees, guarantee fees, interest, and start-up costs. Using the 20 audits as a statistical sample respondent offered to settle the entire project by conceding 56 percent of all Cole-West deductions or losses claimed by the various partners. Neither Colonial Partners nor Gateway Partners were included in the 20 partnerships audited by respondent. Consequently, the record contains1990 Tax Ct. Memo LEXIS 63">68 no evidence of the actual items which comprise the disallowed portion of their adjustments. In the settlement of Mr. LaMothe's case (docket No. 16982-83), his estate accepted respondent's offer and the parties stipulated that Mr. LaMothe was entitled to 56 percent of the deductions claimed for partnership losses on the 1979 joint return. The settlement was computed as follows: AmountsPortion toDisallowedbePortion toin StatutoryDisallowedbe AllowedNotice ofPerPerPartnershipDeficiencySettlementSettlementColonialPartners,Ltd.$ 37,500.00$ 16,500.00$ 21,000.00GatewayPartners,Ltd.40,562.0017,847.0022,715.00$ 78,062.00$ 34,347.00$ 43,715.00In their stipulation of settled issues the parties in this matter have agreed that if respondent prevails on the innocent spouse issue in docket No. 15162-83, the correct amount of the deficiency for 1979 is $ 18,060, a duplication of the amount agreed to by the parties in docket No. 16982-83. After her husband's death, petitioner received the following as the beneficiary of insurance payable at his death, as the surviving tenant of property held1990 Tax Ct. Memo LEXIS 63">69 jointly with her husband, or by bequest under his will: DescriptionValueHouse and lot, 4 Country Aire, Town andCounty, MO 63131 (family residence),joint property.$ 190,000.0010 units First Trust INSD MunicipalBonds, 52 Series, Semi-Annual, OTC,joint property.10,529.75Joint checking account: Acct. No. 23-27-139 Mercantile Trust Company NationalAssociation, 8th and Locust, St. Louis,MO 63166.21,865.23Anchor National Life Insurance Company,single premium deferred annuity, policynumber 294891, insurance.24,338.77Cash bequest.225,000.00Total$ 471,733.75After Mr. LaMothe's death, petitioner also received per year $ 27,000 for seven years, or a total of $ 189,000, pursuant to two employment contracts which Charles J. LaMothe had with former employers. Facts Relating to the Transferee Issue. Mr. LaMothe's will directed, among other things, that his surviving spouse, Viola A. LaMothe, was to receive a marital bequest in the amount of $ 250,000. His will was admitted to probate in the Circuit Court of St. Louis County, Missouri. His daughter, Joan LaMothe Bebee, qualified1990 Tax Ct. Memo LEXIS 63">70 as the Executrix and Personal Representative of the estate. In an Inventory and Appraisement filed on June 8, 1981, with the Circuit Court, the Personal Representative reported personal property in the estate with a value of $ 420,856.46. In her First Annual Settlement filed on June 15, 1981, the Personal Representative reported total receipts by the estate of $ 878,870.06 and disbursements of $ 640,884.71, leaving a balance of $ 237,985.35 in the estate. In her Third Annual Settlement filed on June 27, 1983, the Personal Representative reported receipts by the estate totaling $ 556,675.16 and disbursements of $ 556,653.21, leaving a balance in the estate of $ 21.95. Included in the disbursements was a payment of Federal estate tax of $ 222,951.54 and interest on the Federal estate tax of $ 16,226.28. With respect to the marital bequest to petitioner, Joan LaMothe Bebee, the Personal Representative, recognized and did not contest the intentions of her father, but did not immediately pay the bequest because of a lack of funds in the probate estate. Therefore, on or about June 15, 1983, petitioner filed a will construction action in the Circuit Court to compel the estate to pay1990 Tax Ct. Memo LEXIS 63">71 her bequest. On February 8, 1984, the Judge of the Probate Division of the Circuit Court entered a Consent Order and Judgment which provides, in part, as follows: THIS COURT HEREBY construes the will of Charles J. LaMothe to provide that the surviving spouse Viola LaMothe shall receive a bequest from his estate in the pecuniary sum of $ 250,000.00 (the other formula provisions of the said Article being inapplicable) and the Executrix is hereby ordered to pay from the estate the sum of $ 250,000.00 to Viola LaMothe on or before March 1, 1984, in full and complete satisfaction of her marital bequest. This Court shall retain jurisdiction over this matter until said amount has been paid and an acknowledgment of payment filed with this Court by Viola LaMothe, or on her behalf. It is further ordered that if the Executrix fails to make such payment by such date then this Court shall forthwith, upon request of counsel for Viola LaMothe, and without further notice or hearing, enter judgment imposing a personal surcharge upon the Executrix for such amount. On January 19, 1984, and February 17, 1984, Joan LaMothe Bebee and her brother, Charles Rodney LaMothe, each made a cash advance to1990 Tax Ct. Memo LEXIS 63">72 the Estate of Charles J. LaMothe of $ 112,500. From these advances Mrs. Bebee in her capacity as Personal Representative of the estate issued two checks, each in the amount of $ 112,500, to petitioner in full satisfaction of her marital bequest. The cash advances made by Mrs. Bebee and Charles Rodney LaMothe to the probate estate to fund petitioner's marital bequest were loans and not gifts or contributions. On February 20, 1984, petitioner signed a release which provides, in pertinent part, as follows: VIOLA A. LaMOTHE does hereby acknowledge receipt from JOAN LaMOTHE BEBEE, Executrix of the Estate of Charles J. LaMothe, of the sum of Two Hundred Fifty Thousand Dollars ($ 250,000.00) paid to her in hand and further declares and acknowledges that the said sum constitutes the total of all distributions, monies, bequests, devises or other properties, of any kind whatsoever, to which she is entitled from the estate of Charles J. LaMothe in accordance with his Last Will and Testament dated the 7th day of October, 1977, now being probated in St. Louis County, Missouri. In a Fourth Annual Settlement of the estate, filed by the Personal Representative on July 14, 1984, the advances1990 Tax Ct. Memo LEXIS 63">73 made to the estate by Charles Rodney LaMothe and Joan LaMothe Bebee, and the payments made by the estate to petitioner in satisfaction of the marital bequest are reflected. The record contains no other evidence of any consideration received by the estate for the bequest. The Fifth Annual Settlement of the estate, filed on July 19, 1985, reflects partial repayments by the estate of the advances made by Charles Rodney LaMothe and Joan LaMothe Bebee in April 1985. They each received $ 52,500. The report also reflects the receipt by the estate of a Federal estate tax refund of $ 105,425.57 based on an amended estate tax return in which an additional marital deduction under section 2056 was claimed and allowed. The refund supplied the funds for the partial repayments to Charles Rodney LaMothe and Joan LaMothe Bebee. On March 13, 1986, this Court entered the stipulated decision in the case of the Estate of Charles J. LaMothe, Deceased, docket No. 16982-83, in which the parties agreed that there was a deficiency in the income tax of Charles J. LaMothe, Deceased, of $ 18,060 for 1979. On April 28, 1986, respondent assessed the deficiency, plus statutory interest against the estate1990 Tax Ct. Memo LEXIS 63">74 of Charles J. LaMothe. The assessment has not been paid. In her Sixth Annual Settlement of the estate, filed on June 26, 1986, the Personal Representative reported that the estate has no assets remaining. On April 28, 1987, respondent timely mailed his notice of transferee liability to petitioner. Prior to his death, Charles J. LaMothe as grantor had on November 6, 1967, entered into a Living Trust Agreement with his then wife, Margaret Virginia LaMothe, and his two children, Joan LaMothe Bebee and Charles Rodney LaMothe, as trustees. Upon its creation, Mr. LaMothe placed in the trust 5,910 shares of the common stock of Mid-West Terminal Warehouse Company and 14,010 shares of St. Louis Terminals Corporation. The trust, with an Addenda dated November 28, 1967, and amendments dated October 25, 1974, and January 30, 1975, continued until the death of Mr. LaMothe when, under the terms of its last amendment, the trust was to terminate with any accumulated income being distributable to his estate and with the corpus being distributable to Joan LaMothe Bebee and Charles Rodney LaMothe. OPINION Issue 1 -- Innocent Spouse. 1990 Tax Ct. Memo LEXIS 63">75 Section 6013(a) allows a husband and wife to file a joint return even though one of them has no gross income and claims no deductions. In such case, the liability of each spouse is joint and several. Sec. 6013(d)(3). However, one of the parties to a joint return may be relieved of his or her liability for certain items attributable to the other spouse if the following requirements of section 6013(e)(1) are met: (A) a joint return has been made under this section for a taxable year, (B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, (C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement * . The burden is on petitioner to prove that she is entitled to innocent spouse relief under section 6013(e). Ratana v. Commissioner, 662 F.2d 220">662 F.2d 220, 662 F.2d 220">224 (4th Cir. 1981);1990 Tax Ct. Memo LEXIS 63">76 Adams v. Commissioner, 60 T.C. 300">60 T.C. 300, 60 T.C. 300">303 (1973). Petitioner contends that she has carried her burden of proof that she has established and meets all four requirements of the statute. Respondent agrees that petitioner filed a joint return with her husband for 1979. Furthermore respondent does not dispute that there was a substantial understatement of tax on the joint return which is attributable to the partnership losses claimed by Mr. LaMothe and that in signing the joint return petitioner did not know, and had no reason to know, of the substantial understatement. Respondent contends, however, that petitioner has failed to prove that the partnership losses claimed by her husband and disallowed by respondent are grossly erroneous items within the meaning of section 6013(e)(2) and that, taking into account all the facts and circumstances of this case, it would be inequitable to hold her liable for the deficiency in tax attributable to the underpayment. "Grossly erroneous items" are defined in section 6013(e)(2) as being items omitted from gross income and claims for deduction, 1990 Tax Ct. Memo LEXIS 63">77 credit, or basis in an amount for which there is no basis in fact or law. Under the plain wording of the statute the mere proof of an item of omitted income qualifies as a grossly erroneous item, but the same is not true with respect to a deduction. To qualify as a grossly erroneous item a deduction must be shown not only to be erroneous, but also to have no basis in fact or law. As we stated in Douglas v. Commissioner, 86 T.C. 758">86 T.C. 758, 86 T.C. 758">763 (1986), "it simply does not follow that because deductions lacking in a factual or legal basis will be disallowed, all deductions which are disallowed lack a factual or legal basis." The burden of proving that an erroneous deduction has no basis in fact or law is on petitioner. Purcell v. Commissioner, 86 T.C. 228">86 T.C. 228, 86 T.C. 228">240 (1986), affd. 826 F.2d 470">826 F.2d 470 (6th Cir. 1987). There is no statutory definition of the phrase "no basis in fact or law." However, we have previously stated that a deduction has no basis in fact when the expense for which the deduction is claimed was never, in fact, made. A deduction has1990 Tax Ct. Memo LEXIS 63">78 no basis in law when the expense, even if made, does not qualify as a deductible expense under well-settled legal principles or when no substantial legal argument can be made to support its deductibility. Ordinarily, a deduction having no basis in fact or in law can be described as frivolous, fraudulent, or, to use the word of the [Ways and Means] committee report [on the Tax Reform Act of 1984], phony. 86 T.C. 758">Douglas v. Commissioner, supra at 762-763. See also Purcell v. Commissioner, 826 F.2d 470">826 F.2d 470, 826 F.2d 470">475 (6th Cir. 1987), affg. 86 T.C. 228">86 T.C. 228 (1986). Petitioner merely asserts that "the deductions taken for Colonial Partners, Ltd. and Gateway Partners, Ltd. have no basis in law or fact and are grossly erroneous." The record, however, does not support the assertion because it contains no evidence tending to show the nature of the deductions or that they were "phony" or had no basis in law. In fact, petitioner alleged in paragraph 5 of her petition as follows: a. The business conducted by Colonial Partners, Ltd. and Gateway Partners, Ltd. consisted entirely of transactions entered into for profit. b. The expenditures and deductions1990 Tax Ct. Memo LEXIS 63">79 reported on the partnership returns reflect deductible charges included in the conduct of the business. c. The adjusted basis of Charles J. LaMothe in the partnerships are as reported during the calendar year 1979. Furthermore, in his explanation of how the parties arrived at their agreement to allow 56 percent and disallow 44 percent of the partnership losses, the appeals officer who coordinated the Cole-West Tax Shelter audit for respondent stated that in some categories of partnership expense respondent made significant concessions ranging from 50 percent to 80 percent. The settlement in which 56 percent of the losses were allowed as deductions clearly indicates that respondent concluded that the claimed deductions had a substantial basis in fact or law. The mere disallowance by respondent of deductions in his notice of deficiency does not permit petitioner to leapfrog to the conclusion that the deductions have no factual or legal basis. 86 T.C. 758">Douglas v. Commissioner, supra; Hawbaker v. Commissioner, T.C. Memo. 1988-406. We conclude, therefore, that1990 Tax Ct. Memo LEXIS 63">80 petitioner has failed to prove that the deductions claimed by the partnerships had no basis in fact or law. We are also satisfied from the record as a whole that it would not be inequitable to hold petitioner liable for the income tax deficiency for 1979. Mr. LaMothe died about two months after the 1979 return was filed. After his death she received a total of over $ 650,000 directly or indirectly from his estate in the form of a cash bequest, insurance proceeds, jointly owned property, and employment contracts. Under these circumstances it is logical to assume that if Mr. LaMothe had not died shortly after the return for 1979 was filed, the deficiency of $ 18,060 for 1979 would have been paid from either his separate assets or assets held jointly with petitioner. In either event it would be reasonable to further assume that the payment of the deficiency would have reduced the assets received by petitioner upon his death by a corresponding amount. Therefore, she significantly benefited from the understatement. Sec. 1.6013-5(b), Income Tax Regs. See also Estate of Krock v. Commissioner, 93 T.C. (Dec. 11, 1989). Issue 2 -- Transferee Liability1990 Tax Ct. Memo LEXIS 63">81 . A transferee has been defined as "one who takes property of another without full, fair and adequate consideration to the prejudice of creditors." First National Bank of Chicago v. Commissioner, 255 F.2d 759">255 F.2d 759, 255 F.2d 759">762 (7th Cir. 1958). At least to the extent of the cash bequest petitioner is clearly a legatee and as such meets the classic definition of a transferee under section 6901. Sec. 6901(h). Section 6901 sets forth a collection procedure to be used by respondent against transferees. Section 6901 does not establish or define a transferee's substantive liability as a transferee. The existence and extent of such liability is determined under State law. Commissioner v. Stern, 357 U.S. 39">357 U.S. 39, 357 U.S. 39">41-45 (1958); Berliant v. Commissioner, 729 F.2d 496">729 F.2d 496, 729 F.2d 496">499 (7th Cir. 1984); Gumm v. Commissioner, 93 T.C. 475">93 T.C. 475 (1989). Thus, in the case before us, petitioner's liability as a transferee, if any, must be determined by reference to the law of Missouri. 1990 Tax Ct. Memo LEXIS 63">82 However, it is clear that in Missouri it has long been established that the distributees of a decedent's estate take and hold the decedent's assets subject to an implied trust in favor of the decedent's creditors and that such distributees are liable for such debts in equity to the extent of the value of the assets. Hagan v. Lantry, 338 Mo. 161">338 Mo. 161, 89 S.W.2d 522 (1935); Walker v. Deaver, 79 Mo. 664">79 Mo. 664 (1883). As we stated in Moran v. Commissioner, 45 T.C. 528">45 T.C. 528, 45 T.C. 528">529-530 (1966), there are five elements which respondent must prove in order to establish transferee liability. The five elements are: (1) That a transfer of assets was made from the transferor to the transferee; (2) That the transfer was made for inadequate consideration; (3) That the transferor was insolvent at the time of the transfer or became insolvent as a result of the transfer; (4) The value of the property transferred; and (5) That the transferor presently owes the tax. 1990 Tax Ct. Memo LEXIS 63">83 From the record before us it is apparent that respondent has proved each of the elements necessary to establish transferee liability. First, in January and February of 1984 the Estate of Charles J. LaMothe transferred to petitioner $ 225,000 in full satisfaction of the $ 250,000 bequest in Mr. LaMothe's will. Secondly, the transfer was made for less than a full and adequate consideration because the payment of such a bequest is a transfer that lacks consideration. See Shimko v. Commissioner, T.C. Memo. 1972-64. Thirdly, the transferor, the Estate of Charles J. LaMothe, was obviously left insolvent by the transfer because in the absence of the payment of the $ 225,000 in satisfaction of the bequest to petitioner the estate would have been solvent under either the equity test of insolvency (the inability to meet obligations as they accrue) or the bankruptcy test for insolvency (having liabilities in excess of assets). Swinks v. Commissioner, 51 T.C. 13">51 T.C. 13, 51 T.C. 13">17 (1968); and Kreps v. Commissioner, 42 T.C. 660">42 T.C. 660, 42 T.C. 660">670 (1964), affd. 351 F.2d 1">351 F.2d 1 (2d Cir. 1965). Fourthly, the value of the assets transferred has been shown. 1990 Tax Ct. Memo LEXIS 63">84 Finally, the transferor presently owes the tax. The transfer took place in early 1984, long after the liability of Mr. LaMothe for the 1979 income tax had accrued on April 15, 1980. Although the transfer must occur after the tax liability accrues, the tax need not be assessed at the time of the transfer. 51 T.C. 13">Swinks v. Commissioner, supra; 42 T.C. 660">Kreps v. Commissioner, supra.Respondent has exhausted all reasonable efforts to collect the deficiency in tax from the transferor by assessing it against his estate which no longer has any assets. Petitioner's contention that she is not liable as a transferee for the income tax deficiency because she did not receive any assets from the estate ignores the facts and is without merit. Contrary to her contention the record as a whole clearly demonstrates that she received the $ 225,000 as a bequest from the estate and not as a gift from Joan LaMothe Bebee and her brother, Charles Rodney LaMothe. It is true that the funds with which the bequest was paid were advanced to the estate by Mrs. Bebee and her brother, but we have found that the advances were loans to the estate and not gifts to the estate or to1990 Tax Ct. Memo LEXIS 63">*85 petitioner. Petitioner's further contention that the $ 225,000 was paid by Mrs. Bebee and her brother in order to avoid a personal surcharge against Mrs. Bebee "for the purported mishandling of the estate" is also a distortion of the record. We have found that after payment of Federal estate tax the probate estate did not have sufficient funds to pay petitioner's bequest. At this point petitioner filed the action in the Circuit Court to compel the payment of her bequest. In due course, the Probate Division of the Circuit Court ordered the Personal Representative to pay the bequest or face the possibility of a personal surcharge. Thereafter a payment in satisfaction of the bequest was made. In view of the foregoing, we conclude that petitioner is liable as the transferee of Charles J. LaMothe, Deceased, for the deficiency in 1979 of $ 18,060, plus interest as provided by law under the provisions of section 6901. Due to concessions, and to the duplication of petitioner's liability for the deficiency, first under the joint return for 1979, and secondly as a transferee of Charles J. LaMothe, Deceased, Decisions will be entered under Rule 155. Footnotes1. Unless otherwise noted, all section references are to Internal Revenue Code of 1954, as amended and in effect for the year in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620794/	IRON CITY ELECTRIC CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Iron City Electric Co. v. CommissionerDocket No. 11311.United States Board of Tax Appeals13 B.T.A. 286; 1928 BTA LEXIS 3280; August 28, 1928, Promulgated 1928 BTA LEXIS 3280">3280 Special assessment denied. Walter W. McVay, Esq., for the petitioner. J. F. Greaney, Esq., for the respondent. MURDOCK 13 B.T.A. 286">286 Income and excess-profits taxes for the fiscal year ending October 31, 1918, in the amount of $740.37 are in controversy for the single reason that the petitioner contends for special assessment. The Commissioner has held and contends that the petitioner is not entitled to special assessment. Under Rule 62(b) the proceeding was limited to the question of whether or not the petitioner is entitled to have its tax determined as provided in section 210 of the Revenue Act of 1917 and 328 of the Revenue Act of 1918. FINDINGS OF FACT. The petitioner was incorporated in 1909, under the laws of Pennsylvania. It is engaged in selling electrical supplies, both wholesale and retail, at Pittsburgh. In 1901 the Iron City Engineering Co. was organized and took over the business of a partnership. It did electrical contracting and sold electrical supplies wholesale. The petitioner was organized to take over the sales department of the Iron City Engineering Co. The latter company continued, doing only electric contracting. 1928 BTA LEXIS 3280">3281 The Iron City Engineering Co. transferred certain assets at $53,811.50 subject to certain liabilities in the amount of $27,811.50 to the petitioner for $25,000 par value of the common and $1,000 par value of the preferred stock of the petitioner. At this time the Iron City Engineering Co. represented certain manufacturers of electrical supplies and had a number of customers to whom it had sold supplies. The petitioner succeeded to these relations. The petitioner thereafter sold supplies to the Iron City Engineering Co. at market prices. In such sales the petitioner incurred no sales expense. For the taxable year the Commissioner determined that the petitioner's gross sales amounted to $1,250,023.63, from which its gross 13 B.T.A. 286">287 income was $212,798.79; total gross income was $238.907.73 and net income $86,446.18; invested capital was $155,383.94; and its excess-profits tax at 1917 rates was $32,927.30, at 1918 rates, $54,326.23, and its tax for the fiscal year, $54,298.37. OPINION. MURDOCK: The petitioner offered evidence for the purpose of showing that it received good will of a certain value at the time of its incorporation. We need not decide whether or not this1928 BTA LEXIS 3280">3282 evidence established a value in dollars for this alleged good will because in any event it would not show that invested capital could not be satisfactorily determined. The petitioner argued that the evidence proved a value and therefore invested capital could not be satisfactorily determined. We confess our inability to follow such an argument or to see in the evidence any reason for special assessment based upon the provisions of section 210 of the Revenue Act of 1917 or of section 327(a) or (c) of the Revenue Act of 1918. This leaves section 327(d) for our consideration as a possible basis for the petitioner's contention. We were shown that for the year the petitioner had borrowed on notes and a mortgage in the average amount of $42,500, which amount was about 67 per cent of the average par value of capital stock outstanding and about 27.3 per cent of the average invested capital for the year. On authority of , an abnormal condition affecting capital is claimed. The facts clearly distinguish the two cases. We see no abnormality in the facts before us. 1928 BTA LEXIS 3280">3283 . The petitioner conducted its business in a rented building. In the taxable year it paid two officers $23,000 as compensation whereas in the following year it paid these same men $36,000. It sold supplies to the Iron City Engineering Co. at market prices without thereby incurring any selling expense. These facts are immaterial. The petitioner tried to show that its good will had grown and that its income during several years before the war was unusually small. But even if these facts were established the petitioner would not be entitled to the relief sought. We have carefully considered all of the evidence but have been unable to find any such abnormality as was intended to be the basis for special assessment. ; ; ; . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620795/	Ralph B. Wattley and Josephine R. Wattley v. Commissioner.Wattley v. CommissionerDocket No. 62297.United States Tax CourtT.C. Memo 1961-24; 1961 Tax Ct. Memo LEXIS 320; 20 T.C.M. 111; T.C.M. (RIA) 61024; January 31, 1961Ralph B. Wattley, pro se, 141-48 85th Road, Kew Gardens, New York, N. Y. Clarence P. Brazill, Jr., Esq., for the respondent. RAUMMemorandum Opinion RAUM, Judge: This case is here on remand from the Court of Appeals for the Second Circuit (275 F.2d 461), which reviewed our prior decision herein (31 T.C. 510">31 T.C. 510). The issue was whether the taxpayer was entitled to spread a commission of $30,666.67, received early in 1951, over a period of some 19 years pursuant to Section 107(a) of the Internal Revenue Code of 1939. The question turned upon whether the taxpayer was to be treated as an employee of his wholly-owned corporation or whether that corporation was to be regarded merely as a "front" or "token" and its existence ignored. We held that the corporate existence could not be ignored, 1961 Tax Ct. Memo LEXIS 320">321 and the Court of Appeals approved our decision in this respect. However, it concluded from the record that the corporation was dormant from 1944 to 1951 and that the taxpayer was not its employee during that period. Accordingly, it remanded the case for findings as to what part of the $30,666.67 commission was allocable to services performed by the taxpayer during that period. Pursuant to the remand the remainder of the commission would still not be entitled to the benefits of Section 107. Petitioners sought review of the decision of the Court of Appeals in the Supreme Court, but their petition for certiorari was denied, 364 U.S. 864">364 U.S. 864. The question of allocating the commission which is now before us on the remand was not raised at the original trial of this case and the Court therefore had no occasion to consider it at that time. Nevertheless, we are required to make that allocation now by reason of the order of remand. Neither party has requested the opportunity of presenting further evidence. A document filed by the petitioners stated that the Tax Court has "all the information needed * * in order to decide the matter", and respondent's representative expressly stated1961 Tax Ct. Memo LEXIS 320">*322 that respondent did not desire to present any additional evidence. An allocation suggested by respondent appears to us to be reasonable on all the evidence, and indeed somewhat shaded in petitioners' favor. We accept it as correct, and, accordingly, on the basis of evidence already in the record, we hereby find as a fact that of the $30,666.67 commission received by petitioner Ralph B. Wattley early in 1951, $10,869.18 was allocable to services performed by him beginning in 1944 up to the time of receipt; the remainder of the commission was allocable to services rendered by him prior thereto as an employee of his wholly-owned corporation. Decision will be entered in accordance with the foregoing opinion.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620798/	WILLIAM S. COOK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCook v. Comm'rUnited States Tax CourtT.C. Memo 1999-50; 1999 Tax Ct. Memo LEXIS 57; 77 T.C.M. 1442; T.C.M. (RIA) 99050; February 24, 1999, Filed 1999 Tax Ct. Memo LEXIS 57">57 No. 2037-98 Decision will be entered under Rule 155. William S. Cook, pro se.Robert W. Dillard, for respondent. CHIECHI, JUDGE. CHIECHIMEMORANDUM OPINION[1] CHIECHI, JUDGE: Respondent determined the following deficiencies in, and additions to, petitioner's Federal income tax (tax):Additions to TaxYearDeficiencySec. 6651(a) 1Sec. 6654(a)1994$ 20,835$ 3,084$ 30319957,7781954241999 Tax Ct. Memo LEXIS 57">58 [2] The only issues remaining for decision are whether petitioner is liable for 1994 for the additions to tax under sections 6651(a) and 6654(a). We hold that he is.[3] Some of the facts have been stipulated and are so found.[4] Petitioner resided in Indialantic, Florida, at the time the petition was filed.[5] At all relevant times, petitioner worked as a catastrophe insurance claims adjuster. His income from that work depended, inter alia, upon whether there was bad weather. Given the nature of petitioner's work, it was difficult for him to determine the amount of income that he would earn from year to year.[6] Petitioner filed his 1994 tax return on or about October 3, 1997. Petitioner contends that the reason that he filed his 1994 return late was because he wanted to make sure that he completed that return accurately, and he was concerned that if he filed an inaccurate return, he would be penalized.[7] Petitioner claims that he made estimated tax payments with respect to the income that1999 Tax Ct. Memo LEXIS 57">59 he expected to earn for 1994. He further contends that one of the reasons why he did not make the appropriate amount of estimated tax payments for 1994 related to certain unresolved tax issues for 1993 that were pending before the Internal Revenue Service.[8] Petitioner has the burden to show that he is not liable for the additions to tax under sections 6651(a) and 6654(a). Rule 142(a); .[9] Section 6651(a)(1) imposes an addition to tax for failure to file timely a tax return. The addition to tax does not apply if the failure is due to reasonable cause, and not to willful neglect. Sec. 6651(a)(1). Petitioner suggested at trial that one of the reasons that he did not timely file his 1994 return was because he did not know the amount of his income for 1994 as of the time that return was due. We find that explanation hard to believe, since petitioner is presumably a cash basis taxpayer who would have known the amount of income that he earned during 1994 well before the due date of his 1994 return. In any event, unavailability of information or records does not necessarily establish reasonable1999 Tax Ct. Memo LEXIS 57">60 cause for failure to file timely. See , affd. without published opinion . A taxpayer is required to file timely based on the best information available and to file thereafter an amended return if necessary. . Nothing in the record suggests that petitioner applied for an extension of time to file his 1994 return. Petitioner did not show that as of the due date of his 1994 return he did not have information showing the amount of his income for 1994. Nor did he establish that he could not have prepared a timely 1994 return with a reasonable degree of accuracy based on the information available to him as of the due date of that return. On the record before us, we find that petitioner has not demonstrated that the failure to file timely his 1994 return was due to reasonable cause, and not to willful neglect. We further find on that record that petitioner is liable for 1994 for the addition to tax under section 6651(a)(1).[10] Section 6654(a) imposes an addition to tax in the case of any underpayment1999 Tax Ct. Memo LEXIS 57">*61 of estimated tax by an individual. The addition to tax under section 6654(a) is mandatory unless petitioner qualifies under one of the exceptions in section 6654(e). See . Petitioner claims that he made estimated tax payments with respect to the income that he expected to earn for 1994 and that one of the reasons why he did not make the appropriate amount of estimated tax payments for that year related to certain unresolved tax issues for 1993 that were pending before the Internal Revenue Service. Petitioner does not argue, and did not prove, that he qualifies under any of the exceptions listed in section 6654(e). On the instant record, we find that petitioner failed to prove that he is not liable for 1994 for the addition to tax under section 6654(a).[11] To reflect the foregoing and the concessions by the parties,[12] Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020

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