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https://www.courtlistener.com/api/rest/v3/opinions/4621097/	William E. Speer v. Commissioner.Speer v. CommissionerDocket No. 86707.United States Tax CourtT.C. Memo 1962-220; 1962 Tax Ct. Memo LEXIS 89; 21 T.C.M. (CCH) 1164; T.C.M. (RIA) 62220; September 17, 196289 1. Petitioner, a funeral director, purposefully padded the direct expenses itemized for each funeral in his records purportedly to cover indirect expenses, and had his tax returns prepared from his records. Held, a part of the deficiencies for each of the years involved was due to fraud with intent to evade tax. 2. Petitioner's filing of an amended return, purporting to be a joint return, for 1955 more than 3 years after the return was due and after the notice of deficiency herein was issued was not effective under section 6013(b), I.R.C. 1954, to permit computation of the tax on a joint return basis. Meyer Weiner, CPA, 130 N. Eighth St., Reading, Pa., for the petitioner. Frederick A. Levy, Esq., for the respondent. DRENNENMemorandum Findings of Fact and OpinionDRENNEN, Judge: Respondent determined deficiencies in petitioner's income tax and additions to tax as follows: Additions to taxSec. 294Sec. 293(b),Sec. 6653(b),(d)(1)(A),Year190 Deficiency I.R.C. 1939I.R.C. 1954I.R.C. 19391953$ 2.89$400.151954153.90$ 996.55$.4519551,494.472,717.89 and overassessments of additions to tax under section 294(d)(2) for the years 1953 and 1954 in the amounts of $47.84 and $110.35, respectively, and under section 294(d)(1)(A) for the year 1953 in the amount of $7.73. The notice of deficiency was dated February 15, 1960, and computed the tax on the basis of a married individual filing a separate return. The issues for decision are: (1) Whether any part of any deficiency in tax for each of the years 1953, 1954, and 1955 was due to fraud with intent to evade tax. (2) Whether resondent erred in determining the deficiency for 1955 on the basis of a married individual filing a separate return. Other issues raised by the pleadings were either conceded or abandoned by the parties at the trial or on brief, including a concession by respondent that he overstated petitioner's gross receipts from his business by $1,045 in determining the deficiencies for 1955. Findings of Fact Some of the facts have been stipulated and are incorporated herein by this reference. During the years 1953, 1954, and 1955, petitioner was a resident of Burnham, Pennsylvania, and filed an individual 91 income tax return for each of those years on a cash basis with the district director of internal revenue, Philadelphia, Pennsylvania. Petitioner was married and living with his wife on the last day of each of the taxable years 1953, 1954, and 1955. The original returns filed by petitioner were captioned in his name alone, were signed by him alone, and it was not indicated anywhere thereon that they were intended to be joint returns. Petitioner's wife did not have any income during those years and did not file a separate return for any of those years. Petitioner executed and filed a waiver extending the time for assessment of the tax for 1955 to June 30, 1960. After the filing of a petition in this case, petitioner filed an amended return for 1955 which purported to be a joint return of husband and wife, which was mailed to respondent's representative by certified mail on June 29, 1960. During the taxable years 1953 to 1955, inclusive, petitioner operated a funeral parlor as a sole proprietorship in Burnham. Petitioner's principal income was derived from his funeral parlor business and his services as an undertaker. Petitioner's returns for the years 1953, 1954, and 1955 reported the 92 following: 1953195419551955 Total receipts$20,954.35$26,916.61$46,279.72$46,297.79Cost of goods sold15,472.3022,557.0041,781.2119,894.09Gross profit$ 5,482.05$ 4,359.61$ 4,498.51$26,448.70Other business deductions3,248.122,734.502,785.598,009.85Net profit$ 2,233.93$ 1,625.11$ 1,712.92$18,438.85Adjusted gross income2,233.931,625.111,712.9218,622.31Deductions570.10Net income (or balance)$ 1,663.83$ 1,625.11$ 1,712.92$17,632.31Less exemptions1,800.001,800.001,800.001,800.00Income subject to tax: Taxable income15,832.31Tax due3,866.69Self-employment tax51.39126.00During each of the years here involved, petitioner personally maintained a form of funeral director's book in which he entered, using a separate page for each funeral conducted, the fee he charged for each funeral, a notation of receipt of payments, and an itemized listing of the direct expenses allegedly incurred in connection with each funeral for such items as casket, burial vaults, embalming, dressing the body, hearse, limousine, flowers, burial permits, assistants, opening of graves or tombs, and other miscellaneous items related to conducting a particular funeral. The entries for direct expenses were made 93 by petitioner on or about the date of the funeral to which they were related and, for the most part, were purposely in excess of the actual expense incurred. The expense entries were padded, according to petitioner, to cover indirect expenses, such as "insurance, upkeep and so on," for which there was no specific place on the record books, and to make the profit total about $90 per funeral, which he had read in a trade magazine was about the average profit made per funeral. The expense entries in his books were not totaled in the books. However, for 1953 they totaled approximately $15,000, for 1954 approximately $22,000, and for 1955 approximately $31,900. Petitioner paid some of his expenses by cash and some of them by check. He did not reconcile his expenses paid by check with the actual and estimated expenses recorded in his record books. Petitioner's original income tax returns for the years 1953-1955 were made out for him at a cost of $10 by an individual in Burnham who held himself out to the public to be qualified to prepare income tax returns. In making out petitioner's returns this individual relied primarily on petitioner's funeral record books and petitioner's mental estimates 94 of other expenses incurred in his business, such as utilities, advertising, insurance, repairs, and depreciation. The recorded expenses were entered on the returns as cost of goods sold. 2 and the unrecorded estimates were entered on the returns as other business deductions. Petitioner did not inform this individual that for the most part the expense entries in his funeral record books were not his actual expenses. The receipts recorded in petitioner's books and reported on his returns were approximately $700 less than his actual receipts for 1953, about $2,050 less than his actual receipts for 1954, and practically the same as his actual receipts for 1955 after eliminating from recorded receipts for 1955 the amount of $1,045 for two funerals where receipts were recorded but not actually collected. Petitioner overstated his actual trade or business deductions on his original returns for the years here involved in the amounts of $3,421.01 for the year 1953, $8,772.20 for the year 95 1954, and $16,725.93 for the year 1955. Petitioner conducted 47 funerals in 1953, 52 funerals in 1954, and 80 funerals in 1955. His average profit per funeral in the years 1953-1955, based on the net profit he reported for his funeral parlor business on the returns for those years, was $47.53, $31.25, and $21.41, respectively. Sometime in January 1956, after his income tax return for 1955 had been prepared showing no income tax due although he had $5,000 in the bank, petitioner went to a local office of the Internal Revenue Service, presented his funeral record books for 1955 to one of the personnel there, and requested that someone determine the amount of income tax he owed for the year 1955. He did not inform anyone at that office of the mode in which he maintained his funeral record books or that his return for 1955 had already been prepared. His request was denied and he was advised to engage the services of an accountant. Petitioner did not engage an accountant until sometime after November 1, 1956, when an agent of the Internal Revenue Service, who had been assigned petitioner's 1955 return for examination, suggested that he do so. Petitioner was cooperative with this agent and 96 with the other agents subsequently assigned to audit his returns. The date noted next to petitioner's signature on his original return for 1955 was January 16, 1956. This return was stamped "Rec'd with remittance" by the district director of internal revenue at Philadelphia with the date March 2, 1956. On March 16, 1959, during one of the conferences that culminated in petitioner signing the waivers of April 14, 1959, an agent of the Internal Revenue Service who investigated petitioner's returns for the years here involved indicated to petitioner's representative that he was going to recommend in his report that petitioner's tax for the year 1955 be computed on the basis of a joint return. At this conference petitioner's representative offered to have petitioner and his wife file an amended joint return for 1955, but the agent stated that such was not necessary and would result in delaying his report. Petitioner's representative, a former agent of the Internal Revenue Service, knew at the time of the conference that the agent's report was subject to review by the agent's supervisors. On April 14, 1959, petitioner signed waivers of restriction on assessment and collection of deficiency 97 in tax and additions to tax, other than for fraud, for the years 1953-1955 which caused taxes and additions to tax to be assessed and paid prior to the issuance of the statutory notice of deficiency in this case, as follows: YearTaxAddition to tax1953$ 797.40$127.6019541,839.19294.2719553,941.30Petitioner's original income tax return for 1955 was treated as a joint return in computing the taxes assessed pursuant to the waiver for that year. The deficiency in tax for 1955 before the Court in this proceeding results from respondent's determination that petitioner's original return for 1955 was that of a married person filing a separate return. Ultimate Findings of Fact At least a part of the deficiency in petitioner's income tax for each of the years 1953, 1954, and 1955 was due to fraud with intent to evade tax. Petitioner did not file a joint income tax return for the year 1955 prior to June 29, 1960. Petitioner, without reasonable cause, failed to file a declaration of estimated tax for the year 1954, though required to do so. Opinion There is no real dispute here as to the amount of net income or taxable income. Respondent concedes that gross income for 1955 is overstated by $1,045 98 because of the inclusion in gross income of fees for two funerals that were not collected in full. Petitioner claims the overstatement is $1,095. The evidence does not support petitioner's claim to the additional $50 of overstatement and we adopt the amount conceded by respondent as the correct amount of overstatement. The parties have stipulated the amounts by which trade or business deductions were overstated in the returns, and there is no evidence to support any other adjustments in petitioner's net income and taxable income for the years involved as determined by respondent. The above adjustment to gross income for 1955 will be reflected in the Rule 50 computations. Petitioner introduced no evidence with respect to, and abandoned on brief, the issue of an addition to tax for the year 1954 under section 294(d)(1)(A) of the 1939 Code. Our ultimate finding of fact disposes of this issue in favor of respondent. The principal remaining issue is whether any part of the deficiencies for each year is due to fraud with intent to evade tax. Respondent has the burden of proving fraud by clear and convincing evidence. Arlette Coat Co., 14 T.C. 751">14 T.C. 751 (1950). We have determined from our observations 99 of the witnesses on the stand, and our examination and analysis of the evidence presented in the light of those observations, that respondent has carried that burden and that at least a part of the deficiencies for each year was in fact due to fraud on the part of petitioner with intent to evade tax. Petitioner was successfully engaged in the funeral parlor and undertaking business during the years 1953 through 1955 and did not impress us on the witness stand as being as ignorant of bookkeeping procedures and tax accounting as his testimony might lead one to believe. This business was apparently his only source of income and he was conscious of the fact that he had to make a profit in it to exist. He bought a form of funeral director's record book which he had seen advertised, purportedly for the purpose of keeping track of his profits, and made all the entries therein himself. The expense entries were for the most part made near to the time of the funeral when the expenditures had recently been made, but they were admittedly overstated and in part, at least, estimated. It is hard to understand how such a record could aid petitioner in keeping track of his profits. And it is hard to 100 believe that petitioner deliberately padded his recorded expenses only to fool himself. Petitioner testified that he padded the recorded expenses to make the profit average out to about $90 per funeral, which he understood was about the average profit he should make. But petitioner's records do not support this testimony - and the average profit per funeral based on the income he reported was $47.53 in 1953, $31.25 in 1954, and $21.41 in 1955. Petitioner was also aware of the fact that his income tax would be based largely on the actual net profit he realized from his business. Nevertheless he testified that in order to have his tax returns prepared he simply took his books to an individual who prepared tax returns without telling him about the false entries in the books, knowing that that individual would rely almost entirely on the information in the books to prepare the tax returns, and then signed the returns without questioning them. Petitioner also testified that he gave the individual estimates of indirect expenses such as utilities which, so far as we can determine, would duplicate estimated expenditures which were already padded into the record book. Such expenses were, in 101 fact, claimed as other business deductions in addition to the expenses recorded in the books. Furthermore, no explanation was given as to why cost of goods sold claimed on the 1955 return, which in prior years had closely approximated the recorded expenses, exceeded recorded expenses by approximately $10,000 on the return for that year. Nor was any explanation given as to how the individual who purportedly prepared the return could have arrived at the figure used. The individual who prepared the returns was not called as a witness. We are convinced from all the evidence that petitioner deliberately padded the expenses recorded in his record books to reduce his recorded net profit or income, that this resulted in his net income or taxable income being understated on his tax returns, and that petitioner was aware of this fact when he filed his returns for each of the years involved. We are not impressed by petitioner's testimony about taking his books into the internal revenue office after his 1955 return had been prepared. It only indicates that either he filed his 1955 return knowing or having good reason to believe that it was wrong or that he was completely indifferent to the advice 102 given him that he should employ an accountant to check the books and prepare his returns. We think this deliberate and consistent overstatement of substantial amounts of trade or business deductions, without any tenable explanation, constitutes clear and convincing evidence of fraud. See In re Frank Fehr Brewing Co., 160 F. Supp. 631">160 F. Supp. 631 (W. Ky. 1958); Bennett E. Meyers, 21 T.C. 331">21 T.C. 331 (1953). The only other issue remaining is whether petitioner is entitled to have his tax for the year 1955 computed on the basis of a joint return. While petitioner argues on brief that subsequent events, primarily his offer to the revenue agent to file an amended joint return for 1955 when it became apparent that there would be some tax liability for that year, prove that he intended to file a joint return for 1955, the evidence does not support this conclusion. The original 1955 return was captioned in petitioner's name alone, was signed by him alone, and nowhere indicates that it was or was intended to be a joint return. The fact that the return was marked to indicate that his wife was not making a separate return, and the fact that after a revenue agent's investigation indicated there was tax due he offered 103 to file a joint return, does not prove that the original return was intended to be a joint return. This is not a case where husband and wife clearly intended to file a joint return originally but for some reason one of them did not sign the return. See Myrna S. Howell, 10 T.C. 859">10 T.C. 859 (1948), affd. 175 F. 2d 240 (C.A. 6, 1949). The more basic question seems to us to be whether petitioner's offer to file a joint return for the year 1955 at a conference with the revenue agents on March 16, 1959, constituted an election to file a joint return within section 6013(b)(1) of the 1954 Code, despite the fact that no joint return was actually filed prior to June 29, 1960, after the notice of deficiency had been issued and the petition filed herein. It appears from the evidence that at a final conference with the revenue agents on March 16, 1959, Revenue Agent Johnson, who did not testify, told petitioner's representative that inasmuch as the statute of limitations had not run on the year 1955, and it was obvious that petitioner and his wife met all the requirements for filing a joint return, he would compute the tax for 1955 in his report to his supervisors on the basis of a joint return. Petitioner's 104 representative offered at that time to file an amended joint return but Johnson said it would not be necessary because he was computing the tax on a joint return basis in his report anyway and it would only delay his report. Petitioner's representative thereupon recommended to petitioner that he sign a waiver permitting immediate assessment of the deficiency and that he pay the tax as so computed. Johnson apparently filed his report on the above basis and petitioner paid the deficiency as so computed. Subsequently, however, a deficiency notice dated February 15, 1960, was issued, prior to the expiration of the statute of limitations as extended to June 30, 1960, by agreement of the parties, which computed petitioner's tax on the basis of a separate return filed by a married person. The petition in this case was filed on May 16, 1960. On June 29, 1960, petitioner mailed to respondent an amended return for 1955 purporting to be a joint return for petitioner and his wife. Section 6013(a) of the 1954 Code provides that a husband and wife may make a joint income tax return even though one of the spouses has neither gross income nor deductions, with certain exceptions not applicable here. 105 Section 6013(b)(1) provides that, except as provided in paragraph (2), if spouses have filed separate returns for a year for which a joint return could have been filed, and the time prescribed for filing a return for the year has expired, the spouses may nevertheless make a joint return for such taxable year - and a joint return filed by the spouses under this subsection shall constitute the return of the husband and wife for such taxable year. Section 6013(b)(2) provides in part as follows: (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; 106 * * It is clear from the statutory language that the election to switch from a separate return to a joint return requires the actual filing of a joint return, and that the joint return may not be filed after the expiration of 3 years from the last date prescribed by law for filing the return for that year, without regard to extensions, and also may not be filed after the issuance of a notice of deficiency for that year. Petitioner runs afoul of both of these provisions. He did not actually file a joint return until more than 3 years after the 1955 return was due and until after the notice of deficiency for that year was issued. It is suggested by petitioner (1) that because there was no tax shown to be due on the original return, and, according to petitioner, the joint return provisions pertain only to the tax computation, no election to file a joint return could have been made when the original return for 1955 was filed; (2) that the waiver extending the time for assessing the tax and filing claim for refund should also extend the time for electing to switch to a joint return; and (3) that respondent cannot deny responsibility for the actions of his agent in advising petitioner 107 that it would not be necessary to file a joint return at a time when it would have come within the statute. We find no merit in any of these suggestions. Section 6013 grants the privilege to switch from a separate to a joint return only under the conditions prescribed therein. If those conditions are not met, as is the situation here, we know of no other provision of the law which would permit the election to file a joint return after a separate return has been filed and "under no circumstances could a revenue agent waive the statutory conditions under which an effective joint return could be filed." Constance B. Kirby, 35 T.C. 306">35 T.C. 306 (1960). While it may be unfortunate if petitioner was misled by respondent's agent, this cannot affect our decision under the law, and, furthermore, petitioner's representative acknowledged that he knew the agent's report was subject to review and change. We hold for respondent on this issue. Decision will be entered under Rule 50. Footnotes1. It appears that certain deficiencies in tax and additions to tax, other than for fraud, for the years here involved were assessed and paid prior to issuance of the notice of deficiency. See page 7, ante [Page 1166].. Amended return.↩2. No explanation was given for the discrepancy between the $41,781.21 claimed as cost of goods sold on the original return for 1955 and the approximately $31,900 in expenses recorded on the books for that year.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621101/	Appeal of SAVOY OIL CO.Savoy Oil Co. v. CommissionerDocket No. 323.United States Board of Tax Appeals1 B.T.A. 230; 1924 BTA LEXIS 204; December 23, 1924, decided Submitted December 3, 1924. 204 Where an agreement, under which an interest in a leasehold is transferred, describes the transaction as a sale and the Commissioner assesses a profit tax on the money received in payment for such interest, the transaction will be treated as a sale and the tax approved in the absence of clear and convincing proof of another intent of the agreement. The Board will not disturb the method employed by the Commissioner in calculating the capital amount used as a basis for arriving at a depletion rate in the absence of proof of error on the part of the Commissioner. Harry G. Sundheim, Esq., for the taxpayer. A. Calder Mackay, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. GRAUPNER 231 Before GRAUPNER, LANSDON, LITTLETON, and SMITH This appeal is from a determination of a profits tax for the year 1917 in the amount of $56,821.68. From admissions in the pleadings, stipulations of theparties and testimony offered at the hearing, the Board makes the following FINDINGS OF FACT. 1. The taxpayer is a corporation, organized under the laws of the State of New Jersey, with its principal office in New York City. During205 the year 1912, it acquired oil and gas mining leases on some 760 acres of unproven land in what is known as the Healton District in Carter County, Okla. 2. In 1916 the taxpayer entered into an agreement with an outside organization, whereby that organization received an undivided one-half interest in the oil and gas rights under the above-mentioned leases in consideration of drilling one well on the leased premises. The well was drilled and oil struck, though not in a commercially profitable quantity. 3. The taxpayer, not having sufficient funds to enable it to drill wells on its own account, entered into an agreement with the Burke-Hoffeld Oil Co., an Oklahoma corporation, on May 1, 1917. Under this agreement the taxpayer sold and assigned to the Burke-Hoffeld Oil Co. an undivided one-fourth interest in and to the oil and gas leases. The portions of the agreement which are relevant to the issues of this appeal are as follows: The party of the first part "(the taxpayer) * " hereby sells and agrees by good and sufficient assignment * * to transfer and convey to the party of the second part "(Burke-Hoffeld Oil Co.)" an undivided one-fourth interest in, to and206 under the following-described oil and gas leases. [There follows a description of the leases.] * * Party of the second part, in consideration therefor, agrees to purchase same and to pay to the party of the first part for such undivided one-fourth interest * * * the sum of two hundred fifty thousand dollars ($250,000) to be paid as follows: One hundred twenty-five thousand dollars ($125,000) in cash, receipt of which is hereby acknowledged by party of the first part; and the remaining one hundred twenty-five thousand dollars ($125,000) to be paid from the proceeds of one-half of the oil and gas produced and belonging to the party of the second part. * * * It is further agreed that the party of the second part shall be entitled * * * to the proceeds of that part of the oil and gas produced from said premises proportionate to the interest hereby sold, from and including the 21st day of April, 1917, and the party of the second part, from and including the said date, agrees to pay its one-foruth part of the expense of operating and developing said leasehold and properties. (Italics ours.) 4. The agreement contains no restriction on the taxpayer as to the207 uses to which the $125,000 paid to it in cash by the Burke-Hoffeld Oil Co., shall be put; nor does it impose any liability or 232 burden on the taxpayer "to pay its one-fourth part of the expense of operating and developing said leasehold and properties," such as is placed on the Burke-Hoffeld Oil Co. by the last paragraph quoted above. The taxpayer showed by parol evidence that it retained an undivided one-quarter interest in the leases and that it expected to pay its quota of any operating and developing expense. 5. The cash payment of $125,000 received by the taxpayer for making the assignments under the above-described agreement was not distributed to the stockholders but was invested in Liberty Bonds, as being readily convertible into cash, and held as a reserve to meet what it considered to be its liability to bear one-fourth of the expense of any operations or development work which the Burke-Hoffeld Oil Co. might undertake, though the agreement placed no obligation on the Burke-Hoffeld Oil Co. to do any work. 6. The Commissioner held that the transaction between the taxpayer and the Burke-Hoffeld Oil Co., as defined in the above-mentioned agreement, was208 a sale and that the taxpayer was liable for profits taxes on the calculated profit thereon. DECISION. The deficiency of $56,821.68 determined by the Commissioner for the calendar year 1917 is approved. OPINION. GRAUPNER: The taxpayer contends that, in determining the tax, the Commissioner erred in the following particulars: (1) In holding that the transaction between itself and the Burke-Hoffeld Oil Co. constituted a completed sale, on which a profits tax could be assessed, instead of holding (a) that the sale was incomplete and conditional until the balance of the $250,000 was paid, or (b) that the agreement provided for a joint venture between the parties and that there could be no profit or loss until the development of the leased properties was completed or the leases abandoned, or (c) that there was no profit to the taxpayer because the sum of $125,000, received by it was an advance by the Burke-Hoffeld Oil Co. to enable it to meet its liability for its pro rata of the cost of operations and development and, in effect, a contribution to capital. (2) In calculating the capital amount used as a basis for arriving at the depletion rate for the year 1917 by using209 the value as at March 1, 1913, reduced by the amount of depletion claimed to have been sustained but not allowed by prior tax laws. The taxpayer asserts that the determination of the tax presented in this appeal resulted from failure to recognize the real facts regarding the transaction resulting from its agreement with the Burke-Hoffeld Hoffeld Oil Co. On the hearing of the appeal every opportunity was given the taxpayer to present its proofs, and much testimony was admitted over the meritorious objections of the Solicitor in order to permit it to prove the errors alleged to have been made by the Commissioner. Unquestionably, the terms of the agreement described a sale of an undivided one-fourth interest in the described gas and oil leases from the taxpayer to the Burke-Hoffeld Oil Co. and prescribed no restrictions 233 on the use of the $125,000 cash paid to the taxpayer for the property. The president of the Savoy Oil Co. was permitted to testify in explanation of what he believed the duty of that corporation to be under the agreement. This testimony, briefly stated, developed the following: That, on May 1, 1917, the taxpayer had insufficient funds on hand to meet210 what it considered its quota of any operations or development work that might be done; that, if the Burke-Hoffeld Oil Co. carried on any operations or development work, the Savoy Oil Co. considered itself bound to pay one-fourth of the cost of such work; that the Burke-Hoffeld Oil Co. expected the taxpayer to pay one-fourth of the cost of such work; that the taxpayer corporation felt obligated to set aside the $125,000 cash received as a contingent or reserve fund to meet its share of the cash of any operations or development if and when such work was done, and did not consider that it had made any profit; that, therefore, the money had been invested in Liberty Bonds, as being easily convertible into cash, and held in its treasury. It was stipulated that, if three other directors of the corporation were present they would testify to the same effect. This testimony was admitted, over the objections of the Solicitor as to its competence, relevancy, and materiality to permit the taxpayer to attempt to prove the error of the position assumed by the Commissioner in determining the tax. The testimony did not show that the money received by the taxpayer from the Burke-Hoffeld Oil Co. 211 was in any way incumbered or its use restricted by any agreement between the taxpayer and the Burke-Hoffeld Oil Co., or between both or either of them with the outside organization that owned the undivided one-half interest in the leases. There is nothing in therecord to show that there was any obligation to be performed by the Burke-Hoffeld Oil Co. after the making of the agreement of May 1, 1917, order than to pay the taxpayer $125,000 from the proceeds of one-eighth of the oil and gas produced and sold if and when such oil and gas was produced and sold, and if and when the Burke-Hoffeld Oil Co. decided that it would operate or develop the property. Nor is there anything in the record to show that the taxpayer could not have disposed of the cash in any way it saw fit or that it was legally bound to meet any definite or indefinite obligation from the money in question. We are therefore confronted with this condition of fact: That the Savoy Oil Co. received $125,000 cash for assigning certain leasehold interests to the Burke-Hoffeld Oil Co. under an agreement that characterized the transaction as a sale; that the balance of the purchase price was limited by contingencies that212 might not happen, and that the Savoy Oil Co. had received $125,000. in cash for the property, which it might dispose of in any legal way it saw fit. The taxpayer can not convert a sale into a conditional sale, a trust, a joint adventure, or an advance merely by its board of directors deciding that they did not consider it a sale. The taxpayer did not produce the minutes of any meeting of its stockholders or directors as evidence of its contentions, it did not produce any evidence of a collateral agreement between it and the Burke-Hoffeld Oil Co., showing that the sale evidenced by the agreement of May 1, 1917, was not a sale but was something else; instead, it chose to rely on parol evidence of conclusions drawn, after the lapse of seven years, by officers of the corporation. 234 In the absence of convincing evidence that the transaction evidenced by the agreement of May 1, 1917, was not what it purports to be, viz, a sale, this Board can not accept any of the contentions advanced by the taxpayer purporting to show error on the part of the Commissioner in determining the tax. As to the alleged error on the part of the Commissioner in calculating the amount used as213 a basis for arriving at the depletion rate for the year 1917, it is sufficient to state that the taxpayer has presented no evidence tending to prove such an error. The deficiency determined by the Commissioner and set forth in the notice of deficiency mailed to the taxpayer on August 9, 1924, is approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621102/	ARTHUR S. BARNES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Barnes v. CommissionerDocket No. 81873.United States Board of Tax Appeals36 B.T.A. 764; 1937 BTA LEXIS 660; October 27, 1937, Promulgated 660 Upon the record, held, the Commissioner has not sustained his burden of proof to show that petitioner filed a false or fraudulent return for 1928 with intent to evade tax; held, further, since, the deficiency notice for that year was not mailed to petitioner within two years after the return was filed, the deficiency, if any, is barred by the statute of limitations. John E. Mack, Esq., Andrew T. Smith, Esq., and Dwight E. Rorer, Esq., for the petitioner. J. R. Johnston, Esq., for the respondent. BLACK 764 Petitioner contests the determination by respondent of a deficiency of $35,053.88 income tax and $17,526.94 fraud penalty for the calendar 765 year 1928. The basis for the deficiency in tax and penalty is the alleged failure on the part of petitioner to report as income for 1928 the amount of $140,547.13 as part of a fee which petitioner and an associate firm of lawyers received for prosecuting a suit in the Court of Claims in the case of Estate of Ambrose Monell, Deceased, v.United States of America. The Commissioner alleges that petitioner should have reported his entire part of this fee as having been received661 in 1928. Of this fee, petitioner reported $85,000 as income in 1928 and $90,251.90 as income received in 1929 and paid the tax thereon, but $50,295.23 of the amount received by petitioner was not reported in any year. Petitioner alleges that this latter amount should have been reported as income by the law firm which was associated with him in the case. Petitioner denies fraud, alleges that he properly reported his income in the years in which it was received, and further pleads the statute of limitations as a bar to any deficiency for 1928. FINDINGS OF FACT. Petitioner is an individual, residing in Mineola, New York. He is a lawyer by profession, having been admitted to the New York bar in 1904. On March 15, 1929, petitioner duly filed his individual income tax return for the calendar year 1928 with the collector of internal revenue for the first district of New York. This return was made upon the basis of cash receipts and disbursements. On July 23, 1935, the respondent, in accordance with section 272(a) of the Revenue Act of 1928, as amended by section 501 of the Revenue Act of 1934, sent petitioner a deficiency notice advising him that the determination of his income662 tax liability for the year 1928 disclosed a deficiency of $35,053.88 in income tax, and $17,526.94 as a fraud penalty under section 293(b) of the Revenue Act of 1928. In a statement attached to the deficiency notice the respondent determined petitioner's income for 1928 to be $232,758.87 and set it up in tabulated form as follows: Net income reported on return$92,211.74Add: Fees received from estate of140,547.13Ambrose Monell, Deceased, Adjusted net income$232,758.87On or about March 1, 1926, petitioner had a talk with Paul Bonynge, of the firm of Bonynge & Barker, relative to the possible employment of petitioner by one of their clients, namely, Maude M. Monell, executrix of the estate of Ambrose Monell, deceased. Ambrose Monell died May 2, 1921, leaving an estate of over five million 766 dollars. His executrix had filed a Federal estate tax return and had paid a tax of over $600,000. Petitioner, if employed, was to analyze this return with a view to determining whether the tax paid was or was not in excess of the amount which should have been legally assessed and paid. As a result of petitioner's interview with Bonynge, petitioner and the663 executrix entered into an agreement, stated in letter form, as follows: March 17, 1926. Arthur S. Barnes, Esq., 111 Broadway, New York City, N.Y.Dear Sir: As Executrix of the Estate of Ambrose Monell I hereby employ you to analyze the Federal Inheritance Tax Return of the above named Estate for the purpose of determining whether the tax levied, assessed and paid was in excess of the amount which should have been legally assessed and paid. And you are hereby employed to prepare, present and prosecute a claim for refund of any amounts paid, for any cause, which may be in excess of the amounts which should have been legally paid. This employment is upon the express agreement however, that you are to be paid no sums, or money, whatsoever unless the Estate receives a refund on account of said tax, and in the event of a refund being received by the Estate, then you are to receive an amount equal to one-half of any such amounts so refunded, the one-half to be computed upon the gross amount received, i.e., including interest as well as principal. Any amounts accruing, or becoming due to you, as herein set forth, are to be payable within five (5) days after the check664 from the Government is received. ESTATE OF AMBROSE MONELL BY - MAUDE M. MONELL Executrix.In less than two months after obtaining this contract of employment petitioner was successful in obtaining a refund of over $44,000, due to the exclusion of certain insurance from the decedent's gross estate. For obtaining such refund petitioner received a fee from the estate of $22,115.97, one third of which, or $7,371.99, he paid over to Bonynge by check dated April 26, 1926. Later, in the summer of 1926, petitioner was successful in obtaining a second refund of over $134,000 due to the excessive valuation of certain securities included in the gross estate. For obtaining the second refund petitioner received a fee from the estate of $67,141.26, one third of which, or $22,380.42, he paid over to Bonynge by check dated August 18, 1926. Thereafter, petitioner filed a third claim for refund on behalf of the estate for the entire balance of the taxes on the ground that the decedent died from a disease contracted while in the military forces of the United States and that, therefore, under section 401 of the Revenue Act of 1918 the estate taxes imposed by the laws then in effect665 did not apply to the transfer of the decedent's net estate. This 767 claim was denied and suit was brought in the Court of Claims. On February 20, 1928, the Court of Claims ordered "Judgment for the plaintiff for $524,598.90, with interest thereon at the rate of 6 per cent per annum until date of judgment." See . On June 20, 1928, Maude M. Monell drew a check on the Bankers Trust Co. for $351,094.26, payable to the order of "Fulton Trust Company for a/c Arthur S. Barnes." Petitioner learned that the check was being held in the office of Bonynge & Barker, the attorneys who were associated with him in the suit. He went to the office and was informed that Bonynge, who was then in Europe, left instructions not to deliver the check for $351,094.26 to petitioner unless he executed an assignment of one half of the amount to Bonynge & Barker, as their share of the fee. This petitioner refused to do on the ground that it was his understanding that the agreement between Bonynge & Barker and himself was for a division of one third and two thirds, respectively; that such had been the percentage division on prior refunds; 666 and that there had been no change in the agreement to warrant a departure in the division of this particular fee. Petitioner then engaged Townsend Morgan to bring suit against Maude M. Monell, and paid Morgan $6,000 for his services. Before the suit came on for trial, the parties, petitioner and Bonynge & Barker, agreed to arbitrate the matter before Robert Van Iderstine. Van Iderstine had been a friend and client of both parties. The arbitration hearing was held Saturday, October 27, 1928. On the following Monday, Van Iderstine signed the following: MEMORANDUM OF SETTLEMENT AGREEMENT BETWEEN BONYNGE & BABKER AND ARTHUR S. BARNES. The parties not being able to agree as to a division of the Monell exemption claim fee, did place the decision of the same in the hands of Robert Van Iderstine, and as a condition precedent, did consent that the fund be placed in his hands. The following conclusion is reached and agreed to by the parties. The fee is to be equally divided between the parties. That is, Arthur S. Barnes is to receive the sum of $175,547.13, and Bonynge & Barker are to receive the sum of $175,547.13. However, as such amounts do not fairly represent an667 even division of the fee due to the fact that said Barnes has borne all of the expenses directly incident to the preparation, presentation and prosecution of the exemption claim, and also, inasmuch as Barnes represents that he has for upwards of nine years last past, maintained not only his office in New York City but also headquarters in Washington, D.C., spending the major part of his time there (thereby incurring substantial amounts of expense in excess of any amounts which could be deducted on account of his income tax) which has enabled said Barnes to become highly specialized in Federal Government Departmental procedure, it is therefore only fair that Bonynge & Barker (participating equally in the fee) should participate equally in the expense. Bonynge & Barker should, therefore, reimburse said Barnes the proportionate amount of said capital expenditure. 768 The amount of said reimbursement is fixed at $50,000.00 and said Bonynge & Barker are to pay said Barnes as a reimbursement to his expenditure said amount, and without claiming said amount, so paid, as a deduction on account of income tax, either Federal or State. [Signed] ROBERT VAN IDERSTINE. Prior to668 the arbitration hearing petitioner addressed a communication dated October 27, 1928, to the Fulton Trust Co., the contents of which are as follows: I hereby assign and request you to transfer to the order of Robert Van Iderstine the sum of $351,094.26, represented by a check for that amount payable to you drawn by Mrs. Maude M. Monell, to be deposited simultaneously herewith. This communication was acknowledged on October 30, 1928, before a notary public. The check for $351,094.26 was not delivered to Van Iderstine until several days after the arbitration decision. Bonynge was incensed at the award of the arbitrator and threatened to sue to upset it. But in a few days he yielded to the judgment of his partner, Barker, who had agreed to the arbitration, and decided to accept the award. After the arbitration decision on October 29, 1928, petitioner asked Van Iderstine if he could let him have his money and Van Iderstine replied that he could not, but that petitioner should call him at the end of the week. On Friday, November 2, 1928, petitioner called Van Iderstine on the telephone and asked if he could have his money and was again told that he could not. Petitioner then669 said "I need money; let me have $75,000; you can do that with no more work than drawing a check." Van Iderstine replied that he would let him have it; that petitioner should come and get it; and that he would leave it with his secretary. On the same day, petitioner went to the office and was given a check for $75,000. While at the office Van Iderstine said to petitioner, "By the way, what will I do with this $50,000 coming from Bonynge & Barker to you?" Petitioner said, "Why not buy government bonds with it", to which Van Iderstine replied "That might be a good idea", and went on out. On or about November 14, 1928, petitioner received a letter from Van Iderstine, the body of which was as follows: Pursuant to your instructions I have invested in PriceAmountCom'nNet Amount50 M U.S. Treasury 3 7/8%99 29/32$49953.13$15.62$49968.75March 15, 1929Int. M & S 15 (2 months)322.92$50291.67I have placed these certificates in the Custody Department of the Fulton Trust Company in my name, and I shall leave them there subject to your further instructions. 769 On either November 26 or November 27, 1928, petitioner670 again called Van Iderstine on the telephone and asked if it would not be possible to "settle" with him, and Van Iderstine said, "No, it is a short week, and I have lots to do." The next and last time petitioner talked to Van Iderstine during 1928 was about a week before Christmas. Petitioner called him on the telephone and again asked him if he would not "settle" with him, but Van Iderstine said he could not do it. Petitioner then asked if he could have a little money to take him over the holidays and Van Iderstine inquired if $10,000 would be enough. Petitioner said it would and Van Iderstine said he would send him a check for that amount, which he did and which petitioner received during 1928. On January 8, 1929, petitioner called Van Iderstine on the telephone and asked if he would "settle" with him, and Van Iderstine told him "yes" and for him to come to Van Iderstine's office. When petitioner arrived, the secretary handed him a check for $90,251.90 and told him that Van Iderstine had been unexpectedly called away and that it would be impossible to deliver the bonds to petitioner at that time. On January 18, 1929, petitioner again called Van Iderstine on the telephone671 and asked him if he could let him have the bonds and settle up the transaction. Van Iderstine said to meet him at the Fulton Trust Co., which petitioner did, and at that time Van Iderstine handed petitioner the Treasury certificates of the par value of $50,000. At or about this time, petitioner also received from Van Iderstine a statement of his account, which was as follows: Due A. S. Barnes - 1/2 of$351,094.26175,547.13Add $50,000 due from Bonynge & Barker50,000.00$225,547.13Paid A. S. BarnesNov. 2 - Check$75,000.0015 - Liberty Bonds50,295.23Dec. 14 - Check10,000.00Jan. 8 - Check to balance90,251.90$225,547.13After the arbitration hearing and before the close of the year Van Iderstine paid Bonynge & Barker by three separate checks the total amount of $125,547.13 as representing their share of the arbitration award. Van Iderstine received no compensation for his services in arbitrating except about $500 interest, which was credited to Van Iderstine's account at the bank while the fund in dispute was there deposited. 770 Petitioner reported as income in his 1928 and 1929 income tax returns fees from the Monell estate672 in the amounts of $85,000 and $90,251.90, respectively. He did not report as income in any year the $50,000 Treasury certificates received by him because of that clause in the arbitration award which reads as follows: "The amount of said reimbursement is fixed at $50,000 and said Bonynge & Barker are to pay said Barnes as a reimbursement to his expenditures said amount and without claiming said amount so paid as a deduction on account of income tax; either Federal or State." Bonynge & Barker did not report as income in any year that portion of the total fee amounting to $50,000 which was paid to petitioner under the award as a so-called capital reimbursement. The respondent determined that petitioner constructively received in 1928 the $50,295.23 invested in Treasury certificates and the $90,251.90 paid him by check on January 8, 1929; that petitioner should have reported both of these amounts in his income tax return for 1928 in addition to the $85,000 which he did report; and that because of his failure to report these two items his return for 1928 was a false or fraudulent return with intent to evade tax. Petitioner did not file a false or fraudulent return for 1928 with673 intent to evade tax. OPINION. BLACK: The principal question in this proceeding is whether petitioner filed a false or fraudulent return for 1928 with intent to evade tax. If this question is decided in petitioner's favor, we need go no further as any deficiency that might be due would be barred by the statute of limitations for the reason that the exceptions to the statute provided for in section 276 of the Revenue Act of 1928 would not be applicable and the deficiency notice was not mailed to petitioner within the two-year period of limitations provided for in section 275(a) of the same act. Congress has provided (sec. 601, Revenue Act of 1928) that "in any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax * * the burden of proof in respect of such issue shall be upon the Commissioner." In , the Circuit Court of Appeals for the Sixth Circuit said that "* * * it is a fundamental rule of judicial procedure that fraud can not be lightly inferred but must be established by clear and convincing proof." In 674 ; affd., , the Board said: * * A charge of fraud has always been regarded as a serious matter in the law. Not only is it never presumed, but the ordinary preponderance of evidence is not sufficient to establish such a charge. It must be proved by clear and convincing evidence. ; ; Budd v. Commissioner, supra.771 The respondent contends (1) that the entire amount of $225,547.13 awarded to petitioner by the arbitration award was income to petitioner in 1928, $85,000 being actually received and $140,547.13 being constructively received; (2) that petitioner knew that his tax would be greater, due to the surtax brackets, if the full fee were reported in one year than if it were divided between two years, and, knowing this, caused Van Iderstine to delay paying him the full $225,547.13 during 1928; and, (3) that in any event, petitioner's failure to report as income in any year the amount of $50,295.23 invested in Treasury certificates is sufficient evidence to justify a finding of fraud. 675 We think that, notwithstanding the $50,295.23 item was denominated in the award as a reimbursement to petitioner for capital expenditures, it should have been included in petitioner's gross income for either 1928 or 1929. This case, in some of its features, is like that of . Whether the $50,295.23 item should have been included in income for 1928 as the Commissioner contends, or in 1929 when petitioner actually received the Treasury certificates into which the $50,000 fund had been converted, we need not decide. We do not have the year 1929 before us in this proceeding and therefore have no jurisdiction as to that year, and we are not called upon to decide that it should be included in 1928 income unless we hold that petitioner's income tax return for 1928 was false or fraudulent with intent to evade tax. If it was not, then the statute of limitations has barred any deficiency. The arbitration award specifically stated that "The amount of said reimbursement is fixed at $50,000 and said Bonynge & Barket are to pay to said Barnes as a reimbursement to his expenditure said amount and without claiming said amount, so paid, as a deduction676 on account of income tax, either Federal or State." We do not think such a statement as above quoted would make the $50,000 item income to Bonynge & Barker (because they never received it); neither do we think it would relieve petitioner from including such a payment in gross income when he received it. We would so hold if we reached that question for decision. But notwithstanding we would so hold, we can not hold that its omission from income in 1928 establishes that petitioner filed a false and fraudulent return for that year with intent to evade tax. Even if we assume, as the Commissioner contends, that petitioner constructively received the bonds in 1928 and should have included them in his gross income for that year, we can not hold that his failure to include them was due to a fraudulent intent. Petitioner seems to have believed in good faith that, because of the recitations in the arbitration award, this $50,000 in question would be returned as income by Bonynge & Barker; that they and 772 not he would have to return it and pay tax on it. Petitioner testified that he did not know until 1934 that Bonynge and Barker had not returned the $50,000 in question as677 a part of their income. In this state of facts we can not find that petitioner's omission of this $50,000 item from his income tax return for 1928 was due to fraud with intent to evade the tax. As to the item of $90,251.90, we think there is still less ground for holding that it was fraudulently omitted from petitioner's income tax return for 1928. Cf. This item was not actually received in cash by petitioner until 1929 and, only by holding that it was withheld by Van Iderstine at the connivance of petitioner, as respondent alleges, could we hold that it was income to petitioner and was knowingly omitted from his income tax return for 1928 in order to lessen his income tax for that year. Van Iderstine was dead at the time of the hearing and did not testify. There is no evidence whatever that petitioner caused Van Iderstine to delay turning over to him any portion of the Monell fee. In fact, the evidence that was introduced shows that the opposite was true. Petitioner appears to have made every effort within reason to obtain his share of the fee as soon as possible. Petitioner was put on the witness stand by the respondent and testified678 that from October 29, 1928, until he had actually received his entire fee he continually endeavored to settle with Van Iderstine; that Van Iderstine "always had a reason" why he would not settle but "would not give it to me"; that at no time had he ever asked Van Iderstine not to pay him until after the first of January; that when he filed his return for 1928 he did not know what his income would be for 1929; that the delay in payment was not in any way brought about by himself; that up until January 8, 1929, he did not believe he could get the Treasury certificates simply by calling for them; that when he asked Van Iderstine to "settle" with him, he considered that an indirect request for the delivery of the certificates as well as the balance of the cash; that he knew very little about income taxation; that he never considered himself fit for that type of work as he had no accounting mind; and that he never took an income tax case in his life. After a careful consideration of all of the evidence, we hold that the respondent has not sustained his burden of showing fraud. For us to hold that petitioner's income tax return for 1928 was filed falsely or fraudulently with intent679 to evade tax would have to be based too much on inference. We would have to infer that Van Iderstine, if he were living, would testify in a way which would support respondent's theory of the case. This we may not do. 773 It is therefore our opinion, and we have so found in our findings of fact, that petitioner did not file a false or fraudulent return for 1928 with intent to evade tax. This finding makes it unnecessary for us to decide whether any part of the $140,547.13 was constructively received by petitioner during the taxable year 1928, for the reason that any deficiency that might be due would be barred by the statute of limitations. Sec. 276(a), Revenue Act of 1928. Reviewed by the Board. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621103/	WILLIE HOLLESEN AND CAROLYN HOLLESEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHollesen v. CommissionerDocket No. 8803-76.United States Tax CourtT.C. Memo 1979-269; 1979 Tax Ct. Memo LEXIS 251; 38 T.C.M. (CCH) 1058; T.C.M. (RIA) 79269; July 23, 1979, Filed 251 Held, (1) petitioners are not engaged in the leasing of their motor home for profit as provided by sec. 183, I.R.C. 1954; (2) petitioners' automobile expense and meals and lodging deductions determined; (3) sec. 6653(a), I.R.C. 1954, penalty not imposed. Noran L. Davis, for the petitioners. J. Anthony Hoefer, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, 253 Judge: Respondent determined the following deficiencies in petitioners' Federal income tax: Additions to TaxYearDeficiencySec. 6653(a)1973$1,568.43$78.421974$1,541.96$77.10The issues for decision are: (1) Whether petitioners held their motor home primarily for profit and thereby are entitled to a depreciation allowance and business expense deductions in excess of the income earned from leasing it; (2) whether petitioners have sufficiently substantiated the business expense deductions they claimed on their 1973 and 1974 returns for automobile expenses and for meals and lodging; and (3) whether any part of the underpayments of tax for the taxable years 1973 and 1974 was due to petitioners' negligence or intentional disregard of the rules and regulations. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Willie (hereinafter petitioner) and Carolyn Hollesen, husband and wife, resided in Council Bluffs, Iowa, when they timely filed their 1973 and 1974 joint Federal income tax returns with the Internal Revenue Service Center at Kansas City, Missouri, and when they filed their petition in this case. 254 They were cash basis taxpayers. Subsequent to the taxable years at issue, the Hollesens were divorced. Petitioner is a self-employed long distance truck driver who owns his own tractor and trailer which has been leased to Little Audrey Transportation Company since 1968. He made weekly runs from Council Bluffs, Iowa, to Los Angeles, California, during 1973 and 1974. He routinely left Council Bluffs on Friday nights and made his deliveries to Los Angeles on Sunday mornings. After loading his trailer in Salinas, California, late on Monday afternoon, he would make his delivery in Des Moines, Iowa, either late on Tuesday nights or early on Wednesday mornings before returning to his home in Council Bluffs on Thursday. Due to his schedule, petitioner was generally home only on Thursday nights and during the day on Fridays. In 1973 and 1974, he deducted $2,880 and $3,440, respectively, as business expenses he incurred for his meals and lodging while on these runs. On Fridays, petitioner spent the day maintaining and making repairs on his tractor and trailer. He used one of his automobiles for obtaining parts and servicing materials. In 1973 and 1974, he deducted $1,440 and $1,800, 255 respectively, for automobile expenses resulting from these trips. In the Fall of 1972, the Hollesens purchased a used 24-foot Winnebago motor home. Title to the motor home was in the names of both petitioner and his wife. Both parties were licensed to drive the motor home. They obtained insurance for the motor home with coverage appropriate for the purpose of commercial leasing. Petitioner's wife, Carolyn, had commercial leases drawn up for leasing the motor home so that the Hollesens could earn extra income. Her efforts in leasing the motor home included informing the Winnebago Company that the vehicle was available for rental and placing a "For Rent" sign in the vehicle's front window. The motor home was parked in front of the Hollesens' residence which was located on a heavily traveled highway. Motorists could see the vehicle and the "For Rent" sign posted in its front window approximately 300 feet from the property. Carolyn handled the rentals of the motor home exclusively by dealing with the renters and by handling the execution of the lease contracts. The rental rate was $40 per day plus $.10 per mile or $200 per week plus $.10 per mile. The gross rental receipts256 from the motor home shown on the Hollesens' returns were as follows: YearGross Rents1973 $2001974 $555The business expense and depreciation deductions claimed by them with respect to the motor home exceeded their receipts from the vehicle during the taxable years at issue. On October 5, 1973, the odometer of the motor home registered mileage of 3,137 and on November 22, 1974, it registered mileage of 34,160. Between October 5, 1973 and November 22, 1974, the motor home was driven 31,023 miles. The rental contracts covering the leasing of the motor home show that during 1973 and 1974, based on the vehicle's odometer readings entered on the contracts, renters used it as follows: Date of ContractMiles Driven3-16-73unknown10-5-735297-3-745198-11-742,1659-12-7454211-1-741,34311-22-74134Total5,232Claiming the leasing of the motor home was not an activity engaged in for profit, respondent denied petitioner's depreciation deductions and reduced his business expense deductions to the extent they exceeded income earned from such leasing activity during the respective years of 1973 and 1974. He further denied257 petitioner's deductions for automobile expenses for failure of substantiation and reduced the meals and lodging deductions to $6.50 per day on the same grounds. Finally, respondent imposed a penalty on the underpayment for negligence or intentional disregard of the rules and regulations. OPINION We must determine the following issues: (1) whether the Hollesens were holding their motor home for a profit and thereby are entitled to a depreciation allowance and to business expense deductions in excess of the income derived from the leasing activity, (2) whether they are entitled to deductions for automobile expenses and for meals and lodging in excess of that which respondent has allowed in his notice of deficiency; and (3) whether the 5 percent penalty provided by section 6653(a)1 should be imposed on their underpayment of tax. Issue 1. Activity Engaged in For ProfitPetitioner contends that he purchased the motor home with the intent of leasing ic and making a profit. He claims, accordingly, that he is entitled to a depreciation allowance and to deductions for the expenses arising from258 the leasing of the motor home even though these deductions exceeded the income derived from such leasing activity. Respondent argues that the evidence does not support petitioner's contention and therefore he is entitled to neither a depreciation allowance nor deductions in excess of the income derived from his leasing the motor home as provided by section 183. We agree with respondent. Section 162(a) provides a deduction for ordinary and necessary expenses paid or incurred in carrying on a trade or business. Section 212(2) permits a deduction for all ordinary and necessary expenses paid or incurred for management, conservation, or maintenance of propery held for production of income. Depreciation deductions are permitted under section 167 for property held for the production of income or for use in a trade or business. No deduction is permitted under any of these provisions unless the primary intention and motivation in holding the property was to make a profit. Jasionowski v. Commissioner,66 T.C. 312">66 T.C. 312, 321 (1976); Johnson v. Commissioner,59 T.C. 791">59 T.C. 791, 814 (1973);259 Adirondack League Club v. Commissioner,55 T.C. 796">55 T.C. 796, 809 (1971). After 1969, an activity not engaged in for profit is governed by section 183. Section 183(c) defines an "activity not engaged in for profit" as an activity other than one for which deductions are allowable under section 162 or section 212(1) or (2).When an activity is not engaged in for profit, section 183(b) allows deductions, which are allowable without regard to whether an activity is engaged in for profit, but only to the extent of gross income from the activity. The existence of an overriding profit motive is a question of fact and must be determined on the basis of the facts and circumstances in each case. The test under section 183 is not whether the taxpayer's intention and expectation of profit is reasonable but whether such intention and expectation is bona fide. Golanty v. Commissioner,72 T.C. No. 39">72 T.C. No. 39 (1979); Benz v. Commissioner,63 T.C. 375">63 T.C. 375, 383 (1974); Bessenyey v. Commissioner,45 T.C. 261">45 T.C. 261, 274 (1965), affd. 379 F. 2d 252 (2d Cir. 1967),260 cert. denied 389 U.S. 931">389 U.S. 931 (1967). The Commissioner has promulgated regulations under section 183 which set forth nine separate factors to consider in making a profit-motive determination. Sec. 1.183-2(b)(1)-(9), Income Tax Regs. In applying an objective standard, however, these enumerated factors are neither exclusive nor necessarily controlling. Petitioner has the burden of proving the requisite profit motive. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioner has not met this burden. The controlling factor in arriving at our decision was the mileage attributed to the leasing activity. The leases, which petitioner submitted into evidence, show that of the 31,023 miles registered on the odometer between October 5, 1973 and November 22, 1974, only 5,232 miles were directly related to petitioner's leasing activity. Petitioner claims that he was unable to find in his house any other leases from the period at issue. He testified that his former wife had been responsible for the bookkeeping, thereby suggesting that there were more leases executed in 1973 and 1974 than those which were261 submitted.No other evidence was offered, however, to show whether the 25,791 unaccounted for miles were attributable to profit-making activity or to the Hollesens' personal use of the motor home. Petitioner did disclose that he had a heavy work schedule leaving him little time for recreation. However, petitioner's wife had a license to drive the motor home and no evidence was presented showing that the unaccounted for miles were not attributable to her personal use of the vehicle. Given that only 5,232 miles of the 31,023 miles registered on the odometer of the motor home over a period in excess of a year during the taxable years at issue was attributable to the leasing activity, we are unable to find that petitioner held the motor home primarily for profit. The Hollesens appeared to have leased the motor home merely to reduce the costs of their personal recreational use of the vehicle. Since petitioner was not holding the motor home primarily for profit, he is only entitled to the deductions respondent allowed to the extent of the $200 and $555 petitioner earned from leasing the motor home in 1973 and 1974, respectively. For the same reason, he is not entitled to a depreciation262 allowance. Issue 2. Automobile and Meals and Lodging Expense DeductionsRespondent has denied petitioner's automobile expense deductions in the amounts of $1,440 and $1,800 for 1973 and 1974, respectively, due to petitioner's failure to substantiate them. Respondent has also reduced petitioner's deductions for meals and lodging while away from home from $12 and $16 per day for 1973 and 1974, respectively, to $6.50 per day for both years. Petitioner claims respondent's disallowance of the deductions was arbitrary and capricious and that, since none of the claimed expenditures for meals and lodging were more than $25, documentary evidence is not required. Section 162(a) allows a deduction for ordinary and necessary expenses paid during the taxable year in carrying on a trade or business. Petitioner has the burden of proving that the amount of automobile expenses deducted was paid in carrying on a trade or business. Section 274(d) provides that deductions are not allowed under section 162 for any travel expense, including meals and lodging while away from home, unless the expenses263 are substantiated by records or sufficient evidence corroborating the taxpayer's statement of the amount, time, place and business purpose of the expense. Adequate substantiation means an account book, diary, statement of expense or similar record, and documentary evidence, which, in combination, are sufficient to establish each item of expenditure. Sec. 1.274-5(c), Income Tax Regs. These regulations have been upheld as valid. Sanford v. Commissioner,50 T.C. 823">50 T.C. 823 (1968), affd. per curiam 412 F. 2d 201 (2d Cir. 1969). Petitioner was engaged in the truck driving business. He testified that he used one of his automobiles on a weekly basis to obtain parts and servicing materials for maintaining his tractor and trailer. Petitioner was a credible and forthright witness. We believe petitioner's deductions for autombile expenses should not be disallowed entirely. He is entitled to some allowance for these expenses. The record is vague as to distances and petitioner kept no records. Therefore, it is necessary under the rule of Cohan v. Commissioner,39 F. 2d 540 (2d Cir. 1930), to make a close approximation,264 bearing heavily against petitioner "whose inexactitudes are of his own making." Applying the rule, we conclude that petitioner is entitled to deductions of $720 and $900 for automobile expenses in 1973 and 1974, respectively. As to the deductions for meals and lodging, however, we must sustain the respondent. Petitioner kept no records with respect to the cost of his meals and lodging in 1973 and 1974. Contrary to petitioner's argument, the regulations do not dispense with the recordkeeping requirement for expenditures of less than $25 except for the need of keeping receipts. Section 1.274-5(c)(2)(iii)(b), Income Tax Regs. Petitioner testified that he spent about $70 for food on his weekly round trips to the west coast. Petitioner's uncorroborated testimony, however, is insufficient for us to allow him deductions for meals and lodging. Absent adequate substantiation, we are without authority to make some approximation under the so-called Cohan rule. See Sanford v. Commissioner,supra.Petitioner is entitled to deduct only the $6.50265 per day, or $1,560 and $1,397.50 for 1973 and 1974, respectively, allowed by respondent in his notice of deficiency. Issue 3. Negligence Penalty. Respondent imposed the 5 percent negligence penalty under section 6653(a) for petitioner's understatement of income. He claims petitioner was negligent in failing to keep adequate records with respect to business expense deductions. Petitioner has the burden to establish that the underpayment was not "due to negligence or intentional disregard of rules and regulations." Enoch v. Commissioner,57 T.C. 781">57 T.C. 781, 802 (1972); Courtney v. Commissioner,28 T.C. 658">28 T.C. 658, 669 (1957). On the basis of this record, we believe that petitioner's errors were made due to an honest misunderstanding of the facts and the law. See Wesley Heat Treating Co. v. Commissioner,30 T.C. 10">30 T.C. 10, 26 (1958); Wofford v. Commissioner,5 T.C. 1152">5 T.C. 1152, 1166-67 (1945). While good faith does not always negate negligence, American Properties, Inc. v. Commissioner,28 T.C. 1100">28 T.C. 1100, 1116 (1957), it is*266 our opinion that no part of petitioner's deficiencies for 1973 and 1974 was due to negligence or intentional disregard of rules and regulations. Accordingly, respondent should not have imposed the penalty. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621104/	Estate of Clothilde K. Lueders, Deceased, City Bank Farmers Trust Company, and Frederick J. Lueders, Executors, Petitioners, v. Commissioner of Internal Revenue, RespondentLueders v. CommissionerDocket No. 5884United States Tax Court6 T.C. 587; 1946 U.S. Tax Ct. LEXIS 251; March 27, 1946, Promulgated 251 Decision will be entered under Jule 50In 1930 the husband of decedent created a trust under which decedent was to receive income for life and had the power to terminate the trust and take the corpus. In 1931 decedent created a trust, with identical terms, giving her husband the income for life and the right to terminate the trust and take the corpus. Shortly thereafter he terminated the trust and took the corpus. It is held that the value at the date of decedent's death of the trust created by her husband is includible in her gross estate under section 811 (d) of the Internal Revenue Code, under the doctrine of Lehman v. Commissioner, 109 Fed. (2d) 99; certiorari denied, 310 U.S. 637">310 U.S. 637. Walter E. Cooper, Esq., for the petitioners.Robert S. Garnett, Esq., and Albert H. Monacelli, Esq., for the respondent. Harron, Judge. Smith and Van Fossan, JJ., dissent. Murdock, J., dissenting. Leech and Tyson, JJ., agree with this dissent. HARRON 587 Respondent determined a deficiency in estate tax in the amount of $ 123,053.33. The question is whether there should be included in the gross estate of the decedent, Clothilde K. Lueders, under section 811 (a), (c), or (d) of the Internal Revenue Code, the value on the date of decedent's death of the corpus of a trust which was created by her husband during his lifetime. The value of that trust at the date of decedent's death was $ 363,988.55. At the hearing respondent stated that this value is the value to be included in decedent's estate under his contentions.The parties have submitted a stipulation of facts, together with exhibits.FINDINGS OF FACT. 253 The facts are found as stipulated.The decedent, Clothilde K. Lueders, died testate on March 29, 1942, a resident of Summit, Union County, New Jersey. Her last will was duly admitted to probate by the surrogate of Union County on 588 April 13, 1942. Petitioners are the duly appointed and acting executors of the decedent's estate.In determining the amount of the deficiency, respondent has not allowed the executors any credit for payment of state inheritance and estate taxes. He stated in the notice of deficiency that the deficiency in estate tax would be reduced to $ 106,920.61 upon proof of payment of state taxes.Frederick G. Lueders, the husband of the decedent, died on May 4, 1933, at the age of 76 years. He was born on February 4, 1857. The decedent was born on September 3, 1866. She died at the age of 75 years.From February 1930 until his death, Frederick G. Lueders was chairman of the board of directors of George Lueders & Co., a New York corporation, engaged in the business of distilling, manufacturing, and dealing in essential oils and aromatic chemicals. Frederick G. Lueders owned 1,200 shares out of a total of 2,000 shares of the common stock of the company, 254 and he was in control. Prior to being chairman of the board of directors, he had been president of the company for many years. Decedent owned 450 shares of the preferred stock of the company, which had no voting rights. She did not own any of the common stock.On July 2, 1930, when he was 73 years of age, Frederick G. Lueders executed a trust indenture under which he created a trust, naming himself and the City Bank Farmers Trust Co. as trustees. Under the terms of the trust the trustees were to pay the income to Clothilde K. Lueders during her lifetime. Upon her death the trustees were to divide the principal and to hold it in three separate trusts, one for each of the children of Frederick G. Lueders. All of the provisions of the trust relating to the disposition of the income and principal of the trust fund, covered by article 1, were made subject to articles 2 and 3 of the trust indenture. Article 2 gave Clothilde K. Lueders the right to amend the trust and to terminate the trust. Article 2 provides as follows:At any time and from time to time so long as my said wife, Clothilde K. Lueders, shall be living, she shall have the right, by an instrument in writing, signed 255 and acknowledged by her like a conveyance of real property entitled to record in New York, and delivered to my said Trustees during her life, to amend this trust in any respect whatsoever and to terminate the same as to the whole or any part thereof, and in the event of any such termination my said Trustees shall transfer, pay over and deliver to my said wife such part, or the whole, as the case may be, of the principal of the trust fund, as to which the trust is so terminated.Article 3 provides in part as follows:* * * my said wife shall have the power by an instrument in writing, signed and acknowledged by her like a conveyance of real property, entitled to 589 record in New York, and delivered to my said Trustees during her life, to direct my said Trustees to continue to hold the principal of the trust fund undivided after her death for such period, but in no event exceeding twenty-one years after the death of the last survivor of my said wife and all our issue now living, as my said wife may specify in such written instrument, and during such period as she may so specify, to pay the net income from said trust fund to such of her husband and/or her issue her surviving, and256 in such proportions, as she may direct in such written instrument. In the event that my said wife shall exercise the power in this Article "3" of this Agreement above conferred upon her, then during the period specified by her in such written instrument, the principal of the trust fund shall be held undivided and the income thereof shall be disposed of as directed in such instrument instead of as in Article "1" hereinabove provided; and upon the termination of the period so specified by her the principal of the trust fund then in the hands of my said Trustees shall be disposed of as in Article "1" of this Agreement above provided, in like manner as if my said wife had died immediately after the termination of such period.The trust indenture provided, further, that if at any time during the life of Clothilde K. Lueders there should be no individual cotrustee acting with the trust company, then she should have the power to appoint, by a written instrument, an individual to act as cotrustee with the trust company.The trust indenture executed by Frederick G. Lueders on July 2, 1930, is incorporated herein by reference.On July 2, 1930, Frederick G. Lueders irrevocably transferred to257 the trustees under the trust created on the same day stocks of various corporations and bonds which had a fair market value on that date of approximately $ 640,000.Although Clothilde K. Lueders had the power to terminate the above trust and take over the property in her own right, she did not exercise the power, and the trust was in existence at the date of her death. The corpus had a value of $ 363,988.55 on that date.From the time of the creation of the above trust until his death, Frederick G. Lueders continued to reside with his wife, the decedent, in their home at Summit, New Jersey. During this period their mode of living continued on the same standards as existed prior to the creation of the trust.As a result of his creation of the trust, Frederick G. Lueders was left without any assets except his salary, which was $ 9,250 in 1930 and $ 8,025 in 1931.On October 21, 1931, about 15 months after July 2, 1930, Clothilde K. Lueders created a trust for the benefit of her husband, naming him and the City Bank Farmers Trust Co. as trustees. She transferred to the trustees irrevocably under her trust stocks of various corporations which belonged to her in her own right. They258 had a fair market value of approximately $ 349,200 on October 21, 1931.Under this trust, the decedent's husband was to receive the income 590 of the trust during his life, and upon his death the principal was to be held in trust for the children in the same manner as was specified in the trust of July 2, 1930. Also, Frederick G. Lueders was given the right to amend and to terminate the trust in whole or in part, and in the event of such termination the trustees were to pay the principal of the trust fund to him. Also, he was given the right to direct the trustees, by a written instrument, to retain the principal of the trust for a limited number of years after his death. The trust indenture dated October 21, 1931, is incorporated herein by reference.The terms of the trust indenture, dated October 21, 1931, are identical with the terms of the trust executed on July 2, 1930, with a few immaterial exceptions. Clothilde K. Lueders did not name herself as a cotrustee of the trust which she created. Both of the trust indentures dated July 2, 1930, and October 21, 1931, were drafted by the same firm of attorneys.On October 21, 1931, the value of the corpus of the trust of July259 2, 1930, created by Frederick G. Lueders, was approximately $ 373,000, and on March 29, 1942, the date of the death of the decedent, the value of the corpus of that trust was $ 363,988.55.The transfers in trust by the decedent October 21, 1931, were not made in contemplation of death.The creation of the trust of October 21, 1931, by the decedent, did not result in her impoverishment.None of the securities which were transferred by the decedent, Clothilde K. Lueders, to the trustees under the trust instrument of October 21, 1931, were at any time a part of the securities comprising the corpus of the trust of July 2, 1930, created by Frederick G. Lueders.On November 17, 1931, Frederick G. Lueders executed and delivered to the trustees of the trust created by the decedent on October 21, 1931, an instrument in writing dated November 17, 1931, terminating the trust of October 21, 1931, and the principal of that trust was paid over to Frederick G. Lueders forthwith. The instrument dated November 17, 1931, is incorporated herein by reference.On July 2, 1930, and October 21, 1931, the three children of Frederick and Clothilde Lueders, mentioned in their respective trust indentures, 260 were living; and on both of the above dates two grandchildren were living.The property which Frederick G. Lueders acquired from the trustees of the trust of October 21, 1931, upon his exercise of the power to terminate that trust, was part of his general estate at the time of his death.For many years prior to October 21, 1931, George Lueders & Co.591 had been borrowing substantial sums of money from banks in New York, and in the months of August, September, and October of 1931 the company continued such practice. The reason which Frederick G. Lueders gave to his counsel for terminating the trust of October 21, 1931, created by the decedent, was that it had become necessary for George Lueders & Co. to make arrangements for additional lines of credit in connection with its business and in order that the company might secure credit he had to guarantee, personally, the bank loans of the company and give the lending banks a satisfactory statement of his own financial condition, which he was unable to do without terminating the trust.OPINION.Respondent contends that the value of the corpus of the Frederick Lueders trust is includible in the estate of the decedent under section261 811 (d) of the Internal Revenue Code under the doctrine of Lehman v. Commissioner, 109 Fed. (2d) 99; certiorari denied, 310 U.S. 637">310 U.S. 637.Section 811 (d) provides that the value of the gross estate of a decedent shall be determined by including the value at the date of his death of all property of which he has made a transfer "where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, * " There can be no doubt that the enjoyment of the property in the trust in question was subject to the exercise of a power to alter, amend, or revoke the trust by the decedent at the time of her death. The only question to be decided is whether the decedent can be deemed to have been the grantor of the trust. "A person who furnishes the consideration for the creation of a trust is the settlor even though in form the trust is created by another." Scott on Trusts, sec. 156.3; Lehman v. Commissioner, supra;Blackman v. United States, 48 Fed. Supp. 362, 368.262 The Frederick Lueders trust was in existence at the time of decedent's death and under the trust the decedent had the right to revoke the trust, and upon such revocation the decedent had the right to receive the entire corpus. The Frederick Lueders trust was created on July 2, 1930, for the benefit of the decedent. Frederick depleted his assets entirely by transferring all of his assets to the trust. The decedent did not create a cross-trust at or about the same time that the above trust was created, but she created a trust having identical terms for the benefit of Frederick in October of 1931, to which she transferred property having a value almost equal to the then value 592 of the property in the Frederick Lueders trust. Decedent transferred in trust property having a value of $ 349,200. At that time the property in Frederick's trust had a value of $ 373,000.These facts compel the conclusion that the decedent furnished consideration for the trust which was in existence at the date of her death. She must be deemed to have been the settlor of that trust, even though in form, the settlor was her husband. This conclusion is impelled by the effects of the transactions 263 of the decedent and her husband relating to their respective assets. The two trusts which were created were reciprocal upon the creation in 1931 of the second trust. This is because, under a practical view of the facts, the creation of a trust by the decedent in 1931 made it feasible for the 1930 trust to be continued in existence. Furthermore, the circumstances strongly indicate that Frederick Lueders had some assurance in 1930, when he transferred all of his assets to a trust, that the decedent would not fail to provide him with some assets, in return, if necessary. She did this a little over one year thereafter. It became a matter of form on October 21, 1931, that the trust which respondent has included in the decedent's estate was dated July 2, 1930, in view of the situation which developed in October and November of 1931. The evidence clearly shows that Frederick became in need of assets, and the decedent was the source for obtaining them. The situation was such that there was surely a practical need for the decedent's terminating the 1930 trust and returning the property to her husband. That she elected not to do so is a fact which can not be minimized. That the 1930264 trust continued in existence after October 21, 1931, and at the same time, Frederick Lueders received needed property, is important in the determination of the question.In October of 1931 the decedent could not have been acting independently, and we do not believe that her creation of a trust for the benefit of her husband was entirely unrelated to his termination of that trust within 30 days thereafter. Also, we do not believe that the amount of property which the decedent took out of her separate estate and transferred to a trust for her husband had no relation to the then value of the corpus of the trust created by her husband. Furthermore, a realistic view indicates that the decedent was under a moral obligation to provide her husband with assets when he became in need. It is not impossible that the decedent and her husband had some understanding, at the time he created a trust in 1930, that she would so act, if necessary. The sole source of Frederick's income was the corporation of which he was chairman of the board of directors. It became necessary for him to guarantee loans to that corporation, and for that purpose he had to have assets. Assets formerly belonging 593 265 to him were held in a trust which the decedent could terminate. When, therefore, petitioner transferred her own property to a trust for her husband, which he could terminate, instead of terminating the existing trust and returning his property to him, there was a mutual exchange of property. The property which the decedent transferred to a trust for her husband constituted a quid pro quo for the property which was allowed to remain in the existing trust. The property which the decedent transferred out of her separate estate had its equivalent on October 21, 1931, in the corpus of the 1930 trust, which the decedent had only to terminate in order to restore to herself the equivalent of that which she conveyed on the above date.Under these circumstances it is concluded that the decedent furnished consideration for the trust which was in existence at the date of her death, and that she must be regarded as the settlor of that trust. It follows that section 811 (d) is applicable and that respondent's determination must be sustained.Petitioners rely upon Estate of Gertrude Leon Royce, 46 B. T. A. 1090. In that case a single trust was involved, a trust266 created by a husband for the benefit of his wife. It is the contention of petitioners, in effect, that the subsequent steps taken by the decedent in creating a trust for the benefit of her husband are immaterial, and that the issue presented should be decided without giving consideration to all that transpired. We can not so limit our consideration of the evidence. Estate of Gertrude Leon Royce, supra, is not a case in point, under the facts before us.Decision will be entered under Jule 50MURDOCK Murdock, J., dissenting: I do not think that this case is distinguishable in principle from Estate of Gertrude Leon Royce, 46 B. T. A. 1090.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621105/	Estate of Horace G. Wetherill, Deceased, J. A. Cornett, as Administrator of the Estate of Said Horace G. Wetherill, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Horace G. Wetherill Trust -- Crocker First National Bank of San Francisco, Individually, and as Trustee of Said Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent. Board of Regents of the University of Colorado, Petitioner, v. Commissioner of Internal Revenue, RespondentWetherill v. CommissionerDocket Nos. 1275, 1276, 1277United States Tax Court4 T.C. 678; 1945 U.S. Tax Ct. LEXIS 242; January 31, 1945, Promulgated 242 Decision will be entered under Rule 50. The trust indenture executed by Horace G. Wetherill provided that following his death the net income from the trust corpus should be paid to his wife during her lifetime and upon her death to the Board of Regents of the University of Colorado. The trust instrument also provided that, if the trustor's wife should become incapacitated after his death, the trustee should use any part or all of the trust fund for her care, maintenance, and support and that, further, it should pay out of the principal any extraordinary expenses arising from injury, illness, or disability, provided his wife should state to the trustee that she had insufficient funds to provide for such extraordinary expenses. After trustor's death no part of the income or corpus was paid to his widow. Held, that the gift to the regents was capable of calculation with reasonable accuracy and deductible in computing estate taxes. Charles G. Heimerdinger, Esq., for the petitioners.T. M. Mather, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 678 The respondent determined a deficiency of $ 4,347.19 in the estate tax of the estate of Horace G. Wetherill, deceased. He also determined the same amount for assessment against the Crocker First National Bank of San Francisco as trustee and transferee and also against the Board of Regents of the University of Colorado as transferee of the property of the estate.The single issue is whether or not the amount of the bequest to the Board of Regents of the University of Colorado, a corporation duly qualified under section 812 (d) of the Internal Revenue Code, 679 is deductible from the gross estate of Horace G. Wetherill, pursuant to the provisions of that section.It is stipulated that, if the estate is liable for the deficiency in tax, each of the transferees is also liable for the tax.FINDINGS OF FACT.The244 facts were either stipulated or admitted in the pleadings, and as so stipulated and admitted they are adopted as findings of fact. The portions thereof material to the issue are as follows:Horace G. Wetherill died on January 24, 1941. At the time of his death he was a resident of Monterey County, California. The Federal estate tax return for his estate was filed with the collector of internal revenue for the first district of California. On August 24, 1942, J. A. Cornett was appointed and is the duly qualified administrator of the estate of the decedent.On or about October 29, 1940, the decedent, as trustor, made and entered into a certain trust agreement, creating an irrevocable trust, with the Crocker First National Bank of San Francisco, to which he transferred certain securities. The trust was never revoked, amended, or in anywise modified.The trust indenture provided that the decedent should receive the net income during his lifetime and, in the event he should become incapacitated, the principal should be used for his care, maintenance, and support. It also directed the trustee to pay the expenses of the trustor's last illness and funeral if such expenses were not paid245 with other funds within thirty days after his death. The trustor also directed the trustee to pay four specific donations upon the decedent's death.Articles V and VI of the trust instrument are as follows:ARTICLE V.Following the death of said Trustor and after the payments hereinbefore in Articles III and IV mentioned have been made or provided for, the Trustee shall thereafter pay all of said net income from said trust to said Trustor's wife, Nellie A. Wetherill, during her lifetime.In the event Trustor's said wife is or becomes incapacitated after the death of said Trustor, the Trustee shall pay said net income and any part, or all, of the principal of said trust fund for her care, maintenance, and support. Said Trustee shall also pay out of said principal of said trust fund for any extraordinary expenses caused by an emergency created by her injury, illness, or disability, provided Trustor's said wife states to Trustee that she has insufficient funds to provide for such extraordinary expenses. Said Trustee shall also pay from the principal of said trust the expenses of the last illness and funeral of Trustor's wife, provided they are not paid from other funds within thirty246 (30) days after her death.680 Article VI.Upon the death of the survivor of the Trustor and his said wife and after the payments hereinbefore in Articles III, IV, and V mentioned have been made or provided for, the Trustee shall distribute the entire balance and remainder of the trust estate, both principal and income, to the Board of Regents of the University of Colorado, as the same may then or thereafter be constituted, which balance and remainder, together with any additions thereafter made thereto by any person or corporation, shall be known as The Horace G. Wetherill Trust Fund and shall be held, administered, used, and distributed by the said Board of Regents as follows: * * The fund was to be used for the benefit of the Medical School of the University of Colorado. Other provisions of the trust indenture are not pertinent to the issue.The assets of the trust had a value of $ 106,373.56 at the time of the decedent's death. They were valued at $ 98,997.57 in the estate tax return, pursuant to the optional method of valuation provided in section 811 (j) of the Internal Revenue Code.At the time of the creation of the trust, and at all times since such creation, 247 the Board of Regents of the University of Colorado was, has been, and now is a corporation organized and operated exclusively for scientific and educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation.At the time of the death of Horace G. Wetherill his wife, Nellie A. Wetherill, was 79 years of age. Nellie A. Wetherill died on December 3, 1941, less than one year after the date of the death of her husband. Nellie A. Wetherill had a personal estate of her own of a value in excess of $ 100,000 at the time of the creation of the trust and at all times thereafter until the time of her death. Her estate was appraised for inheritance and estate tax purposes at about $ 110,000.In the year 1941 Nellie A. Wetherill had a net income of $ 5,075.63, exclusive of the income of the trust. The income of the trust which became distributable to her during the year 1941 amounted to approximately $ 3,000. In 1940 her net income amounted to $ 5,000. In neither the year 1940 nor the year 1941 did her living248 expenses exceed $ 5,000.Nellie A. Wetherill resided at the Forest Hill Hotel in Pacific Grove, California, from January 25 to July 25, 1941, and her lodging and meals were furnished by that hotel for $ 140 per month. On July 25, 1941, she moved to the Morgan Cottage, a nursing home in Carmel, California, in which she resided until her death on December 3, 1941. The cost, including nursing service, during her residence at the Morgan Cottage was $ 50 per week.On or about May 28, 1941, the Crocker First National Bank of San Francisco received from Nellie A. Wetherill a letter reading as follows:681 Forest Hill Hotel,Pacific Grove, Cal.Mr. L. A. McCrystleTrust Officer,Crocker 1st Nat. Bank --Dear Mr. McCrystle: Thank you for your letter of May 24th. It will be quite all right if you send me the semi-annual statement of Dr. Wetherill's Trust Fund. At present, I do not need to draw from it for myself as my private income is quite sufficient for my needs, and I am anxious to keep the fund as large as possible for the bequest to the Denver Medical School. I may even add to it myself.Thanking you for all your kindness and interest.Sincerely yours,Nellie 249 A. Wetherill.No income nor any part of the principal of the trust was ever paid to Nellie A. Wetherill during her lifetime. After her death the trustee expended the sum of $ 1,969.30 out of the trust fund in payment of expenses of her last illness and funeral.The gift to the Board of Regents of the University of Colorado was capable of calculation with reasonable accuracy.OPINION.The issue here is whether or not the estate's right to a deduction under section 812 (d) of the Internal Revenue Code is defeated by the fact that the value of the gift to the Board of Regents of the University of Colorado can not be determined because the trust instrument permitted the invasion of the trust corpus for the benefit of the decedent's wife.The question in all cases of this character must be answered by the precise phraseology of the trust or will. Generally speaking, such instruments fall into two classes: (1) Those in which the language permitting the invasion of corpus is confined to the continuation of the beneficiary's life on the same plane and according to the same standard of living as those normally existing before the gift, and (2), those in which the donor injects some element250 of additional and enlarged enjoyment of the gift, directs invasion when the beneficiary "desires" that expenditures be made for her happiness, pleasure or comfort, and enjoins on the trustee a liberal or generous use of the power so granted.In cases of the first class, the amounts needed to provide for the care and support of the life beneficiary can be ascertained with reasonable certainty, and thus such directions of the trustor do not defeat the charitable bequests. Provisions relating to illness, injury, or incapacity such as are found in the trust before us do not enlarge or extend the nature of the prescribed expenditures, but merely define and emphasize them. They are of the kind normally expected in the preservation and continuation of the beneficiary's usual mode of living.682 In the cases of the second class, the element of speculation is added, thus making the amounts spent for the life beneficiary -- and hence the amounts ultimately distributed to charity -- impossible of calculation with reasonable accuracy.For many years the leading and controlling case on this subject has been Ithaca Trust Co. v. United States, 279 U.S. 151">279 U.S. 151.251 There the trustor authorized the invasion of the corpus for any sums "that may be necessary to suitably maintain her in as much comfort as she now enjoys." There the court stated that the standard was fixed in fact and capable of being stated in definite terms of money, observing that the income for the estate was more than sufficient to maintain the widow as required and that "there was no uncertainty appreciably greater than the general uncertainty that attends human affairs." The Court held that the bequests to charity were allowable.The two leading cases in the Ninth Circuit, both decided on facts quite similar to those in the case at bar, are Commissioner v. Bank of America National Trust & Savings Association (Mayo estate), 133 Fed. (2d) 753, and Commissioner v. Wells Fargo Bank & Union Trust Co. (Hume estate), 145 Fed. (2d) 130. In both cases the court allowed the deduction.In the Mayo case the testator bequeathed certain property in trust from which the trustee was directed to pay $ 250 per month to the testator's sister and, "in case she should, by reason of accident, illness or other unusual circumstance252 so require, such additional sum or sums as in the judgment of said trustee may be necessary and reasonable under the existing conditions." The value of the gross estate was over $ 114,000. The sister was 78 years of age at the time of the decedent's death. She had property valued at $ 26,900, from which she received an annual income of about $ 900. She used her own income for her needs and deposited a large part of the monthly payments in her savings account. The court held that, although the beneficiary's activities had been greatly restricted due to impaired eyesight and advanced age, the invasion of corpus was remote and not sufficiently probable to affect the charitable bequest.In the Hume case the testator directed that the income from a trust fund should be paid to her niece for life, with charitable organizations as residuary legatees. The trustees were empowered to apply such part of the principal as they deemed reasonable to assist the niece in case of her need "on account of any sickness, accident, want or other emergency." The appraised value of the decedent's residuary estate was $ 130,000. The niece was 54 years old and owned property valued at $ 35,000. She253 received $ 300 per month from the trustees. The court there also held that the bequests to charitable institutions were deductible.683 The decisions in both the Mayo and Hume cases relied largely on the reasoning in the Ithaca Trust Co. case.The case at bar presents facts essentially the same as those in the two cases just cited. Here, none of the trust income or principal was needed by Mrs. Wetherill or paid to her. Her own estate was appraised at $ 110,000. Her living expenses, including the charges of a nursing home, did not exceed the income from her own property. The sum of almost $ 2,000 was expended by the trustees to cover the cost of her last illness and funeral, but that amount was less than the annual trust income distributable to her. Furthermore, such expenditure may have been compelled by the thirty-day limitation set in the trust indenture.The trustee is directed to pay any part of the trust principal for Mrs. Wetherill's "care, maintenance and support" and for any extraordinary expenses due to injury, illness, or disability, provided, however, that she shall state to the trustee that she has insufficient funds for such expenses. The record254 discloses that she not only did not state to the trustee that her own funds were insufficient, but she specifically refused to accept even income from the trust fund. At the same time she expressed her deep personal interest in the object of the charity, this fact making it practically unlikely that she would ever invade the corpus. Thus, the facts here bring this case directly under the rule of the Ithaca Trust Co. case, followed in the Mayo and Hume cases.The respondent argues that the recent case of Merchants National Bank of Boston v. Commissioner (Field estate), 320 U.S. 256">320 U.S. 256, decided November 15, 1943, controls the situation before us. We do not agree. In that case, which falls within the second class described above, the Court distinguished the facts of the Ithaca Trust Co. case from the facts there under consideration. The Court did not condemn or overrule the principles set forth in the Ithaca Trust Co. case, but rather approved them when applied to appropriate cases. 1 In the Hume684 case, decided October 11, 1944, the Circuit Court of Appeals for the Ninth Circuit was well aware of the effect of the255 Field case decision and quoted a part of the excerpt in the footnote. The court there said:In the instant case there is substantial evidence to support the finding of the Tax Court concerning the remoteness of invasion of the trust corpus. The taxpayer has shown with sufficient certainty that the entire amount of the principal will be available for charitable purposes in accordance with the directions in the will by a showing of the beneficiary's advanced age, frugality over a long period of time, and independent means. The Merchants National Bank case, supra, is clearly distinguishable on its facts. The opinion therein emphasizes the possibility under the will of draining corpus for the widow's happiness through the trustee's exercise of "discretion with liberality," a highly speculative element, which is absent in the instant situation. We therefore find no error.256 So here, we find that Mrs. Wetherill was a woman of advanced years, had ample independent means, lived modestly, and was conspicuously economical in the use of money. Therefore, on the authority of the Hume, Mayo, and Ithaca Trust Co. cases, we approve the petitioner's contention.Decision will be entered under Rule 50. Footnotes1. " * * Only where the conditions on which the extent of invasion of the corpus depends are fixed by reference to some readily ascertainable and reliably predictable facts do the amount which will be diverted from the charity and the present value of the bequest become adequately measurable. And, in these cases, the taxpayer has the burden of establishing that the amounts which will either be spent by the private beneficiary or reach the charity are thus accurately calculable. Cf. Bank of America Nat'l. Trust & Savings Ass'n. v. Commissioner, 9 Cir., 126 Fed. 2d 48.In this case the taxpayer could not sustain that burden. Decedent's will permitted invasion of the corpus of the trust for "the comfort, support, maintenance and/or happiness of my wife." It enjoined the trustee to be liberal in the matter, and to consider her "welfare, comfort and happiness prior to the claims of residuary beneficiaries," i. e., the charities.Under this will the extent to which the principal might be used was not restricted by a fixed standard based on the widow's prior way of life. Compare Ithaca Trust Co. v. United States, 279 U.S. 151">279 U.S. 151, 49 S. Ct. 291">49 S. Ct. 291, 73 L. Ed. 647">73 L. Ed. 647. * * * The salient fact is that the purposes for which the widow could, and, might wish to have the funds spent do not lend themselves to reliable prediction. This is not a "standard * * * fixed in fact and capable of being stated in definite terms of money." Cf. Ithaca Trust Co. v. United States, supra↩."Introducing the element of the widow's happiness and instructing the trustee to exercise its discretion with liberality to make her wishes prior to the claims of residuary beneficiaries brought into the calculation elements of speculation too large to be overcome, notwithstanding the widow's previous mode of life was modest and her own resources substantial. * * *"	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621106/	GREGORY L. DEBLOCK AND KYUNG B. DEBLOCK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDeblock v. CommissionerDocket No. 10003-75.United States Tax CourtT.C. Memo 1980-277; 1980 Tax Ct. Memo LEXIS 314; 40 T.C.M. (CCH) 774; T.C.M. (RIA) 80277; July 28, 1980, Filed; As Amended July 30, 1980 314 Petitioners lived in Portland, Oregon. From April 12, 1972, to July 1975, petitioner-husband was employed by a subcontractor at the construction site of a nuclear power plant at Rainier, Oregon, 45 miles from Portland. From July to December 1975, he was employed by another subcontractor at the same site. He drove from his Portland home to the construction site and back each working day. Held: Petitioner-husband's employment at the Rainier job site was not temporary during 1972 and 1973; his daily transportation expenses are not deductible under section 162(a). Donald H. Burnett and I. Franklin Hunsaker, for the petitioners. Jan R. Pierce, for the respondent. CHABOTMEMORANDUM OPINION CHABOT, Judge: 315 Respondent determined deficiencies in Federal individual income tax against petitioners for 1972 and 1973, in the amounts of $448.17 and $650.83, respectively. The issue for decision is whether petitioners may deduct under section 162(a) 1 automobile expenses incurred by petitioner, Gregory L. Deblock, in traveling each working day between his residence and his place of employment. 2 The case was submitted on the pleadings and a stipulation of facts; the stipulation 316 and the stipulated exhibits are incorporated herein by this reference. 3When the petition in this case was filed, petitioners, Gregory L. Deblock (hereinafter sometimes referred to as "Gregory") and Kyung B. Deblock (hereinafter sometimes referred to as "Kyung"), husband and wife, resided in Portland, Oregon. The Trojan nuclear power plant is located at Rainier, Oregon, some 45 miles from Portland, Oregon. The plant was designed to generate electricity for three area power companies (Portland General Electric, Pacific Power & Light, and Eugene Water & Electric Board). Construction on the plant was begun in February 1971 and was slated to be completed in late 1975. The initial generation of power 317 from the plant actually began on December 22, 1975. One of the primary subcontractors on the construction of the plant was Wright-Schuchart-Harbor Construction Co. (hereinafter referred to as "WSH"), of Seattle, Washington. WSH, a plumbing subcontractor, employed steamfitters on the construction of the plant from July 18 1971, through December 1975. WSH had contracts which covered the bulk of the piping work on the construction of the plant. WSH's employment at the site averaged about 300, reaching a maximum of about 550 in July 1974. About 70 percent of WSH's employees were steamfitters. Steamfitters working on the project were dispatched through Local No. 235, Steam and Marine Fitters Union (hereinafter referred to as "the Union"), and employment was on a day-to-day basis. Gregory first worked as a steamfitter at the Trojan plant site for WSH in September 1971 for less than one month, after which his employment was terminated by WSH because of a large reduction in the work force. He returned to work as a steamfitter with WSH at the Trojan plant site on April 12, 1972, and worked until July 1975. From July 1975 through December 1975, Gregory was employed at the Trojan plant 318 site by Jelco, another subcontractor. During 1972 and 1973 petitioners resided at the home they owned in Portland. Gregory made a round trip from this home to the Trojan plant site--a total distance of 92 miles--every working day during 1972 and 1973 that he was employed by WSH. In this manner, Gregory drove approximately 16,000 miles in 1972 and 20,000 miles in 1973. During 1972 and 1973, Gregory was a member of the Union. All of Gregory's employment (as well as the employment of the other steamfitters) at the Trojan plant site was subject to the Union's contracts with the Portland Plumbing, Heating, and Cooling Association (hereinafter referred to as "the Association"). The contract between the Union and the Association provided for employers to pay travel allowances for work a specified distance away from City Hall in Portland, following an almost universal pattern in construction union contracts in the Pacific Northwest. The contract between the Union and the Association set up a series of concerntric travel zones, like the rings of a target, for work in which travel allowances were paid. A ten-mile radius from City Hall in Portland (the bullseye of the target) constituted 319 the "free zone". If travel was within the Free zone, no travel allowance was provided. The Trojan plant site was 45 miles from City Hall, in zone 4. The zone 4 daily allowance was $9 per day, plus one round-trip bus fare per week. All workers under the contract received the same travel allowance regardless of where they traveled from, or whether they traveled in a car pool or bus, or whether they drove their own automobiles. The workers received no other travel or mileage allowance and they were not paid for travel time. Table 1 shows the average length of employment of WSH's employees who were working on the Trojan project in July and August of 1975: Table 1 Length ofPercentage ofEmploymentEmployees0-3 months29.63-6 months20.16-12 months24.712 months or over25.5Table 2 shows the average employment period for those who had worked as WSH employees on the Trojan project at some time but who were not so employed as of July or August 1975: Table 2 Length ofPercentage ofEmploymentEmployees0-3 months64.63-6 months13.26-12 months13.812 months or over8.5 Table 2 is based on a sampling of records. At a 90-percent confidence level, the percentages are accurate to plus or minus 4 percent. 320 During the time that construction was being carried on at the Trojan plant site, there were not enough steamfitters on the Union's rolls to handle both the regular work in the Portland area and the Trojan project work. Accordingly, many journeymen steamfitters from other parts of the Nation (hereinafter sometimes referred to as "travelers") came to work in the Portland area. These travelers were issued temporary cards by the Union while retaining membership in their home locals. At the peak of the work at the Trojan plant site, the majority of the steamfitters were travelers. Under the contract between the Union and the Association, a Union member had to have been a permanent resident within the territorital "jurisdiction" of the Union for at least two years in order to be on the "A" list. The "B" list included all other Union members residing in Oregon. The "C" list included all Union members not on the "A" list or the "B" list. With certain specified exceptions, "C" list employees were to be laid off before "B" list employees, and "B" list employees were to be laid off before "A" list employees. During the years before the Court, available housing at or near the Trojan plant 321 site was very limited. During the period 1970-1974, the county in which the Trojan plant is located (Columbia County) had a severe housing problem characterized by low vacancy rates; it was the most residentially-blighted county in or immediately adjacent to the Portland metropolitan area. Rainier, Oregon, the town closest to the Trojan plant site, had a population of 1,731 in the 1970 census. There was substantially no rental housing available in Rainier from 1971 through 1975 for the 1,400 or so workers at the Trojan plant site. Other towns relatively close to the Trojan plant site are Longview, Washington (7 miles from the site, 1970 population of 28,373), St. Helens, Oregon (14 miles from the site, 1970 population of 6,212), and Scappoose, Oregon (more than 20 miles from the site). Gregory's employers did not provide housing at the site. There was no direct public transportation from any of these towns to the Trojan plant site. A bus from Portland stopped about 1/4 mile from the Trojan plant site, but did not run at times coincident with shift changes. When Gregory returned to his employment with WSH at the Trojan plant site, on April 12, 1972, his immediate supervisor estimated 322 that work with WSH could last through early 1974. However, Gregory was not guaranteed a specified length of employment; his employment was on a day-to-day basis and was subject to termination at any time. In the early part of Gregory's employment with WSH, he worked on organizing a supply and layout building, part of which time he was a foreman. Thereafter, he worked on the plant structures themselves. At oe point in this period, he was promoted to foreman in that work, but was later demoted back to journeyman. Gregory did not look extensively in the small communities around Rainier for housing as he believed it would be impractical for his family to move in view of the small amount of available housing and the strain a move would put on the family finances. Kyung would have had to give up her employment, or commute herself without any subsistence allowance to offset the cost. During the period Gregory was employed at the Trojan plant site, he believed the construction industry in the Portland area was depressed. He believed that if the Trojan plant had not been under construction, there would have been increased competition for jobs in the Portland area. Gregory did not actively 323 seek other employment while working at the Trojan plant site. However, if fairly steady employment for which he was qualified had been available closer to Portland, he would have accepted it. He was confident that he would have become aware of any such employment opportunities through the Union if there were any. Gregory made no commitment to WSH regarding length of employment at the Trojan plant site. Gregory has lived in Portland nearly all his life, except for military service. Gregory and Kyung were married in 1961. During 1972 and 1973, petitioners owned their own home in northern Portland, paid real estate taxes there, and voted there. They have two children, both of whom attended school during the period Gregory worked at the Trojan plant site. In March of 1973, Kyung began working as a repair person at the Western Electric repair facility in Portland. She believed there were no jobs of a comparable nature available in the immediate area of the Trojan plant site and that she would have had difficulty in securing other types of employment at the Trojan plant site because of her limited ability to speak the English language. Kyung would not have been able to maintain her 324 position with Western Electric if she had taken a leave of absence from her job while Gregory worked at the Trojan plant site. Petitioners included in income the travel allowances received by Gregory from WSH--$1,617 in 1972 and $2,308 in 1973. From the amounts of these allowances, petitioners deducted $2,016 for 1972 and $2,229 for 1973, as Gregory's automobile expenses (computed on a standard mileage basis) incurred in his workday round trips between petitioners' home in Portland and Gregory's workplaces at the Trojan plant site. The parties do not dispute the includibility of the travel allowances received by Gregory from WSH (see Coombs v. Commissioner,608 F.2d 1269">608 F.2d 1269, 1272 (CA9 1979), affg. in part and revg. in part 67 T.C. 426">67 T.C. 426, 469-472 (1976)), nor do they dispute the amounts of Gregory's automobile expenses attributable to his workday round trips. The issue we face is the deductibility of these automobile expenses. Petitioners maintain that the cost of Gregory's automobile expenses for his workday round trips to the Trojan plant site are deductible under section 162(a) as ordinary and necessary expenses of Gregory's trade or business because (1) Gregory's job at the site was 325 temporary rather than indefinite, (2) the site was "at a remote location, with limited housing and public transportation", and (3) petitioners constituted a two-job family, with Kyung "working at an established job in the locality of the permanent residence". Respondent asserts that the "expenses incurred by [Gregory] in commuting" 6 are personal expenses which are not deductible because of section 262, and that Gregory's job at the site was indefinite. We agree with respondent that the automobile expenses are not deductible because they are personal expenses (sec. 262) and are not ordinary and necessary expenses of Gregory's trade or business (sec. 162(a)). Personal expenses are not deductible, unless the contrary is "expressly provided" in chapter 1 of the Internal Revenue Code of 1954 (sec. 262). 7 The transportation expenses ordinarily incurred in going between one's 326 abode and one's place of business are nondeductible personal expenses under section 262. Fausner v. Commissioner,413 U.S. 838">413 U.S. 838 (1973); Commissioner v. Flowers,326 U.S. 465">326 U.S. 465 (1946); section 1.262-1(b)(5), Income Tax Regs. Section 162(a) expressly provided for the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. 8327 Generally, for transportation expenses to be deductible as expenses incurred in pursuit of business, "[the] exigencies of business rather than the personal conveniences and necessities of the traveler must be the motivating factors." Commissioner v. Flowers,326 U.S. at 474.Petitioners concede that Gregory's transportation expenses are not deductible under section 162(a)(2) as traveling expenses while away from home, since Gregory has not satisfied the requirements of the "overnight" rule. United States v. Correll,389 U.S. 299">389 U.S. 299 (1967). See Coombs v. Commissioner,608 F.2d at 1276-1277. They assert, instead, that the amount is deductible as an ordinary and necessary business expense under the "lead-in language" of section 162(a). An exception has been developed to the general rule that "home" as used in section 162(a)(2) means the vicinity of the taxpayer's principal place of employment and not where his or her personal residence is located. Under this exception, a taxpayer's personal residence may be his or her "tax home", and the taxpayer's absence from that home may give rise to an ordinary and necessary expense of the taxpayer's trade or business if the taxpayer's principal place of business is "temporary", rather than "indefinite". See Peurifoy v. Commissioner,358 U.S. 59">358 U.S. 59, 60 (1958). This exception 328 is relevant to section 162(a)(2) cases and not to general section 162(a) cases. Turner v. Commissioner,56 T.C. 27">56 T.C. 27 (1971), vacated and remanded on respondent's motion in an unpublished order (CA2 1972). See Coombs v. Commissioner,608 F.2d at 1276, n. 3. Nevertheless, the parties herein have framed their dispute largely in terms of whether Gregory's work at the Trojan plant site during the years before the Court was "temporary", or "indefinite", within the meaning of the Peurifoy exception. Under this Peurifoy exception, a place of business is a "temporary" place of business if the employment is such that "termination within a short period could be foreseen." Albert v. Commissioner,13 T.C. 129">13 T.C. 129, 131 (1949). See Michaels v. Commissioner,53 T.C. 269">53 T.C. 269, 273 (1969). Or, viewed from the other side of the coin, an employment is for an "indefinite", "substantial", or "indeterminate" period of time if "its termination cannot be foreseen within a fixed or reasonably short period of time." Stricker v. Commissioner,54 T.C. 355">54 T.C. 355, 361 (1970), affd. 438 F.2d 1216">438 F.2d 1216 (CA6 1971). "Further, if the employment while away from home, even if temporary in its inception, becomes substantial, indefinite, 329 or indeterminate in duration, the situs of such employment for purposes of the statute becomes the taxpayer's home." Kroll v. Commissioner,49 T.C. 557">49 T.C. 557, 562 (1968). These are questions of fact ( Peurifoy v. Commissioner,358 U.S. at 60-61), as to which petitioners have the burden of proof ( Daly v. Commissioner,72 T.C. 190">72 T.C. 190, 197 (1979)). The primary factors pointing toward petitioners' position that the employment was "temporary" are the day-to-day nature of the employment with no commitment by Gregory to WSH and none by WSH to Gregory, and the shifting nature of Gregory's work (organizing a supply and layout building, working on plant structures, in each case being a foreman part of the time and a journeyman part of the time). The primary factors pointing toward respondent's position that the employment was "indefinite" are WSH's contracts covering the bulk of the piping work, Gregory's preferred status in the event of layoffs (as compared to the many "travelers" on the project), Gregory's immediate supervisor estimating the April 1972 that work with WSH could last through early 1974, Gregory's belief that it would be difficult to find work in the Portland area, and Gregory's total 330 employment at the site lasting about 44 months (39 months with WSH and five with Jelco).On balance, the evidence in this record leads us to conclude that Gregory did not foresee termination of his employment at the Trojan plant site "within a short period" at any time during the years before the Court. We conclude that the Peurifoy "temporary" rule does not apply to this employment. See McCallister v. Commissioner,70 T.C. 505">70 T.C. 505 (1978); Norwood v. Commissioner,66 T.C. 467">66 T.C. 467 (1976). See also Blatnick v. Commissioner,56 T.C. 1344">56 T.C. 1344 (1971). The Court of Appeals for the Ninth Circuit has established its own approach to the Peurifoy "temporary" exception. See Mitchell v. Commissioner, 74 T.C. (June 16, 1980). In Harvey v. Commissioner,283 F.2d 491">283 F.2d 491 (CA9 1960), revg. 32 T.C. 1368">32 T.C. 1368 (1959), the Court of Appeals set forth its rule as follows: An employee might be said to change his tax home if there is a reasonable probability known to him that he may be employed for a long period of time at his new station. What constitutes "a long period of time" varies with circumstances surrounding each case. If such be the case, it is reasonable to expect him to move his permanent abode to his new 331 station, and thus avoid the double burden that the Congress intended to mitigate. * * [283 F.2d at 495; emphasis in original.] In Wills v. Commissioner,411 F.2d 537">411 F.2d 537, 541 (CA9 1969), affg. 48 T.C. 308">48 T.C. 308 (1967), the Court of Appeals summarized the foregoing Harvey rule; it then distinguished Harvey as a holding "that the particular taxpayer had not changed his tax home [i.e., that his new employment was not temporary] where employment at the new station normally lasted only a few months." See Doyle v. Commissioner,354 F.2d 480">354 F.2d 480 (CA9 1966), affg. a Memorandum Opinion of this Court, 9 in which the Court of Appeals indicated that a 28-month period was sufficiently long to satisfy the Harvey "long period of time" test (354 F.2d at 482) and suggested that nine months might be an appropriate general dividing line (354 F.2d at 483, n. 3). See Stricker v. Commissioner,54 T.C. at 362. See also Marth v. Commissioner,342 F.2d 417">342 F.2d 417 (CA9 1965), affg. per curiam a Memorandum Opinion of this Court. 10Weighing the same elements as set forth above we conclude that, at the start of Gregory's employment in 1972, he could reasonably expect his employment 332 to last "a long period of time"; that under the Harvey test, Greory accepted employment for an indefinite time away from the place of his usual abode; and that his decision to retain his home at Portland was a personal choice, and his travel expenses between Portland and the Trojan plant site are not deductible. 11Petitioners' primary reliance on our opinion in Norwood v. Commissioner,supra, is misplaced. When Gregory returned to work for WSH in April 1972, he was in a position similar to that faced by Mr. Norwood when the latter was kept on as a foreman after the completion of the latter's first, five-month, 333 job. See Norwood v. Commissioner,66 T.C. at 470, and the cases cited therein. The fact that Kyung secured outside employment in Portland in 1973 does not affect the deductibility of Gregory's expenses for 1972 or 1973. Mitchell v. Commissioner, 74 T.C. at ; Daly v. Commissioner,72 T.C. at 196; Foote v. Commissioner,67 T.C. 1">67 T.C. 1, 6-7 (1976); Tucker v. Commissioner,55 T.C. 783">55 T.C. 783, 788 (1971). The remoteness of the Trojan plant site does not make Gregory's daily round trip expenses deductible. Coombs v. Commissioner,608 F.2d at 1276; Sanders v. Commissioner,439 F.2d 296">439 F.2d 296, 299 (CA9 1971), and cases there discussed, affg. 52 T.C. 964">52 T.C. 964 (1969). On the only issue presented for decision, we hold for respondent. To take account of the medical expense deduction adjustments (see note 2, supra), Decision will be entered under Rule 155.Footnotes. By order dated August 1, 1978, the Chief Judge reassigned this case from Judge William M. Fayto Judge Herbert L. Chabot↩ for disposition. 1. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954 as in effect for the taxable years in issue. ↩2. Respondent's proposed adjustments decreasing the amount of petitioners' medical expense deductions are not explained in the statements accompanying the notice of deficiency. They appear to be solely derivative; that is, they appear to be in the amounts that would result from recomputation of the three-percent "floor" (sec. 213(a)(1)) that would be required by a holding for respondent on the "above-the-line" automobile expense issue. However, the proposed 1972 medical expense deduction adjustment ($60.48), exceeds petitioners' claimed 1972 medical expense deduction ($37). Also, respondent proposed to reduce petitioners' 1973 medical expense deduction by $66.87, even though petitioners claimed no medical expense deduction for 1973. In view of our decision on the automobile expense issue, the treatment of the proposed medical expense deduction adjustments will be resolved in the computation under Rule 155.↩3. The parties have stipulated to what twelve individuals would have testified to if they had been called as witnesses in the instant case. Respondent objects to substantially all of this "testimony" (and, presumably, to the seven exhibits attached thereto) "on the grounds that it is irrelevant and immaterial to any issue in this case." We conclude that the stipulated "testimony" and exhibits are relevant and they are received into evidence. Rules 401 and 402, Federal Rules of Evidence.↩6. The term "commuting" is little more than a shorthand for "nondeductible"; especially in the context of the way the parties herein have framed the issue, "commuting" is a label that does not appreciably advance the logical analysis of the situation. See United States v. Tauferner,407 F.2d 243">407 F.2d 243, 245↩ (CA10 1969).7. 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. ↩8. Section 162(a) provides, in relevant part, as follows: SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General.--There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including-- * (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; * 9. T.C. Memo. 1964-110↩. 10. T.C. Memo. 1964-116↩.11. See Coombs v. Commissioner,608 F.2d at 1275-1276, where the Court of Appeals set forth its analysis as follows: In addition, when a taxpayer accepts employment either permanently or for an indefinite time away from the place of his usual abode, the taxpayer's tax home will shift to the new location--the vicinity of the taxpayer's new principal place of business. * * In such circumstances, the decision to retain a former residence is a personal choice, and the expenses of traveling to and from that residence are non-deductible personal expenses. * * * [Citations omitted.]↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621107/	D. C. CLARKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clarke v. CommissionerDocket No. 28257.United States Board of Tax Appeals22 B.T.A. 314; 1931 BTA LEXIS 2138; February 24, 1931, Promulgated 2138 1. The petitioner employed one Thurman to accompany him to Washington and introduce him to the "authorities." The trip was made by the parties, who got no further than the hotel and who interviewed no one. A deduction of $1,000 was taken by the petitioner as representing the amount paid Thurman for making the trip with him. Respondent's action in disallowing the deduction is approved in the absence of evidence to show that the expenditure was incurred in connection with the petitioner's business. 2. Held, that the amount of $20,000 paid by the petitioner to one Knight in accordance with a contract by which Knight was to assist the petitioner in financing the sale of Camp Taylor and for Knight's services in assisting him in the sale of the camp is an allowable deduction. 3. In 1920 the petitioner purchased certain land which he subdivided into lots and sold all but 12 in that year. The entire purchase price of the land was deducted by the petitioner in his return for 1920. In 1921, the remaining 12 lots were sold and the entire sale price was reported as income for that year. The respondent's action in refusing to allow a deduction of $2,730 in 1921 as representing2139 the cost price of the 12 lots approved where the evidence affords no basis upon which the purchase price can be allocated to the lots sold in that year. 4. Deductions allowable on worthless stocks determined. 5. Amounts reported as "unidentified income" which in fact were cash transferred from two banks held not to constitute taxable income. 6. Held, that respondent did not err in disallowing certain expenses incurred by the petitioner in connection with the sale of his father-in-law's farm in 1922 and deducted in his return for that year. 7. On the evidence, held that the petitioner's returns for 1921 and 1922 are false and fraudulent and were made with the intent of evading tax. Elwood Hamilton, Esq., for the petitioner. Arthur Carnduff, Esq., for the respondent. TRAMMELL 315 This proceeding is for the redetermination of deficiencies in income tax and penalties as follows: YearTaxPenalty1921$18,436.89$9,218.4519223,080.151,540.08The matters put in controversy by the petition as amended are the action of the respondent (1) in refusing to allow as a deduction as additional sales2140 expense for 1921 an amount of $1,000 paid M. Bert Thurman for accompanying the petitioner on a trip to Washington for the purpose of introducing the petitioner to the "authorities" and telling of petitioner's business; (2) in refusing to allow as a deduction as additional sales expense the amount of $20,000 alleged to have been paid to E. V. Knight for his assistance to the petitioner in the procurement and financing of a contract for the sale of Camp Zachary Taylor; (3) in refusing to allow as a deduction for 1921 as an additional sales expense an amount of $2,730 representing the cost of real estate bought and sold near Burlington, Lowa: (4) in disallowing as a deduction for 1921 as a loss on stocks that became worthless an amount of $18,290; (5) in including in income for 1922 an amount of $10,117.56 representing gross receipts from the sale of land from which the cost thereof was not deducted; (6) in disallowing as a deduction for 1922 an amount of $1,545.35 representing the advertising cost and sales expenses of a farm sold by the petitioner for his father-in-law; and (7) in asserting the penalty of 50 per cent for filing false and fraudulent returns for 1921 and 1922. FINDINGS2141 OF FACT. The petitioner is a resident of Louisville, Ky., and during the taxable years 1921 and 1922 was engaged in the real estate business under the trade name of the Louisville Real Estate & Development Company. He sold real estate on a commission basis and also bought and sold in his own name. Most of his business was on a commission basis. The petitioner carried on business in six or eight States. Nearly all of his transactions were outside of Kentucky so he worked out of the office almost entirely, going into various States making contracts with owners of land which he subdivided, advertised, and sold at auction. During the taxable years, the petitioner had about eight employees. His transactions were many and his average annual gross income for the four years prior to 1921 was approximately $100,000. Until about June, 1922, the only records kept of the petitioner's business showing receipts and disbursements were from memorandum cards, the bank deposits and the canceled checks. Such 316 records were kept by the petitioner's stenographer who had been working for him since 1917, and who knew nothing about bookkeeping until some time after July, 1922. About2142 June, 1922, the petitioner employed J. T. Holmes as a full-time bookkeeper, who on June 1 of that year installed a system of bookkeeping that required the use of a cash book, journal and ledger. Holmes had charge of the books. However, the petitioner's stenographer made entries therein. The petitioner personally never kept the books nor made any entry in them. On February 9, 1921, the petitioner entered into a contract with the United States Government whereby he was to sell Camp Zachary Taylor, near Louisville. The contract provided that if the gross returns from the sale of the camp did not exceed $1,000,000 the petitioner was to receive no compensation nor any reimbursement for expenditures. It slso provided that should the gross receipts from the sale exceed $1,000,000 the petitioner would get as full compensation for services and expenditures the excess above $1,000,000, provided, however, that the amount to be paid him should not exceed 15 per cent of the total amount of gross receipts on completion of the sale. At the time the petitioner submitted his bid he submitted a certified check for $100,000, which amount he raised without assistance from anyone. The contract2143 required the petitioner to pay his own expenses and provided that he should spend not less than $25,000 for advertising and publicity. It also provided that neither it nor any interest in it should be transferred by the petitioner to any other party except to the extent permitted in section 3477 of the Revised Statutes of the United States. The contract also contained the following provision: SEVENTEENTH: Contemporaneously with the execution hereof the said Louisville Real Estate and Development Company, party of the second part hereto, has deposited with the Quartermaster General, a certified check for $100,000 drawn to the order of the Treasurer of the United States, as a guarantee of its faithful compliance with all of the terms provisions and conditions of this contract, and in the event of the failure of the said Louisville Real Estate and Development Company to faithfully comply with and perform its part of this contract, the said sum of $100,000 shall be immediately forfeited to the United States of America as liquidated damages. The $100,000 referred to in the foregoing provision was the check for $100,000 formerly submitted by the petitioner. The petitioner completed2144 the sale of the camp in June, 1921, and received $114,000 and "some odd" dollars for the sale. His expenses in making the sale were $60,654.67, exclusive of an amount of $20,000 hereinafter mentioned. Prior to the time the petitioner entered into the contract for the sale of the camp, he employed M. Bert Thurman of New Albany, Ind., to accompany him to Washington to introduce him to the 317 "authorities" and tell them what he knew about the petitioner's business. For this service the petitioner agreed to pay Thurman $1,000. The trip was made to Washington, but the petitioner and Thurman never got any further than the hotel and never interviewed anyone. On September 27, 1921, the petitioner paid Thurman the $1,000. In determining the deficiency for 1921 the respondent disallowed this amount as a deduction. After having entered into the contract for the sale of the camp and having borrowed at the bank until he had reached his limit and being in need of the $25,000, which he had agreed to spend in advertising the sale of the camp, the petitioner executed the following instrument: APRIL 22, 1921. It is hereby agreed by and between D. C. Clarke and E. V. Knight, 2145 that for and in consideration of the said E. V. Knight agreeing to furnish one-half of such sum as is required by the Government to insure faithful performance of contract and for other services rendered the D. C. Clarke agrees to pay to said E. V. Knight, forty (40) per cent of whatever net profits accrue from the sale of Camp Zachary Taylor or of any and all other sales of Governmentowned property which may be made by the Louisville Real Estate and Development Co. or by D. C. Clarke, within a period of five years from above date. (Signed) D. C. CLARKE. E. V. KNIGHT. Immediately underneath the foregoing and in the handwriting of Knight is the following: APRIL 23RD, 1921. Should the commissions for the sale of Camp Zachary Taylor not equal the expenses of the sale as actually paid by D. C. Clarke then and in that event E. V. Knight is to share difference on the same percentage basis as the profits viz - forty per cent - (Signed) E. V. KNIGHT. At the time the petitioner and Knight entered into the foregoing agreement they anticipated the sale of other Government camps before this one was settled for, and they did sell other camps together. Under date of August 20, 1921, the2146 petitioner issued the following check on the Second National Bank, New Albany, Ind.: No. 4922. LOUISVILLE REAL ESTATE & DEVELOPMENT CO., Louisville, Ky., 8/20 1921.Pay to the order of Second Nat. Bank. $20,000.00 Twenty thousand and no/100DollarsTo the National Bank of Kentucky in Louisville, Ky. (Signed) D. C. CLARKE. 318 The check bears in handwriting the endorsement "D. C. Clarke" and the following stamped endorsements: Pay to the order of Any Bank, Banker or Trust Co. All Prior Endorsements Guaranteed Aug. 20, 1921 SECOND NATIONAL BANK 71-90 New Albany, Ind. 71-90 Geo. A. Newhouse, Cashier Louisville Branch of the Federal Reserve Bank of St. Louis, Louisville, Kentucky. Aug. 22, 1921 All prior Endorsements Guaranteed FIRST NATIONAL BANK Louisville, Kentucky21-5 The petitioner and Knight borrowed money on several occasions from the Second National Bank, New Albany, Ind., while the Camp Taylor transaction was being handled giving joint notes signed by both of them. The petitioner gave instructions to his office that the $20,000 should not be included as a deduction for advertising expense in preparing2147 his return for 1921 which was filed on April 10, 1922. The petitioner's stenographer who prepared the data from which the return was made finding that the check was made payable to the Second National Bank, and knowing nothing about the contract between the petitioner and Knight, assumed that the check was in payment of a note and the amount was not deducted in the petitioner's return. The revenue agent who examined the petitioner's returns and records about July, 1926, found no record of any payment to Knight of the $20,000 and the first the agent learned about the matter was in the petitioner's second protest filed in October, 1926, against the agent's report. Prior to this, the agent had conferred in regard to the petitioner's tax liability for 1921 with both the petitioner and his stenographer who kept the records. In determining the deficiency for 1921, the respondent refused to allow as a deduction the amount of $20,000 alleged to have been paid to Knight for his assistance in the procurement and financing of the contract for the sale of Camp Taylor. When the income tax law became effective in 1913, the petitioner adopted the method of deducting the cost price of real2148 estate purchased for resale in the year in which it was bought and crediting the sale price in the year in which sold. In an audit of his sincome tax returns made on this basis, for the years previous to 1921, the method used by him has been accepted by the Government. 319 In 1920 the petitioner purchased land near Burlington, Iowa, for the purpose of subdividing into lots and reselling. The total cost was $18,038. On May 14, 1920, 166 lots were sold for $16,661.50. In 1921 the remaining 12 lots were sold for $3,000. In his 1921 return the petitioner reported as income from the property the $3,000. Under his system of keeping records the petitioner deducted the cost of the property in his return for 1920, the year in which it was purchased. As the full cost of the property had been taken as a deduction in the 1920 return no deduction therefor was taken in the 1921 return. In his 1921 return the petitioner claimed a deduction of $16,933 as a loss on the sale of stocks purchased in 1919. In determining the deficiency for 1921 the respondent disallowed the deduction which was computed by the petitioner in his return as follows: CostAmount receivedNet lossFlesher Petroleum Co. stock$4,150.00$207.50$3,942.50Lee-Allen Oil Co. stock5,000.00250.004,750.00Archer Tire & Rubber Co. stock1,000.0050.00950.00Wyoming-Kentucky Petroleum Co. stock500.0025.00475.00Co-Operative Land & Development Co. stock340.0017.00323.00Paragon Oil Co. stock400.0020.00380.00Burk-Brown Investment Co. stock2,750.00137.502,612.50Favorite Oil Co. stock2,000.002,000.00Southern States Oil Co. stock1,000.001,000.00Kytex Oil Co. stock500.00500.002149 The petitioner had thought of taking a loss on the stocks in his 1920 return, but was advised by the examining officer that this could not be done unless the stocks were sold and the loss actually established in that manner. As the petitioner could not sell the stocks, he transferred them to H. B. Cassin, who under date of December 31, 1921, executed to the petitioner a note for $707 due two years from date with interest at 6 per cent. The amount of $707 represented 5 per cent of the cost of the stocks as shown above excepting however the last three stocks in the list. The selling price of 5 per cent was used with the idea that if anything should ever be recovered from the stocks, the petitioner would determine his profits on them on the basis of a purchase price of 5 per cent instead of 100 per cent. The note given by Cassin has never been paid and in taking it the petitioner never expected it to be paid, nor did he expect Cassin otherwise to pay for the stocks, as they were transferred to Cassin only for the purpose of the petitioner's claiming a deduction on them in his income tax return. The petitioner attempted to have all of the stocks transferred to Cassin on the books2150 of the various corporations, but in some instances was unable to do so because he could not locate the corporations. 320 The petitioner paid $2,051.68 for the Flesher Petroleum Company stock, which he admitted at the hearing was not worthless in 1921. For the other stocks he paid the amounts indicated: Lee-Allen Oil Co. stock$2,500.00Archer Tire & Rubber Co. stockWyoming-Kentucky Petroleum Co. stockCo-Operative Land & Development Co. stock102.00Paragon Oil Co. stock200.00Burk-Brown Investment Co. stockFavorite Oil Co. stock500.00Southern States Oil Co. stock1,000.00Kytex Oil Co. stock1,150.00The Lee-Allen Oil Company was organized in April, 1919, with a capitalization of $300,000 with shares of a par value of $1 each. In May, 1919, the directors authorized the sale of 150,000 shares of the stock at 50 cents per share. The agents who sold the stock received a commission of 15 per cent for selling it. The proceeds from the sale of the stock were used for purchasing certain leases the chief of which was on what was known as the Eureka tract and for development purposes. In drilling wells on the Eureka tract the funds of the2151 company were practically exhausted. The wells began as good producers but rapidly settled down to small production. Thereafter the sale of 43,200 additional shares of the company's stock was authorized at 50 cents per share and the stock was sold. The money realized from the sale of this stock was used in developing other of the leases and in acquiring a lease in Oklahoma which never was developed or sold and which was a total loss to the company. By a written instrument dated December 4, 1919, E. A. Flanagan proposed to purchase the Eureka tract for $38,000, $15,000 to be paid in cash and the remainder to be paid in four equal installments due in 6, 10, 14, and 18 months after date. The proposal was accepted, but Flanagan sought to withdraw. A suit instituted against him resulted in his compliance with the contract of purchase. Part of the proceeds derived from the sale were used to pay the debts of the company resulting from development and operating expenses and the remainder, approximately $20,000, was used to purchase a one-half working interest in the D. N. Witt lease. At the time of this purchase in the spring of 1920 there were nine producing wells fully equipped. Additional2152 drilling was done on this lease, and for a while it gave promise of being a steady producer, but gradually it dwindled to point where it did not pay sufficient to carry itself and the company gradually drifted into debt. The lease was operated until about March, 1924, when it was sold in consideration of the purchaser assuming the company's existing indebtedness not exceeding $1,000 and paying an amount in addition 321 to net and pay each stockholder 1 cent per share for each share issued and outstanding out exceeding 234,000 shares. This sale was approved by a majority of the outstanding stockholders and wound up the affairs of the company. The company never paid any dividends. During 1919 and 1920 Hudson and Collins, large oil operators, purchased from various sources approximately 100,000 shares of the company's stock at prices ranging from 15 to 20 cents a share. There was no sale of the company's stock during 1921 and its book value did not exceed 5 cents a share. The stock never had a market. There was no market for the stock of the Wyoming-Kentucky Petroleum Company in 1921. The Co-Operative Land & Development Company was a stock-selling scheme and while the2153 stock had a market for about a month or so it died out prior to 1921. The stock was never worth anything. The Paragon Oil Company stock had a good market about 1918 or 1919, but that died out in a month or so and the stock could not be sold. A number of times in 1921 the petitioner called G. T. Dick, a brother-in-law of William H. Brown, who was the principal stockholder of the Burk-Brown Investment Company, and Dick did not give him a very good report on the stock of the company. At the time the petitioner transferred the stock of this company to Cassin he had a report that the stock was of a very doubtful value, if worth anything at all. There was no market for the stock of the Favorite Oil Company in 1921. In 1921 the stock of the Southern States Oil Company became greatly reduced in value and on October 25, 1921, the trustee of the company bought 10 shares of the stock of a par value of $100 each for $150. There was no ready market for the stock. In 1921 the stock of the Kytex Oil Company had little or no ready market value. The company was liquidated in that year and a distribution of one-half of 1 per cent of the par value per share was made to the stockholders. 2154 There was no more market in 1920 for the stock of the Lee-Allen Oil Company, Wyoming-Kentucky Petroleum Company, Co-Operative Land & Development Company, Paragon Oil Company and the Favorite Oil Company than there was in 1921 and these stocks were as worthless in 1920 as in 1921. In his return for 1922 the petitioner reported as "unidentified income" an amount of $10,117.56. This amount represented bank deposits which the petitioner's stenographer was unable to classify because of insufficient information at the time the return was prepared. Of the $10,117.56, $4,500 represented cash transferred under date of January 23, 1922, from the Second National Bank of the New Albany, Ind., to another bank, and $1,000 represented a transfer 322 on the same date from the Citizens Union National Bank to some other bank. In determining the deficiency for 1922 the respondent made no change in this item of income as reported by the petitioner. In 1922 the petitioner sold a farm for his father-in-law, E. R. Rowlett. Expenses incurred in making the sale amounted to "about $1,500," which the petitioner took as a deduction in his return and which the respondent disallowed. The agreement2155 between the petitioner and Rowlett was that the petitioner would charge no commission for making the sale but that Rowlett would pay the expense. Of the land sold about one-fifth was paid for. The checks amounting to about $6,000 given in payment therefore were made to the petitioner and endorsed by him to Rowlett. When Holmes started a set of books for the petitioner on June 1, 1922, he thought commissions paid and commissions received could be kept in the same account, but after making a few entries he found it did not work out in some ways and separate accounts were opened for commissions received and commissions paid. Holmes thereupon drew a red line across and about one-third of the way down the page on which the first account was opened and when the petitioner's stenographer was preparing the data from which the 1922 return was made she omitted the amounts above the red line, thereby failing to include in income commissions from June 10, 1922, to July 8, 1922, amounting to $20,362.71. There were also omitted from the petitioner's 1922 return commissions on the sale of the Massey farm amounting to $3,810 and commissions on the sale of the Morrison farm amounting to $3,005.76. 2156 Instead of crediting these amounts to the commissions received account, they were erroneously posted to the credit of the accounts for the owners of the farms. The petitioner's income tax return for 1921 was made by T. M. Knight, who had formerly been employed for about three years as a Deputy Collector engaged on income tax work. He left the Government service on January 1, 1921, and started making returns for taxpayers, having about 150 clients a year. Knight knew nothing about the petitioner's business. He made the return from the data prepared by the petitioner's stenographer and did not check it against the original sources of information to determine the correctness of it. The petitioner never gave him directly any instructions about making the return nor did the stenographer suggest that he leave out anything. The 1922 return was made by Holmes with the assistance of the petitioner's stenographer, the only person who prepared the data for the petitioner's returns for 1921 and 1922. 323 The net income reported by the petitioner for 1921 was $23,197.71, and for 1922 was $8,017.40. The petitioner's returns for 1921 and 1922, which were signed and sworn2157 to by him, are false and fraudulent, and were made with the intent of evading tax. OPINION. TRAMMELL: The petitioner contends that he is entitled to a deduction in 1921 of $1,000 representing the amount he paid M. Bert Thurman for accompanying him to Washington. In his petition he alleged that the amount was paid Thurman for his services rendered in connection with the procurement of the contract for the sale of Camp Taylor and the sale of the camp. With respect to Thurman's employment and services, the petitioner under questioning of his counsel, testified as follows: Q. Mr. Clarke what connection, if any, did Mr. M. Bert Thurman have with the sale of Camp Taylor? A. I think it would be safe to say that he did not have any. Mr. Thurman went to Washington one time. He lived in New Albany, at the time we sold an estate, for the DePauls, and was familiar with our operation, and he went to Washington to introduce me and tell what he knew about our business. We never got any further than the hotel. We never interviewed a soul, and came back home, and I gave that check to him for his services. * * Q. Did you pay Mr. Thurman or employ him before or after the contract2158 was entered into for the sale of Camp Taylor? A. Afterwards - I do not remember the date. Q. What was he to do; what was the purpose of his employment? A. It must have been before. As I remember he was to introduce me to the authorities there and tell them about my service. * * Q. Mr. Clarke, did you ever pay * * * Mr. Thurman or anybody else any money to procure the contract for you for the sale of Camp Taylor? A. I did not. We think the foregoing testimony of the petitioner clearly is in direct conflict with the allegation in the petition that the amount was in payment of services rendered by Thurman in procuring the contract to sell Camp Taylor or in the sale of the camp. The testimony merely shows that Thurman was to introduce the petitioner to some one of Washington and to tell what he knew of petitioner's business, but it fails to connect Thurman with the transaction connected with Camp Taylor. If the petitioner had any other business in Washington at that time the testimony does not indicate its nature and does not connect Thurman with it. The introduction of the petitioner to some one in Washington or a statement of the petitioner's business does2159 not necessarily constitute a business transaction. Since 324 the record does not show that the expenditure was for any purpose connected with the petitioner's business, we do not think the respondent erred in refusing to allow the amount as a deduction. The petitioner contends that he is entitled to a deduction for 1921 of $20,000 on account of a payment of that amount to E. V. Knight. The petition contains the following allegations: The petitioner employed E. V. Knight of New Albany, Indiana, to assist him in the procurement and financing of the contract and sale of the property [Camp Taylor]. During the tax year 1921, the property was sold and the commissions paid to the petitioner were reported in gross income. The petitioner paid to E. V. Knight the above mentioned $20,000. The petitioner submitted in evidence the check dated August 20, 1921, payable to the Second National Bank, New Albany, Indiana, which is as set out in our findings of fact, and testified that it was for the payment of Knight's part of the profits under the written contract of April 22, 1921, between the parties for his assistance in the sale of Camp Taylor. While the check was not drawn2160 payable to Knight and does not bear his endorsement, the petitioner testified unqualifiedly as to what it was for. We are convinced by the evidence that the amount in question was paid by the petitioner to Knight for services rendered in connection with the sale of Camp Taylor under the contract which was introduced in evidence, and represents an allowable deduction. Counsel for the respective parties have referred in their briefs to our decision in , wherein in deciding whether a portion of the $20,000 was a gift to Knight. In that to Gwin, we stated that the $20,000 was a gift to Knight. In that case we had before us the question of the taxability to Gwin of a portion of the $20,000 here involved which was paid over to him by Knight. In the Gwin case Knight was a witness and testified that the $20,000 was a gift to him from Clarke. In the instant case we have the written instrument signed by Knight under which the amount was paid in addition to having Clarke's testimony as to what the payment was for, and at a rehearing of this proceeding we have heard the testimony of Knight and further testimony from the petitioner, both2161 of whom were subjected to cross-examination. From all the evidence we are convinced that the payment was for services rendered and was not a gift by the petitioner. While there is an irreconcilable conflict between the testimony and the decision in the Gwin case and in this case, we must decide each case according to the testimony in that particular case. The petitioner contends that the respondent erred in refusing to allow as a deduction for 1921 as additional sales expense an amount of $2,730 which he claims represents the cost of the lots near Burlington, Iowa, sold in that year. These lots, twelve in number, were 325 a part of the land purchased in 1920, subdivided and all sold in that year except them. The total cost of the land purchased, including the 12 lots, was $18,038, which was deducted in the petitioner's return for 1920. The petitioner contends that the respondent erred in allowing the total cost of the land in 1920, a year not before us, and that he should be allowed a deduction in 1921 of $2,730 as representing the cost of the 12 lots. We recognize the rule that where land is acquired on one tract, subdivided, and sold in different tracts, the2162 purchase price of the entire tract may be allocated to the portions or subdivided tracts which are sold and gain or loss determined. ; . In allocating the cost price to the subdivided portions there must be some reasonable fact basis on which to make an allocation. As no evidence was submitted on the basis of which an allocation of the cost could be made, the determination of the respondent is affirmed. In his original petition the petitioner alleged that the respondent erred in disallowing as a deduction for 1921 an amount of $17,640 representing the cost of stock acquired prior to 1921 and which became worthless in 1921. In the amended petition the amount is shown as $18,290. The costs of the various stocks involved here have been determined on the basis of the evidence in the record and are set out in our findings of fact. At the hearing the petitioner stated his contention as being that the transaction with Cassin "was not a real sale." He admits in his brief that the so-called sale of the stocks to Cassin was for the sole purpose of reducing income tax and that it was not an actual2163 sale. He contends, however, that all of the stocks except one became worthless in 1921, and that he is entitled to deduct the loss on all of them except the one from his gross income for that year. The petitioner, being unable to make a bona fide sale of the stocks, entered into the arrangement with Cassin as set out in our findings of fact, and on the basis of it reported in his 1921 return a loss sustained on the sale of the stocks. At the time he transferred the stocks to Cassin, who was in the petitioner's employ at $200 per month and who had no assets, he did not expect Cassin to pay anything for them and according to the petitioner's testimony he knew that Cassin would not give 5 per cent of the par value of the stocks or even 1 per cent of such value for them. The only purpose of the arrangement was for the petitioner to take a loss on them in his income tax return and thereby reduce the amount of his tax. Although the petitioner went through the form of selling these stocks to Cassin, he actually made no sale to him. Cassin paid nothing for them and was not to pay anything for them. They were and continued to remain the property of Clarke. 326 In his return2164 for 1921 the petitioner took a deduction of $3,942.50 as a loss on the stock of the Flesher Petroleum Company. He has established by evidence a cost of $2,051.68 for this stock, which he admitted at the hearing was not worthless in 1921. This stock was included in the pretended sale to Cassin. By the use of a transaction known to him to be fictitious the petitioner took as a deduction a loss which he claimed had been sustained by a sale of stock which was in fact not worthless, and which so far as the record shows was known not to be worthless. In our opinion the return for 1921 in which such a deduction was claimed was false and fraudulent and was made for the purpose of evading tax. The respondent's action in imposing the fraud penalty for 1921 is approved. . In order to sustain the petitioner's contention that the remainder of the stocks became worthless in 1921 and that he is entitled to deduct the losses on them from his gross income for that year, it must be shown that the stocks became worthless in fact during that year and that there was no reasonable probability that any portion of the investment in them would2165 ever be recovered. See , and cases there cited. The evidence with respect to the value in 1921 of the stock of the Lee-Allen Oil Company, Wyoming-Kentucky Petroleum Company, Co-Operative Land & Development Company, Paragon Oil Company, and the Favorite Oil Company is indefinite, ambiguous and uncertain. The conclusion we reach from it is that the stocks were as worthless in 1920 as in 1921 and have so found as a fact. Aside from the Lee-Allen Oil Company stock no evidence was submitted as to whether the companies were still in business in 1921, or as to the assets owned by them or their financial condition otherwise. From such evidence we are unable to find that the respondent was in error in disallowing the losses claimed in 1921 on these stocks. Cost was not established by the evidence for the stock of the Archer Tire & Rubber Company and no evidence was offered as to the value of it. We therefore have no basis for allowing any loss on it. No cost was established for the stock of the Burk-Brown Investment Company and from the evidence as to the value of this stock in 1921 we are unable to determine when it became worthless. 2166 Under the evidence therefore, no deductible loss is shown. While the evidence shows that the stock of the Southern States Oil Company became greatly reduced in value in 1921 and that there was no ready market for it, we are unable to find that the stock actually became worthless in 1921. The petitioner's contention as to this stock is therefore denied. 327 The Kytex Oil Company was liquidated in 1921 and a distribution of one-half of 1 per cent of the par value per share was made to the stockholders. The petitioner is entitled to a deduction for a loss on this stock of the cost price of $1,150 less the amount received in liquidation. In a schedule attached to his return for 1922 the petitioner listed 13 items, totaling $10,117.56, which he reported as "unidentified income" and explained as follows: "Unable to classify the following income due to insufficient information regarding deposits." He now contends that these amounts can be identified and that they do not represent income. The evidence shows that two items included in the above amount, one of $4,500 and another of $1,000, represented cash merely transferred from two banks. It was money already received2167 and the transfer from one bank to another did not affect income. The amounts should, therefore, be omitted in determining the petitioner's taxable income. The petitioner contends that he is entitled to deduct in 1922 the amount of $1,545.35 as expenses incurred by him in the sale in that year of the farm of E. R. Rowlett, his father-in-law. With respect to the repayment by Rowlett of the expenses the petitioner testified as follows: Q. Do you know whether or not he ever paid these expenses? A. I do not recall. I know he paid for the car. We gave a car away, and he paid for that, and I do not recall any other settlement. * * Q. Did you ever ask him for that money? A. I do not recall. That has been five or six years ago, and I do not recall how that was paid. I do recall that he paid for a car given there, but I married Mr. Rowlett's only daughter, and he has been paying me for twenty years in different ways. Q. You felt very friendly towards him? A. Exceedingly so. We are not convinced by the evidence that the petitioner has not received payment for the expenses incurred in the transaction. The burden is upon the petitioner to show that he has2168 not been reimbursed. If he was reimbursed he is not entitled to the deduction claimed. The determination of the respondent on this issue is affirmed. For 1922 the petitioner failed to report commissions amounting to $27,178.47 as set out in our findings of fact. He concedes that these items are taxable income, but does not accept the blame for these omissions from his return. He seeks to lay it all on his stenographer or others in his office. The petitioner testified that he left the making of his returns and the keeping of his accounts entirely and wholly to the office force. 328 In contrast to this we have his testimony as to how he had thought of taking in his 1920 return the losses taken on stock in his 1921 return and how he devised and carried out the fictitious scheme resorted to in order to take losses in his 1921 return. With respect to the $20,000 paid to Knight, he testified that he told his office force not to put the amount in his return as advertising the which direction, according to his explanation, resulted in the amount being omitted from the return. His stenographer also testified as to instructions received from the petitioner as to including2169 certain unidentified bank deposits in the return. The petitioner also testified that he employed men of experience in tax matters to make out his returns and that he left their preparation to them with such assistance as might be gotten from the office force. Holmes, who was employed as a full-time bookkeeper, made out the 1922 return with the assistance of the petitioner's stenographer. From a consideration of the evidence we do not accept the petitioner's claim that he had but little if anything to do with the preparation of the return or furnishing the data from which it was made Neither do we think it likely that the petitioner could have filed an income tax return such as was filed for 1922, showing a net income of $8,017.40 when commissions of more than three times that amount had been omitted, without realizing that it was not a true return. The great discrepancy in the amount of income with respect to which it appears the petitioner had never entertained a doubt as to its taxability is one circumstance which, taken in connection with other evidence, prevents our attributing the errors to mistakes of judgment or oversight. Aside from the above considerations there2170 is a personal responsibility of a taxpayer in reporting his taxable gains and profits which he can not lightly avoid by leaving the preparation of his return to others. We think that the language of the Court in the case of Duffin v. Lucas, decided by the United States District Court for the Western District of Kentucky, September 12, 1929, unreported to date, in which the Court found that the return was fraudulent upon facts similar to those here presented, is applicable here. There the Court said: But it does not help plaintiff to have it accepted that he had little, if anything to do with the preparation of the returns. If such was the case in signing and swearing to them he must have done so either with or without carefully advising himself as to their contents. It is not reasonable to suppose that he did so without advising himself and if he was fully advised as to their contents he must have known that they were wrong and that egregiously so. If as a matter of fact he thus did and allowed them to be given in there was such indifference on his part in regard to the matter as to indicate that he desired 329 to keep in the dark as to their contents. I am2171 led to these conclusions by the fact that the returns were so far out of the way from what they should have been. * * * From the facts before us we are of the opinion that the petitioner's return for 1922 was false and fraudulent and made with the intent of evading tax and that the respondent did not err in imposing the fraud penalty for that year. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621108/	AMALENDU MAJUMDAR and PURABI MAJUMDAR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMajumdar v. CommissionerDocket No. 17516-88United States Tax CourtT.C. Memo 1989-418; 1989 Tax Ct. Memo LEXIS 416; 57 T.C.M. (CCH) 1254; T.C.M. (RIA) 89418; August 14, 1989Leonard Gerstein, Joseph L. Fieger, and Eileen Murphy, for the petitioners. Janine M. Poronsky, for the respondent. TANNENWALDMEMORANDUM OPINION TANNENWALD, Judge: This case is before the Court on petitioners' motion for litigation costs pursuant to section 7430 1 filed under Rule 231. Respondent has filed his response to said motion, and petitioners have filed a reply to that response. Neither party has requested a hearing, and we have determined that no hearing is necessary. Based upon418 our assuming without deciding that petitioners' version of the facts as hereinafter set forth is correct, we hold for respondent. Petitioners maintained their legal residence in Skokie, Illinois, at the time they filed their petition in this case. On April 11, 1988, respondent issued a deficiency notice in which he determined that there was a deficiency of $ 18,052 in petitioners' Federal income tax for the taxable year ended December 31, 1982, plus additions to tax of $ 903 under section 6653(a)(1), an additional unspecified amount under section 6653(a)(2), and $ 4,513 under section 6661. The sole basis for the deficiency was the disallowance of losses of $ 37,582 stemming from an investment of petitioners in "Energy Resources." On July 11, 1988, petitioners filed their petition herein in which, with respect to the deficiency, they claimed only that respondent erred in not allowing a deduction of $ 10,000 representing cash expenditures which "were an allowable deduction per the419 IRS Settlement Offer for Energy-Resources, Inc." No document reflecting such offer was submitted with the petition. On August 24, 1988, respondent filed his answer in which he denied the allegations relating to the claimed $ 10,000 deduction and asserted the increased rate of interest under section 6621(c). On October 12, 1988, the Court issued a notice setting the case for trial at a Trial Session commencing in Chicago, Illinois, on March 13, 1989. At the call of the calendar of said Trial Session, the parties reported the case as settled on the basis of an underlying deficiency in tax of $ 13,117, additions to tax of $ 1,312 under section 6661 and 120 percent of the interest due on $ 13,117 under section 6621(c), and no additions to tax under section 6653. The settlement in respect of the underlying deficiency was based on a concession by respondent of the $ 10,000 claimed deduction. The parties had entered into a closing agreement (Form 906) in March 1986, relating to petitioners' investment as limited partners in Energy Resources, Ltd., which included the following provision: 1. The taxpayer(s) is (are) entitled to an ordinary deduction from taxable income for any taxable420 period subsequent to 1979 for which the statute of limitations is open, in the amount of unrecouped cash payments made by the named partner in the taxable period as a part of the cash portion of the purchase price as required by the Subscription Agreement, or as a result of the partner's liability under notes executed by the Partnership under the Lease Agreement. The closing agreement was lost or misplaced and was not taken into account in issuing the notice of deficiency for 1982. In a notice of deficiency for the taxable year ended December 31, 1983, issued to petitioners under date of April 13, 1987, an allowance of a $ 10,000 deduction was made to petitioners' income in respect of Energy Resources, Ltd., in accordance with the statement that "ADJUSTMENTS MADE TO PARTNERSHIP INCOME OR LOSS ARE BASED ON A PRIOR YEAR CLOSING AGREEMENT (FORM 906) SIGNED BY YOU AND THE INTERNAL REVENUE SERVICE." Petitioners were allowed deductions in respect of the investment in Energy Resources, Ltd., in the amount of $ 10,000 for each of the taxable years ended December 31, 1980 and 1981. In order for petitioners to prevail, they must have been the "prevailing party" within the meaning421 of section 7430(c)(2) (since amended and redesignated as (c)(4), see . One of the requirements of that section is that petitioners have the burden of proving "that the position of the United States in the proceeding was not substantially justified," i.e., unreasonable. Rule 232(e); ; . The "position of the United States" was defined in section 7430(c)(4) (since amended and redesignated as (c)(7), see ) to include: (A) the position taken by the United States in the civil proceeding, and (B) any administrative action or inaction by the District Counsel of the Internal Revenue Service (and all subsequent administrative action or inaction) upon which such proceeding is based. Since the petition herein was not filed after November 10, 1988, the provisions of the present section 7430(c)(7)(B) relating to "the position taken in an administrative proceeding" do not apply. See . Although422 the Courts of Appeals are divided on the issue of whether the actions by respondent's representatives prior to the time that District Counsel becomes involved in the case should be considered, see , it is the established position of this Court that they should not. . The essential thrust of petitioners, position herein is that, because of the existence of the closing agreement, it was unreasonable for respondent to have issued the notice of deficiency for 1982. But petitioners make no claim that District Counsel was involved in the instant case prior to the issuance of the deficiency notice. Insofar as events subsequent to the issuance of the deficiency notice are concerned, petitioners again do not point to any action or inaction by District Counsel. Rather they rest their claim of unreasonableness on the fact that, on January 13, 1989 (after the petition and answer herein were filed), respondent's Chicago Appeals Office suggested that petitioners sign another closing agreement for 1982 in respect of their investment in Energy Resources, Ltd. We note423 that petitioners have not claimed that District Counsel was involved in such action, and we are not disposed to impute such action to District Counsel; nor are we prepared to conclude that any such action would, in any event, require a decision that respondent's position herein was unreasonable. A review of the record herein shows that not only did petitioners not include a copy of the closing agreement with their petition but did not do so with their motion for litigation costs. 2 They did not submit an actual copy with date and signatures until they responded to the Court's order dated May 26, 1989, directing petitioners to reply to respondent's objections to their motion for litigation costs by dealing, specifically among other matters, with "the existence of a closing agreement signed by both parties (and if such agreement existed, a copy thereof)" (emphasis in original). Moreover, we note that the closing agreement did not specify the amount of the specific dollar amount of the allowable deduction in respect of Energy Resources, Ltd. It is at least open to question that each year's amount had to be separately verified before any concession could appropriately be made. 424 Finally, it is not without significance that the record fails to reflect any effort on the part of petitioners to persuade District Counsel to dispose of the case more expeditiously or that respondent's counsel affirmatively delayed such disposition. 3Under all the circumstances herein, we conclude that petitioners have not carried their burden of proof that respondent's position herein was substantially unjustified within the meaning of section 7430(c)(2). Cf. , affd. . 4 Accordingly, petitioner's motion will be denied. In view of our conclusion, we do not reach the other issues425 involved herein, namely, whether since petitioners only placed in issue $ 10,000 of the $ 37,582 disallowed deduction, they have "substantially prevailed with respect to the amount in controversy, or * * *the most significant issue" within the meaning of section 7430(c)(2)(A)(ii)(I) and (II) and whether the amount of the litigation costs sought by petitioners is unreasonable within the meaning of section 7430(c)(1). An appropriate order and decision will be entered. Footnotes1. All statutory references are to the Internal Revenue Code as amended and applicable to the circumstances herein, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioners apparently had previously submitted an unsigned copy of the closing agreement to respondent's Chicago Appeals Office in 1986. Petitioners claim that the original signed copy of the closing agreement was in the files of their prior counsel who would not release it until petitioners paid certain disputed fees. The fees apparently were finally paid and the signed closing agreement released on June 15, 1989. ↩3. See .↩4. Cf. also ; ; .↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621109/	JOSEPH J. NICKLO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentNicklo v. CommissionerDocket No. 27738-86.United States Tax CourtT.C. Memo 1988-235; 1988 Tax Ct. Memo LEXIS 264; 55 T.C.M. (CCH) 953; T.C.M. (RIA) 88235; May 26, 1988. Joseph J. Nicklo, pro se. Phillip A. Pillar, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION 265 COHEN, Judge: Respondent determined deficiencies of $ 16,127 and $ 2,271 in petitioner's Federal income taxes for 1980 and 1981, respectively , and an addition to tax in the amount of $ 681 under section 6659 1 for 1981. The issue for determination is whether petitioner is entitled to enforce the terms of settlement offered to his partners in a tax shelter venture or to abatement of interest from the effective date of his partners' settlement. FINDINGS OF FACT Some of the facts have been stipulated and the stipulation of facts is incorporated in our findings by this reference. In 1979, petitioner was a partner in Jolyn Fine Arts of Aurora, Colorado. The partnership invested in an art master sold by Jackie Fine Arts, Inc. On his 1979 tax return, filed on or about June 19, 1980, petitioner claimed an investment tax credit in the amount of $ 15,741, of which $ 15,700 was passed through from Jolyn Fine Arts. On his tax returns for 1980 and 1981, petitioner claimed losses passed through from Jolyn Fine Arts in the amounts of $ 266 44,132 and $ 15,778, respectively. Prior to February 23, 1982, the Internal Revenue Service commenced an investigation of petitioner's tax liability for 1980. Among the documents requested was a copy of petitioner's 1979 tax return. Thereafter respondent's investigation expanded to include 1981. On March 7, 1984, and January 14, 1985, petitioner executed Consents to Extend the Time to Assess Tax (Form 872), as a result of which the time for assessing a deficiency for 1980 was extended to June 15, 1986. On January 14, 1985, petitioner executed a Consent to Extend the Time to Assess Tax (Form 872) for 1981, extending the time to assess tax for that year to June 15, 1986. On April 9, 1986, respondent sent the notice of deficiency in issue in this case, determining deficiencies for 1980 and 1981 by disallowing the losses claimed from Jolyn Fine Arts. No notice was sent with respect to petitioner's tax year 1979, and no extension of the time to assess the tax for that year was requested, even though the statute of limitations did not preclude such assessment as of the time that the examination for 1980 commenced. In or about January 1984, petitioner's partners in Jolyn Fine267 Arts entered into a settlement with the Internal Revenue Service, pursuant to which they were allowed to deduct their cash investments in Jolyn Fine Arts during the years that the investments were made. Petitioner was not offered the same settlement, because the year in which he first claimed deductions, 1979, was no longer open to assessment. At no time in this proceeding did petitioner contend that he was entitled to the investment tax credit and deductions claimed in relation to Jolyn Fine Arts. 2 Petitioner has simply contended that his cash investment was $ 8,723; that his tax for 1980 should be reduced by $ 4,270; and that interest should be abated from the date of his partners' settlement in January 1984. He has offered to "agree to open 1979 tax year, presently barred by statute, for consideration in the settlement of the named case" on conditions including: 1. In settlement of the dispute, the taxpayer would be entitled to ordinary deductions of actual cash expenditures in the investment, and the income tax treatment of the investment would be fixed for taxable years 1979, 1980, 1981, and 1982, and all years thereafter. The taxpayer would be liable only for applicable268 interest and penalties up to and including January, 1984, same date of partners' acceptance of final settlement. 2. The IRS agrees not to require the taxpayer to defend his 1979 tax return. Reason: Since 1979 was not an issue in the dispute, the taxpayer disposed of most records and documents. OPINION Petitioner here is contending that respondent erred (1) in not determining a deficiency in his tax liability for 1979 prior to the expiration of the period of limitations for that year (in June 1983) and (2) in not offering to him in January 1984 the same settlement that was effectuated with his partners. Respondent has declined petitioner's offer, described above. Petitioner seeks to have the Court effectuate his offer. There are several reasons why that is not possible. First, a limited waiver of the statute of limitations,269 such as the conditional one now offered by petitioner, is not valid unless executed prior to the expiration of the original period of limitations. Section 6511(c)(1); see Glenshaw Glass Co. v. Commissioner,25 T.C. 1178">25 T.C. 1178 (1956), and General Lead Batteries Co. v. Commissioner,20 T.C. 685">20 T.C. 685 (1953), interpreting the predecessor to section 6511. There is no other applicable theory under instant facts under which the running of the period of limitations would be suspended or the effect of the statute of limitations would be mitigated. Second, petitioner has not presented any proof of his actual cash investment or legal theory under which such investment would be allowed as a deduction. If the case had proceeded to trial on the merits of his original investment in a Jackie Fine Arts reproduction through the partnership, he probably would not be entitled to any deductions or investment tax credit. See Rose v. Commissioner,88 T.C. 386">88 T.C. 386 (1987), on appeal (6th Cir., Dec. 14, 1987); West v. Commissioner,88 T.C. 152">88 T.C. 152, 161-164 (1987). Because of the failure of respondent to audit petitioner's 1979 tax return and determine a270 deficiency in relation to that year, petitioner has received tax benefits in excess of $ 16,000. According to one of the exhibits submitted by petitioner (a calculation by a revenue agent, prepared November 25, 1983), if petitioner had been allowed the out-of-pocket settlement, and the year were not barred, his deficiency for 1979 would have been $ 6,528. Whatever underpayment for 1979 was determined would bear interest to the date of payment, probably at the rate of 120 percent of the normal rate after December 31, 1984. Section 6621(c); Rose v. Commissioner,88 T.C. at 424-427. Thus if appropriate adjustment were made for 1979, petitioner would probably owe more, not less, than the amount of deficiencies determined by respondent for 1980 and 19981 and interest due thereon. 3 Under those circumstances, there is no legal or equitable basis for relief to petitioner. See Adams v. Commissioner,85 T.C. 359">85 T.C. 359, 375-376 (1985); Avers v. Commissioner,T.C. Memo. 1988-176; Adelberg v. Commissioner,T.C. Memo. 1985-597, affd. without published opinion 811 F.2d 1507">811 F.2d 1507 (9th Cir. 1987). *271 Third, we have no jurisdiction generally to abate interest. See Betz v. Commissioner, 90 T.C. (Apr. 26, 1988). See also Bowman v. United States,824 F.2d 528">824 F.2d 528 (6th Cir. 1987); LTV Corp. v. Commissioner,64 T.C. 589">64 T.C. 589, 597 (1975). Petitioner relies on Rev. Proc. 87-42, 1987-35I.R.C. 11, which sets forth procedures for abatement of interest at the discretion of the Secretary of the Treasury under section 6404(e)(1). This Court lacks jurisdiction to consider an interest abatement issue raised under section 6404(e). 508 Clinton Street Corp. v. Commissioner,89 T.C. 352">89 T.C. 352 (1987). In any event that section is not applicable here, however, because the error, if any, attributable to the Internal Revenue Service was in not determining a deficiency for 1979; petitioner is not making or being requested to make any payment for that year. Petitioner has not shown any error attributable to the Internal Revenue Service with respect to 1980 or 1981. Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect during the years in issue. ↩2. This investment was apparently indistinguishable from the one described in Rose v. Commissioner,88 T.C. 386">88 T.C. 386↩ (filed Feb. 5, 1987), on appeal (6th Cir., Dec. 14, 1987), in which we concluded that the taxpayers were not entitled to investment tax credits or deductions claimed in relation to Art Masters acquired from Jackie Fine Arts. 3. Because respondent did not raise the issue in any way until the time of trial, the Court denied a oral motion to amend the answer to claim interest under section 6621(c) in this case. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621111/	Estate of Louis Stockstrom, Deceased, Arthur Stockstrom, Executor v. Commissioner.Estate of Louis Stockstrom v. CommissionerDocket No. 1237.United States Tax Court1947 Tax Ct. Memo LEXIS 337; 6 T.C.M. (CCH) 268; T.C.M. (RIA) 47028; January 16, 1947KERN Order KERN, Judge: Petitioner has filed herein its Petition for Rehearing or, in the Alternative, for Review by the Court. Upon due consideration of the arguments of the parties herein, it is ORDERED: That that part of said petition which requests that petitioner be granted a rehearing be and it hereby is denied. Memorandum Sur Order We attach this Memorandum to our Order on the Petition for Rehearing for the purpose of making more explicit our Supplemental Findings of Fact and Opinion reported at 7 T.C. 251">7 T.C. 251, in the light of recent comments thereon. See Pavenstedt, The Treasury Legislates, 2 Tax Law Review, 7. Treasury Decision 5488 [1946-1 CB 19] which amended Regulations 111 by the addition338 of section 29.22(a)-21 specifically made the amendment applicable only to taxable years beginning after December 31, 1945. Section 29.22(a)-21(f) provided that "section 22(a) shall be applied to the determination of the taxability of trust income for taxable years beginning prior to January 1, 1946, without reference to this section." Mimeograph 5968 [1946-1 CB 25] merely stated the administrative policy of the Commissioner of Internal Revenue not to assert the liability of a grantor of a trust for income taxes upon the trust income under the provisions of section 22(a) if the trust income would not have been taxable to the grantor under the amended regulations. In our original opinion herein (3 T.C. 255">3 T.C. 255) we held that the grantor of certain trusts was taxable upon the income of the trusts under the provisions of section 22(a) of the applicable Revenue Acts. We were affirmed by the Circuit Court of Appeals for the Eighth Circuit (148 Fed. (2d) 491). Our opinion and that of the Circuit Court were handed down before the Commissioner amended his regulations. The tax years here involved were 1938, 1939, 1940 and 1941. After the opinions were339 handed down the regulations were amended to be effective as amended with regard to taxable years beginning after December 31, 1945. Then, on January 4, 1946, Mimeograph 5968 [1946-1 CB 25] was issued by the Acting Commissioner of Internal Revenue. The pertinent parts are as follows: Reference is made to Treasury Decision 5488, approved December 29, 1945, which amends Regulations 111 so as to include therein a statement of those factors which demonstrate that the grantor of a trust has retained such control that he is taxable on the income therefrom under section 22 (a) of the Internal Revenue Code within the principles of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. The Treasury decision provides that section 22 (a) of the Code shall be applied in determining the taxability of trust income for taxable years beginning prior to January 1, 1946 without reference to the amendment to the regulations made by the Treasury decision. However, in cases not yet finally determined for such taxable years, it will be the policy of the Bureau, where no inconsistent claims prejudicial to the Government are asserted by trustees or beneficiaries not to340 assert liability of the grantor under the general provisions of section 22 (a) of the Code, if the trust income would not be taxable to the grantor under the amendment to the regulations. It is apparent that this mimeograph relates only to "the policy of the Bureau." Each Internal Revenue Bulletin carries a caveat that "the rulings other than Treasury Decisions have none of the force or effect of Treasury Decisions and do not commit the department to any interpretation of the law which has not been formally approved and promulgated by the Secretary of the Treasury." The Circuit Court of Appeals in its modified mandate authorized us to "consider the question of Louis Stockstrom's tax liability on the income from the * * trusts * * * in the light of Treasury Decision 5488 [1946-1 CB 19] * * * and Mimeograph No. 5968 [1946-1 CB 25] * * ." We were "authorized" so to do, not directed. It is our opinion that Treasury Decision 5488 [1946-1 CB 19] is, by its terms, inapplicable to the tax years before us; and that whether respondent follows, or fails to follow, his Mimeograph No. 5968 [1946-1 CB 25], is a matter of administrative341 policy with which we are not concerned. Thus, we conclude that there is nothing in either Treasury Decision 5488 [1946-1 CB 19], or Mimeograph 5968 [1946-1 CB 25], which would cause us to alter our interpretation of section 22(a) as applied to the facts of the instant case, which has already been affirmed by the Circuit Court. In our Supplemental Opinion herein reported at 7 T.C. 251">7 T.C. 251, we were largely engaged in disposing of the several contentions of petitioner. In the final paragraph we expressed the thought that even if the respondent's amended regulations were applicable to the instant case (and we have sought to show above that they are not), and even if they were contrary to the holding of this Court in this case which was affirmed on appeal, we would, nevertheless, adhere to our original holding herein. This we would do because (1) this holding continues to be our construction of the statute as applied to the facts of the instant case, and (2) regulations issued after the trial, decision and affirmance on appeal of a case can not in any way affect the law of that case. This view does not question the full power of respondent*342 to comply with his Mimeograph No. 5968 [1946-1 CB 25] with regard to any proceeding falling within its scope which has not been tried and decided by this Court. In such a proceeding respondent may decide as a matter of administrative policy to comply, or not, with this Mimeograph. It is not our intention to decide the question whether any part of the respondent's amended regulations is contrary to our holding therein. That question, as we have pointed out, is not properly before us. A fortiori, it was not our intention to condemn as invalid or improper the amended regulations as a whole, or to indicate any view that the amended regulations are ultra vires the Commissioner of Internal Revenue.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621112/	NORWICH PHARMACAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Norwich Pharmacal Co. v. CommissionerDocket Nos. 64542, 67492.United States Board of Tax Appeals30 B.T.A. 326; 1934 BTA LEXIS 1344; April 5, 1934, Promulgated 1344 A trade-mark is not such property as is susceptible to exhaustion by the passage of time, nor wear and tear by use in the business, and respondent's action in disallowing deductions for "depreciation" or trade-marks is approved. H. A. Mihills, C.P.A., for the petitioner. B. M. Coon, Esq., for the respondent. TRAMMELL 326 These are consolidated proceedings for the redetermination of deficiencies in income tax for the years 1929 and 1930 in the amounts of $5,457.34 and $5,508.68, respectively. The sole error assigned by petitioner is that "The respondent has failed to allow as a deduction from gross income depreciation of trade-marks based on their cost and useful life." FINDINGS OF FACT. The petitioner is a New York corporation, with its principal office at Norwich. It has been engaged since 1890, the date of its incorporation, in the manufacture and direct sale of pharmaceutical products, cosmetics, and toilet preparations. Its principal and best known product is Unguentine, used for burns and skin injuries. Petitioner is known in the drug industry as a direct service house. It maintains five branches and a corps of traveling salesmen1345 and 327 takes care of its own distribution. Only a small part of its total sales is made to jobbers. Its line embraces some 150 products. At one time petitioner produced and listed in its catalogues about 4,000 items, including staple products, trade-marked products, and certain coined-name products which were not protected by registered trade-marks. But for the past several years petitioner has followed the policy of centering upon a limited group of trade-marked, nationally advertised products. Petitioner's board of directors had concluded that the future success of the company should be predicated upon the development of public demand for the trade-marked type of items. In pursuance of this policy, petitioner acquired the right to manufacture and sell a product known as "Amolin" through the purchase in 1928 of the entire capital stock of the Amolin Co. Amolin is a deodorant powder having the quality of neutralizing perspiration and body odors. Prior to 1928 it had been on the market for a number of years and had been distributed by retail stores throughout the country. Amolin was not a patented product. The exact formula was a secret, not known to petitioner, 1346 although the petitioner had analyzed the product in its laboratory and could have manufactured substantially the same preparation, but could not have sold it under the trade name by which it was favorably known on the market, for the reason that it was protected by registered trade-marks. On or about November 12, 1928, the petitioner purchased the entire outstanding capital stock of the Amolin Co. for a cash consideration of $675,000 and the assumption of an obligation to pay the sum of $500 per month to one Pray, inventor of the Amolin formula, during his lifetime. At the close of 1928 petitioner liquidated the business of the Amolin Co., taking over all of its assets for the nominal consideration of $1 and the assumption of all its liabilities. The charter of the Amolin Co. was surrendered on December 29, 1928. Usable items of equipment in the Amolin Co.'s New York plant were transferred to the petitioner's Norwich plant, together with any usable inventories remaining on hand at the close of the year 1928. The recorded value of assets on the books of the Amolin Co. at December 31, 1928, other than trade-marks, was $19,496.21. Those assets which were not usable by the petitioner1347 were sold or otherwise disposed of. The actual, realized value of the net tangible assets of the Amolin Co., other than trade-marks, was less than the recorded book value. The opening entry on the books of the petitioner, recording the purchase of the capital stock of the Amolin Co. and the subsequent liquidation of the assets, set forth net tangible assets in the amount of $19,496.21, the same value recorded on the books of the Amolin Co., and after making an adjustment of $914.70 for an 328 operating loss sustained by the Amolin Co. from November 20 to December 31, 1928, the balance of the purchase price in the amount of $654,589.09 was recorded on the petitioner's books as the cost of trade-marks acquired from the Amolin Co. The two trade-marks, which were registered under No. 59178, dated January 1, 1907, and renewed January 1, 1927, and No. 126943, dated October 14, 1919, were duly assigned by the Amolin Co. to petitioner under date of December 22, 1928. Apparently "Amolin" is a coined word having no particular significance. This trade-marked word has been used continuously in the petitioner's business and that of its predecessors since about January 1, 1893. 1348 It originated with the Matteson Rubber Co,, from which company it was acquired by the Lodi Co. and transferred to the Amolin Co. The books of the Amolin Co. showed items amounting to $138,000 as the cost of acquisition of trade-marks. This amount included $50,000 paid to the Lodi Corporation on August 1, 1919, and other payments to Pray, inventor of the formula, up to December 31, 1928. The Amolin Co. purchased the assets of the Lodi Co. for $60,000 cash, of which $10,000 was to cover physical assets and $50,000 was allocated to the purchase or cost of the trade-marks. In computing the claimed annual depreciation deductions in respect of the Amolin trade-marks petitioner included in the depreciation base, in addition to the recorded book cost of $654,589.09, the liability assumed by the petitioner to pay Pray $500 per month during his lifetime, computed according to annuity tables. The additional cost so computed by the petitioner amounted to $23,086, making a total cost of the trade-marks on this basis in the amount of $677,675.09. The trade-marks were estimated by the petitioner to have a remaining useful life of 14 1/2 years, resulting in the annual exhaustion deduction1349 of $46,736.21 claimed by the petitioner. Neither the petitioner nor its stockholders owned any of the capital stock of the Amolin Co. prior to November 12, 1928. OPINION. TRAMMELL: In its returns petitioner deducted from gross income on account of exhaustion of its trade-marks, and now contends it is entitled to deduct each year, an aliquot part of the total cost of the trade-marks. Respondent disallowed the deductions claimed, and asserts that trade-marks are not subject to exhaustion. The statute (section 23(k), Revenue Act of 1928) provides that in computing net income there shall be allowed as deductions, among other things, "A reasonable allowance for the exhaustion, wear and 329 tear of property used in the trade or business, including a reasonable allowance for obsolescence." It is not questioned here that trade-marks constitute property, nor that the petitioner used its trade-marks in its business. It is elemental to say that, under the quoted statute, deductions are allowable only in respect of property used in the trade or business which is being exhausted by the passage of time or worn out and consumed by use. Obviously, of course, trade-marks, like1350 other intangibles, are not subject to physical wear and tear. The issue, then, which is purely one of law, is resolved into the question, whether trade-marks may be the subject of exhaustion allowances. Rights in trade-marks are of common law origin, ; certiorari denied, . The right to a trade-mark exists at common law, , and has long been protected thereby, ; affd., . A trade-mark does not derive its existence from any statute, state or Federal, but exists independent of statutes, and is protected even in the absence thereof. Trade-marks are not created by the trade-mark statutes. Such statutes merely fortify the common law right to a trade-mark by conferring the statutory title on the owner. Authorities cited, supra, and . The value of a registered trade-mark does not cease upon expiration of the registration period. Registration under the Federal law protects only in interstate1351 commerce, and the rights of the owner of such a trade-mark will be protected by the courts even after expiration of the registration. Hence, prior to the complete abandonment of a trade-mark the period of its useful life can not be forecast or determined. There is no determinable period over which cost may be spread. Certainly it is not the period of registration, for the trade-mark is still valuable and enjoys protection of the law after expiration of that period. On this ground alone it would be necessary to disallow petitioner's claims. However, another and equally difficult obstacle to petitioner's contention is the fact that the value of a trade-mark, registered or otherwise, is not exhausted by use nor the passage of time. So long as it is used in connection with a going business, it may safely be said that, barring obsolescence which results in disuse or abandonment, the value normally increases. And it may be noted on this point that no claim is made hre on account of abandonment or obsolescence. 330 The principle stated is well illustrated by the facts of the instant case. The Amolin Co. acquired1352 the trade-marks in question from the Lodi Co. and its books disclosed a total cost of the trade-marks in the amount of $138,000. Thereafter, the Amolin Co. sold the trade-marks to the petitioner for more than $677,000, notwithstanding the intervening use and lapse of time. There are no facts disclosed by the record before us to justify the conclusion that the value of the petitioner's trade-marks is being lessened either by use or the passage of time. The inherent quality of trade-marks is such that they are not subject to exhaustion. A trade-mark is essentially an inseparable part of, or the outward symbol of, good will. In , it was pointed out that: A trade-mark is not only a symbol of an existing good will, although it commonly is thought of only as that. Primarily it is a distinguishable token devised or picked out with the intent to appropriate it to a particular class of goods and with the hope that it will come to symbolize good will. So far as concerns exhaustion, or the allowance of deductions therefor, trade-marks must be considered in the same classification as good will; in fact, 1353 good will embraces trade-marks. In , following its prior decision in , the Supreme Court held that the taxpayer was not entitled to deduct for exhaustion or obsolescence of good will, and specifically treated good will "as embracing trade-marks, trade brands and trade names." In the Renziehausen case the Circuit Court of Appeals in its opinion (; affd., supra ) said: Trade-marks, trade brands and trade names are closely related to good will and no attempt has been made to segregate or differentiate them. The Circuit Court of Appeals for the Eighth Circuit * * in the case of * * * held that a deduction for obsolescence of the good will of a brewing company was not allowable * * * because the allowance for obsolescence is limited to such property as is susceptible to exhaustion, wear and tear by use in the business, and good will is not such property. Good will is not susceptible of being disposed of independently, that is, separate and1354 apart from the business to which it attaches. . "Good will is the favor which the management of a business wins from the public." It has no existence separate and apart from an established business, and it can not be the subject of a loss except on the termination of the business and the sale of the assets. . 331 The petitioner is not here claiming a loss of the value of good will represented by its trade-marks on account of obsolescence or abandonment of the trade-marks upon the termination of the business to which they appertain. In , we said on this subject: The intangible property which the petitioner asserts is subject to obsolescence consists of good will, trade names, and trade-marks. Such assets have value, but that value is so interwoven with the operation of the business, so much an inseparable part of the going concern to which they appertain, that the ascertainment of such value is difficult and their sale, except as component parts of*1355 a going business concern, is all but impossible. They are not subject to physical wear and tear incident to their use in the business operations of their owner, nor ordinarily is the period of their useful life limited either by contract or statute. No one would argue that such intangibles are subject to annual losses due either to wear and tear or exhaustion even if their cost or capital value could be ascertained. Respondent's action in disallowing deductions for exhaustion of trade-marks is approved. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621113/	Louis Rothbard and Lottie Rothbard v. Commissioner.Rothbard v. CommissionerDocket No. 60530.United States Tax CourtT.C. Memo 1957-155; 1957 Tax Ct. Memo LEXIS 111; 16 T.C.M. (CCH) 636; T.C.M. (RIA) 57155; July 31, 1957111 Arthur L. Harrow, Esq., 19 Rector Street, New York, N. Y., for the petitioners. Herbert Rothenberg, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined a deficiency in income tax for the year 1952 of $620, and an addition to tax of $37.20 pursuant to section 294(d)(2), Internal Revenue Code of 1939. The only question for decision is whether a nonbusiness bad debt deduction was properly claimed in 1952. Findings of Fact Some of the facts are stipulated and the stipulation is included herein by reference. The petitioners are husband and wife, residing in New York, New York. Their joint return for the taxable year 1952 involved herein was filed with the collector of internal revenue for the first district of New York. The word "petitioner" will be hereinafter used to refer to Louis Rothbard. Lottie Rothbard is involved only because a joint individual tax return was filed by her and her husband. The petitioner on his individual income tax return for the calendar year 1952 reported in Schedule D, Form 1040, loans to Diameter, Inc. in excess of $4,000, claiming a capital loss in that amount and112 accordingly a deduction of $1,000 in that year. Lorraine is petitioner's only child and she has at all times been claimed by petitioner as a dependent for income tax purposes. She graduated from Russell Sage College in 1943 and is presently a full-time student working for her Master's degree. Her schooling is being paid for by petitioner and she is still presently claimed as a dependent by her father. In May 1947 Lorraine and Sally Woroner, a college friend of Lorraine's, formed Facet Magazine, Inc., a corporation organized under the laws of the State of New York, for the purpose of publishing a monthly magazine devoted to literature, fine arts and music. In November 1950 the corporate name was changed to Diameter, Inc. The original capital of the corporation was $2,000, which was subscribed to by Lorraine and Sally, each of whom held title to 50 per cent of the stock. The $1,000 contributed to capital by Lorraine consisted of a check dated May 17, 1947, signed by petitioner in favor of Lorraine. The two stockholders were the sole corporate officers, Sally serving as president and secretary of the corporation, and Lorraine serving as vice president and treasurer. From time113 to time from 1950 until March 1953 petitioner made advances to his daughter for the use of the corporation and paid certain expenses of the corporation. During the examination of petitioner's 1952 tax return by a revenue agent petitioner's certified public accountant and representative produced the following list of alleged loans to Diameter, Inc. in substantiation of the $4,000 figure referred to above: May 1947$1,000.00December 29, 19501,000.00May 24, 1951285.91June 22, 1951400.00June 27, 1951300.00July 25, 1951300.00December 8, 1952525.00March 1953500.00Total$4,310.91The cash receipts book of the corporation shows the following amounts entered as "loans" from petitioner. March 2, 1950$ 67.13December 29, 19501,000.00May 24, 1951285.91June 22, 1951400.00June 27, 1951300.00July 25, 1951300.00March 8, 1953500.00Total$2,853.04The corporate general ledger, under the title "Loans and Exchanges" shows all the above amounts, except for the March 8, 1953 entry in the amount of $500. According to this ledger none of the above-listed amounts was ever repaid by the corporation to petitioner. 114 The March 2, 1950 item in the amount of $67.13 was erroneously entered on the cash receipts book as a loan. The moneys were advanced without security, without any notes or other written indicia of indebtedness, and without a due date designated for repayment. These sums were not to be repaid unless the corporation had sufficient income with which to pay back the advances. Petitioner gave the two girls the use of a room in his law office suite from which they conducted the magazine's business activities. Petitioner did not charge the corporation any rent for this office space. They occupied these quarters for several years. Petitioner then needed the additional space for his legal practice. Accordingly, the corporation's supplies were placed in storage. Since the corporation was unable to afford the expense of renting an office, no office space was ever obtained after vacating the quarters donated by petitioner. Lorraine worked on the project on a full-time basis. Neither Lorraine nor Sally ever received any salary or income from the corporation, nor did they employ any salaried employees. From 1944 to the formation of the corporation in the spring of 1947 Sally had been115 employed as a teacher in the New York City School System. She did not intend at that time to resume teaching. It was anticipated by the two girls that the first issue of the magazine would be published within the first year 1947-1948. However, they were unable to have the first issue published within this period. Sally resumed teaching in the fall of 1948. From that time on she held a full-time teaching position and devoted whatever spare time she had to the project. After failing to meet the 1948 publication goal, it was planned to have the initial issue of the magazine published prior to Christmas 1950. However, due to printing difficulties, the first issue was again delayed. The initial issue was published in March 1951. A second issue was published in April 1951. No further issues were ever published. Following the publication of the second issue in April 1951, a third issue was prepared. It had been decided not to ask petitioner for any additional funds. Publication was to be delayed until sufficient income could be obtained from advertisements and subscriptions to cover the printing costs of this issue. These funds were never obtained. The magazine was to be financed solely116 by advertisements and subscriptions. All advertisements were to be prepared under the direction of the two girls and were required to meet the artistic standards desired by them for the magazine. Lorraine personally visited publishers, recording companies, musical instrument stores, art supply stores, art supply manufacturers, concert halls, textile designers, etc. in an effort to solicit advertisements for the project. However, the corporation succeeded in obtaining only one advertisement for the two published issues. One or two contracts for advertisement were also secured for the third issue. The total income derived from advertisements for the two published issues was $115.65. None of the artists who contributed work to the magazine was ever paid any fee for his contribution. Nor do the corporate books reflect the making of any refunds, after the magazine ceased publication, to the various subscribers to the magazine listed therein. The cost of an annual subscription to the magazine was $4. According to the books of the corporation the number of annual subscribers obtained by the monthly magazine is as follows: CalendarNumber of AnnualYearSubscribers194853194911319501195183195254Total304117 Included in the list of subscribers were approximately 18 universities and colleges. Sales from all other sources for the period 1948 through 1952 totalled approximately $122.20. Prior to publication in March 1951 the bulk of the subscribers were personal friends and acquaintances of Sally or of the Rothbard family. The estimated cost of printing the magazine was $1,200 per issue, or $14,400 on an annual subscription basis. The balance sheets of the corporation on April 30 of the indicated years were as follows: 19481949195019511952AssetsCash$1,451.05$1,024.34$1,389.14$ 15.38$ 196.42Furniture & Fixtures31.5928.0824.5721.0617.55Other Assets31.14294.30149.7275.0075.00Total Assets$1,513.78$1,346.72$1,563.43$ 111.44$ 288.97LiabilitiesLoans & Exchanges$1,835.36$3,136.38Capital Stock$2,000.00$2,000.00$2,000.002,000.002,000.00Surplus or (Deficit)( 486.22)( 653.28)( 436.57)(3,723.92)(4,847.41)Total Liabilities$1,513.78$1,346.72$1,563.43$ 111.44$ 288.97Petitioner was at all times kept informed by the two girls of the general financial condition of118 the project. Ultimate Finding and Conclusion The moneys advanced to the corporation by the petitioner did not constitute a debt of the corporation to petitioner in 1952. Opinion The issue is one of fact and our ultimate finding and conclusion is dispositive of it. Though petitioner and the two girls testified that it was intended to create a debtorcreditor relationship between petitioner and the corporation for the amount of the advances made by petitioner, we are convinced by the whole record that no such intention existed. Commencing in 1950 and thereafter until 1953, petitioner advanced moneys for the magazine project as requested by his daughter. No notes or other evidence of indebtedness was given. No interest was charged. No due date was specified. If the money was to be repaid at all it appears from the record that this would depend on whether the project ever produced enough income to repay the advances. Though the petitioner testified he kept in touch with the situation from a financial standpoint this is to some extent belied by the fact that on his 1952 return he stated a claimed capital loss of more than $4,000, whereas, the corporate books showed advances only*119 of some $2,850, and in this proceeding petitioner limits his claim to the amount of $2,375.92 because of alleged repayment. It is evident that petitioner's attention to the affairs of the magazine was cursory at best. We think, rather than intending the establishment of a bona fide debtor-creditor relationship, petitioner here was simply making advances to his daughter's magazine project out of a commendable paternal interest in furthering her literary pursuits. The evidence falls short of proving that a debt existed and the Commissioner's determination (which he explained by stating "The debt is not allowable due to your failure to establish the validity thereof") must be sustained. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621114/	William DeMarco v. Commissioner.De Marco v. CommissionerDocket No. 55764.United States Tax CourtT.C. Memo 1958-80; 1958 Tax Ct. Memo LEXIS 152; 17 T.C.M. (CCH) 394; T.C.M. (RIA) 58080; April 30, 1958152 Robert M. Taylor, Esq., and W. Howard Sharp, Esq., for the petitioner. Max J. Hamburger, Esq., for the respondent. TRAINMemorandum Findings of Fact and Opinion TRAIN, Judge: Respondent determined deficiencies in income taxes and additions to tax of the petitioner as follows: Additions to TaxTaxableSec.YearDeficiencySec. 293(b)294(d)(2)1946$ 588.43$ 294.21$ 57.15194719,395.779,697.881,242.451948501.78250.89151.3419491,495.80747.90201.561950611.81305.90129.16Petitioner disputes the above determinations and additions to tax and denies any fraudulent intent to evade tax. The issues presented are: (1) Whether petitioner realized any taxable income during the years in question which he failed to report on his income tax returns. (2) If he did realize additional taxable income: (a) Whether the assessment of the deficiency for the year 1946 is barred by the statute of limitations. (b) Whether any part of the deficiencies is due to fraud with intent to evade the tax. Findings of Fact Some of the facts are stipulated and are hereby found as stipulated. Petitioner, William153 DeMarco, is an individual residing in Vineland, New Jersey, and for each of the taxable years involved, 1946 to 1950, inclusive, he filed his individual income tax returns with the then collector of internal revenue for the first district of New Jersey at Camden, New Jersey. During the taxable years involved, petitioner was engaged in the business of selling and servicing new and used automobiles and parts in Vineland as an individual proprietor. During this period, petitioner operated under the trade names of "Stone and DeMarco" and "DeMarco Motors." The books were kept on the accrual basis of accounting. Petitioner's father, Emidio DeMarco, was born in Italy in 1876 and emigrated to the United States as a young boy. He lived first in Egg Harbor and Hammonton, New Jersey, where he attended a local school. After the completion of his schooling, he learned the glass-cutting trade and worked for various concerns in the area. He married and continued his trade as a glass cutter with the Skinner Glass Company. The surviving children born of this marriage are: Mamie, Jennie, Joseph, Rose, Vincent, William (petitioner in this case), Marie, Natalie, Charles, and Michael. Emidio owned154 two farms near Hammonton, New Jersey, on which he grew principally blackberries and blackberry plants, raspberries, and other fruits. As soon as the children were old enough to work, usually about six to eight years of age, they were required to put in full time at the farms except when actually in school. The children did all of the planting, weeding, tending, and picking on the farms. Emidio acted as the foreman and spent time with the children to see that the work was done. At least one of the farms was very profitable. Blackberry plants were the chief product of that farm and they were in great demand. The children attended the nearby school but were taken out of school early in the spring of each year to work the farms and did not return until late in the fall, after the farming was finished. Emidio sold all of the crops from the farms and held the money for the family, never spending any of it. All of the clothing which the family used was made by Emidio's wife, Madeline, mostly from scraps of cloth and cheap clothing obtained by him. The home in Hammonton was surrounded by three lots on which the family was able to produce enough food to supply most of its needs. They grew155 fruits and vegetables, tended fruit trees, and raised chickens, the latter being fed grass which the children collected from the neighborhood and the town. Emidio spoke Italian and English and was considered a good businessman. He earned money as an interpreter and business adviser for his friends and other Italian people who did not speak English. He handled real estate transactions for them and bought and sold real estate for himself. He also purchased fruit and produce at the railroad station from farmers and peddled it on the streets and to commission merchants in Philadelphia and New York. Joseph, the oldest boy, left school at the age of 14, and went to work with his father to learn the glass-cutting trade. Emidio kept Joseph's earnings for the family. However, the glass-cutting trade was seasonal and part of the year was spent on the farms and with the fruit and vegetable business. The records of the Skinner Glass Company indicate the following earnings for an Emidio DeMarco during the following years: CalendarYearEarnings1910$328.591911531.631912417.581913551.451914180.36191576.491916319.25In 1917 Emidio left the Skinner156 Glass Company and went to work for the Edison Company on war work. Some of the children worked with him, and he kept the wages earned by the children for the family. In 1919 the family moved to Philadelphia and purchased a home on 1131 Cross Street, Philadelphia. In 1921 they moved to 1121 Tasker Street, Philadelphia. At one time they lived at 6139 Vine Street to enable them to sell the house there. After the house was sold, they returned to 1121 Tasker Street. In Philadelphia, Emidio concentrated his efforts on the fruit business. He was in a partnership with another man. The two would purchase food as it arrived in Philadelphia at the docks and distribute it at the stores with which they had dealings. Emidio also owned a fruit stand which he operated. He secured the use of a small farm near Philadelphia which the family worked and he managed. Emidio was in a partnership with the owner of the farm to grow and sell the crops. The two shared equally the profits of the enterprise. Emidio charged for the labor which the family put into the farm before the profits were computed. However, he kept that portion of the earnings for the family. While in Philadelphia, the family continued157 to work the farms in New Jersey. During the summers they lived on those farms, usually in the barns. As the children grew older, Emidio obtained positions for them in Philadelphia. Any monies they were paid were given over by them to Emidio. Emidio kept all of the money earned by the family. It was usually left lying around the house in any available place. It was stuffed in drawers, boxes, chairs, and on the shelves. However, no one in the family dared to touch any of it for fear that they would be severely punished by Emidio. He also kept large amounts of money on his person and wore a money belt filled with bills of various denominations. Prior to the depression of 1929, he kept some money in a building and loan association in Philadelphia. This money was withdrawn at the start of the depression and periodically Emidio gave large amounts to Rose to wrap and keep in a drawer in her desk at home. This drawer became the most cared-for family possession. Everyone in the family knew where the money was and was instructed to make sure that nothing ever happened to the drawer. In the case of a fire or any mishap, their only concern was to make sure that the drawer was removed safely. 158 Rose urged Emidio to put this money lying around the house and in the drawer in a bank, but Emidio distrusted banks and kept the money at home. After repeated arguments and discussions, he rented a lock box from the Broad Street Trust Company and put some of the family funds in it. In 1934, the family moved to Vineland, New Jersey, although Rose, who was a teacher in one of the Philadelphia schools, stayed in Philadelphia. Joseph and Vincent opened an undertaking establishment in Vineland shortly after the family moved there. The family helped them out financially while they were getting started in the business by paying bills and purchasing equipment, such as caskets, outer cases, and presses, and by acquiring a few cemetery lots. When the undertaking business in Vineland slacked off, Vincent moved to Atlantic City, New Jersey, where he set up an undertaking establishment of his own. The family helped him get started as they had Joseph. Jennie had left school at the age of 14 and with Emidio's help obtained a job in Philadelphia. She gave all of her earnings to Emidio. When she married, Emidio gave her a substantial undisclosed sum of money as a wedding gift and told her not to159 mention anything about it to the family. Thereafter, she saw him repeatedly with great sums of money on him. On one occasion it appeared to her that he might have had as much as $80,000 on his person. On August 24, 1934, Emidio opened a postal savings account with the purchase of a $100 certificate. Thereafter, several certificates were purchased and small withdrawals were made. As the interest dates arrived, the certificates were cashed and the interest withdrawn. New certificates were purchased to replace those cashed at about the same date that the interest was withdrawn. On May 12, 1941, the date of the last withdrawal by Emidio, there was $1,400 left in the account. Emidio became a diabetic and thereafter did not engage in profit-making enterprises. Instead, he spent his time visiting various families, including those of his own children and of friends, in Philadelphia, Vineland, and Atlantic City. He usually stayed at one place for a few days at a time. On one occasion while visiting Joseph in Vineland, he took off his money belt and counted out $56,700 in Joseph's presence. He remarked at that time that there was more money elsewhere. There weeks before his death, Emidio160 called Rose to his bed at Vincent's home in Atlantic City. He complained about an operation which he did not want performed and made her promise that it would not be forced on him. He then told her to go home and count the money in the desk drawer and said that it was about time the family began using the money for the things they needed. That night, Rose and her mother, Madeline, removed the money from the paper wrappings and counted out the money together. It amounted to $40,000. After Emidio died in January 1942, Rose deposited $20,000 of this money in a safe deposit box at the Broad Street Trust Company. Madeline, as the administrator of the estate of Emidio DeMarco, closed out the postal savings account. She filed an estate tax return with the State of New Jersey and reported only $1,500 as the total estate left by Emidio DeMarco. In answer to the question on the return as to whether the deceased had transferred any property two years prior to his death, she stated "No." Other records indicate no income or gift tax returns filed by either Emidio or Madeline DeMarco for any of the years 1930 through 1941, inclusive. William DeMarco, the petitioner, left school after completing161 two years of high school. At the age of 17, he went to work for the American Stores Company as a manager of one of their grocery stores located at 24th and Dickinson, Philadelphia. Petitioner left Philadelphia and sought work in New York where, in 1930, he managed a store for Sheffield Farms, a dairy concern. Later he left Sheffield Farms and entered the undertaking business. Shortly thereafter, he returned to Philadelphia and worked in an undertaking establishment there. About one year after the family moved to Vineland, New Jersey, William moved to Vineland and assisted his brothers in the undertaking business. When there was not enough business for all, William became associated with Walter Stone in an automobile agency which at first sold Willis and Graham-Paige automobiles. The agency was organized originally as a corporation, but was dissolved and a partnership was formed. In 1941 the agency changed to selling Dodge and Plymouth automobiles for the Chrysler Corporation. Petitioner's partner, Walter Stone, died in 1944, and petitioner continued the auto business as sole proprietor. The Chrysler Corporation informed petitioner that he no longer held an agency franchise, but that162 he could continue to operate and would be granted a new franchise if he would build a new building for the business. At that time, the business was being operated at East and Landis Avenues in Vineland, New Jersey. Petitioner acquired a new lot at West and Landis Avenues for the purpose of constructing a new building as requested by the Chrysler Corporation. Plans were adopted for the new building in the latter part of 1946. Petitioner obtained a bank loan in the amount of $15,000, $5,000 of which was received in the fall of 1946, and the other $10,000 in 1947. The building was completed in the spring of 1947 and the business was moved into it in April of that year. The cement, stone, brick and steel building consisted of a garage, showroom, two offices, a parts department, and a small office upstairs. In the latter part of 1947, petitioner moved his living quarters into the upstairs office. He lived in that office until 1950, when he moved into his own home at Main and Washington Streets, Vineland, New Jersey. Repayment of the $15,000 loan from the bank was completed by 1950. Petitioner hired Virginia Bailey as a bookkeeper for the business in the fall of 1946. She recorded the163 sales of the automobiles from the information given her by petitioner. Petitioner would give her the cash proceeds from the sales and she would prepare the deposit slips. At the same time she entered in the books the amount of checks, cash, trade-ins, and additional features of the sales price. The deposit tickets were taken to the bank by petitioner at the end of each day. In addition to the usual records, the agency was required to send information of each sale to the factory. The agency was charged $5 for each automobile delivered by the factory, and would receive this money back after the auto was sold. The information sent to the factory was filed on a Retail Delivery Record (hereinafter called R.D.R.). These records were filed by both the bookkeeper and the petitioner. The information on the R.D.R. was not necessarily the same information entered in the books, although both were recorded from the same sale. Automobiles were difficult to obtain, and petitioner would receive delivery of a new automobile only after he had informed the factory of a sale of one previously delivered. In order to obtain deliveries under these circumstances, petitioner would occasionally prepare R. 164 D.R.'s on the basis of fictitious sales. Such an R.D.R. would contain a fictitious sales price, and the purchaser's name would be that of a friend or would be fabricated. These fictitious sales were never entered on the regular books of petitioner, and the financial reports required by the Chrysler Corporation, which were prepared by petitioner, likewise never included any of these fictitious sales. At the end of the year 1946, petitioner retained Charles Rice, an accountant, to prepare his tax returns for the calendar year 1946. He informed the accountant that certain additional investment items on the statements forwarded to the Chrysler Corporation were in reality loans from his family. The accountant then made adjustments to the tax returns so as not to include the items as additional income for the year. In September 1947, petitioner hired a new full-time bookkeeper named Lillian Brunner. She continued the work of Virginia Bailey, keeping the account books, cash receipts and disbursements, general ledger, and, in addition, made out the financial reports. She also prepared all of the R.D.R.'s forwarded to the factory, including the ones based on fictitious sales. She took monthly165 inventory of the automobiles and parts as required by the Chrysler Corporation, and she prepared the weekly progress sheets showing the actual sales of automobiles. The accounts of the business were kept in one book at that time. About the same time that petitioner hired the new bookkeeper in 1947, the Chrysler Corporation prevailed on him to adopt their system of bookkeeping. The new system required some changes in the accounts, primarily in the manner of entering a transaction on the books. When petitioner adopted the Chrysler method, he was required to file a balance sheet with the corporation as of the date of the changeover. His accountant, Charles Rice, compiled this initial balance sheet from working papers prepared by the bookkeeper. The balance sheet as forwarded to Chrysler did not show any items as loans from members of the petitioner's family, which loans are found below to have been in fact received. The balance sheet simply reflected these amounts as capital because it was petitioner's desire to present a picture of high investment to Chrysler. Aside from this misrepresentation, the balance sheet was accurate. During the 1947 calendar year petitioner had the following166 automobile transaction with Simon M. Cherivtch, a used-car dealer in the Vineland area: Date of SaleMakeModelSerial NumberMotor NumberSales Price2/27Dodge'47 Express81174384T112-149472$1,4003/24Dodge'47 1 Ton81227921T116-919341,7005/20Dodge'47 Coupe30866597D24-2326511,8505/21Dodge'47 Coupe30869354D24-2357122,3005/23Dodge'47 4 Door30864928D24-2301612,3005/29Plymouth'47 5 Pass.11717312P15-3863441,900At the request of his bookkeeper, Lillian Brunner, petitioner retained Marcus Leiberman, a practicing accountant, to prepare his yearly financial reports and tax returns. The financial reports were prepared from the balances prior to the adjusting entries for the year-end and did not reflect the usual accruals. These reports were forwarded to the Chrysler Corporation at about the same time petitioner's tax returns were prepared. Included in the adjusting entries for each year, were entries transferring amounts from an investment account to a loans payable account. As a result, the balance sheet filed with the Chrysler Corporation differed from the tax returns in the amount of the167 adjusting entries, mainly to the extent of the loan account. For the years in question, petitioner's net worth, his living expenses, and his adjusted gross income as reported on his tax returns, were as follows: Net WorthReported Adj.Taxable YearNet WorthIncreaseLiving ExpensesGross Income1946$ 39,846.45$ 3,230.08194779,804.56$39,958.11$ 5,000.009,277.91194890,332.5610,528.006,874.6616,189.451949100,612.5110,279.959,145.9915,925.941950105,803.045,190.5311,092.3214,782.85 The petitioner's net worth in each of the years, as shown above, is based on the financial reports forwarded to the Chrysler Corporation in the ordinary course of the taxpayer's business. Thus, petitioner's net worth, as so computed, includes the loans received from members of his family. The net worth increase and living expenses for the years involved, not reflected in the adjusted gross income as reported on petitioner's return, are due primarily to the following loans petitioner received from members of his family and which were stated as increased investment in the statements forwarded to the Chrysler Corporation: MethodRelationDate of LoanAmountof PaymentReceived Fromto Taxpayer10/29/46$ 800CheckRose DeMarcoSister11/ 4/462,000CheckRose DeMarcoSister2/20/472,000CashRose DeMarcoSister2/25/4710,000CheckRose DeMarcoSister4/15/473,600CheckRose DeMarcoSister5/23/471,600CashNatalie DeMarcoSister5/28/472,000CashMary DeMarcoSister7/ 2/473,200CashMary DeMarcoSister1/22/481,800CashMadeline DeMarcoMother12/13/493,500CashRose DeMarcoSister168 The above loans occurred because petitioner needed working capital, partly due to the cost of his new building. After receiving a bank loan of $15,000, the only source from which petitioner could obtain these additional funds was his family. The latter had available for this purpose the $40,000 which petitioner's father Emidio had kept in Rose's desk drawer at the home in Vineland. While this money belonged to the family as a whole, Rose was, in practice, its actual custodian and decided how it was to be employed. For each check or cash amount that the petitioner received, he gave a demand note payable to the individual who paid him the cash or drew him the check. In each case, these demand notes were executed contemporaneously with the receipt of the loan. None of the loans has been repaid, nor has any attempt been made to collect on them. When petitioner was in need of a family loan, he would tell Rose, usually by telephone. When the loan was made in cash, the money was placed in a brown envelope which was then handed to petitioner. If Rose was not at home when petitioner called for the money he had requested, one of the other members of the family present would hand it over169 to him. When petitioner was paid by check, Rose would draw a check on her personal account at the Central Penn National Bank of Philadelphia and then deposit that amount in her account to cover the check. The amount so deposited was drawn either from the $20,000 kept in the safe deposit box or from the $20,000 kept at home. On one occasion after Rose had turned over $3,600 to petitioner, she began to worry whether any of the loans would ever be repaid. She expressed this concern in a discussion with the petitioner and, as a result, he returned the particular $3,600 loan to the family funds. Madeline then reprimanded Rose for her conduct which the mother considered selfish, and Rose returned the loan to petitioner. In addition to the above loans, petitioner borrowed $1,500 from Michael in the fall of 1950 and repaid that loan a few months later. Petitioner and Rose had several discussions about repayment of these loans, some of these discussions being heated arguments. On one occasion, petitioner's bookkeeper, Lillian Brunner, overheard an argument between the two concerning the loans. On another occasion when Rose visited petitioner's business premises, she specifically told this170 same bookkeeper that she was making loans to the petitioner. Petitioner did not realize additional items of taxable income in the taxable years 1946, 1948, or 1949, which he failed to report on his tax returns for those years. Petitioner did realize additional taxable income of $13,280.20 in 1947 and $1,500 in 1950, which he failed to report on his tax returns for those years. The deficiencies for 1947 and 1950 are not due to fraud with intent to evade tax. Opinion The issues in this case are largely questions of fact. The primary dispute relates to whether loans were in fact received by petitioner from members of his family. We have found that petitioner received the following amounts as loans from the family during the years in question: Total LoansTaxableDuringYearTaxable Year1946$ 2,800194722,40019481,80019493,50019501,500 Moreover, we have found that the loans were made out of some $40,000 accumulated by the family prior to Emidio's death, which money was held by Emidio, not as his, but because of his position as the head of the family. The loans for the years 1946 through 1949, inclusive, account for the additional net worth171 for each of those taxable years, except for 1947, when there was an increase in the capital of petitioner's business in the amount of $35,680.20. Since only $22,400 of this amount was received in the way of loans from the family, and petitioner has not attempted to explain the other $13,280.20 of the increase, we have found as a fact that the unexplained amount was additional unreported taxable income for that year. Respondent has conceded, on brief, that, if the loans were in fact received, there was no fraud in the failure to report the additional income. Respondent has also conceded the section 294(d)(2) additions to the tax for that year, and the other years in which no deficiency exists. The $1,500 loan which petitioner received in the taxable year 1950 was not outstanding at the end of that year. There existed some $5,190.53 increase in net worth for that year, none of which is attributable to family loans. Petitioner disputes the correctness of respondent's determination that he had $11,092.32 in living expenses for the taxable year 1950, but has introduced no evidence to indicate that that figure was incorrect. His only defense was that the manner in which respondent determined*172 the amount of living expenses was arbitrary and without substance. The fact that respondent's determination is based on unsound reasoning, does not destroy the presumption that it is correct. . Petitioner's living expenses were found to be $11,092.32 for the taxable year 1950. The living expenses of $11,092.32 and the increase in net worth of $5,190.53 for that year indicate that petitioner had adjusted gross income of $16,282.85 in 1950, $14,782.85 of which he reported on his return for that year. There remains an unreported amount of $1,500 for the 1950 taxable year. However, we have found no evidence of fraud in the failure to report that amount. Petitioner argues that respondent does not have the right to use the net worth method to compute petitioner's net worth and thereby arrive at corrected taxable income when books and records exist. This contention has recently been decided against the taxpayer by the Supreme Court in , rehearing denied (1955). Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621115/	LLOYD C. THURSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Thurston v. CommissionerDocket No. 5944.United States Board of Tax Appeals11 B.T.A. 1269; 1928 BTA LEXIS 3648; May 10, 1928, Promulgated 3648 The Commissioner's action in including in petitioner's taxable income his distributive share of the profits of the Bankers Audit & Appraisal Co., a personal service corporation, of which he was a stockholder, is approved. Lloyd C. Thurston pro se. Thomas P. Dudley, Jr., Esq., for the respondent. LOVE 1269 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1920, in the amount of $92.39. The petitioner alleges that the Commissioner erred in including in his taxable income for the year 1920 the amount of $1,806.06, as distributive share of the profits of the Bankers Audit & Appraisal Co., a personal service corporation of which he was a stockholder. FINDINGS OF FACT. The petitioner is an individual who resides in Chicago, Ill.During the first three months of the year 1920, petitioner was employed as an accountant by the firm of Kirby, Auer & Kunicker, which had for several years kept in existence a corporation known as the Bankers Audit & Appraisal Co. which, however, did not engage in business. About April 1, 1920, the Bankers Audit & Appraisal Co., having shortly theretofore engaged3649 in business, employed petitioner as an accountant. Either in May or June, 1920, Daniels, the principal stockholder of the corporation, gave petitioner 15 shares of stock 1270 of the Bankers Audit & Appraisal Co. This stock was issued to petitioner in order that he might become one of the corporate officers and would act in accordance with the wishes of Daniels, the principal stockholder. Petitioner gave no other consideration for the stock. During the year 1920 petitioner continued to work for the Bankers Audit & Appraisal Co. as an accountant at a regular monthly salary. He received no dividends from the corporation on the 15 shares of stock during the year 1920 or at any time subsequent thereto. The Commissioner determined that the Bankers Audit & Appraisal Co. was, during 1920, a personal service corporation and he further determined that petitioner's distributive share of profits was $1,806.06, which amount was added to petitioner's taxable income for 1920. OPINION. LOVE: It is the petitioner's contention that the 15 shares of stock of the Bankers Audit & Appraisal Co. were issued to him merely for the convenience of Daniels and that inasmuch as the amount3650 of $1,806.06, or any amount, was not received by him at any time from the corporation, he is not taxable thereon. The petitioner does not challenge the Commissioner's determination that the Bankers Audit & Appraisal Co. was a personal service corporation. The evidence shows that he was during 1920 and subsequent thereto a record stockholder of 15 shares of the corporation's stock. Petitioner testified with respect to the acquisition of the stock in question as follows: Q. Those fifteen shares of stock were issued to you? A. Yes, sir. They were turned over to me and I held them, but there was no money nor no consideration at all given for the stock, and Daniels stated that he turned this stock over to me and gave it to me, because he wanted me to be one of the officers, so he could run things the way he wanted to. There is nothing in the record to indicate that he would have been unable to enforce his rights as a stockholder. Consequently, on the record we must hold that, at the close of the year 1920, petitioner was entitled to share in the undistributed net income of the corporation and, under such circumstances, he was, under the provisions of section 218(e) of the3651 Revenue Act of 1918, required to report his respective share in his gross income. The fact that petitioner did not receive the amount in question or any other amount, in our opinion, has no bearing on the question of tax liability for the year 1920. As far as the record shows, he was entitled to share in the net income of the corporation at the close of 1920. It is true, of course, that a loss may have been sustained later. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621116/	G-5 INVESTMENT PARTNERSHIP, H. MILES INVESTMENTS, LLC, TAX MATTERS PARTNER, AND HENRY M. GREENE AND JULIE M. GREENE, PARTNERS OTHER THAN THE TAX MATTERS PARTNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentG-5 Inv. P'ship v. Comm'rNo. 17767-06United States Tax Court128 T.C. 186; 2007 U.S. Tax Ct. LEXIS 15; 128 T.C. No. 15; May 30, 2007, Filed 15 G-5 filed its partnership return for 2000 on Oct. 4, 2001. R issued a notice of final partnership administrative adjustment (FPAA) to G-5 for 2000 on Apr. 12, 2006, more than 3 years after the date of filing of the partnership tax return and the filing of the partners' individual 2000 and 2001 Federal income tax returns, but before the expiration of 3 years from the dates the partners filed their individual 2002-04 Federal income tax returns.R's FPAA denied partnership losses in 2000. G-5's partners reported their distributive shares of partnership losses for 2000 as capital loss carryovers on their individual Federal income tax returns for 2002-04.Ps moved for judgment on the pleadings on the ground that the period of limitations for assessing any tax resulting from this partnership proceeding has expired pursuant to secs. 6229(a) and 6501(a), I.R.C. R contends the period of limitations for assessment has not expired under sec. 6501(a), I.R.C., for 2002-04 and he may assess taxes attributable to the adjustment of partnership items for 2000 against the partners for 2002-04.Held: Secs. 6229(a)16 and 6501(a), I.R.C., do not preclude R from issuing the FPAA and adjusting partnership items for 2000.Held: Secs. 6229(a) and 6501(a), I.R.C., do not preclude R from assessing against the partners an income tax liability for the 2002-04 tax years attributable to the carryforward by the partners of their distributive shares of partnership losses for 2000 where the partnership item adjustments relate to transactions completed and reported on G-5's partnership return in 2000. Denis J. Conlon and Steven S. Brown, for petitioners.William F. Castor, for respondent.Haines, Harry A.HARRY A. HAINES187 OPINIONHAINES, Judge: This case is a partnership-level action based on a petition filed pursuant to section 6226.1 The sole issue raised by petitioners' motion for judgment on the pleadings is whether the period of limitations for making assessments of income tax against individual partners, relative to partnership items, has expired pursuant to sections 6501 and 6229. 17 The following facts are based upon the parties' pleadings. See Rule 120. They are stated solely for the purpose of deciding the motion for judgment on the pleadings and not as findings of fact in this case. See Fed. R. Civ. P. 52(a).BACKGROUNDG-5 Investment Partnership (G-5) filed a Form 1065, U.S. Return of Partnership Income, for 2000 on October 4, 2001. Henry M. Greene and his wife, Julie M. Greene (partners), 2 were indirect partners 318 in G-5, and H. Miles Investments, L.L.C., was the tax matters partner (TMP). 4On April 12, 2006, respondent issued a notice of final partnership administrative adjustment (FPAA) for 2000. The FPAA was issued more than 3 years after the filing of the partnership return and the filing of the partners' individual 2000 and 2001 Federal income tax returns, but before the expiration of 3 years from the dates the partners filed their individual 2002-04 Federal income tax returns.In the motion for judgment on the pleadings, petitioners contend respondent is barred by the statute of limitations under sections 6501(a) and 6229(a) from assessing an income tax liability attributable to G-5's partnership items for 2000 188 because the FPAA was issued more than 3 years after the partnership and the partners filed their 2000 tax returns. Respondent argues that because the FPAA was issued within 3 years after the partners filed their 2002-04 Federal income tax returns, the period of limitations has not expired for 2002-04 and he may assess19 income taxes attributable to the adjustment of partnership items against the partners for those years. 5 Petitioners do not dispute that they carried forward capital losses attributable to G-5 partnership items incurred in 2000 to their 2002-04 Federal income tax returns. DISCUSSIONA. Judgment on the PleadingsRule 120 provides that, after the pleadings in a case are closed but within such time as not to delay the trial, a party may move for judgment on the pleadings. The granting of a motion for judgment on the pleadings is proper only where the pleadings do not raise a genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403, 408 (1984); Anthony v. Commissioner, 66 T.C. 367">66 T.C. 367 (1976). The record shows, and the parties agree, that there20 is no genuine issue of material fact.B. BackgroundSection 6226 is one of a group of provisions concerning the tax treatment of partnership items 6 that was added to the Code by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 648">96 Stat. 648 (TEFRA partnership provisions). The TEFRA partnership provisions have been amended since their enactment in 1982 and are now contained in sections 6221 through 6234. A taxpayer may seek judicial review of an FPAA by filing a petition for readjustment of the partnership items with this Court. Sec. 6226. The procedures under TEFRA parallel deficiency 189 procedures in that notice (the FPAA), and the right to petition this Court must generally21 be given before assessments can be made attributable to partnership items or affected items 7. See secs. 6223, 6225, 6226. The Commissioner must give notice of both the beginning and the ending of administrative proceedings. Sec. 6223(a). The ending notice is the issuance of the FPAA, which must be mailed no earlier than the 120th day after the notice of the beginning of the administrative22 proceedings was mailed. Sec. 6223(d)(1). TEFRA partnership provisions do not contain a period of limitations within which an FPAA must be issued, unlike the period of limitations applicable to the issuance of an FPAA to a large partnership. 8Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533">114 T.C. 533, 534 (2000). C. Statute of Limitations in TEFRA ProceedingsSection 6501(a) provides that the amount of any tax shall be assessed within 3 years from the date a taxpayer's return is filed. 9 The term "return" for purposes of section 6501(a) does not include23 a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit, e.g., a partnership return. Sec. 6501(a). Section 6501 provides the general period of limitations for assessing any tax imposed by the Code. Section 6229 establishes the minimum period for the assessment of any tax attributable to partnership items (or affected items) notwithstanding the period provided for in section 6501. Section 6229 is not a stand-alone statute of limitations but can extend the section 6501 period of limitations 190 with respect to the tax attributable to partnership items or affected items. Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, supra at 542-544; Estate of Quick v. Commissioner, 110 T.C. 172">110 T.C. 172, 181-182 (1998), supplemented 110 T.C. 440">110 T.C. 440 (1998).Stated another way, sections 6229 and 6501 provide24 alternative periods within which to assess tax with respect to partnership items, with the later expiring period governing in a particular case. AD Global Fund, LLC v. United States, 481 F.3d 1351">481 F.3d 1351 (Fed. Cir. 2007); Ginsburg v. Commissioner, 127 T.C. 75">127 T.C. 75, 84-85 (2006); Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, supra at 534; Andantech L.L.C. v. Commissioner, T.C. Memo. 2002-97, affd. in relevant part and remanded in part 331 F.3d 972">331 F.3d 972 (D.C. Cir. 2003); CC&F W. Operations Ltd. Pship. v. Commissioner, T.C. Memo. 2000-286, affd. 273 F.3d 402">273 F.3d 402 (1st Cir. 2001).The issuance of an FPAA suspends the running of any applicable period of limitations under sections 6229 and 6501 until the FPAA adjustments become final or conclusively established, 10 after which the Commissioner has 1 year to assess partners with the tax which properly accounts for their distributive shares of the adjusted partnership items. Sec. 6229(d). The adjustment is a computational adjustment, 11 without notice, provided no partner-level determination is necessary. A statutory notice of deficiency is not required25 for a computational adjustment because, under TEFRA, the partnership item has been resolved at the partnership level and cannot be contested at the individual partner level. 12Secs. 6225, 6230(a), 6229(d); sec. 301.6231(a)(6)-1T(a)(1), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3840 (Jan. 26, 1999). 26 Once the partnership proceeding is completed, if an affected item requires determinations to be made at the partner level, the Commissioner may issue a notice of deficiency to a partner for additional deficiencies attributable to an 191 affected item requiring partner-level determinations. Sec. 6230(a); White v. Commissioner, 95 T.C. 209">95 T.C. 209, 211-212 (1990); sec. 301.6231(a)(6)-1T(a)(2), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3840 (Jan. 26, 1999).Petitioners do not dispute that the FPAA was issued within 3 years of the time they filed their 2002-04 individual income tax returns. Petitioners do dispute whether respondent may assess a tax liability for the 2002-04 taxable years where the underlying partnership item adjustments relate to transactions that were completed and reported on G-5's partnership return in 2000, a year closed to assessment by section 6501.In deficiency proceedings, section 6501 does not preclude an examination into events occurring in prior years which are closed to assessment for the purpose of correctly determining income tax liability for years which are still open. Sec. 6214(b); Hill v. Commissioner, 95 T.C. 437">95 T.C. 437, 445-446 (1990);27 Calumet Indus., Inc. v. Commissioner, 95 T.C. 257">95 T.C. 257, 276-277 (1990) (the Commissioner may recompute the amount of a taxpayer's loss for a source year closed under the period of limitations to determine whether a net operating loss was incurred, and, if so, the amount available in a year open under the period of limitations); Mennuto v. Commissioner, 56 T.C. 910">56 T.C. 910, 922-923 (1971) (the statute of limitations does not prevent the recomputation of the investment tax credit carryover from a barred year in order to determine the tax due for an open year). The critical element is that the deficiency being determined be for a year on which the period of limitations has not run.Although the rule, which allows the review of a year closed by the period of limitations to adjust or recompute items that would cause a tax liability in an open year, pertains to deficiency proceedings, there is no TEFRA partnership provision that precludes extending this rule to partnership proceedings. Petitioners offer no reason the same rule should not apply to the assessment of a tax liability arising from a TEFRA partnership proceeding. The Court has jurisdiction to determine all partnership28 items for the taxable year to which the FPAA relates and the proper allocation of such items among the partners. Sec. 6226(f). Therefore, after the Court's decision in this TEFRA partnership proceeding becomes final, respondent may assess a tax liability for a year open under 192 the period of limitations, even though the underlying partnership item adjustments are attributable to transactions that were completed in a year for which assessments of the partners' tax is barred because of the expiration of the period of limitations.In this case, although the periods prescribed by sections 6229(a) and 6501(a) have run for 2000 and 2001, the FPAA determined adjustments to partnership items (capital losses) that may have income tax consequences to the partners at the partner level in 2002-04, years open under the period of limitations. If the adjustments to partnership items in the FPAA are sustained, respondent may assess a computational adjustment or determine a deficiency against the partners for those open years. However, respondent concedes that, because the tax years 2000 and 2001 are closed, respondent is barred from assessing any deficiencies, penalties or additions to tax with respect29 to the partners' 2000 and 2001 tax years.This Court finds that respondent's issuance of the FPAA on April 12, 2006, for G-5's 2000 tax year was not barred by any period of limitations 13 and that the period of limitations for assessing taxes attributable to partnership items for petitioners' 2002-04 taxable years is open. Accordingly, this Court will deny petitioners' motion for judgment on the pleadings. To reflect the foregoing, An appropriate order denying petitioners' motion for judgment on the pleadings will be issued. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.↩2. For convenience, the Court uses the terms "partnership" and "partner" without deciding whether a partnership existed, a matter which respondent disputes.↩3. The term "indirect partner" means a person holding an interest in a partnership through one or more pass-thru partners. Sec. 6231(a)(10). The term "pass-thru partner" means a partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership with respect to which proceedings under subch. C are conducted. Sec. 6231(a)(9)↩.4. H. Miles Investments, L.L.C., is a single-member limited liability company and a pass-thru partner with petitioner Henry M. Greene as its member.↩5. In respondent's objection to the motion for judgment on the pleadings, he concedes the limitation periods are closed with respect to the partners' 2000 and 2001 tax years.↩6. Partnership items are items required to be taken into account for the partnership's taxable year, to the extent regulations provide that such items are more appropriately determined at the partnership level than at the partner level. Sec. 6231(a)(3); sec. 301.6231(a)(3)-1, Proced. & Admin. Regs↩.7. An "affected item" is any item whose existence or amount depends on any partnership item. Sec. 6231(a)(5). Examples of affected items include: Capital loss carryforwards, net operating loss carrybacks, investment tax credit carrybacks, a partner's basis in his partnership interest, passive losses, and sec. 465 at-risk limitations. Harris v. Commissioner, 99 T.C. 121">99 T.C. 121, 125 (1992); Dial USA, Inc. v. Commissioner, 95 T.C. 1">95 T.C. 1, 5-6 (1990); Maxwell v. Commissioner, 87 T.C. 783">87 T.C. 783, 790-791 (1986); sec. 301.6231(a)(5)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790↩ (Mar. 5, 1987).8. SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUSTMENTS.(a) General Rule. -- * * no adjustment under this subpart to any partnership item for any partnership taxable year may be made after the date which is 3 years after the later of --(1) the date on which the partnership return for such taxable year was filed, or(2) the last day for filing such return for such year (determined without regard to extensions).↩9. There are exceptions to the 3-year period which are not applicable in this case. See, e.g., sec. 6501(c), (d), (e), (f), (h)↩.10. Adjustments may become final or conclusively established as a result of an unchallenged FPAA, a judicial determination pursuant to a sec. 6226 proceeding, a settlement agreement pursuant to sec. 6224(c), or a request for administrative adjustment pursuant to sec. 6227↩.11. A computational adjustment is any change in a partner's tax liability to reflect the proper treatment of a partnership item. Sec. 6231(a)(6)↩.12. Challenges to readjustments of affected items requiring partner-level determinations are not precluded by the finality of a partnership proceeding, although relitigation of distributable partnership income is barred. Woody v. Commissioner, 95 T.C. 193">95 T.C. 193, 208↩ (1990).13. See Kligfeld Holdings v. Commissioner, 128 T.C. 192">128 T.C. 192↩ (2007).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621118/	Managers Discount Corporation v. Commissioner.Managers Discount Corp. v. CommissionerDocket No. 108824.United States Tax Court1943 Tax Ct. Memo LEXIS 429; 1 T.C.M. (CCH) 688; T.C.M. (RIA) 43108; February 27, 1943429 Harold H. Bredell, Esq., 115 N. Pennsylvania St., Indianapolis, Ind., for the petitioner. John D. Kiley, Esq., for the respondent. TURNER Memorandum Findings of Fact and Opinion TURNER, Judge: The respondent has determined deficiencies in income tax and excess profits tax against the petitioner for the year 1937 in the respective amounts of $5,379.99 and $2,145.17. The only issue raised by the pleadings is whether the respondent is in error in determining the value of certain stock received by the petitioner in exchange of securities. Findings of Fact Some of the facts have been stipulated and are found as stipulated. Those facts appearing hereafter which are not from the stipulation are facts found from the evidence presented at the hearing. The petitioner is an Indiana corporation, organized in 1927, and has its principal office and place of business in Indianapolis, Indiana. Its return for the year 1937 was filed with the Collector of Internal Revenue for the District of Indiana. R. D. Brown has been president of the petitioner since 1934 and controls all of its stock. The petitioner is a corporation through which the management of a number of properties belonging to other430 corporations in which Brown is a dominating party is conducted. During 1935, 1936 and 1937 the petitioner purchased for $393,005.65 certain Convertible Six Percent Ten-year Secured Notes, Series A, of Indiana Southwestern Gas & Utilities Corporation, sometimes hereinafter referred to as the Debtor or Debtor Corporation, in an aggregate face amount of $1,885,500. The Convertible Notes so acquired by petitioner constituted a major part of a total issue of $2,500,000, which issue was secured under a collateral trust indenture dated June 1, 1930, by the following pledged securities: $1,000,000 Face Amount - Mortgage Gold Bonds, Series A, of Indiana Southwestern Gas Corporation 1,000 Shares - No Par Value Common Stock of Indiana Southwestern Gas Corporation $1,875,000 Principal Amount - Mortgage Gold Bonds, Series A, of Grayburg Oil Company 27,051.58 Shares - $100 Par Value Common Stock of Grayburg Oil Company $250,000 Face Amount - Mortgage Gold Bonds, Series A, of Newton Pipe Line Company, Inc. 1,000 Shares - No Par Value Stock of Newton Pipe Line Company, Inc. 3 Shares - No Par Value Common Stock of Gas Transport Company, Inc. 100 Shares - No Par Value Common Stock of Pike 431 Gas Corporation, Inc. $49,080.93 - Convertible Fifteen Year Gold Notes, dated May 1, 1930, of Pine Street Corporation 50 Shares - $10 Par Value Common Stock of Kilnoc Blue Refining Corporation The above-described securities together with $210,000 principal amount of Secured Six Percent Gold Bonds of Newton Pipe Line Company, Inc., sometimes hereinafter referred to as Newton, and the stock of Pine Street Corporation constituted the assets of the Debtor Corporation and gave it control over the various corporations named. These said corporations were divisible into two groups. One group, designated as the Indiana group, consisted of Indiana Southwestern Corporation, Newton Pipe Line Company, Inc., Pike Gas Company, Inc., Gas Transport Corporation, Inc., and Pine Street Corporation. These companies were engaged in the development, production or distribution of natural gas in the state of Indiana. The other companies, known as the Texas group, consisted of Grayburg Oil Company, sometimes hereinafter referred to as Grayburg, Grayburg Pipe Line Company, Kilnoc Blue Refining Corporation and Muen-Rio Oil Company and were engaged in the development, production or distribution of crude oil432 in the state of Texas, Grayburg Oil Company owned the stock of Grayburg Pipe Line Company and the Class A stock, 505 shares, of Muen-Rio Oil Company. Four hundred and ninety-five shares of Class B stock and an $85,000 secured note of the latter corporation belonged to outside interests. On June 29, 1935, the Debtor Corporation filed a petition in the United States District Court for the District of Delaware for reorganization under section 77 B of the Bankruptcy Act. Under date of February 1, 1937, a plan of reorganization was filed with the court, which plan was approved by the court by order dated March 5, 1937. The plan and the results sought to be accomplished were stated generally as follows: THE PLAN It is proposed in the Plan to eliminate the Debtor and certain of its subsidiary companies, to cancel all of the bonds of subsidiaries, now held by the Debtor and to discharge the existing mortgages by which the same are secured (subject to the provisions of Article II with respect to the issue of new First Mortgage Bonds of Indiana Southwestern Gas Corporation to secure the performance by it of a contract for the sale of gas), and, after certain readjustments of the capital 433 structures of the subsidiaries whose existence is to be preserved, to distribute to the Noteholders the stock of two companies, of which one is to own directly or indirectly the assets now owned by the Indiana Companies and the other is to own directly or indirectly the assets now owned by the Texas Companies. The Notes are to be surrendered and cancelled upon such distribution, and the Collateral Trust Indenture under which they were issued is to be discharged. These readjustments will result in a greater simplification of the present corporate structure and will, it is believed, effect substantial economies through the reduction of overhead applicable to inter-corporate administration and other expenses arising from the existing complex system of companies. The elimination of the present funded indebtedness of the subsidiary companies will reduce the fixed charges to be borne by the two companies whose stock is to be distributed to the existing Noteholders. This stock will represent the ownership of the combined assets of the present group of companies; as the existing stocks and securities of those companies constitute the only security for the Notes, the Noteholders will, through434 the reorganization, acquire a more direct interest in the properties which now indirectly secure their Notes. Article III of the plan of reorganization provided in part as follows: ARTICLE III. Simplification of Corporate Structure of Subsidiaries - New Securities Upon the confirmation of the Plan by the Court in the Reorganization Proceeding, it is proposed to simplify the corporate structure of the subsidiary companies owned and controlled by the Debtor to accomplish the results outlined below in this Article III. To this end the Debtor shall cause to be taken proceedings to eliminate the companies which are not to remain in existence by such consolidations, mergers, sales, transfers of assets, dissolutions and other steps as may be advisable. In addition, such proceedings by the Debtor will include all steps necessary to consummate the settlement of the Hoosier Gas controversy as hereinabove set forth, and the creation and issue to the Debtor of the New Securities hereinafter described, which will be exchanged for the securities now held by the Debtor and ultimately be distributed to the holders of the Notes of the Debtor as provided in Article IV. There will be released from435 the Collateral Trust Indenture securing the Notes the securities of the Indiana and Texas Companies now pledged thereunder, to be surrendered, transferred or distributed by the Debtor in accordance with the provisions of the Plan. A. Indiana Companies. It is contemplated that after such proceedings have been completed, there will be only two companies owning and operating the properties located in the State of Indiana, of which one (hereinafter referred to as Indiana) will own and operate the properties to be subjected to the lien of the new First Mortgage $ entioned in Article II, and the other (hereinafter referred to as Newton) will own and operate the balance of the properties located in the State of Indiana, and will own and hold the entire capital stock of Indiana. The existing corporate entities of Indiana Southwestern Gas Corporation and Newton Pipe Line Company, Inc., may be retained for this purpose, or new corporations may be formed to which the assets will be transferred, or one or more of the charters of the presently existing corporations other than Indiana Southwestern Gas Corporation and Newton Pipe Line Company, Inc. may be utilized. Indiana and Newton will continue436 to be obligated by, or will assume, all the obligations of Indiana Southwestern Gas Corporation and Newton Pipe Line Company, Inc., respectively, except the presently outstanding bonds of said companies and the indebtedness of said companies to the Debtor and its subsidiary companies. The presently outstanding bonds of Indiana Southwestern Gas Corporation and of Newton Pipe Line Company, Inc. will be surrendered by the Debtor, will be cancelled, and the mortgages securing the same discharged of record. The capital stock of Newton will consist of 5,000 shares of Common Stock without par value, described in subdivision C of this Article III, which will be issued and delivered to the Debtor for distribution by it in accordance with the provisions of Article IV. B. Texas Companies. Of the Texas Companies, Kilnoc Blue Refining Corporation (which has no assets) will be dissolved. The entire capital stock of Grayburg Pipe Line Company and the 505 shares of Class A Stock of Muen-Rio Oil Company will continue as heretofore to be owned by Grayburg Oil Company, and the 495 shares of Class B Stock and the $85,000 note of Muen-Rio Oil Company will remain outstanding. Grayburg Oil Company 437 will create an issue of 5,000 shares of Preferred Stock, described in subdivision C of this Article III, which will be issued and delivered to the Debtor in exchange for and upon cancellation of the $1,875,000 principal amount of Mortgage Bonds of Grayburg Oil Company now owned by the Debtor, and will be distributed by the Debtor in accordance with the provisions of Article IV. The par value of the Common Stock of Grayburg Oil Company will be changed from $100 per share to no par value, and the total number of shares authorized to be issued will be increased to 60,000 shares in order to make available a sufficient number of shares for issue in case of the exercise by the holders of the Preferred Stock of their conversion rights described in subdivision C of this Article III. The Common Stock now outstanding will remain in the hands of its present holders, except that 51.58 of the shares now owned by the Debtor will be surrendered and cancelled; the 27,000 shares of said Common Stock which will continue to be owned by the Debtor will be distributed by it in accordance with the provisions of Article IV. Upon the surrender for cancellation of said Bonds of Grayburg Oil Company, the Mortgage438 securing the same will be discharged. C. New Securities. Upon the consummation of the foregoing proceedings, there will be held by the Debtor for distribution in accordance with the Plan: (1) 5,000 shares of the Common Stock of Newton. (2) 5,000 shares of the Preferred Stock of Grayburg Oil Company. (3) 27,000 shares of the Common Stock of Grayburg Oil Company. * * * * D. Cancellation of Inter-Company Indebtedness All Indebtedness between and among the Debtor and its subsidiary and affiliated companies shall be cancelled. It was thereafter provided in Article IV of the plan that the 5,000 shares of the common stock of Newton Pipe Line Company, Inc., the 5,000 shares of preferred stock of Grayburg Oil Company and the 27,000 shares of common stock of that corporation should be distributed by the Debtor Corporation to the holders of its Convertible Six Per Cent Ten-year Secured Notes. For each $1,000 aggregate principal amount of Notes, the holder thereof was to receive 2 shares of the common stock of Newton and 2 shares of preferred and 10.8 shares of the common stock of Grayburg Oil Company. The holders of secured claims, preferred claims and unsecured claims other than439 the holders of Convertible Notes were to be paid in cash. The various steps in the plan preliminary to the distribution of the Grayburg and Newton shares to the Noteholders having been taken, the court on May 5, 1937, entered its order directing distribution of the said Newton and Grayburg stocks and payment of the claims. No assets were available for distribution to the stockholders of the Debtor Corporation. On or about December 28, 1937, the petitioner surrendered the Notes of the Debtor Corporation held by it in exchange for 3,771 shares of the common stock of the Newton Pipe Line Company, Inc., 3,771 shares of preferred stock and 20,363.4 shares of common stock of Grayburg Oil Company. The stock of Grayburg and Newton so received was entered by petitioner on its books at a cost of $393,005.65, which amount was the cost of the Convertible Notes of the Debtor Corporation exchanged therefor. This cost was allocated, $45,279 to the 3,771 shares of Newton common stock, $301,545 to the 3,771 shares of Grayburg preferred stock and $46,181.65 to the 20,363.4 shares of Grayburg common stock. The amount, approximately $12 per share, at which the Newton common stock was set up on the 440 books of the petitioner was based on the estimated salvage value of the Newton properties and the amount at which the Grayburg preferred stock was set up was based on a per share value of $80, which was the value at which the stock was accepted for collateral purposes; while the amount at which the Grayburg common stock was set up, approximately $2,26 per share, represented the balance of the cost of the Convertible Notes of the Debtor Corporation which had been given in exchange. Prior to the bankruptcy proceedings the capital structure of Grayburg Oil Company consisted of $1,875,000 principal amount of Mortgage Gold Bonds and 30,000 shares of common stock, having a par value of $100 per share. The Mortgage Gold Bonds and 27,051.58 shares of the common stock were owned by the Debtor Corporation, 2,767.81 shares of the stock were held by the public, and 180.61 shares were held by Grayburg in its treasury. After the bankruptcy proceedings the $1,875,000 of Mortgage Gold Bonds had been eliminated by cancellation, the 30,000 shares of $100 par value common stock had been surrendered, and 5,000 shares of $100 par value preferred stock and 30,000 shares of no par value common stock had441 been issued. Of the 30,000 shares of new common stock, the petitioner acquired 20,363.4 shares upon surrender of the Convertible Secured Notes to the Debtor Corporation and the remainder, except possibly for a few shares held by Grayburg in its treasury, were acquired by the general public. On June 30, 1936, approximately one year prior to the consummation of the above-described plan, a special master appointed by the court had made a report showing that the liabilities of Grayburg amounted to $1,948,326.48 and that its total assets had a value of $412,693.01. The above liabilities included the $1,875,000 of Mortgage Gold Bonds cancelled in the 77 B reorganization. The preferred stock of Grayburg Oil Company issued pursuant to the above-described plan was $5 cumulative preferred stock and had a preference in liquidation over the common stock to the extent of $100 per share. The highest price at which any of such stock has been sold since its issuance in 1937 has been $50 per share. Grayburg has regularly paid the $5 dividend on the preferred stock since it was issued, but during that period has paid no dividend on the common stock. For the period 1935 to 1941 the consolidated annual442 net earnings or losses of Grayburg Oil Company and Grayburg Pipe Line Company, as shown by their books, were as follows: 1935Loss$165,205.371936Loss113,240.891937Profit2,991.411938Loss42.781939Loss38,599.861940Loss9,050.861941Profit18,328.66From 1935 through 1937 Grayburg Oil Company owned a number of producing oil leases in the state of Texas. R. D. Brown took charge of the properties of Grayburg Oil Company on February 1, 1935, and became its president in 1936. During the years 1935 to 1938, inclusive, Brown made numerous trips to Texas to inspect the properties of Grayburg Oil Company and was familiar with them. The common stock of Grayburg Oil Company has never been listed on any stock exchange, and there has never been any market listing or record of any bid or asked quotation on said stock. Sometime in September 1937 Brown gave orders to three brokers to purchase either on his own behalf or on the behalf of the petitioner, at a ceiling price of $4 per share, all shares of the common stock of Grayburg Oil Company that were offered for sale. He also instructed the brokers that he wanted to be told about any shares of the common stock443 of Grayburg Oil Company that came to their attention which could not be purchased for $4 a share. All of the shares of Grayburg common stock shown to have been sold, with the possible exception of 15 shares, were sold to the petitioner or to Brown for the account of the petitioner. The petitioner never directly solicited the purchase of any stock, never purchased stock except through the brokers, and purchased only such shares as came into the market. The purchases of Grayburg common stock by the petitioner or Brown for the account of the petitioner, during 1937, 1938 and 1939, totaled 1,432 shares, averaged 42 shares per transaction, and ranged in price from $1 to $5 per share, the average price per share being approximately $3.40. The sales of Grayburg common stock nearest December 28, 1937, the basic date in this proceeding, and for the six-month period September 25, 1937, to March 17, 1938, were as follows: AverageNumberPriceofperDateSharesCostShareSept. 25, 193726.6$ 86.40$3.24Oct. 2, 193764.8324.005.00Oct. 2, 193721.6108.005.00Oct. 12, 1937108432.004.00Oct. 18, 193729.6118.404.00Oct. 18, 1937.83.204.00Oct. 23, 1937108432.004.00Oct. 27, 1937.83.204.00Jan. 7, 193864.881.001.25Feb. 23, 19381122.002.00Mar. 10, 193814.004.00Mar. 14, 193832.4129.004.00Mar. 17, 1938120600.005.00444 In making his determination of deficiency the respondent has accepted the amounts of $45,279 and $301,545, at which the Newton Pipe Line Company common and the Grayburg preferred stocks were entered on the petitioner's books, as representing the fair market value of those stocks on December 28, 1937, when they were acquired, but has determined that the 20,363.4 shares of Grayburg common stock had a fair market value on that date of $81,453.60, or an average of $4 per share, instead of $46,181.65, or $2.26 per share, at which the said shares were entered on the petitioner's books. The fair market value of the Grayburg common stock on December 28, 1937, was $4 per share. Opinion The pleadings present for determination a single question of fact, namely, the fair market value of 20,363.4 shares of the common stock of Grayburg Oil Company on December 28, 1937, the date on which the said shares were received as a part of the consideration in exchange for the Convertible Secured Notes of Indiana Southwestern Gas & Utilities Corporation. The respondent has determined that the said shares had a fair market value on the basic date of $81,453.60, or $4 per share. The petitioner claims that445 the value of the shares was not in excess of $2.26 per share, at which rate they were entered on its books. Grayburg was engaged in the production of crude oil and related activities either directly or through its subsidiary or subsidiaries. Its financial structure had just been revamped in proceedings for the reorganization, under section 77 B of the Bankruptcy Act, of Indiana Southwestern Gas & Utilities Corporation, which prior thereto had owned 27,051.58 of the 30,000 Grayburg common shares outstanding and its Mortgage Gold Bonds amounting to $1,875,000. The bonds of Grayburg had been canceled, its stock had been reclassified, and the properties of one of its subsidiaries apparently acquired in place of stock previously held therein, the purpose being to simplify the corporate structure and effect substantial economies through the reduction of overhead and other expenses arising from the existing complex system of companies. After the bankruptcy proceedings the petitioner held approximately two-thirds of the outstanding shares of Grayburg common stock, while the remaining common shares were held by the general public. At or about the time of the final order of the court in the446 bankruptcy proceedings, Brown, president of both the petitioner and Grayburg, placed standing orders with three brokers to purchase, at a ceiling price of $4 per share, all of the Grayburg common stock which should come on the market. He also instructed the brokers to advise him of any such shares coming to their attention which could not be purchased for $4 per share. In giving these orders, Brown was acting for the petitioner. The stock was not listed on any exchange, and there was no active market. Except possibly for three sales covering 15 shares, all of the known sales from the date of the purchase orders through 1939 were sales to the petitioner. During the period from September 25, 1937, to March 17, 1938, which included periods immediately preceding and immediately following December 28, 1937, the basic date herein, the petitioner acquired 589.4 shares at an average cost of $4 per share. Up to December 31, 1939, 1,432 shares had been acquired in transactions averaging 42 shares, at prices ranging from $1 to $5, the average price per share being approximately $3.40. The respondent has determined that $4 per share was the fair market value of the said stock on December 28, 447 1937. The petitioner claims that the value so determined by the respondent is not justified by Grayburg's earnings record, the value of its assets or by the sales of the stock. For proof of the value of the Grayburg assets, it stresses the findings and recommendations contained in the report of the special master filed on June 30, 1936, long prior to the revamping of Grayburg's financial structure pursuant to the reorganization under the bankruptcy proceedings. With respect to earnings, the petitioner seeks to take into consideration not the earnings of Grayburg alone but the consolidated earnings or losses of Grayburg and Grayburg Pipe Line. Furthermore, it seeks to take into account consolidated losses sustained prior to the said reorganization, when Grayburg was still liable for interest at 6 percent on its $1,875,000 of outstanding bonds and before the simplification of the corporate structure and the effecting of "substantial economies through the reduction of overhead applicable to intercorporate administration and other expenses arising from the existing system of companies," contemplated by the plan adopted in the 77 B proceedings. It also contends that no weight should be448 given to representations made by its president, Brown, in a letter written on November 16, 1937, to the effect that the figure of $4.24 per share at which the shares of Grayburg common stock had been purchased up to that date by the three brokers did not "reflect the potential profit" which he hoped and felt sure would "come out of the ownership of the control of the * * Texas properties." Considering the evidence in the case, including the price at which the Grayburg common stock was being purchased on the market, the anticipated economies from the cancellation of the heavy bonded indebtedness and other economies resulting from the simplification of the corporate structure, the potential profits anticipated by those who were in a position to know its business prospects, and other evidence of record bearing upon the fair market value of the Grayburg common stock at the basic date, we conclude that the petitioner has not shown that the repondent's determination of $4 per share for the Grayburg common stock at the time it was acquired was in error, but, to the contrary, that the evidence supports that determination. On brief, the petitioner's counsel contends for the first time 449 that "The transaction whereby Petitioner exchanged certain Convertible Notes for shares of stock did not constitute a taxable exchange or sale, because said transactions came within the non-recognition provisions of the Revenue Act of 1936, to-wit: Section 112 (b) (3), 112 (b) (5), 112 (g) and the related statutory provisions and regulations thereunder." To support this proposition, he relies upon ; ; ; and . He contends that the petitioner has at all times regarded the exchange as being within the scope of the statutory provisions mentioned and that its assignment of error so indicates. He argues further that the "law on the subject of reorganizations and the question of taxable character of an exchange such as existing in the case at bar has been changed by the decision of the United States Supreme Court in Helvering v. Cement Investors,450 Inc." and under the pronouncements of the Supreme Court in , the question as to the character of the transaction should now be considered by this tribunal before reaching its decision herein. The allegation of error as it appears in the petition reads as follows: The Commissioner was in error in assessing tax for additional income alleged to have been realized in the sum of $35,271.95 in the calendar year 1937 as a taxable gain resulting from the exchange by the petitioner of notes of Indiana Southwestern Gas & Utilities Corporation for certain shares of stock of Newton Pipe Line Company, Inc., Grayburg Oil Company common stock, and Grayburg Oil Company preferred stock, which exchange was effected under the orders of the District Court of the United States for the District of Delaware in the reorganization of Indiana Southwestern Gas & Utilities Corporation. The specific issue in dispute is the Commissioner's determination of the value of shares of common stock of Grayburg Oil Company at a value of $4.00 per share, or a total value of $81,453.60 for the 20,363.4 shares exchanged, contrary to the value of $2.26 per451 share, or a total value of $46,181.65 shown by the books of the petitioner. The Commissioner's determination of the value of the other shares involved, namely, the Grayburg Oil Company preferred stock and Newton Pipe Line Company, Inc., common stock, is in accordance with the value shown by the taxpayer's books and is therefore not in controversy. At the hearing, counsel for both the petitioner and the respondent agreed that the only remaining assignment of error was the respondent's determination of the fair market value of the Grayburg common stock on the date acquired by the petitioner, and later in the proceeding, when objection had been made to the admission of evidence covering the details of the transactions occurring in the 77 B proceedings, counsel for the petitioner disavowed any intention to question the nature or character of the transaction, but urged that the matter then offered should be received in evidence as bearing on the value of the Grayburg stock as of the date acquired by the petitioner. It was on that basis that the evidence offered was received. It is not for us to try to guess the facts that might or would have been disclosed by the evidence if the issue452 which the petitioner now seeks to argue had been properly raised by the plcadings and hearing had thereon. Prerequisite, however, to the applicability of section 112 (b) (3), supra, there must have been a reorganization within the meaning of section 112 (g) (1), supra, and in that connection we do know, for instance, that Grayburg did not acquire all or substantially all of the properties of Indiana Southwestern Gas & Utilities Corporation. On the other hand, various facts are not known. The petitioner's own discussion leaves us in the dark as to certain details of Grayburg's participation in the 77 B reorganization and their pertinence to the issue petitioner now seeks to have decided, in that it states as one fact that the transaction made no change in the Grayburg assets and as another that after transaction Grayburg held the Muen-Rio Oil Company's assets "in lieu of stock ownership," while in that connection the record shows that prior to the transaction Grayburg's interest in Muen-Rio Oil Company was limited to 505 of the 1,000 shares of Muen-Rio stock outstanding and that the remaining shares and an $85,000 secured note belonged to outside interests. Similarly, for453 the purpose of showing the applicability of section 112 (b), supra, we should have to assume facts not shown by the record or deny applicability of section 112 (b) (5) for failure of proof. That section is applicable where property is transferred to a corporation by one or more persons solely in exchange for stock and securities in such corporation and immediately after the exchange such person or persons are in control of the corporation. Specific provision is made, however, that the section shall apply "only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange." The facts show that prior to the 77 B reorganization Grayburg had outstanding $1,875,000 par value Mortgage Gold Bonds and 30,000 shares of common stock, that Indiana Southwestern Gas & Utilities Corporation was the owner of the bonds and 27,051.58 shares of the common stock, and that 2,767.81 of the remaining shares were held by the public generally. In the reorganization Indiana Southwestern Gas & Utilities Corporation received for the Mortgage Gold Bonds and old common stock the 5,000 shares of new preferred stock of Grayburg454 and 27,000 of the 30,000 shares of new Grayburg common stock, and the general public for its old Grayburg common received shares of the new Grayburg common stock. Assuming that section 112 (b) (5) would otherwise be applicable, the record falls far short of showing that the holdings of the Grayburg stock after the transaction were substantially in proportion to the interests of the said stockholders prior thereto. In , where the taxpayer undertook to go outside of the pleadings and after hearing had been concluded to argue the statute of limitations, we said, "Orderly procedure requires that the issues be clearly framed in the pleadings that both parties may have notice and an opportunity to produce their evidence. An orderly procedure is necessary if the Board is to handle the large number of cases filed with it and if proper records are to be made for review in the courts. To attempt to decide any issue with respect to the statute of limitations upon the basis of an ex parte statement in the brief that a certain waiver in terms therein quoted was filed would be to deny the respondent a hearing455 upon this issue and an opportunity to produce his evidence." , relied upon by the petitioner, was decided after the hearing in this proceeding but before briefs were filed, while , and companion cases were decided nearly four months prior to the hearing herein. The cases last mentioned gave ample notice of the status of bondholders for the purpose of applying section 112 (b), supra, to exchanges occurring under section 77 B proceedings. The petitioner had ample time to ask leave to amend its pleadings to raise the issue as to the recognition of gain realized upon the acquisition of the Grayburg stock, and no motion, timely or otherwise, to amend the pleadings to raise such an issue has been received. Even if we should now entertain and grant a motion to amend the pleadings to raise the issue argued, it is obvious from the above that a second trial would be indicated and necessary to give the respondent his day in court or to prevent entry of decision for failure of proof. If this Court should be required or should attempt456 to hold cases open for a second trial on alternative issues not properly or timely raised, it should never be able to dispose of the cases before it. The petitioner has had its trial on the issue raised by its pleadings, and on that issue the case is decided. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621119/	DANIEL J. and KATHRYN W. SULLIVAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSullivan v. CommissionerDocket No. 5202-78.United States Tax CourtT.C. Memo 1980-265; 1980 Tax Ct. Memo LEXIS 325; 40 T.C.M. (CCH) 718; T.C.M. (RIA) 80265; July 21, 1980, Filed Daniel J. and Kathryn W. Sullivan, pro se. George MacVogelei, for the respondent. SCOTT MEMORANDUM OPINION SCOTT, Judge:* Respondent determined a deficiency in petitioners' income tax for the calendar year 1974 in the amount of $2,400. The issues for decision are (1) whether the amount of $8,469 received by Kathryn W. Sullivan in 1974 from the California State Teachers' Retirement System is includable in whole or in part in petitioners' taxable income in 1974, and (2) whether petitioners are entitled to an exclusion from gross income of $5,200 under section 105(d), I.R.C. 1954, 1 or only to an exclusion under this section of $3,600. 328 All of the facts have been stipulated by a written stipulation of facts together with exhibits attached thereto and certain exhibits stipulated into the record at the trial of this case. The stipulated facts are found accordingly. Petitioners, husband and wife, who resided in Menlo Park, California at the time of the filing of their petition in this case, filed a joint Federal income tax return for the calendar year 1974 with the Internal Revenue Service Center in Fresno, California. Kathryn W. Sullivan (petitioner) was employed by the Palo Alto, California Unified School District as an elementary school music teacher beginning in 1960. She continued her employment with the school district through the spring of 1969. Because of serious problems with both of her eyes which required several operations and extensive hospitalization, petitioner did not teach during the school year 1969-1970. She went back to her position in the school system during the school year 1970-1971, but by the end of that school year found it impossible to continue teaching. While petitioner was teaching in the Palo Alto school system she was entitled to receive her yearly salary either in 9 monthly329 payments or 12 monthly payments and took the option of receiving it in 12 monthly payments. Petitioner applied for and received a disability allowance from the State Teachers' Retirement System with an effective date of July 1, 1972. Petitioner received a letter dated December 28, 1973, from the State Teachers' Retirement System referring to a report given by her doctor concerning her continued disability and stating that on the basis of that report it had been determined that she was permanently incapacitated for the performance of teaching duties. During the taxable year 1974, petitioner received $8,469.03 as a disability allowance from the State Teachers' Retirement System. The California State Teachers' Retirement System was established to provide a financially sound plan for the retirement, with adequate retirement allowances, of teachers in the public schools of the State. Because of recognition that the assets of the State Teachers' Retirement System were insufficient to meet the obligations of that system already accrued or to accrue in the future with respect to service credited to members of that system prior to July 1, 1972, the State Legislature provided for financing330 of the Teachers' Retirement System by member contributions, by contributions of the employing agencies based on total salaries of the members, and by contributions from the State of a sum certain for a given number of years for the purpose of payment of benefits. 2331 The California State Teachers' Retirement System provided for retirement because of age and for disability retirement. The statute provided for a disability retirement to become effective upon the date designated by the person as the effective date of disability or upon the day of the month following the last day of service for which salary is payable to the person, whichever is later. The statute provided for an annual disability allowance payable in monthly installments equal to 50 percent of the highest annual salary earned by the disabled person in any one of the three school years immediately preceding retirement, increased by 10 percent of such salary for each child to a maximum of four children. 3332 Durng the time petitioner was employed in the Palo Alto public school system she had a yearly contract or notice of re-employment which would list the school year as beginning July 1 and ending June 30 and provide that the number of days of service was either 180 or 181, with the beginning date of service a date in approximately mid-September and an ending date in approximately mid-June. Each of these notices under "work days during holidays" would list "none." The notice would also list the salary and cumulated days of sick leave which petitioner had. The same type of contract was in effect in the year 1974 for teachers employed in positions comparable to the position in which petitioner had been employed from 1960 to 1971. The State Teachers' Retirement System issued bulletins for the benefit of its participants. One of these bulletins which petitioner received contained a statement to the effect that a person retiring on disability might be qualified "for a disability income exclusion" if they met certain criteria. 4The California Teachers Association also issued bulletins for the benefit of retired teachers. One of the bulletins issued by the association referred to333 teachers receiving disability allowances from the State Teachers' Retirement System being entitled "to exclude from taxable income up to $100 a week ($5200 a year)." Petitioners did not include the $8,469.03 received by petitioner from the State Teachers' Retirement System in the income they reported on their 1974 Federal income tax return. However, petitioners did on that return, on line 14, "Adjustments to income (such as 'sick pay,' 334 moving expenses, etc. from line 43)," claim an exclusion of $5,200 which they claimed as "sick pay exclusion" as shown on Form 2440 attached to their return. Respondent in his notice of deficiency determined that the $8,469.03 received by petitioner from the State Teachers' Retirement System was includable in petitioners' income. Respondent further determined that only $3,600 was excludable by petitioners as sick pay and therefore increased petitioners' income by the $1,600 difference in $3,600 and the claimed $5,200 exclusion. It is petitioners' position that they are not required to include any part of the $8,469.03 received by petitioner from the State Teachers' Retirement System in their income since they contend that these amounts are excludable from income under section 104 as amounts received in the nature of amounts under the Workmen's Compensation Act as compensation for personal injury or sickness, or under section 105(c) as payments unrelated to absence from work for permanent loss or loss of use of a member or function of the body computed with reference to the nature of the injury without regard to the period the employee is absent from work. It is petitioners' 335 position that even though under sections 104 or 105(c) no portion of the $8,469.03 is includable in their income, they are entitled under section 105(d), concerning wage continuation plans, to exclude from their reported income $100 a week for 52 weeks, or $5,200. 5336 Petitioners, in support of their position that no part of the $8,469.03 received by petitioner from the California State Teachers' Retirement System is includable in their income, rely on Sibole v. Commissioner,28 T.C. 40">28 T.C. 40 (1957); Watson v. United States, 246 F.Supp. 755 (E.D. Tenn. 1965); and Trappey v. Commissioner, 34 T.C. 407">34 T.C. 407 (1960).They cite no authority for their claim that petitioner's disability allowance is in the nature of workmen's compensation and is therefore excludable under section 104(a)(1). Clearly, from the statutes we have quoted in footnotes 2 and 3, the amount received by petitioner as a disability retirement allowance in 1974 was not workmen's compensation. Section 104(a)(1) deals only with workmen's compensation and not with any other items. Section 104(a)(1) refers only to amounts received under "workmen's compensation acts." The amount petitioner received was under the California statutes providing for teachers' retirement. Therefore section 104 does not entitle petitioners to exclude the $8,469.03 from their income in 1974. The case of Watson v. United States, supra, deals with337 the question of a sick pay exclusion claimed by a taxpayer under section 105(d). It does not involve any claim by the taxpayer for an exclusion under any other provision of the Code. The issue discussed in that case was the proper interpretation of the provision of section 1.105-4(a)(3)(i), Income Tax Regs., as applicable to the year 1959, which provided that section 105(d) did not apply to an employee who was not expected to work because he had reached retirement age. Trappey v. Commissioner, supra, dealt with the difference in the provisions of the 1939 Code which were applicable when Sibole v. Commissioner, supra, had been decided and the provisions of the 1954 Code applicable to the year 1955 there involved. 6 The Sibole case involved the year 1949. That case involved payments under the California State Employees' Retirement Law which we held, relying on Haynes v. United States, 353 U.S. 81">353 U.S. 81 (1957), constituted amounts received through health insurance as compensation for sickness within the meaning of section 22(b)(5), I.R.C. 1939. 338 Sibole v. Commissioner, supra, has no application to the instant case because the law which was applicable in that case is entirely different from the law applicable in the instant case. In Conroy v. Commissioner, 41 T.C. 685">41 T.C. 685 (1964), affd. 341 F.2d 290">341 F.2d 290 (4th Cir. 1965), we pointed out that the Sibole case and similar cases were not applicable to years governed by the 1954 Code. We then stated (at 692) that, as held in Trappey v. Commissioner, supra, "amounts received through accident or health insurance are not excludable from gross income under the 1954 Code to the extent that they are attributable to contributions by the employer which were not includable in the gross income of the employee or which are paid by the employer" unless all or some portion of the amount is excludable under section 105(d). The law concerning the California Teacher's Retirement System provides for financing of the system through payments by the teacher and by the school district in which the teacher is employed as well as through direct payments by the state. In the instant case, as in Conroy v. Commissioner, supra,339 it is not possible to tell what portion, if any, of the $8,469.03 was applicable to amounts that may have been paid by petitioner into the retirement fund. It appears that the retirement system under which petitioner retired was basically set up in 1969 and the facts show that petitioner would have had only approximately one year of employment under that system. Therefore, insofar as this record shows, no part of the $8,469.03 would have been attributable to amounts paid into the fund by petitioner. As was pointed out by this Court and the Circuit Court in the Conroy case, in order for a taxpayer to have any amount excluded as being applicable to amounts paid into the retirement fund by the taxpayer "the apportionment obligation placed upon them by section 1.72-15(c) of the Treasury Regulations" would have to be satisfied. Section 72 of the Code deals with the taxability of annuities and certain proceeds of endowment and life insurance contracts. It provides for an exclusion ratio to allow for the recovery of amounts paid into the annuity fund by the person receiving the annuity or paid for the contract under which the endowment or the insurance340 proceeds are received. There is, however, an exception from the applicability of this general provision of section 72 where an employee will during the first 3 years receive an amount of annuity equal to or in excess of the total contribution he made as consideration for the contract. Petitioner had been receiving disability retirement pay for a year and a half prior to the year 1974 and, if she did in fact make any contribution from her salary to the retirement system, had probably recovered the amount during this period. In any event, here, as in Conroy, the burden would be on petitioner to show that a portion of the payments she received as disability retirement in 1974 was applicable to amounts she paid into the retirement system from her taxable salary. This petitioner has not done. We therefore hold that under section 105(a) petitioners are required to include in income all of the $8,469.03 which is not excludable from their income under section 105(d). Section 105(d) provides that gross income does not include amounts received by an employee through accident or health insurance for personal injury or for sickness if such amounts constitute wages or payments in lieu341 of wages "for a period during which the employee is absent from work on account of personal injuries or sickness." The exclusion is limited to $100 a week. Petitioner takes the position that she was absent from work for 52 weeks during 1974 on account of sickness. It is respondent's position that since petitioner was only required to work for 36 weeks a year and the other 16 weeks were vacation time, she was only absent from work on account of sickness during the 36 weeks that she would have been expected to be present at her position. Respondent relies on section 1.105-4(a)(2)(ii), Income Tax Regs., which provides that section 105 is applicable only if the employee is absent from work due to sickness and does not apply to a plan for continuing the wages of the employee when he is absent from work for other reasons. Respondent relies on our holdings in Cohen v. Commissioner, 41 T.C. 181">41 T.C. 181 (1963), and Weinroth v. Commissioner, 33 T.C. 58 (1959). In the Weinroth case we held that a teacher who had agreed voluntarily to work on some lesson plans during the summer months when he was not required to be in attendance at his teaching position in342 New York City was not entitled to exclude $100 a week during the summer months when illness prohibited him from working on such plans. We pointed out that section 105(d) applies only to amounts attributable to periods during which a taxpayer would be at work if he were not sick.The taxpayer in that case was doing volunteer work without extra compensation during the time normally set aside for his vacation when he became ill and unable to work. We therefore held that the taxpayer was not entitled to an exclusion under section 105(d) because he was not absent from work for a period when he was expected to be at work. Following this case, we held in Cohen v. Commissioner, supra, that a teacher who was ill from April 14, 1959, through December 31, 1959, was entitled only to exclude $100 a week under section 105(d) for the weeks when she would have been teaching had she not been ill. We pointed out that the fact that the taxpayer was paid on a basis of 12 months was not material to the decision since the taxpayer would have been paid for the summer and Christmas vacation even though she had not been ill. Petitioner here stated that when she was teaching she was343 able to elect whether to be paid on the basis of 9 months or 12 months and had elected to be paid on a 12-month basis. Petitioners point out that petitioner also received the disability annuity on a 12-month basis. We dismissed similar facts as being immaterial in Cohen v. Commissioner, supra.In the Cohen case, in answering the distinction the taxpayer attempted to make in her situation and in the Weinroth case, we stated (at 188-189): She contends that the portion of the regulations precluding any exclusion for the summer or other vacation period applies only in the case of a teacher who becomes sick during the summer or other vacation period, whereas she became sick before the summer period commenced. She claims that this provides a distinction between her case and the Weinroth case, where the illness commenced during the summer vacation period. We cannot accept this view. The cited portion of the regulations is followed immediately by the statement that "the exclusion provided under section 105(d) is applicable only * * * to payments attributable to a period when the employee would have been at work but for such personal injury or sickness.344 " The substance of our holding in the Weinroth case was that the taxpayer's absence from work was not due to sickness or injury, but, rather, to the fact that the period in question was not a working period for him. The same reasoning is applicable in the instant case. [Fn. ref. omitted.] Section 1.105-4(a)(3)(i)(B)(ii), Income Tax Regs., provides that-- an employee who incurs a personal injury or sickness during his paid vacation is not allowed to exclude under section 105(d) any of the vacation pay which he receives, since he is not absent from work on account of the personal injury or sickness. Likewise, a teacher who becomes sick during the summer or other vacation period when he is not expected to teach, is not entitled to any exclusion under section 105(d) for the summer or vacation period. However, if an employee who would otherwise be at work during a particular period is absent from work and his absence is in fact due to a personal injury or sickness, a payment which he receives for such period under a wage continuation plan is subject to section 105(d). This provision, insofar as here applicable, reads exactly as the provision of the regulation involved in345 Cohen v. Commissioner, supra, and quoted at Footnote 8, page 187, of that opinion. On the basis of Cohen v. Commissioner, supra, we conclude that petitioner is entitled to an exclusion under section 105(d) of only $3,600 in the year 1974. Decision will be entered for the respondent. Footnotes. This case was tried before Judge William H. Quealy↩, who subsequently resigned from the Court. By Order dated May 15, 1980, the case was reassigned for disposition. 1. All references are to the Internal Revenue Code of 1954, as applicable to the year here in issue, unless otherwise stated.↩2. At the trial the parties referred to section 22000 and subsequent sections of the Annotated California Education Code as the provisions governing the Teachers' Retirement System. These sections of the Code were enacted in 1976, reorganizing and to some extent changing provisions with respect to the Teachers' Retirement System. The derivation of the sections was primarily from sections of a 1969 statute which had been extensively amended in 1971. The statute as enacted in 1969 and amended in 1971 was also the statute effective with respect to the year 1974. Sections 13802 and 13804 of the California Education Code, as applicable to the years 1969 through 1974, provide as follows: Sec. 13802. Establishment of State Techers' Retirement System In order to provide a financially sound plan for the retirement, with adequate retirement allowances, of teachers in the public schools of this state, teachers in schools supported by this state, and other persons employed in connection with the schools, the State Teachers' Retirement System is established.The system is a unit of the Agriculture and Services Agency.(Added by Stats. 1969, c. 896, p. 1738, sec. 2.) Sec. 13804. Declaration of financing policies The Legislature recognizes that the assets of the State Teachers' Retirement System are insufficient to meet the obligations of that system already accrued or to accrue in the future in respect to service credited to members of that system prior to July 1, 1972. Therefore, the Legislature declares the following policies in respect to the financing of the State Teachers' Retirement System: (a) Members shall be required to contribute a percentage of salaries earned. (b) The employing agencies shall contribute a percentage of total salaries on which member contributions are based. (c) The state shall contribute a sum certain for a given number of years for the purpose of payment of benefits. (Added by Stats. 1971, c. 1305, p. 2568, sec. 2, operative July 1, 1972.)↩3. Sections 14210.1, 14260, 14260.1 and 14390 of the Annotated California Education Code applicable in 1972 and 1974 provide as follows: Sec. 14210.1 Effective date of disability; date of accrual of disability allowance; limitations A disability shall become effective upon the date designated by the person as the effective date of disability, or upon the day of the month following the last day of service for which salary is payable to the person, whichever is later. In no event shall the disability become effective or disability allowance begin to accrue earlier than the first day of the month in which the application is received by this system in Sacramento, or earlier than the date upon and continuously after which he is determined to the satisfaction of the board to have been mentally incompetent, or earlier than the date upon and continuously after which the person is determined to the satisfaction of the board to have been disabled. (Added by Stats. 1972, c. 1010, p. 1867, sec. 41, urgency, eff. Aug. 17, operative July 1, 1972.) Sec. 14260. Allowance upon qualification for disability Upon * * qualification for disability, a member shall receive a * * * disability allowance which shall consist of * * * an annual allowance, payable in monthly installments, equal to 50 percent of the highest annual salary earned in any one of the three school years immediately preceding retirement, increased by 10 percent of such salary for each child to a maximum of four such children * * . A stepchild or adopted child acquired subsequent to eligibility for disability benefits shall not be entitled to any benefit and shall be excluded in the calculation of benefits under this section. (Added by Stats. 1969, c. 896, p. 1738, sec. 2. Amended by Stats. 1971, c. 407, p. 783, sec. 33; Stats. 1971, c. 1305, p. 2586, sec. 120, operative July 1, 1972; Stats. 1972, c. 1089, p. 2034, sec. 18, urgency, eff. Aug. 18, 1972, operative July 1, 1972.) Sec. 14260.1 Recalculation of allowance if specified conditions exist Notwithstanding the provisions of Section 14260, any member who applied for a disability allowance to be effective during July, August or September 1972, and who has been or is in the future approved for a disability allowance with an effective date in July, August or September 1972, shall have that allowance recalculated effective on the first day of the month for which the disability allowance was or is approved, if the following conditions exist: (a) The member has five or more years of credited service, the last five of which have been served in this state, and has not attained age 60, and (b) Earned no service credit in the first two school years immediately preceding and less than a year of service credit in the third school year immediately preceding the effective date of the allowance, then the benefit shall be equal to 50 percent of the highest annual salary earned in any one of the four school years immediately preceding the effective date of the disability allowance, increased by 10 percent of such salary for each child to a maximum of four such children. All other provisions of Section 14260 shall be applicable to a member who receives an allowance pursuant to the provisions of this section. (Added by Stats. 1973, c. 789, p. , sec. 1.) Sec. 14390. Accrual of benefits; cessation of allowance on death of recipient (a) The retirement or disability allowance begins to accrue on the first day of the month in which the retirement or disability is effective. (b) On death of the retirant, a person receiving a disability allowance or a person who is reinstated to membership, the allowance ceases on the last day of the month preceding that in which the death or reinstatement occurs. (c) Family benefits begin to accrue on the first day of the month in which the death of the member occurs.(d) Option benefits begin to accrue on the first day of the month in which the retirant died. (Added by Stats. 1972, c. 1089, p. 2037, sec. 23, urgency, eff. Aug. 18, 1972, operative July 1, 1972.)↩4. The full statement was as follows: INCOME TAX INFORMATION AND ASSISTANCE The State Teachers' Retirement System is not empowered to give specific tax information or to implement provisions of the tax laws. You should be aware of the fact that the disability allowance you receive is considered taxable income by the Internal Revenue Service and the California State Franchise Tax Board, whether or not you continue to reside in California. There are different methods of reporting your disability allowance. You may qualify for a disability income exclusion if you meet certain criteria. However, only representatives of the Internal Revenue Service and the California State Franchise Tax Board can assist you in making that determination.↩5. Section 105 provides in part as follows: SEC. 105.AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS. (a) Amounts Attributable to Employer Contributions.--Except as otherwise provided in this section, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer. * (c) Payments Unrelated to Absence From Work.--Gross income does not include amounts referred to in subsection (a) to the extent such amounts-- (1) constitute payment for the permanent loss or loss of use of a member or function of the body, or the permanent disfigurement, of the taxpayer, his spouse, or a dependent (as defined in section 152), and (2) are computed with reference to the nature of the injury without regard to the period the employee is absent from work.(d) Wage Continuation Plans.--Gross income does not include amounts referred to in subsection (a) if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness; but this subsection shall not apply to the extent that such amounts exceed a weekly rate of $100. * ↩6. In explaining the distinction, the Court in Trappey v. Commissioner, 34 T.C. 407">34 T.C. 407, 408 (1960), stated as follows: This Court, citing and following Haynes v. United States, 353 U.S. 81">353 U.S. 81, twice held under circumstances substantially similar to those here present that disability retirement pension payments are received through health insurance and were excluded from gross income under section 22(b)(5) of the 1939 Code. Charles H. Jackson, 28 T.C. 36">28 T.C. 36; J. Wesley Sibole, 28 T.C. 40">28 T.C. 40. Those cases would be controlling here if the same law applied. However, it does not apply, but, instead, section 104(a)(3) must be considered. What change did it make? Section 22(b)(5) is titled "Compensation for Injuries, or Sickness." It excluded from gross income "amounts received through accident or health insurance * , as compensation for personal injuries or sickness." The title of section 104 is "Compensation for Injuries of Sickness" and in (a)(3) it also excludes from gross income "amounts received through accident or health insurance for personal injuries or sickness." However, it qualifies that exclusion by the following limitation: (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer); * * The parenthetical qualification is the only change in the law material hereto made by the 1954 Code. The Court in the Trappey↩ case concluded that the exclusion from gross income was applicable only to that part of the payment not attributable to contributions by the employer. The Court then stated that the parties had covered by stipulation the allocation between contributions made by the employer and the employee.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621121/	WILLIAM HOLDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Holden v. CommissionerDocket No. 5138.United States Board of Tax Appeals6 B.T.A. 605; 1927 BTA LEXIS 3454; March 26, 1927, Promulgated 3454 In 1919 petitioner entered into a contract to sell a lease. The lease with an assignment thereof and payment therefor were deposited with a bank in escrow. The terms of the contract and escrow were performed within the year. After the contract to sell was made, petitioner stated to the purchaser that petitioner did not wish to realize the proceeds of the sale in 1919 and the purchaser instructed the escrow agent, in the presence of the petitioner, that payment of the proceeds was not to be made to petitioner until January 2, 1920. Held, that profit from the sale was taxable income in 1919. Don T. Haynes, Esq., for the petitioner. George G. Witter, Esq., for the respondent. PHILLIPS 605 The petitioner appeals from the determination by the Commissioner of a deficiency of $6,947.44 in income tax for 1919, and as the basis of his appeal sets out in his petition allegations of error as follows: (1) The Commissioner has erred in holding that the sale of a certain oil lease by taxpayer to one C. W. Murchison was a completed transaction within the year 1919 and in including $50,000, profit from such sale, in taxpayer's 1919 income. (2) 3455 The Commissioner has erred in disallowing taxpayer the right of paying out of community funds interest in the amount of $31,686, taxes in the amount of $13,423.26, and other deductions amounting to $22,367.06, all in connection with taxpayer's separate property. Upon the hearing no sufficient evidence was introduced with respect to the second allegation of error. FINDINGS OF FACT. On or about November 22, 1919, the petitioner entered into a contract with one C. W. Murchison for the sale to said Murchison of an oil lease upon certain property in Wichita County, Texas, the material terms of which are as follows: Party of the second part [Murchison] agrees to place fifty-five thousand ($55,000) dollars in the City National Bank of Wichita Falls, to be paid to the party of the first part [Holden] upon examination and approval of the title by the attorneys of party of the second part. Party of the first part agrees to execute an assignment and place together with this contract and above mentioned amount of money in the City National Bank of Wichita Falls, and further agrees to furnish party of the second part abstract of title to said land and allow him five days in which3456 to examine same, and if at the end of five days reasonable objections are found party of the second part agrees to allow first party reasonable length of time to remedy same. 606 Should party of the second part fail or refuse to take said land after good and merchantable title has been shown the above mentioned amount of money is to be forfeited as liquidated damages. Should title of said land prove nonmerchantable, said fifty-five thousand dollars is to be returned to C. W. Murchison, and this contract is to be null and void. It is agreed that this contract should be closed within fifteen days from date of this instrument. This contract, together with the payment of $55,000, was deposited in the City National Bank of Wichita Falls on or about November 24, 1919. Either on that date or at some time shortly thereafter the petitioner stated to Murchison that he did not wish to realize the proceeds of the sale during 1919, and instructions were given to one of the bank's officials by Murchison in the presence of petitioner that the amount of the deposit was not to be paid to petitioner before January 2, 1920. The terms of the contract were fully carried out during3457 1919 and prior to December 31, 1919, Murchison accepted the assignment of the lease and recorded it. The Commissioner determined a profit of $31,000 from the transaction, which he included as income to the petitioner for 1919, and computed the deficiency accordingly. OPINION. PHILLIPS: There is no dispute between the parties that the profit from the sale of the lease was $31,000. It is the contention of the petitioner, however, that such profit was not realized until 1920. The undisputed evidence is that the transaction was completed in 1919 and the assignment of the lease accepted by the purchaser and recorded. Because of the instructions issued to the bank, the payment was not made to petitioner until 1920, and it is his contention that no income was realized until that year. With this contention we can not agree. The sale was completed in 1919. The purchase price was on deposit with the bank and despite the instructions given the bank to withhold payment, it is our opinion that it became available to the petitioner in that year. No one else had, or claimed to have, any interest in it. It was only because of instructions which had been issued to the bank at the3458 instance of the petitioner that it was not paid. Had such instructions been a part of the contract there might have been some basis for a determination that the money was not received in 1919 by the petitioner, who reported his income upon a cash receipts basis. As to this we express no opinion. Here, however, was no contract or enforcible modification of the original contract; nothing more than an instruction (without consideration) at the request of the petitioner that payment be withheld. 607 Murchison had no claim to the money after he had accepted the assignment of the lease. The bank had no interest in it. The money was the petitioner's to do with as he pleased. The fact that he had voluntarily instructed the bank, or caused Murchison to instruct the bank, that the money was not to be paid to him until January 2, 1920, is insufficient in our opinion to prevent the realization of income in the year in which the sale was consummated and the terms of the escrow performed. Thereafter, the bank was the agent of the petitioner only, and its possession of the money, free from any further obligation of the escrow agreement, was possession in the petitioner. Decision*3459 will be entered for the Commissioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621123/	Appeal of the NATIONAL REFINING CO. OF OHIO ET AL. 1National Refining Co. v. CommissionerDocket No. 186.United States Board of Tax Appeals1 B.T.A. 236; 1924 BTA LEXIS 206; December 23, 1924, decided Submitted November 18, 1924. 206 The Board has jurisdiction to determine whether or not an assessment of a deficiency in tax against a taxpayer is barred by the statute of limitations contained in section 250(d) of the Revenue Act of 1921 and section 277(a)(2) of the Revenue Act of 1924. The filing of an amended return does not toll the statutes of limitations contained in section 250(d) of the Revenue Act of 1921 and section 277(a)(2) of the Revenue Act of 1924. J. W. Reavis, Esq., for the taxpayer A. Calder Mackay, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. GRAUPNER 237 Before GRAUPNER, LITTLETON, and SMITH. This appeal involves a deficiency in income and excess profits taxes for the year 1917 in the amount of $95,201.21 and at the hearing was presented on admissions contained in the pleadings and on documentary and oral evidence. FINDINGS OF FACT. 1. The National Refining Co. of Ohio is a corporation organized under the laws of the State of Ohio with its principal offices in the city of Cleveland, Ohio. It is the parent company of the affiliated corporations named in the title of this appeal, and is hereinafter referred to207 as the taxpayer. 2. The taxpayer and its subsidiaries duly filed tax returns for the calendar year 1917 on March 15, 1918. In letters dated February 26, 1923, the Commissioner notified the taxpayer and its subsidiaries that an examination of their books relative to the year 1917 disclosed a total additional tax of $131,403.39 for such year. All of the letters were alike in text and each contained the following: You are advised that section 250(d) of the Revenue Act of 1921 provides that assessment of additional tax found due as a result of an audit of a return must be made within five years from the date on which the return was filed, unless the Commissioner of Internal Revenue and the taxpayer consent in writing to a later determination, assessment, and collection of such tax. * * Assessment of any additional tax found due on your return must be made not later than April 15, 1923, the expiration of the five-year period provided in section 250(d). If you desire that your case be given consideration before assessment is made, it will be necessary that the inclosed form of waiver be signed and returned to this office immediately, otherwise assessment will be made208 not later than 15 days from the date of this letter. (Italics ours.) 3. Upon receipt of the letters, the taxpayer and each of its subsidiary corporations signed and executed waivers, under date of March 5, 1923, in the form proposed by the Commissioner, and filed them in the Commissioner's office, where they were signed by the Commissioner. Each of the waivers contained the following statement and limitation: This waiver is in effect for one year from the date it is signed by the taxpayer. This extended the period for the assessment of 1917 taxes from March 15, 1923, to March 5, 1924. 4. On September 7, 1923, the Commissioner addressed letters to the parent and subsidiary corporations wherein he notified them that the income-tax returns for 1917 had been reexamined and that he proposed to assess additional taxes for that year in the amount of $252,079.13. The letter to the parent corporation contained the statement, "Office letter dated February 24, 1923, is annulled." This date is obviously an error and should have been February 26, 1923. The letters of the same date addressed to the subsidiaries referred to the letter to the parent company. All the letters contained209 this provision: In accordance with the provisions of section 250(d) of the Revenue Act of 1921, you are granted 30 days within which to file an appeal and show cause or reason why this tax or deficiency should not be paid. 238 The final words of explanation in the schedules accompanying the letter of September 7, 1923, are "Waivers for 1917 filed March 5, 1923." 5. On September 17, 1923, and within the 30 days allowed by section 250(d) of the Revenue Act of 1921, each of the corporations named above, parent and subsidiaries, wrote to the Commissioner protesting the proposed assessment and demanding a hearing. The Commissioner acknowledged the receipt of these protests in a letter dated September 22, 1923, and fixed October 11, 1923, as a date for hearing thereon at Washington, D.C.6. At the hearing, as a part of its evidence in support of the protest against the proposed assessment, the taxpayer introduced and filed in the Commissioner's office, and not with the collector at Cleveland, Ohio, a volume containing about 70 pages of calculations and exhibits bound in a leather cover, on the front page of which was printed the title: "The National Refining Co., Cleveland, 210 Ohio, Final Amended Income and Excess Profits Tax Return with Consolidated Statements and Schedules, Year 1917." This was admitted in evidence before the Board and marked "Taxpayers' Exhibit 5." Attached to the third page of this bound volume was an accomplished corporation income tax return (Form 1031) entitled "Final Amended," which was not verified, and, also, an accomplished corporation excess profits tax return (Form 1105), which was verified October 4, 1923. The remainder of the volume consisted of tabulations and schedules such as reconciliation of tax return, balance sheets, profit-and-loss account, depreciation and depletion, etc. 7. After the hearing of October 11, 1923, no notice was received from the Commissioner by the taxpayer concerning the proposed assessment until July, 1924, when it received a letter from him, dated July 21, 1924, notifying it that a deficiency had been determined and that it had 60 days within which to appeal to this Board. DECISION. The deficiency in tax determined by the Commissioner in his deficiency notice of July 21, 1924, for the calendar year 1917, amounting to $95,201.21, is disallowed. OPINION. GRAUPNER: On the hearing of211 this appeal, the taxpayer waived its claims as to one of the two alleged errors asserted in its petition and confined its presentation and argument to the following assigned error of the Commissioner in determining the tax: That the entire additional assessment as proposed in department letter dated July 21, 1924, against all of the above-named companies for the taxable year 1917, is outlawed under the Statute of Limitations contained in section 277(a)(2) of the Revenue Act of 1924. In his answer to the petition, the Commissioner, after admitting most of the allegations of fact contained in the petition, alleged an affirmative defense in the following language: (5) That the taxpayers, on or about October 4, 1923, filed with the Bureau of Internal Revenue amended income and excess-profits tax returns for the 239 taxable year 1917; that said amended returns were accepted by the Bureau of Internal Revenue and that the taxes proposed in said deficiency letter are due under said amended returns; that the taxes proposed in said deficiency letter arise and are based upon the information and statements contained in said amended returns. The Commissioner averred, as propositions212 of law, that: (1) The five-year limitation imposed by section 250(d) of the Revenue Act of 1921, and by section 277(a)(2) of the Revenue Act of 1924, for taxes due under the amended returns filed by the taxpayers began to run from the date the said amended returns were filed. (2) The five-year limitations imposed by section 250(d) of the Revenue Act of 1921 and section 277(a)(2) of the Revenue Act of 1924 have not expired. At the hearing of the appeal the Solicitor objected to the introduction of the oral and documentary evidence offered by the taxpayer and, after its introduction, moved to strike it out on the following grounds; (a) that it was incompetent, irrlevant, and immaterial, and (b) that the Board has not jurisdiction to entertain an appeal which goes only to the remedy of the collection of taxes and not to the amount of the deficiency proposed by the Commissioner. Ruling on the motion was withheld and, for the purpose of clarifying the record, the motion is now denied. We will consider the question of jurisdiction before passing upon the single issue presented by the taxpayer. Section 900 of the Revenue Act of 1924 grants the Board power to hear and determine213 appeals filed under section 274 of the act. Section 274, the one applicable to the tax under consideration in this appeal, grants to the taxpayer the right of appeal if the Commissioner determines that there is a deficiency in respect of the tax imposed by Title II of the act. Nowhere does the act contain any limitation on the Board as to what it may consider in determining whether or not a deficiency in tax exists. There is no restriction on the taxpayer's asserting in his appeal from a deficiency that such tax is in violation of the Constitution, in violation of the provisions of any of the revenue acts, or illegal for any other reason. There is no more cause to prevent it pleading section 277(a)(2) of the Revenue Act of 1924 as a reason why a deficiency should not be determined against it than there is to deny it the right to plead any other section of the act. Congress clearly intended that this Board should relieve taxpayers from illegal or improper tax burdens. In its report to the Senate, dated April 10, 1924, the Finance Committee of the Senate, in referring to the Board of Tax Appeals and its powers, said regarding the rights of a taxpayer: He is entitled to214 an appeal and to a determination of his liability for the tax prior to its payment. (Italics ours.) Similar language was used in the report of the Committee on Ways and Means to the House of Representatives (p. 44, report dated February 11, 1924). A reading of the debates on the Revenue Act of 1924 in the two houses of Congress is convincing of the fact that it was intended that this Board should have the power, and consequently the jurisdiction, to determine a taxpayer's liability for a tax prior to its payment. Congress, at the same time and in section 277(a)(2) of the same act that created this Board, provided that the amount of income, 240 excess-profits, and war-profits taxes imposed by the Revenue Acts of 1909, 1913, 1916, 1917, and 1918 "shall be assessed within five years after the return was filed, and no proceedings in court for the collection of such taxes shall be begun after the expiration of such period." (Italics ours.) This language clearly indicates that the taxpayer can not be forced to pay its tax after five years and that, therefore, there is no liability imposed upon it after that period. It appears to be clearly evident that the plea215 of limitation raises a distinct question as to the liability of the taxpayer for the tax. It is also evident that Congress intended this Board to determine any liability and any taxpayer appealing to it regarding a deficiency imposed prior to payment of the tax. Such being the situation, we do not hesitate to assume jurisdiction in this appeal. We will now consider the merits of the issue raised by the taxpayer and the affirmative defense presented by the Commissioner. The Commissioner tacitly admits that the liability of the taxpayer would be barred under the express waivers filed, but contends that, the taxpayer having filed the volume (Taxpayers' Exhibit entitled "Final Amended Income and Excess Profits Tax Return" with the Commissioner, the Commissioner has five years from the date of filing thereof in which to make an assessment based upon that return. In other words, it is the contention of the Commissioner 5) entitled "Final Amended Income and Excess Profits Tax waiver which extends the operation of the statute of limitations for another five years. Turning to the Revenue Acts of 1918 and 1921 we find no provision for either amended returns or waivers, nor do216 the Revenue Acts of 1916 or 1917 contain such provisions. All of these acts provide in practically identical language for the filing of corporate returns and it will suffice to quote only a portion of section 13(b)(1) of the act of 1916 to show the expected action of a corporate taxpayer: The return shall be made to the collector of the district in which is located the principal office of the corporation, company, or association, where are kept its books of account and other data from which the return is prepared. * * * (Italics ours.) See section 241(b) of the Revenue Acts of 1918 and 1921. We can not find in any of the acts any express language or implication that amended returns are contemplated or that they will be given any special significance. The Solicitor has ruled that: The filing of an amended return does not extend the date for the beginning of the running of the statute of limitations as outlined in section 250(d) of the 1921 act, but that "the return" referred to in subdivision (d) of said section has reference to the original return and not to an amended return (S.M. 1404-III-13-1457). He makes one exception to the effect that, where additional taxes217 are disclosed by an amended return, the return amounts to a limited waiver of the taxpayer to have such additional taxes determined, assessed, and collected within the five year period. There is no evidence in this appeal to show that "Taxpayers' Exhibit 5" disclosed any additional tax. This exception is immaterial to the decision herein. 241 Sections 250(d) of the act of 1921 and 277(a)(2) of the act of 1924 provide that the limitation shall operate "five years after the return was filed." The phrase the return has a definite article and a singular subject; therefore, it can only mean one return, and that the return contemplated by the act under which it was filed. The Revenue Acts of 1916 and 1917 provided for the time and place of filing returns in identical language (Sec. 13(b)(1)) and specified: The return shall be made to the collector of the district in which is located the principal office of the corporation, company, or association, where are kept its books of account and other data from which the return is prepared. * * * (Italics ours.) Again we find a definite article and a definite subject described, viz, the return. The language218 of the sections referred to does not describe any return or many returns, but one special return which is to be filed in one special place at or within a specified time. The taxpayer complied with the law when it filed returns on March 15, 1918, and the Commissioner had five years from that time within which to assess and collect the taxes thereon. This period was extended to March 5, 1924, by express waivers being filed by the taxpayer and approved by the Commissioner. The taxpayer's Exhibit 5 can not be considered a return within the contemplation of the Revenue Act of 1921, because (1) the only return contemplated by the act had been filed on March 15, 1918; (2) it was not intended to be anything but evidence by the taxpayer; (3) it was not filed in the office of the collector of the district in which the principal office of the corporation is located; and, (4) if it could be a proper amendment and was properly filed, it would operate to amend or correct nunc pro tunc as of the date of filing of the original. Had we the power to hold that the filing of an amended return would extend the statute of limitations for five years, such a ruling would tend to discourage219 the coscientious taxpayer who might desire to correct errors made in the original and offer an obstacle to honesty in dealing with the Government. To accept the contention of the Commissioner that the filing of an amended return creates an exception to the provisions of sections 250(d) of the act of 1921 and 277(a)(2) of the act of 1924, would place this Board in the position of legislating. This it can not do ; . The exhibit can not be considered a waiver because it has been consistently held by the courts of this land that waiver is the intentional relinquishment of a known right with both the acknowledgement of its existence and an intention to relinquish it , 97 C.C.A. 62; ; ; ; see, also, 8 Words and Phrases (1st Series) 7379; 4 Words and Phrases (2nd Series) 1229, and there is220 no evidence in this appeal to show any such intention on the part of the taxpayer. In view of these considerations the special defense of the Commissioner must fall. Therefore, we hold that the taxpayer is protected. 242 by the statute of limitations, the liability determined by the Commissioner was barred on July 21, 1924, and the deficiency for the year 1917 is disallowed. Footnotes1. The following affiliated corporations are parties to this appeal: National Refining Co. of Missouri, National Refining Co. of Tennessee, National Refining Co. of Iowa, National Refining Co. of Nebraska, National Refining Co. of Illinois, National Refining Co. of Indiana, National Refining Co. of Oklahoma, Spurlock Petroleum Co., Sterling Oil & Gas Co., National Pipe Line Co., Cudahy Oil Co., and Northern Oil Company. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621124/	AUGUST W. KLEINAU and VIRGINIA S. KLEINAU, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKleinau v. CommissionerDocket No. 9480-79.United States Tax CourtT.C. Memo 1982-52; 1982 Tax Ct. Memo LEXIS 694; 43 T.C.M. (CCH) 456; T.C.M. (RIA) 82052; February 8, 1982. 694 In two separate Court appearances, petitioners failed to testify or submit any other evidence in support of their claimed "contribution" deduction. Held, respondent's motion to dismiss pursuant to Rule 149(b), Tax Court Rules of Practice and Procedure, is sustained. August W. Kleinau, pro se. Kristine A. Roth, for the respondent. STERRETTMEMORANDUM OPINION STERRETT, Judge: This case is before the Court on respondent's motion to dismiss pursuant to Rule 149(b), Tax Court Rules of Practice and Procedure.By notice of deficiency dated April 12, 1979, respondent determined a deficiency in petitioners' Federal income tax for 1975 in the amount of $ 1,280.49. Petitioners August695 W. Kleinau and his wife Virginia S. Kleinau resided in Akron, Ohio at the time of filing the petition herein. Virginia S. Kleinau is a party to this proceeding solely by reason of her filing a joint income tax return with August W. Kleinau (hereinafter petitioner). The deficiency in this case resulted from respondent's disallowance of $ 7,069.57 in deductions taken by petitioner for "contributions." The petition, filed on July 5, 1979, stated that petitioner received $ 14,841.50 in exchange for labor at "fair or less than fair market value." Petitioner further stated that "Congress never taxed nor intended to tax compensation for labor as 'Income.'" Petitioner referred to himself as a "church and college-trained charismatic worker" who "worked with his own hands to supply all contributions and expenses of a God-given ministry." No specific explanation of the deduction was given. Trial was set for October 9, 1980 in Cleveland, Ohio. At trial petitioner, appearing pro se, refused to take the witness stand and submit evidence in support of his claimed contribution deduction. He admitted to the Court that he received wages during the year in question but stated that he owed no696 tax on such wages since he was paid in Federal Reserve Notes instead of silver dollars. He further contended that all Federal Reserve Notes and moneys spent to exercise religion are fully tax-exempt. At his request, petitioner was granted a continuance in order to seek and obtain counsel. However, he was warned by the Court that if he was not prepared to try the case, with or without counsel, when the trial resumed, his case would be dismissed for lack of prosecution. Thereafter, the case was called from the trial calendar at Cleveland, Ohio on October 26, 1981. At that time, again appearing without counsel, petitioner renewed his constitutional arguments. He stated that he had no taxable income for the year 1975 despite his admitted receipt of wages during that year. He further stated that the taxes that he did pay for that year were entirely voluntary. Petitioner once again refused to take the stand. Since no evidence was submitted by petitioner, respondent renewed his Motion to Dismiss for Lack of Prosecution. The Court requested respondent to file a written motion to dismiss and allowed petitioner 30 days to file a brief in opposition thereto. Respondent thereafter697 filed a Motion to Dismiss for Lack of Prosecution and petitioner was ordered to reply to the Court within 30 days, stating reasons why respondent's motion should not be granted and the deficiency determined by respondent should not be sustained. The motion was filed on October 30, 1981 and was served on petitioner. Thereafter, petitioner filed a "motion for default" which was denied by the Court. Petitioner stated in the motion that no copy of the Motion to Dismiss for Lack of Prosecution had been received. In his "Answer" to respondent's motion, which was filed over 2 weeks late, petitioner simply restated his constitutional arguments. Petitioner has failed to produce any evidence in support of the contention that he should be entitled to the claimed deduction for charitable contributions. He has refused to testify, and the only arguments that he has presented to this Court are frivolous. Wages are taxable, the income of a minister is taxable, and income received in the form of Federal Reserve Notes is taxable. Sec. 61(a)(1); Hamblen v. Commissioner, 78 T.C. (Jan. 20, 1982); Cupp v. Commissioner,65 T.C. 68">65 T.C. 68, 80-81, 84 (1975), affd. without published*698 opinion 559 F.2d 1207">559 F.2d 1207 (3d Cir. 1977), Under the circumstances of this case, we conclude that respondent's motion to dismiss should be sustained. An appropriate order will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621127/	Estate of Florence Althea Gibb, Deceased, Althea Gibb Hunter, Malcolm DuBois Hunter and Charles S. McVeigh, as Executors, Petitioners, v. Commissioner of Internal Revenue, RespondentGibb v. CommissionerDocket No. 6947United States Tax Court6 T.C. 1088; 1946 U.S. Tax Ct. LEXIS 190; May 20, 1946, Promulgated 190 Decision will be entered under Rule 50. In 1930 the decedent created a trust providing that the income should be paid to herself for life, then to her daughter for life, with remainders over to the daughter's children; but that, if no children or issue of children survived the daughter, then upon the daughter's death the trust estate was to be paid "to those persons or institutions and in the shares, proportions, or amounts in which they would, in that event, be entitled to receive the same under and pursuant to the provisions of the Last Will and Testament of the Grantor which shall cover the disposition of her residuary estate under such conditions." The decedent was survived by her daughter and four grandchildren. Held, that the value of the trust assets at the date of decedent's death formed a part of her gross estate. 191 Francis J. Rogers, Esq., Whitney N. Seymour, Esq., and Richard D. Duncan, Esq., for the petitioners.James C. Maddox, Esq., for the respondent. Smith, Judge. SMITH 1088 This proceeding is for the redetermination of a deficiency in estate tax in the amount of $ 669,950.89. The petitioners allege that the respondent erred in his determination of the deficiency by (1) including in the gross estate of the decedent the assets of a trust created by the decedent under deed of trust dated March 10, 1930, with the Brooklyn Trust Co. as trustee, and (2) including in the gross estate of the decedent the assets of the above mentioned trust at their full value as of the date of the decedent's death, without deduction of the value of the life estate of decedent's daughter and of the various remainder estates as created by the deed of trust.FINDINGS OF FACT.Florence Althea Gibb died May 17, 1941, a resident of Nassau County, New York. Her last will and testament, dated January 17, 1938, was duly admitted to probate in the Surrogate's Court of Nassau County, New York, and letters testamentary thereunder were issued to Althea Gibb Hunter, Malcolm DuBois Hunter, and Charles192 S. McVeigh, who are still acting as executors. As such executors they filed an estate tax return for the decedent with the collector of internal revenue for the first district of New York on or about August 15, 1942.The decedent was born on October 7, 1864. Her daughter, Althea Gibb Hunter, was born on November 18, 1892, and is the mother of four children born on the following dates: 1089 Mary Althea Eldredge, Apr. 6, 1919.Elaine Gibb Eldredge, Apr. 6, 1919.Edward Irving Eldredge, Mar. 31, 1921.Florence Hunter, May 5, 1928.Decedent's daughter and grandchildren survived her, and since decedent's death four children of decedent's grandchildren have been born and are now living.On March 10, 1930, Florence Althea Gibb executed a deed of trust transferring certain property to the Brooklyn Trust Co., as trustee, to be held and administered as provided by the terms of the deed of trust. The value of the corpus of the trust as of the date it was created was approximately $ 1,000,000. The value of the corpus on the date of decedent's death was $ 1,106,190.57.The above indenture of trust provided that the net income from the fund should be paid to the grantor for her193 life and upon her death the income should be paid to her daughter, Althea Gibb Hunter, for life; that upon the death of the latter the principal of the trust should be distributed to the surviving issue of Mrs. Hunter, in equal shares per stirpes; that in the event the decedent should leave no issue her surviving, then upon her death the trust estate should be paid "to those persons or institutions and in the shares, proportions or amounts in which they would, in that event, be entitled to receive the same under and pursuant to the provisions of the Last Will and Testament of the Grantor which shall cover the disposition of her residuary estate under such conditions." The indenture further provided that if upon the death of the grantor her daughter, Mrs. Hunter, should have predeceased her, the trustee should divide the trust estate into equal shares or parts, one for each child of Mrs. Hunter who should survive the grantor, and one share for the issue taken collectively of each child of Mrs. Hunter who should have predeceased the grantor leaving issue surviving the grantor. A further provision was made for the holding of such shares in trust during the lifetime of each child entitled194 to receive a share, and for the distribution of income to such child and for the transfer and delivery of the share outright to the issue of such child who should survive him upon his death. It was further provided that, in default of issue of any such child entitled to receive a share of the trust estate, his share upon his death should be paid to the then living issue of Mrs. Hunter, and, in default of any such issue "to those persons or institutions and in the shares, proportions or amounts in which they would, in that event, be entitled to receive the same under and pursuant to the provisions of the Last Will and Testament of the Grantor which shall cover the disposition of her residuary estate under such conditions."The decedent executed a number of wills. In none of them was any reference made to the indenture of trust or the power of appointment 1090 referred to in the indenture of trust. One of these wills was executed prior to the date of the creation of the trust. Her last will and testament was dated January 17, 1938. It provided with regard to the disposition of her residuary estate that it should be held in trust, the net income thereof to be paid to her daughter, 195 Althea Gibb Hunter, for her life, and provided that as each child of the daughter married or attained the age of 30 years he or she should be entitled to receive $ 15,000 annually until age 40 and thereafter the sum of $ 25,000 annually, subject to the limitation that the total annual payments of income to all of the children should not exceed four-tenths of the net income of the trust estate. It further provided that upon the death of the daughter, Althea Gibb Hunter, the residuary trust should be divided into equal parts, one for each child her surviving, and one for the issue taken collectively of each child who had predeceased her, leaving issue her surviving, the share so set aside for any child of the daughter not in being at the date of the death of Florence Althea Gibb to be paid outright to such child, the share so set aside for such issue to be paid outright to such issue, and the share of each child of Althea Gibb Hunter who was in being at the date of the death of Florence Althea Gibb to be held in trust, the income thereof to be paid, applied or accumulated for the child until age 21, and thereafter to be paid to the child for life. On the death of any of the children196 one-half of his share should be disposed of as he or she might appoint by will and the remaining one-half, or all in default of appointment, should be distributed to the surviving issue of such child, in equal shares per stirpes, and in default of such issue then to the surviving issue of the grantor, Florence Althea Gibb.The total value of the estate of Florence Althea Gibb in 1930 was approximately $ 10,000,000.The theoretical value at the time of Florence Althea Gibb's death of the possibility that the trust property should be distributable pursuant to the residuary clause of her will, as computed by a qualified actuary using the Actuaries, or Combined Experience Table of Mortality, with 4 percent interest, was $ 1,070.79.In the determination of the deficiency the respondent has included in the gross estate the entire value of the assets of the trust created by the decedent on March 10, 1930.OPINION.The question presented by this proceeding is whether the value of the assets of a trust created by the decedent on March 10, 1930, is includible in her gross estate. The respondent contends that it is so includible by virtue of section 811, Internal Revenue Code, which provides197 in material part as follows:1091 SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, * * ** * * (c) Transfers in Contemplation of, or Taking Effect at Death. -- To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; * No contention is made by the respondent that the transfer to trust on March 10, 1930, was in contemplation of death. The respondent does contend, however, that this198 transfer to trust was a testamentary disposition of a part of the decedent's gross estate and that it was intended to take effect in possession or enjoyment at or after death. He submits that the decedent retained the income from the property for her life and retained the ultimate disposition of the property to persons or institutions to be named by her in the residuary clause of her will.The petitioners take the position that the decedent intended the transfer to trust on March 10, 1930, to be an absolute irrevocable transfer of all of her right, title, and interest to the trust property, save only that she was to have the income from the trust property for her life. In making this contention they rely upon certain statements made by the decedent after the trust was created that she had absolutely parted with all her interest in the property transferred to trust and had no power or control over it. They also submit that the provisions of the trust instrument providing that under certain conditions all or some of the trust assets were to pass according to the terms of the decedent's will were incorporated into the trust instrument by the decedent's attorney, and that they were199 merely for the purpose of providing against a remote contingency, which it was unbelievable on the part of the grantor would ever happen.Although the provisions of the trust instrument adverted to above were incorporated in the deed of trust at the instigation of the decedent's attorney, we, nevertheless, think it is clear that the decedent was fully aware of the provisions of the trust instrument and, by executing the instrument, approved those provisions; in other words, we think that the intention of the grantor must be gathered from the words of the trust instrument.In our opinion this case is ruled by Fidelity-Philadelphia Trust Co. ( Stinson Estate) v. Rothensies, 324 U.S. 108">324 U.S. 108. In that case the grantor 1092 retained the right to appoint by will the recipients of the remainder interests in the event the remaindermen did not survive her, or in the event of failure of remaindermen after her death. The daughters were the holders of life estates, but if they did not survive the grantor or leave issue surviving, the grantor had the right to dispose of the property by will, which power, in such circumstances, the Supreme Court said constituted200 the string which held the corpus of the trust within the grantor's estate for Federal estate tax purposes. Substantially the same situation exists in the instant proceeding. By the trust instrument the grantor retained the right in certain contingencies to control the devolution of the trust property by her will. That right was cut off by her death.The petitioners make much of the point that decedent's final will provided for the same disposition of the remainder interests as was contained in the trust instrument. But the fact remains that up to the date of her death she could have changed her will so as to provide that her residuary estate would go to different parties than those named in the trust instrument. This fact alone, we think, is sufficient to require the inclusion in the gross estate of the trust assets.In the Stinson case the Supreme Court said: * * Only at or after her death was it certain whether the property would be distributed under the power of appointment or as provided in the trust instrument. * * * The remainder interests of the descendants of the daughters were contingent upon their surviving both the decedent and the daughters and took effect 201 in possession only after the death of the decedent. Thus until the moment of her death or until an undetermined time thereafter the decedent held a string or contingent power of appointment over the total corpus of the trust. The retention of such a string, which might have resulted in altering completely the plan contemplated by the trust instrument for the transmission of decedent's property, subjected the value of the entire corpus to estate tax liability. * * It is enough if he [the grantor] retains some contingent interest in the property until his death or thereafter, delaying until then the ripening of full dominion over the property by the beneficiaries. * * * [Emphasis supplied.]Cf. Estate of Arthur Sinclair, 6 T.C. 1080">6 T. C. 1080.The petitioners make the further contention that, if any part of the trust assets is to be included in decedent's gross estate, the only part so includible is the value of the daughter's right to control the devolution of the trust property, which they submit was only $ 1,070.79.A question similar to this was disposed of by the Supreme Court in the above cited Stinson case. In fact, that was the only question*202 before the Supreme Court in that case. We hold that the respondent did not err in including the entire value of the trust assets in the gross estate.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621128/	Sadie D. Leary, Petitioner, v. Commissioner of Internal Revenue, RespondentLeary v. CommissionerDocket No. 31487United States Tax Court18 T.C. 139; 1952 U.S. Tax Ct. LEXIS 213; April 28, 1952, Promulgated 213 Decision will be entered for the respondent. Petitioner contends she is not liable as a transferee for 1945 income taxes of her deceased husband, because the respondent failed to exhaust his remedies against the estate. Respondent duly presented his claim and relied upon petitioner's representations as executrix that funeral and administrative expenses left the estate without assets to pay taxes. To the extent that those representations were incorrect, petitioner benefited personally thereby as creditor and sole beneficiary. Held, that petitioner is liable as transferee. Francis J. Purcell, Esq., for the petitioner.Arthur L. Nims, Esq., for the respondent. Black, Judge. BLACK 140 In a deficiency notice dated August 25, 1950, the Commissioner of Internal Revenue advised Sadie D. Leary as follows:You are advised that there will be assessed against you the amount of215 $ 1,980.69, income tax, plus interest as provided by law, constituting your liability as transferee of assets of the estate of Timothy A. Leary, deceased, * Petitioner does not contest the tax liability attributed to the estate of Timothy A. Leary, but contests only her liability as a transferee. In her petition, petitioner explained her position as follows: * * No objection was made to the Executrix's account, no claim was asserted against the assets of the Estate and thereafter the funds were disbursed in accordance with the decree of the Surrogate. There were sufficient assets in the Estate to satisfy the claim of the government in full, and the Respondent in failing to assert its claim against the assets of the Estate of Timothy A. Leary, deceased, cannot now proceed against the Petitioner.FINDINGS OF FACT.The facts have all been stipulated and are found accordingly.The petitioner Sadie D. Leary was the duly qualified executrix and sole beneficiary of the will of her husband Timothy A. Leary, who died on April 19, 1946, a resident of New York, New York. The estate tax return was filed with the collector of internal revenue for the second district of New York. The 216 tax in controversy is income tax due from Timothy A. Leary, the decedent, for the calendar year 1945 amounting to $ 1,980.69, plus interest, which tax remains due and unpaid.Prior to his election as a justice of the Supreme Court of the State of New York, the decedent had been a justice of the Municipal Court of the City of New York for many years. He was, therefore, a member of both the New York City and New York State Retirement Systems. In connection with both, his wife, the petitioner herein, was named as beneficiary, and upon his death she received from these retirement systems without consideration a total of $ 57,141.84. It is based upon the receipt of this money by the petitioner that the respondent attempts to assert liability against the petitioner as transferee. The stipulation of facts contains the following provision:10. Petitioner makes no contention that the moneys received by petitioner from the New York City and New York State Retirement Systems are of a nature not subject to transferee liability.For approximately two months prior to his death, Timothy A. Leary was confined in the New York Post Graduate Hospital. During this 141 time the petitioner paid217 his medical expenses from her own personal funds as follows:$ 2,155.89New York Post Graduate HospitalMarch 29, 194665.80Eileen Gavagan, NurseApril 4, 1946100.00Dr. PetersonApril 9, 19464.50Dr. BastianApril 9, 194610.00Dr. FredericksonJune 1946329.27Hyde Park Hotel -- Rent for months ofMay and June for apartment leasedby the decedent.July 19461,035.00Dr. PrattSeptember 6, 1946917.00The Abbey -- payment of balance offuneral bill and cemetery plotTotal4,617.46Petitioner was subsequently reimbursed for these expenditures to the extent of $ 2,067.67 out of funds which belonged to the estate.After the death of Timothy A. Leary, his will was offered for probate in the Surrogate's Court, New York County, and letters testamentary were thereafter issued by that court to the petitioner. The net assets of the estate amounted to $ 4,308.49.On June 7, 1949, the petitioner, as executrix, filed the account of her proceedings as such executrix in the Surrogate's Court, New York County. Schedule C itemized disbursements for "administration, funeral and other necessary expenses," including the reimbursement of $ 2,067.67 advanced218 by the executrix.The claim for the income tax in question here was duly filed and the collector of internal revenue for the second district of New York was listed as a creditor for unpaid 1945 income tax of $ 2,218.47. In connection with the accounting proceedings, a citation was issued by the Surrogate directed to, among others, the collector for the second district; and upon the return date thereof a representative of the collector entered an appearance in the Surrogate's Court. Schedule D listed the unpaid creditors as follows:SCHEDULE DAN ITEMIZED STATEMENT OF ALL CLAIMS OF CREDITORS PRESENTED TO EXECUTRIX OR WHICH HAVE COME TO HER KNOWLEDGE, TOGETHER WITH A STATEMENT WHETHER ANY RIGHT OF PREFERENCE EXISTS IN RESPECT OF SUCH CLAIMS AND THE CLAIMED BASIS OF SUCH RIGHT, IF ANY.CreditorsU. S. Collector of Internal Revenue for the 3rd District of NewYork -- Unpaid balance of 1944 Income Tax including interestthrough 1948$ 1,045.18U. S. Collector of Internal Revenue for the 2nd District of NewYork -- Unpaid 1945 Income Tax, including interest through 19482,218.47People of the State of New York (Department of Taxation andFinance, Income Tax Bureau) -- Unpaid State Income Tax for1945, including interest through 1948370.17Counsel fees for services rendered through this accounting byMurphy, Strasburger & Purcell$ 1,500.00Disbursements incurred by counsel50.00Balance due Executrix, for advances as set forth in Schedule D-2* 2,892.67219 142 In the accounting proceedings, in addition to the amounts set out in Schedule C, the executrix made a personal claim in Schedule D as an unpaid creditor of $ 2,892.67 for moneys expended by her for which she had not been reimbursed. Thereafter, by stipulation dated August 17, 1949, it was agreed that the petitioner, as executrix, would waive this additional claim and that the attorneys for the executrix would reduce the amount of their claim for disbursements and counsel fees to $ 536.49, as aforesaid. The Surrogate approved the final accounting as submitted by the executrix, and the final decree was signed on September 12, 1949. The assets of $ 4,308.49 were accounted for as follows:"B-1" (Uncollectible property)None"C" (Funeral and administration expenses actually paid)$ 3,772.00"E" (Debts actually paid)None"F" (Legacies or distributive shares actually paid)NoneLeaving a balance in Executrix's hands of536.49220 The $ 536.49 was duly paid over to the attorneys in accordance with the Surrogate's decree and the petitioner, as executrix, was discharged. No additional assets have come into the estate since the date of the final decree.OPINION.The only question in this proceeding is whether respondent failed to exhaust his remedies against the estate of Timothy A. Leary and is thereby prevented from asserting transferee liability against petitioner. Petitioner contends that respondent failed to assert the superior lien of the United States and the estate's assets were used to satisfy junior claims, which were primarily expenses of decedent's last illness. Assuming that petitioner's contentions as to what constitutes superior and junior liens are correct, we find, nevertheless, her defense without merit.The respondent duly filed his claim in the New York Surrogate's Court for Federal income taxes due for the years 1944 and 1945. 143 The Surrogate's final decree signed September 14, 1949, shows that the assets coming into the hands of the executrix were totally disbursed for funeral and administration expenses. The decree on its face shows that there were insufficient assets to pay221 the debts due, including taxes. It is there expressly stated that none of the decedent's debts as such were actually paid. Then, relying on the executrix's representation that the assets of the estate were exhausted in the payment of funeral and administration expenses, no objection was raised to the final decree closing the estate. Nevertheless, petitioner now insists that the expenses of decedent's last illness were improperly classified as funeral and administration expenses, and were ordinary debts subordinate to respondent's claim for taxes. Petitioner argues that respondent was required in the first instance to seek his remedy initially in the Surrogate's Court and then presumably through the entire appellate procedure of the State of New York before relying on the transferee remedy. Furthermore, in this case the executrix was petitioner. Moreover, the sum of $ 2,067.67 was paid by petitioner to herself as partial reimbursement for her advances. Of petitioner's advances, $ 917 were funeral expenses, $ 329.27 for rent after decedent's death under decedent's lease, and $ 3,471.19 for expenses of last illness.Section 311 of the Internal Revenue Code provides the Commissioner222 with procedures for collecting the tax from transferees. This is an administrative remedy, it does not create or affect transferee's liability. Pearlman v. Commissioner, 153 F. 2d 560, 562, affirming 4 T. C. 34. The concept of transferee liability here is a concept of equity law. Petitioner's defense that remedies must initially be exhausted against the transferor prior to holding the transferee liable is an equitable defense which has been recognized in transferee cases. Oswego Falls Corporation, 26 B. T. A. 60, 72-73, affd. 71 F.2d 673">71 F. 2d 673, and Wire Wheel Corporation of America, 16 B. T. A. 737, affirmed per curiam 46 F.2d 1013">46 F. 2d 1013. In Samuel Wilcox, 16 T. C. 572, 576, affirmed per curiam 194 F. 2d 102, the relation between equity law, section 311, and petitioner's defense here was summarized by this Court as follows:The creditor of an improverished debtor has long possessed the right to invoke the aid of equity in following and setting aside any subsequent223 transfer which is made by a debtor for insufficient consideration and leaves the debtor without sufficient property to discharge his existing obligations. Such transfers are characterized as being in fraud of existing creditors regardless of the debtor's actual intent, and the creditor, upon showing that he has exhausted his remedies at law against the debtor, may resort to equity and there attempt to have any such fraudulent transfers set aside. See American Jurisprudence, vol. 24, pars. 187-190, pp. 314-316, par. 213, pp. 330-331. The rights of the Commissioner as a creditor in the collection of Federal taxes are essentially the same and the principal purpose of section 311 was to provide the Commissioner with the same summary procedures for collection of the tax from transferees as he previously possessed in respect to the taxpayer. See Phillips v. Commissioner, 283 U.S. 589">283 U.S. 589. * *144 Were we to be governed solely by considerations of equity law, petitioner would be barred from asserting her defense. Since petitioner was responsible as executrix for exhausting the estate improperly and benefited personally thereby, under general equitable224 principles of estoppel and unjust enrichment and the maxim of clean hands, her defense disappears. See Pomeroy, Equity Jurisprudence, 5th Edition, sections 801-821, section 1044, and sections 397-404.Transferee cases have stated that the administration of the Federal income tax law is not subject to limitations of state laws. Pearlman v. Commissioner, supra,Christine D. Muller, 10 T. C. 678. Where the Commissioner might have enjoined rental payments to shareholders and applied them to taxes, in Samuel Wilcox, supra, p. 577, we held the following:* * * However, where there is no tangible or intangible property in the hands of the taxpayer upon which the Commissioner can levy in satisfaction of the tax and there exists at best only a choice between two equitable remedies, we do not think that the Commissioner must first pursue an untried claim which the transferor may have against a third person, and thereby involve the Government in protracted litigation, as a condition precedent to his alternative recourse against the transferees. Cf. W. W. Cleveland, 28 B. T. A. 578,225 affd., 77 Fed. (2d) 184.The possibility that timely litigation against the transferor might have been successful did not prevent transferee liability in Lehigh Valley Trust Co., Executor, 34 B. T. A. 528, 534, and United States v. Garfunkel, 52 F.2d 727">52 F. 2d 727.Respondent duly presented his claim and relied upon petitioner's representations as executrix that funeral and administration expenses left the estate without assets to pay taxes. To the extent that those representations were incorrect, petitioner benefited personally thereby as creditor and sole beneficiary. Petitioner's defense against transferee liability on the grounds that the remedies against the estate have not been exhausted here is not valid under equitable principles nor Federal income tax law.Decision will be entered for the respondent. Footnotes. That the advances made by Executrix for administration expenses set forth above, including counsel fees, are entitled to a preference. Your petitioner has been advised and verily believes that, as widow of the decedent, she is entitled to a preference as to the first $ 300 of the estate, and that as to the balance, if any, the United States has a preference over the State of New York.(S) Sadie D. Leary,Sadie D. Leary,Executrix↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621129/	John C. O'Connor v. Commissioner. The O'Connor Patent Company v. Commissioner.O'Connor v. CommissionerDocket Nos. 55803, 55865, 62052.United States Tax CourtT.C. Memo 1957-50; 1957 Tax Ct. Memo LEXIS 202; 16 T.C.M. (CCH) 213; T.C.M. (RIA) 57050; March 28, 1957John C. O'Connor, 336 S. State Street, Ann Arbor, Mich., for the petitioners. Robert B. Pierce, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent determined deficiencies in income tax, personal holding company surtax and additions to tax under section 291(a) of the Internal Revenue Code of 1939 as follows: Personal Hold- AdditionDocketIncomeing Companyto TaxNo.TaxpayerYearTaxSurtaxSec. 291(a)55803John C. O'Connor1948$22,632.2755865The O'Connor Patent Company1950 11,092.76$4,220.88$1,055.221951 12,882.688,986.962,246.7462052The O'Connor Patent Company1952 11,131.943,007.16751.791953 11,842.625,020.751,255.19Issues for determination204 are: (1) Whether John C. O'Connor's transfer in 1948 of patents to The O'Connor Patent Company solely in exchange for stock in that company was an exchange on which gain or loss was recognizable; (2) if the exchange was one on which gain or loss was recognizable, what was the amount thereof to be recognized as having been realized or sustained by John C. O'Connor; (3) what was the basis of the patents to The O'Connor Patent Company for the purpose of computing its allowances for depreciation of the patents for the fiscal years ending July 31, 1950 through 1953; (4) whether for the fiscal years ended July 31, 1950 through 1953 The O'Connor Patent Company was a personal holding company and subject to personal holding company surtax; and (5) whether for the fiscal years ended July 31, 1950 through 1953 The O'Connor Patent Company was liable for additions to tax under section 291(a) of the Internal Revenue Code of 1939 for failure to file personal holding company surtax returns for the respective years. Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioner John C. O'Connor is a resident of Ann Arbor, Michigan, has his principal office in that205 city and filed his Federal income tax return for 1948 with the collector at Detroit, Michigan. Petitioner The O'Connor Patent Company (sometimes hereinafter referred to as the Patent Company) is a Michigan corporation, has its principal office in Ann Arbor, and filed its Federal corporation income tax returns for the fiscal years ended July 31, 1950 through 1953 with the collector at Detroit, Michigan. In 1936 John C. O'Connor graduated from the University of Michigan as an aeronautical engineer. After working for a year for an aircraft manufacturer he began an engineering business of his own. In August 1942 he entered the Army Air Corps and was stationed at Wright Field, Dayton, Ohio, until October 1945 when he left the service. Upon leaving the service he resumed the conduct of an engineering business of his own. During the period from 1936 to June 1940 O'Connor developed certain inventions, patents covering which he made application for and received. The following is a statement of the patents so received and owned by him on June 7, 1948, the dates applied for, dates issued, expiration dates, their cost to him, their adjusted cost (after adjustments for depreciation of the206 patents allowed to O'Connor) to June 7, 1948: AdjustedPatentDateDateExpirationCost toNo.Applied forIssuedDateCostJune 7, 1948U.S. 2,353,492Vibration Producing1/16/427/11/447/11/61$2,100$1,616.18MechanismCanadian 431,592Vibration Producing10/20/4412/ 4/4512/ 4/62200170.59MechanismU.S. 2,418,982Rocking Mixer6/ 9/444/15/474/15/641,000931.37U.S. 2,420,793Vibratory Drilling6/ 9/445/20/475/20/641,7001,591.67ApparatusU.S. 2,439,219Apparatus forTransmitting IntenseVibrations for Performing6/ 9/444/ 6/484/ 6/651,9951,975.44WorkTotal$6,995$6,285.25U.S. Patent No. 2,353,492 was basic to all of the other United States patents heretofore mentioned and the specifications and drawings of Canadian Patent No. 431,592 are identical with those of U.S. Patent No. 2,353,492. Beginning in July 1947 and continuing through February 1948, O'Connor's sister, Edith M. O'Connor, at his request, loaned him a total of $225 which he used to pay expenses he had incurred in the development of some of the above-mentioned patents. Beginning July 1942 and continuing207 through June 1948, O'Connor's mother, Mary L. O'Connor, at his request, loaned him a total of $841 which he used to pay expenses he had incurred in getting some of the above-mentioned patents. In addition to the above loans, O'Connor had obtained a loan of an undisclosed amount from his aunt, Margaret O'Connor, and a loan of $400 from George Kalon. All of the foregoing persons expected O'Connor to repay the sums which they had loaned him. Prior to May 17, 1948, O'Connor discussed with Edmond F. DeVine, an attorney, John B. DeVine, also an attorney, and Cyrus R. Jones, the matter of forming a corporation to acquire and exploit the patents owned by O'Connor. On May 17, 1948, O'Connor, Edmond F. DeVine, John B. DeVine, and Cyrus R. Jones (sometimes hereinafter referred to as the promoters) and Elizabeth DeVine, the mother of Edmond F. DeVine and John B. DeVine, as incorporators, duly executed the Articles of Incorporation of the Patent Company. The Articles showed the purpose of the corporation, among others, was to acquire and exploit the inventions of O'Connor. They showed the authorized capital stock of the corporation as 100,000 shares of common stock of a par value of $1 each, 208 with each share to have one vote. They further showed $51,810 as the amount of paid-in capital with which the company would begin business and showed the incorporators as having subscribed for the following number of shares of common stock: No. of SharesEdmond F. DeVine300John B. DeVine200Elizabeth C. DeVine300Cyrus R. Jones10John C. O'Connor51,000Total51,810Edmond F. DeVine, John B. DeVine, Cyrus R. Jones and O'Connor were shown in the Articles as the first board of directors. After execution the Articles of Incorporation were mailed to the Michigan Corporation and Securities Commission and were received by it on May 19, 1948. Thereafter, on June 7, 1948, the Patent Company was duly incorporated. The first officers and directors of the Patent Company were as follows: John C. O'Connor - Chairman of Board of Directors Edmond F. DeVine - President Cyrus R. Jones - Vice President John B. DeVine - Secretary and Treasurer The foregoing persons remained in their respective offices in the Patent Company until about July 30, 1950, at which time Edmond F. DeVine and John B. DeVine resigned as directors and also resigned their respective209 offices. Subsequently Cyrus R. Jones resigned as vice president and director. At or about the time of the resignation of the DeVines, Hadley J. Smith, Andrew W. Row, and Elinor A. Patterson became directors and the following became the officers of the company: John C. O'Connor - President Hadley J. Smith - Vice President Andrew W. Row - Vice President Elinor A. Patterson - Secretary O'Connor has continued to be president of the company. Prior to the meeting of the incorporators on May 17, 1948, O'Connor had anticipated that the Patent Company would be incorporated by not later than June 1, 1948, and he prepared a proposed contract, bearing the latter date, between him and the Patent Company. By the contract he proposed, among other things, to transfer, with certain restrictions, to the Patent Company the 4 United States patents and Canadian patent theretofore issued to him and all inventions and improvements of inventions that he might make for a period of 5 years from June 1, 1948, and that, among other things, the Patent Company issue to him 51,000 shares of its authorized capital stock of 100,000 shares and a like proportion of all future increases of its capital stock, 210 to the end that of every 100 shares of capital stock issued by the company at any time he should receive 51 shares fully paid. Although the proposed contract contained matters which he considered should not be in it, O'Connor submitted it to the promoters at their meeting on May 17, 1948, when they signed the Articles of Incorporation of the Patent Company. After the proposed contract was read and discussed by the promoters, they concluded that it should be studied by the officers of the Patent Company for the purpose of correcting errors therein and revising it so as to make it a better working agreement. The proposed contract contained no provision respecting the issuance of any portion of the foregoing 51,000 shares of Patent Company stock to anyone other than O'Connor. On various occasions following the incorporation of the Patent Company and until about July 30, 1950, when Edmond F. DeVine and John B. DeVine resigned as directors and as officers of the Patent Company, O'Connor took up with them the matter of correcting, revising, and signing the proposed contract but to no avail. On April 11, 1953, the proposed contract was signed for the Patent Company by Elinor P. O'Connor, 211 as secretary and by O'Connor. This execution by the Patent Company purported to be by authority contained in a "September 20, 1952 Supplement" to the contract. On June 7, 1948, O'Connor transferred to the Patent Company the above-mentioned United States and Canadian patents theretofore issued to him solely in exchange for 51,000 shares of the Patent Company's capital stock and immediately after the exchange he owned more than 80 per cent of all that company's capital stock. O'Connor's assignment of the United States patents which had been issued to him prior to June 7, 1948, was recorded in the United States Patent Office, Washington, D.C., on April 7, 1949, and his assignment of the Canadian patent was recorded in the Patent and Copyright Office, Ottawa, Canada, on April 9, 1949. No formal record was made of the first meeting of the board of directors of the Patent Company. The second meeting of the board was held on August 30, 1948, and in addition to other action taken at that meeting the directors authorized the president and secretary to issue to the incorporators and their assigns the 51,810 shares of the corporation's stock for which the incorporators had subscribed. Prior212 to that meeting stock certificates had been issued to the following persons for the indicated number of shares and for the consideration shown: No. ofSharesConsiderationEdmond F. DeVine300ProfessionalservicesJohn B. DeVine200$200Cyrus R. Jones1010Elizabeth C. DeVine300300Total810After the meeting of the board of directors on August 30, 1948, the Patent Company, at the request of O'Connor, issued the 51,000 shares of its stock, which he had acquired in exchange for patents, to the following persons in the indicated amounts, and certificates therefor were issued by the company on the dates shown: DateNo. ofCertificateSharesIssuedMary L. O'Connor5,0008/30/48Edith L. O'Connor5,0008/30/48Margaret O'Connor5008/30/48John C. O'Connor40,0008/30/48George Kalon4008/30/48Catherine P. Dettling1009/25/48Total51,000Aside from O'Connor, none of the foregoing persons paid the Patent Company and consideration for the shares of stock issued to them. The 100 shares of stock in the Patent Company issued to Catherine P. Dettling represented a wedding gift made to213 her by O'Connor. At the time O'Connor requested the company to issue 400 shares of stock to George Kalon, he was indebted to Kalon in the amount of $400 on a loan which Kalon had made to him. O'Connor sent the certificate for 400 shares to Kalon in the hope that it would be acceptable to him as payment of the indebtedness. Kalon refused to accept the stock as payment of the indebtedness, demanded cash payment of the indebtedness, and about February 1949 returned the certificate to O'Connor. Thereafter O'Connor returned the certificate to the Patent Company which canceled it. With respect to the 400 shares represented by the canceled certificate, the Patent Company thereafter, in 1949, at O'Connor's request, issued certificates to 5 other persons for a total of 365 shares. At the time of the trial no further certificate had been issued for the remaining 35 shares. The Patent Company has never issued and had outstanding more than 51,810 shares of stock. In its Annual Reports to the Michigan Corporation and Securities Commission for 1948 and 1949 for the purpose of the computation of its annual privilege fee, the Patent Company listed the 5 patents it acquired from O'Connor on June 7, 1948, as214 having a total fair market value of $914,750 on June 7, 1948. In its Annual Report for 1950 and for subsequent years, the total fair market value of the patents was reduced from $914,750 to $342,675. The reduction was made in order to reduce the amount of the company's annual privilege fee payable to the State of Michigan. In its Federal income tax returns for the period June 7, 1948, to July 31, 1948, and for the fiscal year 1949, the Patent Company listed the above-mentioned 5 patents as having a total fair market value of $914,750 on June 7, 1948, and took deductions for depreciation of the patents computed on that amount as its basis for the patents. In its income tax returns for the fiscal years ended July 31, 1950 through 1953 the Patent Company listed the 5 patents as having a total fair market value of $342,675 on June 7, 1948, and took deductions for depreciation of the patents computed on that amount as its basis for the patents. In determining the deficiencies involved herein against the Patent Company, the respondent determined that the company acquired the patents from O'Connor on June 7, 1948, in an exchange on which no gain or loss was recognizable and that the company's215 basis for the computation of allowances for depreciation of the patents was the adjusted cost of the patents to O'Connor on June 7, 1948, namely, $6,285.25. Accordingly the respondent disallowed the deductions taken by the Patent Company for depreciation of the patents to the extent that the deductions exceeded an amount computed on a basis of $6,285.25. Prior to October 28, 1948, the Patent Company did not license any patents and did not receive any royalties. On October 28, 1948, the Patent Company entered into an agreement with The Gene Olsen Corporation (sometimes hereinafter referred to as Olsen) whereby the Patent Company licensed to Olsen certain patents it had acquired from O'Connor. The consideration was the royalties to be paid to the Patent Company by Olsen for the privilege of using the patents and was a specified percentage of the net selling price of the machines manufactured under the license agreement. The agreement contained no provision respecting the Patent Company furnishing any engineering or other services to Olsen. On December 1, 1950, the Patent Company entered into an agreement with General Mills, Inc. (sometimes hereinafter referred to as General Mills), 216 whereby the Patent Company licensed to General Mills certain patents it had acquired from O'Connor. The consideration was payment of royalties by General Mills to the Patent Company for the privilege of using the patents and was a specific amount per linear foot of vibratory conveyor manufactured under the license agreement. The agreement contained no provision respecting the Patent Company furnishing any engineering or other personal services to General Mills. However, the agreement contained the following provision: "No Other Understandings It is understood and agreed that this written agreement cancels all previous proposals heretofore considered by the respective parties prior to the execution thereof and constitutes the entire understanding and agreement between the parties hereto relating or pertaining to the subject matter hereof." During the following fiscal years the Patent Company received the indicated amounts of royalties from Olsen and General Mills under its respective agreements with them: Royalties Received FromFiscal YearEnded July 31OlsenGeneral Mills, Inc.1950$ 8,902.730195111,150.00$5,000.00195212,049.030195310,175.180217 During the fiscal year ended July 31, 1950, the Patent Company, under an agreement with the Vibro-Plus Corporation, dated June 9, 1950, received $1,000 from that corporation for an option and during the fiscal year ended July 31, 1951, received $1,000 from the corporation for a cancellation of the option. The foregoing amounts received by the Patent Company from Olsen, General Mills, and Vibro-Plus Corporation constituted its entire gross income for the respective years. In the years following the Patent Company's execution of the above-mentioned agreements with Olsen and General Mills, including the taxable years in question, O'Connor imposed upon Olsen and General Mills certain engineering and other services rendered by him. The respondent determined that the Patent Company was a personal holding company for the fiscal years ended July 31, 1950 through 1953 and was subject to personal holding company surtax for those years. Throughout the fiscal years ended July 31, 1950 through 1953 O'Connor owned more than 50 per cent in value of the outstanding stock of the Patent Company. More than 80 per cent of the company's gross income for each of the years was from royalties. For each218 of the years the company was a personal holding company and was subject to personal holding company surtax. The Patent Company failed to file a personal holding company return for each of the fiscal years ended July 31, 1950 through 1953. The company's failure to file personal holding company returns was not due to reasonable cause. In determining the deficiency against petitioner John C. O'Connor, the respondent determined that on June 7, 1948, he transferred his patents to the Patent Company in an exchange on which gain or loss was recognizable and that on the exchange he realized a long-term capital gain of $100,000. Opinion The respondent contends that on June 7, 1948, the petitioner John C. O'Connor transferred his patents to the Patent Company solely in exchange for 51,000 shares of the Patent Company's stock, which was more than 80 per cent of all of the company's 51,810 shares of stock, that immediately after the exchange O'Connor was in control of the company, and that accordingly under the provisions of section 112(b)(5) of the Internal Revenue Code of 19391 no gain or loss was recognizable on the exchange. The petitioners also take the position that the patents219 were transferred to the Patent Company on June 7, 1948, in exchange for 51,000 shares of its stock. However, they contend that, since only 40,000 shares of the 51,000 shares of stock were issued to O'Connor and the remainder of 11,000 shares was issued to others designated by him, he received less than 80 per cent of the Patent Company's stock and was not in control of the Patent Company immediately after the exchange and that accordingly the exchange was not one within the provisions of section 112(b)(5) but was one on which gain or loss was recognizable. 220 On brief the petitioners state that the exchange of patents for stock was made under a written contract and the stock was issued under a separate oral agreement under which less than 80 per cent of the stock was to be issued to O'Connor so that he would not have control of the Patent Company within the meaning of section 112(b)(5). The record contains no evidence of any written contract between the Patent Company and O'Connor respecting the transfer of patents by O'Connor to the company for stock except the proposed contract submitted by O'Connor to the incorporators on May 17, 1948. But that instrument was never corrected and revised as the promoters and incorporators concluded should be done, nor was it signed for the company until in April 1953 when an officer of the company purportedly pursuant to authority contained in a "September 20, 1952 Supplement" to the proposed contract signed it. The supplement referred to was not placed in evidence nor are we informed as to its contents. Since the evidence shows that the patents were acquired by the company on June 7, 1948, that some were licensed to Olsen in October 1948, and some licensed to General Mills in December 1950, we are221 unable to conclude that the patents were acquired by the company under the proposed contract if that is what the petitioners mean by the term "written contract." If the patents were exchanged by O'Connor for stock under an agreement, oral or otherwise, which provided that anyone other than O'Connor should be the owner of the 51,000 shares of stock, or any part thereof, the record fails to disclose it. The earliest arrangement between O'Connor and the Patent Company or anyone else respecting others becoming owners of part of the stock as disclosed by the record was in August 1948. O'Connor testified that about August 15, 1948, he approached the president and the secretary of the company about issuing to him and to others whom he designated certificates for shares of the company's stock. He stated that those officers gave him the company's stock book and told him to fill in certificates to the persons and for the number of shares he desired, that he filled in the certificates as he wished, and that on August 30, 1948, following the directors' meeting on that day, at which issuance of the company's stock was authorized, the president and secretary of the company signed the certificates222 he had prepared. Those certificates were for a total of 50,900 shares. On September 25, 1948, at O'Connor's request, the company issued an additional certificate for 100 shares. While the record discloses that prior to the exchange of the patents on June 7, 1948, certain persons had loaned money to O'Connor which they expected him to repay, and shows that in August 1948 he caused certain shares of stock to be issued to them, it contains nothing from which we can find that prior to the exchange those persons had acquired any interest in the patents or in the stock to be issued in exchange for the patents. O'Connor was the sole owner of the patents prior to and at the time of their exchange on June 7, 1948, and on that day he became the sole owner of the 51,000 shares of stock the Patent Company was to issue for the patents as a result of the exchange. The foregoing situation distinguishes the instant case from Mojonnier & Sons, Inc., 12 T.C. 837">12 T.C. 837; Fahs v. Florida Machine & Foundry Co., 168 Fed. (2d) 957, and similar cases relied on by petitioners. Prior to the exchanges involved in those cases the transferors had entered into arrangements under which others, 223 to whom stock was issued subsequent to the exchange, had acquired an interest in the subject matter of the transfers or had acquired an interest in the stock to be issued therefor. On the basis of such factual situations, it was held that immediately after the exchanges the transferors were not the owners of the stock issued to others and therefore did not own the amount of stock required by the statute to constitute them in control of the corporations. From statements made at the trial and on brief, it appears that petitioners are of the view that it is necessary that a stock certificate be actually issued in order to constitute a person the owner of stock in a corporation. Such issuance is not necessary. In Pacific National Bank v. Eaton, 141 U.S. 227">141 U.S. 227, the Supreme Court said: "Millions of dollars of capital stock are held without any certificate; or if certificates are made out without their ever being delivered. A certificate is authentic evidence of title to stock; but it is not the stock itself, nor is it necessary to the existence of the stock. It certifies to a fact which exists independently of itself." There is no showing that when O'Connor became the224 owner of the 51,000 shares of stock on June 7, 1948, he was under any obligation to make disposition of any portion of it to any one. He was entirely free to do as he wished with it. He could retain or dispose of all of it. Or he could retain part of it and dispose of part of it. Under these circumstances, O'Connor was in control of the Patent Company immediately after the exchange as contemplated by section 112(b)(5). The fact that more than 2 months after the exchange he caused 11,000 shares of his 51,000 shares to be issued to those designated by him in nowise affected the control which he had immediately after the exchange. This subsequent action could not obviate the application of section 112(b)(5) to the exchange. The Roberts Co., Inc., 5 T.C. 1">5 T.C. 1. Accordingly we are of the opinion that the exchange was within the purview of section 112(b)(5) and that no gain or loss was recognizable to O'Connor on the exchange. Cf. Wilgard Realty Co., Inc., 43 B.T.A. 557">43 B.T.A. 557, affd. 127 Fed. (2d) 514, certiorari denied 317 U.S. 655">317 U.S. 655. The next question for determination relates to the basis to the Patent Company for purposes of depreciation225 of the patents acquired from O'Connor on June 7, 1948. Pertinent portions of the Code are set out below. 2226 Since under section 112(b)(5) no gain or loss was recognizable to O'Connor on the exchange of the patents for stock, the situation comes within the provisions of section 113(a)(8), and under the provisions of section 114(a), the basis of the patents to the Patent Company for depreciation purposes was the same as the adjusted cost to O'Connor. The parties have stipulated that the total adjusted cost of the patents to him on June 7, 1948, was $6,285.25. Accordingly we conclude that that is the proper amount to be used by the Patent Company as its basis for computing its depreciation allowances with respect to the patents. Having reached the foregoing conclusion it becomes unnecessary to determine the fair market value of the patents at the time of their transfer to the Patent Company on June 7, 1948. The next question involves the liability of the Patent Company for personal holding company surtax for its fiscal years ended July 31, 1950 through 1953. Pertinent provisions of the Code are set out below. 3 There is no dispute as to the ownership of the stock of the Patent Company during the years in question. Concededly O'Connor owned more than 50 percent in value of its stock227 throughout all the years. The stock ownership requirement of section 501(a) is therefore met and the Patent Company must be deemed to be a personal holding company unless the record shows that less than the statutory percentage of its gross income in the respective years was personal holding company income. The required percentage would be at least 80 per cent for the year ended July 31, 1950, and in the event the Patent Company should be found to be a personal holding company for that year, the required percentage for the following 3 years would be 70 per cent. 228 The petitioners contend that less than the statutory percentage of the Patent Company's gross income for the years in question was personal holding company income for the reason that a stated portion of the total royalties received each year from Olsen and General Mills represented payment for engineering and other services rendered by O'Connor to the licensees. As authority for their contention, the petitioners cite U.S. Universal Joints Co., 46 B.T.A. 111">46 B.T.A. 111. The respondent takes the position that the record does not support the contention of the petitioners. Respecting the circumstances under which he rendered services to the licensees of the Patent Company, O'Connor stated at the trial that he "impressed" his services upon them. In this connection the brief of petitioners, signed by O'Connor, contains the following in the statement of facts as to this issue: "The Gene Olsen Corporation and General Mills were patent licensees under contracts in J. Exhs. 22-V and 23-W, but these particular patent license contracts did not provide for the rendering of engineering services by John C. O'Connor or anyone else connected with The O'Connor Patent Company. Nevertheless it229 was necessary for someone to help these licensees design and build the machines under the patents. The way it was done was that John C. O'Connor forced his services upon these companies and they accepted these services, but paid said O'Connor no money it being assumed that the royalties paid covered these services. * * * "The services above mentioned in brief * * * were performed by [O'Connor] an officer of The O'Connor Patent Company in efforts to increase and/or continue the income from the company's patent licensees. These services were not requested by the licensees, for no one connected with the licensees could have anticipated that they should be performed, or that the problems solved by John C. O'Connor could ever be solved. * * " (Italics supplied.) The factual situation portrayed in the above statement of the petitioners is clearly unlike that in U.S. Universal Joints Co., supra. In that case the licensee, at the time it entered into a written licensing agreement, also entered into an oral agreement with the licensor to furnish it with engineering services which the parties anticipated would be and which were substantial. It was the intention of the parties230 in entering into the written agreement that the amount designated therein as royalty was to be in part, payment for the right to manufacture and use the article covered by the agreement and in part, payment for the services to be rendered by the licensor. After there defining "a royalty as a payment or interest reserved by an owner in return for permission to use the property loaned and usually payable in proportion to use," we held that a portion of the payments received by the licensor from the licensee was compensation for services. From a consideration of the above-quoted statement of the petitioners in connection with the fact that neither of the license agreements involved here provided that the Patent Company should render any engineering or other services to the licensees, and with the further fact that the agreement with General Mills specifically recited that it contained the entire understanding and agreement between the parties, we think it is evident: (1) that the licensees did not desire that the Patent Company furnish them any services, (2) that there were no oral agreements or understandings between the Patent Company and the licensees that the Patent Company should231 furnish them any services, and (3) that there were no agreements that a portion of the payments to be made by the licensees should constitute payment for services or for anything else except payment for the use of the patents or royalty. We fail to see how the licensees' acceptance of O'Connor's services, which admittedly he forced upon them, could change a portion of the royalty payments into compensation for services. While there is some evidence which indicates that the Patent Company accepted for payment certain bills submitted to it by O'Connor for services rendered to the licensees, such action of the Patent Company in agreeing to pay O'Connor for his services could in nowise change the character of the payments made by the licensees to the Patent Company. On the record before us we are of the opinion that no part of the payments received during the years in question by the Patent Company under its license agreements with Olsen and General Mills constituted payment for services, but that the entire amount of such payments was royalties. Since the royalties received by the Patent Company from the licensees during the respective years constituted more than 80 per cent of the232 company's gross income for such years, the Patent Company was a personal holding company for each of the years within the meaning of section 501(a). The petitioners refer to Article I, Section 8, of the Constitution of the United States which authorizes Congress to secure for a limited time to inventors the exclusive rights to their inventions. They contend that by providing in section 502(a) of the Internal Revenue Code that royalties are personal holding company income and thereby making them subject to the personal holding company surtax imposed by section 500 of the Code and by providing that the surtax shall be in addition to the corporate normal tax otherwise provided in the Code, Congress has imposed a confiscatory tax on royalties, and in effect has canceled the benefits which the Constitution contemplated should be secured to inventors in their inventions. Accordingly the petitioners ask that we find that the holding company surtax provisions of the Code as applied to the Patent Company during the years in question are violative of Article I, Section 8, of the Constitution. In Lane-Wells Company, 43 B.T.A. 463">43 B.T.A. 463, we held that the taxpayer, 233 more than 80 per cent of whose gross income was from royalties from patents, was a personal holding company and was liable for the personal holding company surtax imposed by the applicable revenue acts. That holding was affirmed by the Supreme Court in Commissioner v. Lane-Wells Company, 321 U.S. 219">321 U.S. 219. Although the gross income, which was material to the holdings in that case, was from royalties, the question of the constitutionality of the imposition of the personal holding company surtax was not presented and was not considered by us or the Supreme Court. Morris Investment Corporation v. Commissioner, 134 Fed. (2d) 774, certiorari denied 320 U.S. 743">320 U.S. 743, involved an appeal from our unpublished opinion in which we held that the taxpayer was a personal holding company and was liable for the personal holding company surtax determined by respondent. In the Circuit Court of Appeals the taxpayer contended that the personal holding company surtax imposed by section 351 of the applicable revenue act was void because it was an attempt by Congress in the guise of a tax to destroy personal holding companies and because the cumulative effect of undistributed234 profits surtax and personal holding company surtax was confiscatory. In affirming our holding, the Circuit Court of Appeals said: "Any discussion as to the validity of this tax must take into account that the Sixteenth Amendment grants unrestricted power to the Congress to lay and collect taxes upon incomes and that the tax imposed by section 351 is upon income. Even if the motive of Congress had been to destroy personal holding companies, as the petitioner contends, the imposition of the surtax was well within the Congressional power to lay taxes upon incomes. * * " After observing that the purpose of Congress in imposing personal holding company surtax was to increase the public revenues by making unprofitable the tax avoidance device of retention of income by the personal holding company, the court further said: "The Fifth Amendment is not violated by section 351 merely because that section imposes a tax more onerous in the case of personal holding corporations than other corporations. The235 amendment does not require equal treatment in the imposition of taxes. Steward Machine Co. v. Davis, 1937, 301 U.S. 548">301 U.S. 548, 584, 57 S. Ct. 883">57 S. Ct. 883, 81 L. Ed. 1279">81 L. Ed. 1279, 109 A.L.R. 1293">109 A.L.R. 1293. Nor can we find that section 351 amounts to confiscation. Foley Securities Corp. v. Commissioner of Internal Revenue, 6[8] Cir., 1939, 106 Fed. (2d) 731, 736." Although it does not appear that the gross income of the Morris Investment Corporation upon which personal holding company surtax was imposed was from royalties from patents, the court has made clear the power of Congress to impose a surtax on the undistributed income of personal holding companies and that, although the cumulative effect of the surtax with another tax may be onerous, the surtax is not thereby made confiscatory. While it is true that the personal holding company surtax imposed on the Patent Company is imposed on the company's undistributed income from royalties from patents, the petitioners have not indicated, nor are we able to see, how that fact in anywise impairs any right which the above-mentioned portion of the Constitution authorized Congress to secure to inventors. Although by the personal holding company236 provisions of the Code Congress intended to make it unprofitable for a personal holding company to retain and not distribute its income from royalties from patents, and although those provisions do make it unprofitable for the company to do so, such intent and effect neither impair the company's rights in its patents nor do they impinge on the security of those rights to the company. In view of what has been said above, we are unable to find, as petitioners contend, that the personal holding company provisions of the Code as applied to the Patent Company are violative of Article I, Section 8, of the Constitution. The petitioners contest the respondent's determinations of additions to tax in the case of the Patent Company because of its failure to file personal holding company returns, Forms 1120H, for each of the years in question. These additions to tax are proper under section 291(a) of the Code 4 unless such failure was due to reasonable cause and not due to willful neglect. The petitioners have submitted no evidence respecting the failure of the Patent Company to file a personal holding237 company return for the years in question. However, on brief they contend in substance that the Patent Company was not a personal holding company for any of the years and that since its income tax returns, Forms 1120, showed net losses, no personal holding company returns were required. Under our holdings above the Patent Company was a personal holding company for each of the years in question and had a substantial238 amount of income each year subject to the personal holding company surtax. In Safety Tube Corporation, 8 T.C. 757">8 T.C. 757, affd. 168 Fed. (2d) 787, we said: "Advice of reputable counsel that a taxpayer was not liable for the tax has been held to constitute reasonable cause for failure to file a return on time when it was accompanied by other circumstances showing the taxpayer's good faith. Dayton Bronze Bearing Co. v. Gilligan, 281 Fed. 709; Adelaide Park Land, 25 B.T.A. 211">25 B.T.A. 211; Agricultural Securities Corporation, 39 B.T.A. 1103">39 B.T.A. 1103; affirmed on another point, 116 Fed. (2d) 800; C. R. Lindback Foundation, 4 T.C. 652">4 T.C. 652. Cf. Hugh Smith, Inc., 8 T.C. 660">8 T.C. 660. * " In the Patent Company's income tax returns, Forms 1120, for each of the years in question, the answer "No" was given to the question whether the Patent Company was a personal holding company within the meaning of section 501 of the Internal Revenue Code. But we do not have here any showing that advice of counsel was sought, or relied on, by the Patent Company in formulating that answer or in determining239 whether it should file personal holding company returns. The company's officers, without professional or expert assistance, resolved those matters in favor of the company. Under such circumstances, even though it be assumed that the company's officers were innocently mistaken as to the necessity for filing personal holding company returns, the failure of the company to file personal holding company returns is not shown to have been due to reasonable cause. Southeastern Finance Co., 4 T.C. 1069">4 T.C. 1069, affd. 153 Fed. (2d) 205; Cedarburg Canning Co. v. Commissioner, 149 Fed. (2d) 526. In the state of the record before us we have concluded, and found as a fact, that the Patent Company's failure to file personal holding company returns for the years in question was not due to reasonable cause. The respondent's action in determining the additions to tax is sustained. Because O'Connor took the position before the respondent that he transferred his patents to the Patent Company in an exchange on which gain or loss was recognizable, and in order to protect the revenue in the event O'Connor's position should be sustained, the respondent determined the240 deficiency involved in O'Connor's case. Since we have held above that no gain or loss was recognizable on the exchange, we hold that O'Connor was not liable for the deficiency determined against him. Decisions will be entered under Rule 50. Footnotes1. Fiscal year ended July 31.↩1. SEC. 112. RECOGNITION OF GAIN OR LOSS. (a) General Rule. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section. (b) Exchanges Solely in Kind. - * (5) Transfer to corporation controlled by transferor. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. * (h) Definition of Control. - As used in this section the term "control" means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.↩2. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION. (a) Basis for Depreciation. - The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property. * SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (a) Basis (unadjusted) of Property. - The basis of property shall be the cost of such property; except that - * (8) Property acquired by issuance of stock or as paid-in surplus. - If the property was acquired after December 31, 1920, by a corporation - (A) by the issuance of its stock or securities in connection with a transaction described in section 112(b)(5) * * or (B) as paid-in surplus or as a contribution to capital, 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. * * (b) Adjusted basis. - The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a) adjusted as hereinafter provided. (1) General rule. - Proper adjustment in respect of the property shall in all cases be made - * (B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount - (i) allowed as deductions in computing net income under this chapter or prior income tax laws, and (ii) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer's taxes under this chapter * * or prior income, war-profits, or excess-profits tax laws, but not less than the amount allowable under this chapter or prior income tax laws. * * ↩3. SEC. 500. SURTAX ON PERSONAL HOLDING COMPANIES. There shall be levied, collected, and paid, for each taxable year beginning after December 31, 1938, upon the undistributed subchapter A net income of every personal holding company (in addition to the taxes imposed by chapter 1) a surtax equal to the sum of the following: (1) 75 per centum of the amount thereof not in excess of $2,000: plus (2) 85 per centum of the amount thereof in excess of $2,000. SEC. 501. DEFINITION OF PERSONAL HOLDING COMPANY. (a) General Rule. - For the purposes of this subchapter and chapter 1, the term "personal holding company" means any corporation if - (1) Gross income requirement. - At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 502; but if the corporation is a personal holding company with respect to any taxable year beginning after December 31, 1936, then, for each subsequent taxable year, the minimum percentage shall be 70 per centum in lieu of 80 per centum, until a taxable year during the whole of the last half of which the stock ownership required by paragraph (2) does not exist, or until the expiration of three consecutive taxable years in each of which less than 70 per centum of the gross income is personal holding company income; and (2) Stock ownership requirement. - At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. * SEC. 502. PERSONAL HOLDING COMPANY INCOME. For the purposes of this subchapter the term "personal holding company income" means the portion of the gross income which consists of: (a) * * royalties * * ↩4. SEC. 291. FAILURE TO FILE RETURN. (a) In case of any failure to make and file return required by this chapter, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: 5 per centum if the failure is for not more than thirty days with an additional 5 per centum for each additional thirty days or fraction thereof during which such failure continues, not exceeding 25 per centum in the aggregate. The amount so added to any tax shall be collected at the same time and in the same manner and as a part of the tax * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621130/	GARBER INDUSTRIES HOLDING CO., INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGarber Indus. Holding Co. v. Comm'rNo. 10871-01 United States Tax Court124 T.C. 1; 2005 U.S. Tax Ct. LEXIS 1; 124 T.C. No. 1; January 25, 2005, Filed Judgment entered for respondent and in accordance with parties' stipulations as to correct amount of petitioner's income tax deficiencies. 1 P, a closely held corporation, is the parent of an affiliated group that files consolidated Federal income tax returns. In April 1998, A sold all of his P shares to his brother, B. As a result of that sale, B's percentage ownership of P increased by more than 50 percentage points. On its consolidated income tax return for 1998, P claimed a net operating loss (NOL) deduction of $ 808,935 for regular tax purposes and $ 735,783 for alternative minimum tax (AMT) purposes. R determined that the 1998 transaction between A and B resulted in an ownership change with respect to P within the meaning of sec. 382(g), I.R.C. In accordance with sec. 382(b), I.R.C., R reduced P's 1998 NOL deduction, for both regular tax and AMT purposes, to $ 121,258. 1. Held: Sec. 382(l)(3)(A)(i), I.R.C., which provides that an "individual" and all members of his family described in sec. 318(a)(1), I.R.C. (i.e., his spouse, children, grandchildren, and parents) are treated as one individual2 for purposes of applying sec. 382, applies solely from the perspective of individuals who are shareholders (as determined under applicable attribution rules) of the loss corporation. 2. Held, further, A and B are not treated as one individual under sec. 382(l)(3)(A)(i), I.R.C. 3. Held, further, A's sale of his P shares to B resulted in an ownership change with respect to P within the meaning of sec. 382(g), I.R.C.George W. Connelly, Jr., Linda S. Paine, and Phyllis A. Guillory, for petitioner.Susan K. Greene and Marilyn S. Ames, for respondent. Halpern, James S.2 James S. HalpernHALPERN, Judge: By notice of deficiency dated June 21, 2001, respondent determined deficiencies in petitioner's Federal income taxes for petitioner's 1997 and 1998 taxable (calendar) years in the amounts of $ 4,916 and $ 301,835, respectively. The parties have settled all issues save one, leaving for our decision only the question of whether a 1998 stock sale between siblings that increased one sibling's percentage ownership of petitioner by more than 50 percentage3 points resulted in an ownership change for purposes of section 382, triggering that section's limitation on net operating loss (NOL) carryovers. 1 That issue turns on the interpretation of section 382(l)(3)(A)(i), a matter of first impression for this Court.Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 1998, and all Rule references are to the Tax Court Rules of Practice and Procedure. For the sake of convenience, all percentages are rounded to the nearest full percent.FINDINGS OF FACTThe parties submitted this case fully stipulated pursuant to Rule 122. The4 stipulation of facts, stipulation of settled issues, and accompanying exhibits are incorporated herein by this reference. At the time the petition was filed, petitioner's mailing address was in Lafayette, Louisiana.At the time of petitioner's incorporation in December 1982, Charles M. Garber, Sr. (Charles), and his brother, Kenneth R. Garber, Sr. (Kenneth) (collectively, sometimes, the Garber brothers), owned 68 percent and 26 percent, respectively, of petitioner's common stock. The spouses, children, and other siblings of the Garber brothers owned the remaining shares of such stock. The Garber brothers' parents, who are deceased, never owned any of petitioner's stock.3 On or about July 10, 1996, petitioner underwent a reorganization described in section 368(a)(1)(D) (the reorganization). Pursuant to the reorganization, petitioner canceled Charles's original stock certificate for 3,492.85 shares and issued a new certificate to him for 386 shares. As a result, Charles's percentage ownership of petitioner decreased from 68 percent to 19 percent, and Kenneth's percentage ownership of petitioner increased from 26 percent to 65 percent. 25 On April 1, 1998, Kenneth sold all of his shares in petitioner to Charles (the 1998 transaction). As a result of the 1998 transaction, Charles's percentage ownership of petitioner increased from 19 percent to 84 percent.On its 1998 consolidated Federal income tax return, petitioner claimed an NOL deduction in the amount of $ 808,935 for regular tax purposes and $ 728,041 for alternative minimum tax (AMT) purposes. As one of the adjustments giving rise to the deficiencies here in question, respondent adjusted the amount of petitioner's 1998 NOL deduction, for both regular tax and AMT purposes, to $ 121,258 pursuant to section 382(b). Petitioner assigns error to that adjustment.OPINIONI. Substantive Law A. Overview of Section 382Section 382(a) limits the amount of "pre-change losses" that a corporation (referred to as a loss corporation) may use to offset taxable income in the taxable years or periods following an ownership change. 3 "Pre-change losses" include NOL carryovers to the taxable year in which the ownership change occurs and any NOL incurred during that taxable year to the extent such NOL is allocable to the portion of the year ending on the date6 of the ownership change. 4Sec. 382(d)(1). An ownership change is deemed to have occurred if, on a required measurement date (a testing date), the aggregate percentage ownership interest of one or more 5-percent 4 shareholders of the loss corporation is more than 50 percentage points greater than the lowest percentage ownership interest of such shareholder(s) during the (generally) 3-year period immediately preceding such testing date (the testing period). Sec. 382(g)(1) and (2), (i); sec. 1.382-2(a)(4), Income Tax Regs. B. Determining Stock Ownership for Purposes of Section 382Section 382(l)(3)(A) provides that, with certain exceptions, the constructive ownership rules of section 3187 apply in determining stock ownership. Under the first of those exceptions, set forth in section 382(l)(3)(A)(i), the family attribution rules of section 318(a)(1) and (5)(B) do not apply; 5 instead, an individual and all members of his family described in section 318(a)(1) (spouse, children, grandchildren, and parents) are treated as one individual. C. RegulationsThe family aggregation rule of section 382(l)(3)(A)(i) is further addressed in section 1.382-2T(h)(6), 8 Temporary Income Tax Regs., 52 Fed. Reg. 29686 (Aug. 11, 1987). Paragraph (h)(6)(ii) of that section repeats the general rule that, for purposes of section 382, an individual and all members of his family described in section 318(a)(1) are treated as one individual. 6 Paragraph (h)(6)(iv) provides further that, if an individual may be treated as a member of more than one family under paragraph (h)(6)(ii), such individual will be treated as a member of the family with the smallest increase in percentage ownership (to the exclusion of all other families).5 II. 9 Arguments of the Parties A. Petitioner's ArgumentPetitioner argues that, although siblings are not family members described in section 318(a)(1), Charles and Kenneth are nonetheless members of the same family when such determination is made by reference to their parents and grandparents. That is, as sons, they are both members of each family consisting of a parent and that parent's family members described in section 318(a)(1). Similarly, as grandsons, they are both members of each family consisting of a grandparent and that grandparent's family members described in section 318(a)(1). Accordingly, petitioner argues, Charles and Kenneth are treated as one individual under section 382(l)(3)(A)(i), with the result that transactions between them are disregarded for purposes of section 382. B. Respondent's ArgumentRespondent maintains that the family aggregation rule applies solely with reference to living individuals. Under that view, inasmuch as none of the parents and grandparents of the Garber brothers was alive at the commencement of the 3-year testing period immediately preceding the 1998 transaction, from that point forward there was no individual, within10 the meaning of section 382(l)(3)(A)(i), whose family members (as described in section 318(a)(1)) included both Charles and Kenneth. It follows, respondent argues, that Charles and Kenneth are not treated as one individual for purposes of section 382 and that the 1998 transaction resulted in an ownership change with respect to petitioner under section 382.III. Analysis A. General Principles of Statutory ConstructionAs a general matter, if the language of a statute is unambiguous on its face, we apply the statute in accordance with its terms, without resort to extrinsic interpretive aids such as legislative history. E.g., Fed. Home Loan Mortgage Corp. v. Commissioner, 121 T.C. 129">121 T.C. 129, 134 (2003) (citing United States v. Ron Pair Enters., Inc., 489 U.S. 235">489 U.S. 235, 241, 103 L. Ed. 2d 290">103 L. Ed. 2d 290, 109 S. Ct. 1026">109 S. Ct. 1026 (1989)). Accordingly, our initial inquiry is whether the language 6 of section 382(l)(3)(A)(i) is so plain as to permit only one reasonable interpretation insofar as the question presented in this case is concerned. See, e.g., Robinson v. Shell Oil Co., 519 U.S. 337">519 U.S. 337, 340, 136 L. Ed. 2d 808">136 L. Ed. 2d 808, 117 S. Ct. 843">117 S. Ct. 843 (1997). That threshold determination must be made with reference to the context in which such language appears. 11 Id. B. Language of Section 382(l)(3)(A)(i)Section 382(l)(3)(A)(i) provides as follows: (A) Constructive ownership. -- Section 318 (relating to constructive ownership of stock) shall apply in determining ownership of stock, except that -- (i) paragraphs (1) and (5)(B) of section 318(a) shall not apply and an individual and all members of his family described in paragraph (1) of section 318(a) shall be treated as 1 individual for purposes of applying this section * * Respondent apparently would limit our textual analysis to a single word. According to respondent, Charles and Kenneth are not common members of any individual's family under section 382(l)(3)(A)(i) "[b]ecause the commonly used meaning of the term 'individual' does not include a deceased parent". We believe respondent's focus is too narrow. As stated by the Court of Appeals for the Fifth Circuit:However, even apparently plain words, divorced from the contextin which they arise and in which their creators intended them tofunction, may not accurately12 convey the meaning the creatorsintended to impart. It is only, therefore, within a context thata word, any word, can communicate an idea. Leach v. Federal Deposit Ins. Corp., 860 F.2d 1266">860 F.2d 1266, 1270 (5th Cir. 1988). In our view, the question is not whether the noun "individual", standing alone, typically denotes a living person -- typically it does. 713 The question, rather, is whether the language of section 382(l)(3)(A)(i) as a whole definitively establishes, one way or the other, that the identification of a (living) individual whose family members are aggregated thereunder must be made, as respondent maintains (or need not be made, as petitioner maintains), coincident with the determination of stock ownership under section 382 (i.e., on a testing date or at any point during a testing period). 8 Stated 7 negatively, is the language of section 382(l)(3)(A)(i) so plain as to preclude either party's position, as so identified?We are satisfied that the language of section 382(l)(3)(A)(i) can variably (and reasonably) be interpreted as being consistent with each party's position in this case. That is, there is nothing in the language of the statute that would make either party's position patently untenable. While a rule attributing stock owned by an individual on a measurement date to members of his family presupposes that the individual is alive, the same need not be said of a rule (such as that contained in section 382(l)(3)(A)(i)) that identifies (by reference to an individual) the members of a family that, on some measurement date, are to be treated as a single shareholder. By the same token, the language of section 382(l)(3)(A)(i) certainly does not compel the conclusion that the individual whose family members are so aggregated need not be alive on that measurement14 date. Because the answer to our inquiry is not apparent from the face of the statute, we may look beyond the language of section 382(l)(3)(A)(i) for interpretive guidance. C. Legislative History of Section 382(l)(3)(A)(i)Congress enacted the family aggregation rule of section 382(l)(3)(A)(i) as part of its overhaul of section 382 included in the Tax Reform Act of 1986, Pub. L. 99-514, sec. 621, 100 Stat. 2085">100 Stat. 2085, 2254 (hereafter, cited simply as 1986 Act or 1986 Act sec. x.). The rule first appeared in the conference committee bill. 915 The conference committee report that accompanied that bill (the 1986 conference report) does not address the temporal aspect of family aggregation identified above: "The family attribution rules of sections 318(a)(1) and 318(a)(5)(B) do not apply, but an individual, his spouse, his parents, his children, and his grandparents are treated as a single shareholder." H. Conf. Rept. 99-841 (Vol. II), at II-182 (1986), 1986-3 C.B. (Vol. 4) 1, 182. 10 8 D. Other Considerations 1. Family Aggregation Under Pre-1986 Act Section 382 a. General Structure of the StatutePrior to the amendment of section 382 by the 1986 Act, section 382 contained separate rules for ownership changes resulting from purchases and redemptions, see former sec. 382(a), and those resulting from corporate reorganizations, see former sec. 382(b). Under the "purchase" rules of former section 382(a), ownership changes were ascertained by reference to the holdings of the 10 largest shareholders at the end of the corporation's taxable year (as compared to their holdings at the beginning of such taxable year or the preceding taxable year). Former sec. 382(a)(1) and (2). b. Family Attribution16 and AggregationIntrafamily sales were excluded from the operation of former section 382(a) by means of stock attribution (as opposed to shareholder aggregation) rules. Specifically, purchases of stock from persons whose stock ownership would be attributed to the purchaser under the family attribution rules of section 318 were ignored for purposes of determining whether an ownership change by "purchase" had occurred. See former sec. 382(a)(3) and (4). Although family members were potentially subject to aggregation for purposes of determining the 10 largest shareholders at yearend, that rule applied only if loss corporation stock owned by one was attributed to the other under the family attribution rules of section 318. 11 Former sec. 382(a)(2) and (3). For that reason, the aggregation rule of former section 382(a)(2), unlike the aggregation rule of section 382(l)(3)(A)(i), necessarily applied as of the date on which stock ownership was measured (in the case of former section 382(a)(2), at yearend). Accordingly, no inference can be drawn from former section 382(a)(2) as to whether, as respondent maintains, the identification of the 9 individuals whose family members are aggregated under17 section 382(l)(3)(A)(i) occurs as of the date on which stock ownership is measured. 2. Practical Consequences of Each Party's Interpretation of Section 382(l)(3)(A)(i) a. Petitioner's InterpretationUnder petitioner's interpretation of section 382(l)(3)(A)(i), an individual would be aggregated with (and therefore could, without any section 382 consequences, sell loss corporation shares to) not only his spouse, children, grandchildren, and parents, but also his siblings, nephews, nieces, grandparents, in-laws, great-grandchildren, aunts, uncles, first cousins, and great-grandparents. 12 It is difficult to believe that Congress intended to18 expand the scope of exempted intrafamily sales so significantly (as compared to both the then-existing version of section 382, see supra part III.D.1.b., and the House and Senate versions of revised section 382, see supra note 9) with nary a mention of that objective in the 27 pages devoted to section 382 in the 1986 conference report.19 b. Respondent's InterpretationRespondent's interpretation of section 382(l)(3)(A)(i) is perhaps even more troubling than petitioner's. First, it has the potential for being just as expansive as petitioner's interpretation. 13 More importantly, respondent's interpretation leads to arbitrary distinctions. As relevant to this case, respondent would have us believe that the ability of siblings to sell loss corporation shares among themselves without any section 382 consequences is wholly dependent on the continued good health of their parents. We see no rational basis for10 Congress's having drawn a distinction in this context between siblings whose parents happen to be living and those whose parents happen to be deceased; the former are no more related than the latter.20 E. A Third Interpretation 1. IntroductionOur own analysis of the legislative evolution of section 382(l)(3)(A)(i) leads us to believe that both parties have erroneously interpreted that provision. For the reasons discussed below, we conclude that Congress most likely intended the aggregation rule of section 382(l)(3)(A)(i) to apply solely from the perspective of individuals who are shareholders (as determined under the attribution rules of section 382(l)(3)(A)) of the loss corporation. 14 In practical terms, our conclusion dictates that we sustain respondent's determination in this case, even though we disagree with his interpretation of the statute. 2. 1986 Act Revisions to Section 382 a. Relevant Fundamental Changes to the StatuteAmong other21 things, section 621(a) of the 1986 Act replaced the "purchase" rules of former section 382(a) with the concept of the "owner shift", defined broadly to include any change in the respective ownership of the stock of a corporation. Sec. 382(g)(2)(A). The occurrence of an owner shift involving a 5-percent shareholder, see sec. 382(g)(2)(B), (k)(7), is one of two occasions for opening the corporation's stock transfer books to determine whether the aggregate percentage ownership interest of one or more such shareholders has increased by more than 50 percentage points within the relevant "lookback" (testing) period. 15 See sec. 382(g)(1), (i). While the owner shift " trigger" presupposes some type of transaction in the stock of the loss corporation, see H. Conf. Rept. 99-841 (Vol. II), supra at II-174, 1986-3 C.B. (Vol. 4) at 174, the requisite increase in stock ownership within the11 resulting testing period need not be attributable to a purchase, redemption, or, indeed, any transaction in which shares actually change hands, see sec. 382(g)(1)(A) and (B).22 b. Consequences for Family Attribution: Changes in Family StatusUnder a system in which an increase in one's percentage ownership of a corporation need not be associated with a transaction in which shares actually change hands, a straightforward application of the family attribution rules of section 318(a) could produce "artificial" ownership increases; i.e., ownership increases solely attributable to changes in family status. For instance, under the attribution rules, the ownership percentage of an individual who marries the sole shareholder of a loss corporation would thereby increase from zero to 100 percent. If the wedding occurred during a testing period (which could be triggered, for instance, by the subsequent issuance of a relatively small number of additional shares to a key employee), then the increase in the nonshareholder spouse's deemed ownership percentage would result in an ownership change. 16 A similar result presumably would occur if the shareholder legally adopted someone during a testing period. See sec. 318(a)(1)(B).23 c. House Bill Provision Regarding Changes in Family StatusThe House version of revised section 382 provided that the family attribution rule of section 318(a)(1) would apply "by assuming that the family status as of the close of the testing period was the same as the family status as of the beginning of the testing period". H.R. 3838, 99th Cong., 1st Sess. sec. 321(a) (1985) (provision designated as sec. 382(n)(3)(A)). Although the report of the Committee on Ways and Means accompanying the House bill provides no additional insight, see H. Rept. 99-426, at 266 (1985), 1986-3 C.B. (Vol. 2) 1, 266, the practical effect of that provision would have been to eliminate the possibility that a change in family status during a testing period could, in and of itself, contribute to an 12 ownership change. 1724 The conference committee, in addition to substituting family aggregation for family attribution, dropped the provision in the House bill regarding changes in family status. 18 d. ObservationsIn the context of the parties' arguments in this case, the conference committee's excision of the House bill provision regarding changes in family status is somewhat puzzling. Specifically, under each party's interpretation of section 382(l)(3)(A)(i), the family aggregation rule adopted by the conferees would produce the same "artificial" ownership increases that the House bill provision eliminated in the context of attribution. In terms of our marriage hypothetical, the addition of the shareholder spouse to the nonshareholder spouse's family unit during the testing period would increase the ownership percentage of that family unit by 100 percentage points during that period. If, however, the family aggregation rule applies solely from the perspective of shareholders of the loss corporation, there25 would be no separate family unit headed by the nonshareholder spouse in our hypothetical and, consequently, (1) no increase in ownership attributable to the marriage, and (2) no need for the remedial provision contained in the House bill. Under that interpretation of the family aggregation rule, the conference committee's excision of the House bill's family status provision makes perfect sense. 1926 13 3. Revisiting the Language of the StatuteThat our interpretation of section 382(l)(3)(A)(i) provides a cogent explanation for the conference committee's action is of no consequence if a plain reading of the statute does not permit that interpretation. See supra part III.A. The use of the term "individual" in section 382(l)(3)(A)(i), however, does not preclude a contextual interpretation pursuant to which the set of individuals contemplated by Congress (i.e., individuals who own shares of the loss corporation) is smaller than the universe of all possible individuals (i.e., all living beings). More importantly, we are satisfied that our interpretation proceeds from an entirely natural reading of the statute. Given a stock ownership rule that operates by reference to an individual and other persons who are defined in terms of their relationship to that individual, it is hardly a stretch to surmise that the rule presupposes the shareholder status of the referenced individual. 4. Revisiting the 1986 Conference ReportHaving concluded that our interpretation of section 382(l)(3)(A)(i) does not do violence to the plain language of the statute, we27 return to the legislative history to determine whether it is any more supportive of our view than it is of the views of the parties. As indicated above, see supra part III.C. and note 10, the 1986 conference report contradicts the statutory language by including an individual's grandparents (rather than his grandchildren) among the family members who are aggregated for purposes of section 382. If that disconnect were attributable to a simple typographical error, one might reasonably expect that the subsequently issued report of the Joint Committee on Taxation explaining the 1986 Act (the so-called Blue Book) would point out the error. See, e.g., Staff of Joint Comm. on Taxation, General Explanation of Tax Legislation Enacted in the 104th Congress at 81 n. 59 (J. Comm. Print 1996), (noting that the conference report accompanying H.R. 3448, the bill eventually enacted as the Small Business Job Protection Act of 1996, mistakenly refers to the lessee rather than the lessor in the context of new section 168(i)(8)). The Blue Book for the 1986 Act, however, retains the reference in the 1986 conference report to "grandparents" in the context of section 382(l)(3)(A)(i). Staff 14 of Joint Comm.Taxation, General Explanation of the 28 on Tax Reform Act of 1986 at 311 (J. Comm. Print 1987).As is the case with the conference committee's excision of the family status provision of the House bill, see supra part III.E.2. d., the substitution of "grandparents" for "grandchildren" in the 1986 conference report makes perfect sense if the family aggregation rule applies solely from the perspective of individuals who are shareholders of the loss corporation. Section 318(a)(1) (to which section 382(l)(3)(A)(i) refers) is phrased in terms of the family members (spouse, children, grandchildren, and parents) from whom shares are attributed. The converse of that rule is that shares owned by an individual are attributed to that individual's spouse, parents, grandparents, and children. The substitution of "grandparents" for "grandchildren" in the 1986 conference report (reiterated in the 1986 Blue Book) therefore suggests that Congress intended individuals to be aggregated with the same family members to whom their shares would otherwise be attributed under section 318(a)(1), which in turn suggests that Congress intended the family aggregation rule to apply from the perspective of individuals29 who are shareholders of the loss corporation. 20 5. Revisiting the RegulationsHaving concluded that our interpretation of the family aggregation rule (1) does not violate the plain meaning rule, and (2) arguably finds support in the legislative history of section 382(l)(3)(A)(i), we would nonetheless be hard pressed to adopt that interpretation if it were inconsistent with respondent's 17-year-old "legislative" regulations. See, e.g., Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837">467 U.S. 837, 843-844, 81 L. Ed. 2d 694">81 L. Ed. 2d 694, 104 S. Ct. 2778">104 S. Ct. 2778 (1984); see also sec. 382(m) (directing the Secretary to "prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section"). As is the case with30 the statute, see supra part III.E.3., the language of the relevant regulation presents no such obstacle. See sec. 1.382-2T(h)(6), Temporary Income Tax Regs, supra at 29686.Nor does our interpretation of the statute render superfluous the "tiebreaker" rule of paragraph (h)(6)(iv) of the 15 above-cited regulation. See supra note 19. To the contrary, that rule serves the useful purpose of precluding purely "vicarious" ownership increases that could otherwise occur under our interpretation of the statute (as well as those of the parties). For instance, if a husband and wife each own shares of a loss corporation, and the husband purchases additional shares from his mother, the ownership percentage of the family unit centered on the wife would increase as a result of the otherwise exempt transaction. 2131 The tiebreaker rule precludes that result by treating the wife as a member of the family unit centered on her husband rather than a member of the family unit centered on her, since such inclusion would result in the smallest increase (zero) in percentage ownership. 22 See supra part I.C.; supra note 21.IV. ConclusionWe hold that the family aggregation rule of section 382(l)(3)(A)(i) applies solely from the perspective of individuals who are shareholders (as determined under the attribution rules of section 382(l)(3)(A)) of the loss corporation. Inasmuch as an individual shareholder's family consists solely of his spouse, children, grandchildren, and parents for these purposes, sibling shareholders are not aggregated under section 382(l)(3)(A)(i) if none of their parents and grandparents is a shareholder of the loss corporation. 23 Since Kenneth and Charles were not children or grandchildren of an individual shareholder of petitioner at any relevant time, 16 they are not aggregated for purposes of applying section 382 to the facts of this case. It follows that Charles's purchase of shares from Kenneth in 1998 resulted in an ownership change32 with respect to petitioner as contemplated in section 382(g).*33 To reflect the foregoing,Decision will be entered for respondent and in accordance with the parties' stipulations as to the correct amount of petitioner's income tax deficiencies. Footnotes1. The parties have stipulated that (1) if the sec. 382 limitation applies to petitioner's 1998 net operating loss (NOL) deduction, there is a deficiency in petitioner's income tax for that year in the amount of $ 311,188, and (2) if the sec. 382↩ limitation does not apply to petitioner's 1998 NOL deduction, there is a deficiency in petitioner's income tax for that year in the amount of $ 5,070.2. The parties provided no information regarding the reorganization other than the fact of its occurrence and the resulting changes in percentage ownership interests.↩3. Sec. 382(b) prescribes a formula for calculating the amount of the sec. 382 limitation. See also sec. 382(e) and (f)↩.4. A net operating loss, as defined in sec. 172(c), is an NOL carryover to the extent it is carried forward to years following the year of the loss under rules set forth in sec. 172(b)↩.5. Sec. 318(a)(1) provides that an individual is treated as owning the stock owned by his spouse, his children, his grandchildren, and his parents. Sec. 318(a)(5)(B) provides that stock constructively owned by an individual by operation of the family attribution rule of sec. 318(a)(1) is not reattributed from such individual to other individuals under that rule. For example, stock constructively owned by an individual through attribution from his spouse under sec. 318(a)(1)↩ is not reattributed from that individual to his parent under that provision.6. The family aggregation rule does not apply, however, to any family member who, without regard to aggregation, would not be a 5-percent shareholder. Sec. 1.382-2T(h)(6)(iii), Temporary Income Tax Regs., 52 Fed. Reg. 29686 (Aug. 11, 1987). That exception in turn does not apply if the loss corporation has actual knowledge of such family member's stock ownership. Id.; sec. 1.382-2T(k)(2), Temporary Income Tax Regs., supra at 29694↩.7. Cf. Jonson v. Commissioner, 353 F.3d 1181">353 F.3d 1181, 1184 (10th Cir. 2003)(decedent's estate is not an "individual" eligible for innocent spouse relief under sec. 6015(c)), affg. 118 T.C. 106">118 T.C. 106↩ (2002).8. Putting the question somewhat differently, at the time stock ownership is to be determined, must the individual referenced in sec. 382(l)(3)(A)(i)↩ be available (alive) for a family portrait, or need he or she only occupy a place in the family tree?9. Both the House and Senate versions of revised sec. 382↩ contained family attribution provisions rather than a family aggregation rule. See H.R. 3838, 99th Cong., 1st Sess. sec. 321(a) (1985) (provision designated as sec. 382(n)(3)(A)); H.R. 3838, 99th Cong., 2d Sess. sec. 621(a) (1986) (provision designated as sec. 382(k)(3)(A)).10. As noted supra part I.B., the members of an individual's family described in sec. 318(a)(1) (to which sec. 382(l)(3)(A)(i)↩ refers) are his spouse, children, grandchildren, and parents. Regarding the possible significance of the conferees' reference to "grandparents" in lieu of "grandchildren", see infra part III.E.4.11. Persons aggregated under former sec. 382(a)(2) were then disaggregated for purposes of measuring changes in stock ownership. See former sec. 1.382(a)-1(d)(3)(i), Income Tax Regs. (as revised in 1968). Thus, the actual number of persons whose stock ownership was subject to scrutiny at yearend could be greater than 10.↩12. As a member of each parent's family (i.e., in his capacity as a child of those parents), an individual would be aggregated with his parents' children (his siblings), grandchildren (his nephews and nieces), and parents (his grandparents). As a member of his spouse's family (i.e., in his capacity as her spouse), an individual would be aggregated with his spouse's parents (his mother- and father-in-law). As a member of each child's family (i.e., in his capacity as a parent of those children), an individual would be aggregated with each child's spouse (his sons-and daughters-in-law) and grandchildren (his great-grandchildren). As a member of each grandparent's family (i.e., in his capacity as a grandchild of those grandparents), an individual would be aggregated with his grandparents' children (his aunts and uncles), grandchildren (his first cousins), and parents (his great-grandparents). See secs. 382(l)(3)(A)(i), 318(a)(1)↩.13. Respondent's interpretation of the statute differs from petitioner's in that respondent would require that the relevant parent, spouse, child, or grandparent of the individual in question be living when stock ownership is measured. See supra note 12.↩14. In other words, composite shareholders are to be constructed only around individuals who directly or indirectly (through an entity or by means of an option) own shares of the loss corporation.↩15. The other such occasion is the occurrence of an equity structure shift (in general, most corporate reorganizations). See sec. 382(g)(1), (3)↩.16. Note that the foregoing problem did not arise under former sec. 382(a), since the nonshareholder spouse's ownership increase would not have been attributable to a purchase. See former sec. 382(a)(1)(B)(i).↩17. Returning to our marriage hypothetical, under the House bill's provision, the couple's relationship on the testing date would have been deemed to be the same as it was at the beginning of the testing period (i.e., not married), with the result that the nonshareholder spouse's ownership percentage would have been deemed to be zero throughout the testing period.↩18. The Senate version of the bill contained no such provision, providing instead for the application of the family attribution rules of sec. 318↩ without modification. H.R. 3838, 99th Cong., 2d Sess. sec. 621(a) (1986) (provision designated as sec. 382(k)(3)(A)).19. We recognize that, even if the family aggregation rule were not limited to shareholders, the "tiebreaker" rule of sec. 1.382-2T(h)(6)(iv), Temporary Income Tax Regs., 52 Fed. Reg. 29686↩, would preclude the artificial ownership increase illustrated above by treating the shareholder spouse as a member of his own family rather than that of the nonshareholder spouse. See supra part I. C. Of course, that regulation was not in existence when the conference committee acted on H.R. 3838. Accordingly, it is not relevant to our analysis of such committee action. Regarding the remedial effect of the regulation under our interpretation of the family aggregation rule, see infra part III.E.5.20. We do not mean to suggest that sec. 382(l)(3)(A)(i) should be interpreted as incorporating a modified version of sec. 318(a)(1)↩ (i.e., one that substitutes grandparents for grandchildren); such an interpretation presumably would violate the plain meaning rule. See supra part III.A.21. Since the purchased shares would be included in the holdings of the family unit centered on the husband both before and after the sale, the percentage ownership of the husband-centric family unit would remain unchanged. However, since the purchased shares would not be included in the holdings of the family unit centered on the wife until after the sale, the percentage ownership of the wife-centric family unit would increase as a result of the sale. A similar result would occur if the purchaser's child (rather than his wife) were a shareholder.↩22. As is the case with changes in family status, see supra note 16, this problem did not arise under former sec. 382(a), since the "vicarious" ownership increase would not have been attributable to a purchase by the wife. See former sec. 382(a)(1)(B)(i).↩23. We recognize that our interpretation of the statute suggests a distinction between siblings who are the children or grandchildren of a shareholder and those who are not, a distinction that is arguably just as arbitrary as the distinctions resulting from respondent's interpretation of the statute. See supra part III.D.2.b. That problem would not arise if the tiebreaker rule of sec. 1.382-2T(h)(6)(iv), Temporary Income Tax Regs., supra at 29686, were inapplicable in any instance in which such application would have the effect of exempting a transaction (such as a sale between siblings) that otherwise would have increased the percentage ownership of the purchaser's family unit. Cf. sec. 1.382-4(d)(6)(i), Income Tax Regs. (rules treating an option as exercised do not apply if a principal purpose of the option is to avoid an ownership change by having it treated as exercised); T.D. 9063, 2003-2 C.B. 510, 511 (discussing the need for additional regulations dealing with changes in family composition in the context of sec. 382↩).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621132/	REUBEN G. MONTOYA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMontoya v. CommissionerDocket No. 30585-81.United States Tax CourtT.C. Memo 1983-36; 1983 Tax Ct. Memo LEXIS 751; 45 T.C.M. (CCH) 552; T.C.M. (RIA) 83036; January 19, 1983. Reuben G. Montoya, pro se. Gary A. Benford, for the respondent. FEATHERSTONMEMORANDUM OPINION FEATHERSTON, Judge: Respondent determined deficiencies in petitioner's Federal income taxes and additions to tax as follows: Additions to TaxSec. 6651(a),Sec. 6653(a),Sec. 6654,YearDeficiencyI.R.C. 1954I.R.C. 1954I.R.C. 19541978$1,216$304.00$60.80$38.911979$ 526$131.50$26.30$22.31Petitioner has alleged error in respondent's determinations that (1) he received gross income in 1978 and 1979 in the stated amounts, (2) no deductions were allowable, and (3) he was liable for additions to tax. Although petitioner was sworn as a witness, he maintains that providing information about his income would infringe his constitutional rights752 under the Fifth Amendment of the Constitution. As a result, the record contains nothing to show that respondent's determinations are erroneous. At the time he filed his petition, petitioner's legal residence was San Lorenzo, New Mexico. Petitioner submitted to the Internal Revenue Service Forms 1040 for 1978 and 1979 which contained no information on his income or deductions. The forms, signed by petitioner, were filled with the words "none" or "object--self incrimination." He received employment income in those years in the amounts of $9,974.44 and $6,576.95, respectively, as evidenced by W-2 forms which were admitted in evidence by stipulation. Petitioner has offered no evidence to show that he is entitled to any deductions. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). Petitioner's Fifth Amendment argument, from the record before the Court, is groundless. 1 Respondent's counsel stated in open court that, to his knowledge, no criminal proceeding or investigation was pending against petitioner for the years here in issue. The Fifth Amendment privilege against self-incrimination may be invoked only when an answer to the question posed would expose the petitioner753 to danger of prosecution; remote or speculative possibilities of prosecution for unspecified crimes do not relieve petitioner of the duty to respond. E.g., McCoy v. Commissioner,76 T.C. 1027">76 T.C. 1027, 1029 (1981), on appeal (9th Cir., Sept. 15, 1981). As stated by the court in Lukovsky v. Commissioner, F.2d (8th Cir. 1982), affg. an order of this Court: "The fifth amendment may not be used as a subterfuge to avoid paying taxes. See, e.g., Edwards v. Commissioner,680 F.2d 1268">680 F.2d 1268, 1270 (9th Cir. 1982)." Petitioner has also failed to show that respondent erred in his determinations of additions to tax under sections 6651(a), 2 6653(a), and 6654. (a) Sec. 6651(a)--Failure to file a timely return. Petitioner's "no information" 754 Forms 1040 do not constitute returns. United States v. Porth,426 F.2d 519">426 F.2d 519 (10th Cir. 1970). He has shown no reason why his failure to file was due to reasonable cause and not to willful neglect. Indeed, he filed returns containing detailed information on his income and deductions for 1975 and 1976 and this indicates that petitioner knew of his duty to file returns in accordance with the law. (b) Sec. 6653(a)--Negligence. Again petitioner has shown nothing to refute respondent's determination that his underpayment of tax was due to negligence or intentional disregard of the tax laws. His deliberate avoidance of income tax withholding from his salary by filing forms on which he claimed exemption from tax liability, as well as his filing Porth-type returns for both years, is affirmative evidence of intentional disregard of the law. See Druker v. Commissioner, F.2d (2d Cir. 1982), affirming in part and reversing in part 77 T.C. 867">77 T.C. 867 (1981). (c) Sec. 6654--Failure to pay estimated tax. The addition to tax for failure to pay estimated tax is mandatory except in carefully delineated circumstances, and petitioner has not755 shown that his case falls within any of the exceptions. Reaver v. Commissioner,42 T.C. 72">42 T.C. 72, 82 (1964). To reflect the foregoing. Decision will be entered for the respondent.Footnotes1. Petitioner also alleges violations of due process and his jury trial right, and those allegations are likewise frivolous. E.g., Blackburn v. Commissioner,681 F.2d 461">681 F.2d 461↩ (6th Cir. 1982), affg. a Memorandum Opinion of this Court, and cases cited therein.2. All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621133/	Charles E. Marsh II and Loretta Marsh, Petitioners v. Commissioner of Internal Revenue, RespondentMarsh v. CommissionerDocket No. 6126-77United States Tax Court73 T.C. 317; 1979 U.S. Tax Ct. LEXIS 16; November 26, 1979, Filed 16 Decision will be entered under Rule 155. Petitioner was one of a group of investors who acquired oil and gas leases, drilled wells thereon, and sold the gas to Southern Natural Gas Co., an interstate carrier. Under the agreements with Southern, the group agreed to sell all of its gas to Southern at a price fixed by the Federal Power Commission, and Southern agreed to advance to the group, interest free, part of the money needed to develop the leases and clean and deliver the gas. Held, petitioners did not realize taxable income in the form of an economic benefit from the use of the advances made by Southern, interest free. Dean v. Commissioner, 35 T.C. 1083">35 T.C. 1083 (1961), and Greenspun v. Commissioner, 72 T.C. 931 (1979), followed. J. W. Bullion and Emily A. Parker, for the petitioners.Mark D. Petersen, for the respondent. Drennen, Judge. DRENNEN317 Respondent determined the following deficiencies in petitioners' income taxes:YearDeficiency1970$ 14,247.671971117 22.701973$ 23,292.45197471,680.77On brief, respondent claims revised deficiences as follows:YearDeficiency1970$ 12,316.3419711 22.7019731974$ 95,075.78318 The deficiency for 1970 and 1974 is the result of respondent's increase in taxable income for 1973 and the concomitant decrease in the net operating loss for 1973 available to be carried back to 1970 and forward to 1974. 1 The facts and issues discussed relate primarily to the years 1973 and 1974. Due to concessions the issues remaining for resolution are:(1) Whether petitioners are in receipt of income by virtue of receiving certain interest-free advances during the years 1973 and 1974; and(2) If petitioners are in receipt of income during the years in issue, are they entitled to an offsetting 18 deduction under section 163, I.R.C. 1954. 2FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts together with the exhibits attached thereto are incorporated herein by reference.Charles E. Marsh II (Marsh) and Loretta Marsh, the petitioners herein, are husband and wife and reside in Midland, Tex. For the calendar years 1970, 1971, 1973, and 1974, petitioners timely filed joint Federal income tax returns on the cash basis with the Internal Revenue Service, Southwest Region, through the Internal Revenue Center at Austin, Tex.During the years in issue, Marsh was an independent oil and gas operator and president of Mallard Exploration, Inc. (Mallard), a Texas corporation having its principal place of business in Midland, Tex.Mallard was also principally involved in the oil and gas business.During June and July 1971, Mallard acquired approximately 200 undivided interests in certain oil and gas leases covering acreage located in sections 1, 2, 3, 4, 9, 10, 11, 12, and 13, Township-1-North, Range-7-East, 19 Escambia County, Ala., principally through the execution of three farmout agreements with Humble Oil & Refining Co., Louisiana Land & Exploration Co., and Chevron Oil Co.319 Under the terms of the farmout agreements, Mallard was required to drill three test wells at its sole risk and expense in order to earn its interest in the oil and gas leases.In addition to the drilling of the test wells, Mallard was presented with other operational problems relating to its continuing ownership of the leases. The problems it encountered were threefold: (1) The primary term of certain leases would terminate within 1 or 2 years; (2) the primary term of other leases had already expired and Mallard held these leases only because of "continuous drilling clauses," which meant Mallard could retain ownership in these leases only by drilling new wells within 90 days after completion of drilling a previous well; and (3) some of the wells were subject to a "no shut-in gas clause," which means the leases could only be held beyond the primary term by the production and marketing of gas.On July 26, 1971, Marsh acquired from Mallard a 10-percent undivided interest in Mallard's interest in the oil and gas leases. 20 At the same time, several other individuals, corporations, and trusts acquired from Mallard various undivided interests in the leases. Mallard retained a 10-percent interest in the leases. (Mallard and those who acquired their interest in the leases from Mallard, including Marsh, are hereinafter sometimes collectively referred to as the Mallard group or the owners.)Between August 17, 1971, and September 12, 1972, the Mallard group drilled three test wells on these leases, and all three wells were completed as commercially productive natural gas wells. The drilling of these wells proved the existence of substantial natural gas reserves, and the gas field which was discovered became known as the Big Escambia Creek Field (field).The gas produced from the field contained sulphur, carbon dioxide, and condensate (high gravity oil) and other hydrocarbons. In order to market the gas, it was necessary to construct gathering lines and a treating facility to remove the sulphur, carbon dioxide, and liquids from the natural gas.Because of the continuous drilling clauses and the no shut-in gas clauses, the Mallard group determined that it would need a substantial amount of money in a relatively 21 short period of time to finance the building of the treatment facility and to drill 320 additional wells. The Mallard group estimated the amount needed to be approximately $ 12.8 million.With the exception of two individuals who represented a 12 1/2-percent interest in the Mallard group, the other members did not have the resources to fund their share of the cost of development. It therefore became apparent that outside financing was necessary for the success of the venture.The Mallard group initially approached a large number of banks, insurance companies, and intrastate transmission companies 3 in an attempt to raise the needed funds, but were unable to obtain commitments in a sufficient amount to pay for the cost of the development.Due to the fact that certain leases would terminate quickly, the 22 Mallard group relunctantly entered into negotiations with various interstate transmission companies, and, on October 16, 1972, the Mallard group entered into a letter agreement with Southern Natural Gas Co. (Southern), a public utility company subject to regulation by the Federal Power Commissioner (FPC), whereby Southern and the Mallard group agreed to enter into, within 90 days, a gas purchase contract, an advance payment agreement, and an agreement to purchase condensate and other liquid hydrocarbons removed from the gas produced from the field. This letter agreement was finalized into the above-named agreements on December 1, 1972.Under the terms of the Gas Purchase Contract (GPC) between Southern and the Mallard group, Southern agreed to purchase, and the Mallard group agreed to sell to Southern, all gas produced from the field for a period of 20 years. Southern agreed to pay $ 0.55 per 1 million BTUs for the initial 2 years of the contract, with escalating prices thereafter. The price of $ 0.55 per 1 million BTUs was the highest price the parties believed the FPC would approve for sales of gas from the field. The contract provided that it was subject to cancellation in the 23 event the FPC did not approve this price.Under the terms of the GPC, the Mallard group agreed to drill additional wells, install gathering lines, and construct a treating facility in order to produce, clean, and deliver the gas to 321 Southern. Southern also committed itself to construct the facilities necessary to receive deliveries of gas. In the event that Southern did not obtain approval by the FPC to construct the necessary facilities, either the Mallard group or Southern had the right to cancel the GPC. In addition, the Mallard group had the right to cancel the GPC if (1) on January 1, 1974, Southern had not constructed the facilities needed to accept deliveries and the Mallard group was capable of delivering gas as required under the GPC; and (2) on October 15, 1974, Southern was not in the process of construction or had not completed construction of the facilities necessary to accept deliveries of gas from the field.Simultaneously with the execution of the GPC, Southern and the Mallard group entered into an Advance Payment Agreement (APA). Under the terms of the APA, Southern agreed to advance to the Mallard group a maximum of $ 12.8 million, in installments, determined on 24 the basis of $ 0.15 per million BTUs of gas proved by drilling in the field. It was necessary for Southern to make the advance payments in order for the Mallard group to develop and produce the natural gas reserves in the field and in order to induce the Mallard group to enter into the GPC.The APA further provided that (except in the event of termination of the GPC or the APA), the funds advanced would be repaid in full by the Mallard group, without interest, in 54 equal monthly installments, the first installment commencing the sixth month immediately following the month during which deliveries of natural gas commenced under the GPC. The provision providing that the principal was to be paid back interest free was to induce Mallard to enter into the GPC.If the Mallard group exercised their right to terminate the GPC, they agreed to repay the advances to Southern in 36 equal monthly installments commencing 12 months after termination of the GPC, including interest thereon computed at the Chase Manhattan Bank's prime commercial rate. In the event that Southern exercised its right to terminate the GPC, however, the Mallard group was obligated to repay the advances under identical terms 25 but without interest. Southern did not require the Mallard group to execute a note covering the amount advanced under the APA, nor was the Mallard group required to secure the advances.Simultaneously with the execution of the GPC and the APA, 322 the Mallard group also entered into an option agreement with Southern under which the Mallard group granted Southern an option to purchase the condensate and other liquid hydrocarbons removed from the gas produced from the field.At the time Southern and the Mallard group negotiated the GPC, the APA, and the option agreement, and through the years in issue, Southern was a publicly traded company. None of the members of the Mallard group owned any stock in Southern, nor did Southern own any interest in the Mallard group. All the dealings between the parties were at arm's length.At the time of the execution of the agreements with Southern, the members of the Mallard group also entered into two agreements among themselves. First, all the members of the group entered into an agreement in which they designated Mallard as the operator of the field on their behalf. Secondly, the members (except for two members who were to receive advances directly), 26 entered into a trust agreement designating Marsh and the First National Bank of Midland as cotrustees to disburse the advances received by Mallard from Southern. Mallard, as operator of the field, was to receive the advances directly from Southern and was to pay the advances to the cotrustees and the two nonparticipating members. The purpose of the trust agreement was to assure that the advances would be used to pay for past and future expenditures for drilling, construction of the treating facilities, and the processing and marketing of gas.In November 1973, the FPC tentatively decided to authorize the sale of gas from the field at a rate of $ 0.50 per 1 million BTUs. The price tentatively authorized by the FPC was $ 0.05 less than the price provided under the GPC with Southern. Furthermore, as of January 1, 1974, Southern had not obtained authorization from the FPC to construct the facilities required under the GPC. Although the right to cancel the GPC matured, neither party exercised that right. The Mallard group did not cancel the GPC at that time because they did not have the resources to repay the advances over the 36-month period as required under the APA.As a result of 27 the FPC's tentative approval of a price of only $ 0.50 per million BTUs, the parties renegotiated certain provisions of the APA. The APA was amended to provide repayment of the advances in a lump sum without interest rather than installments. However, in the event the Mallard group terminated, 323 the original APA provisions applied. The APA, as amended, required repayment on or before the 25th day of the 60th month immediately following the month during which deliveries of natural gas commenced. In additon, the parties agreed to terminate the option agreement relating to the purchase of the condensate.In order to assure repayment of the advances made by Southern, the APA, as amended, also required the Mallard group to establish an escrow account or accounts and to pay into such account, on the 25th day of each month, one fifty-fourth of the total advances made by Southern for a period of 54 consecutive months, commencing the sixth month immediately following the month in which the deliveries of natural gas to Southern commenced. All income from the escrow account would be payable to the members of the Mallard group. This escrow arrangement was subsequently entered into by all members 28 of the Mallard group with the exception of the two members who received advances directly.Eventually the FPC approved the full price of $ 0.55 per million BTUs as provided under the GPC. Nevertheless, the amended APA and the escrow agreement remained in force.Pursuant to the APA, Marsh received the following payments from Southern through Mallard:Date of paymentAmountTotals12/18/72$ 253,164.30 12/21/7246,835.70 $ 300,000.001/15/73285,000.00 2/15/73463,790.05 2/15/7359,668.95 5/15/73149,677.78 7/15/7321,683.22 979,820.003/12/7448,586.37 5/15/74128,625.26 8/13/744 (139,129.39)38,082.24Total payments received1,317,902.24 All of the advances received by Marsh, as described above, were 324 received by the trustees and held and disbursed by the trustees under the terms of the trust agreement.Effective March 1, 1974, Marsh sold one-half of his 10-percent interest in the field to W. R. Grace & Co. (Grace), including one-half of his interest in the funds held under the trust agreement. As part of the consideration, Grace agreed to assume liability for repayment of one-half of the advances received by Marsh pursuant to the APA. In reporting the gain recognized 29 upon the sale, petitioners treated the obligation to repay the advances as part of the proceeds of the sale.On or about June 10, 1974, the Mallard group commenced delivery of natural gas from the field to Southern pursuant to the GPC. Pursuant to the terms of the APA, as amended, and the escrow agreement, Marsh and certain other members of the Mallard group made the first payment into the escrow account on December 25, 1974, and thereafter have continued to make such payments on or before the 25th day of each month. The first payment made by Marsh was in the amount of $ 12,557.25, and each payment thereafter has been in the amount of $ 12,557.07. As of December 27, 1977, Marsh had paid a total of $ 464,611.77 into escrow accounts.The petitioners have received interest income with respect to the escrow accounts held by the escrow agent through December 31, 1977, as follows:Calendar yearInterest received1975$ 1,947.65197612,477.67197723,192.34Total5 37,617.62Petitioners included this interest income from the escrow accounts in their taxable income for the years 1975, 1976, and 1977, respectively.Except for the 30 interest income received with respect to the escrow accounts and included in taxable income, petitioners did not include any amount in income with respect to receipt of the advances from Southern pursuant to the APA.At no time during the years in issue did petitioners own an 325 interest in any obligations, the interest on which was exempt from taxes.In the course of negotiating the APA, neither Southern nor the Mallard group requested or discussed the payment of interest with respect to the funds to be advanced thereunder, except for the interest to be paid by the Mallard group in the event they exercised their right to terminate the GPC and APA. So long as the GPC remained in effect, Southern was authorized by FPC rulings to include in its rate base a factor of 10.8 percent of the entire advance to cover the costs of the advance until the Mallard group repaid the loan. In the event of termination of the GPC by the Mallard group, however, Southern was required to remove this factor from the rate base; therefore, Southern required the Mallard group to pay interest in that event.At the time the notice of deficiency was issued, respondent's position was that petitioners had received additional 31 income from the interest-free use of the funds received from Southern. The amount of additional income received was deemed realized in the years that the Mallard group was in actual receipt of the advances and was determined by applying an interest rate equal to the prime rate plus 1 percent to the amount of advances in question for the entire period that the advances were subject to petitioner's interest-free use.Respondent's position on brief is that the amount of income received should be measured by applying the above interest factor to the daily balance outstanding. It has been stipulated that for the purposes of this case, an interest factor of prime plus 1 percent, applied to the daily balance outstanding, is the correct measure of any economic benefit inuring to petitioners from the interest-free use of the funds advanced.OPINIONThe first issue for our consideration is whether petitioners are in receipt of taxable income derived from the interest-free use of the funds advanced by Southern under the APA. Respondent contends that since the funds were advanced interest-free in consideration for the GPC and for the natural gas that would ultimately be delivered by the Mallard32 group pursuant to that contract, petitioners are clearly in receipt of an economic benefit, and such benefit is required to be included in gross income. Respondent would measure the economic benefit by the 326 amount of interest petitioners would have had to pay had they borrowed the amount of the advances from commercial lending institutions. Petitioners state that the resolution of this issue is controlled by our decision in Dean v. Commissioner, 35 T.C. 1083">35 T.C. 1083 (1961), where we held under similar circumstances that "an interest-free loan results in no taxable gain to the borrower." (35 T.C. at 1090.) We agree with petitioners.Initially, respondent recognizes the applicability of Dean to the facts in issue, but urges that Dean was wrongly decided and should now be overruled by us.Since the briefs in the instant case were filed, we have had three occasions to review and consider the correctness of our holding in Dean. See Greenspun v. Commissioner, 72 T.C. 931">72 T.C. 931 (1979); Zager v. Commissioner, 72 T.C. 1009">72 T.C. 1009 (1979); Creel v. Commissioner, 72 T.C. 1173">72 T.C. 1173 (1979). For the reasons stated in the above cases, we adhere to our views as expressed in Dean. 633 Respondent attempts to distinguish Dean factually on the basis that this loan was negotiated by two unrelated parties and was intended to provide additional consideration for a larger transaction, e.g., the sale of natural gas. To be sure, this represents a different set of circumstances than we encountered in Dean. However, we are convinced that the reasoning and rationale in Dean apply equally in the instant case.This view is clearly consistent with our recently decided opinion in Greenspun v. Commissioner, supra, where we found that no taxable income was realized by the borrower on the receipt of a loan, with a favorable rate of interest, even as a quid pro quo for services to be rendered to an unrelated party. (72 T.C. at 946.) The rationale of our holding in Greenspun was to place taxpayers who received low- or no-interest loans on a parity with taxpayers who received interest-bearing loans accompanied by additional consideration equal to the interest charged. We found the taxpayers in both these situations to be "economically speaking" in the same situation, and concluded that it is reasonable to assume that the tax consequences should follow the economic 34 realities of the situation.Accordingly, we hold that no taxable income resulted to petitioners from the interest-free advances in the years in issue.327 Since the parties suggested that this was a test case for this type of transaction, we find it appropriate to discuss briefly some of the arguments in light of the facts of this case.Respondent argues that having cash readily available is an economic benefit because the owner is entitled to demand and receive interest as a condition of lending such capital to another "or investing his capital in some other income-producing venture." 7 Petitioners' response, with which we agree, is that the fact that the owner of capital is entitled to interest on a loan does not mean that he must or actually does receive interest on money loaned. The business transaction here involved was arrived at by arm's-length bargaining between two entirely unrelated parties, each of whom had something the other wanted. Petitioner needed cash and Southern wanted the gas produced by petitioner. They agreed on the terms upon which the exchange would be made. Southern agreed to provide petitioner with the needed cash interest free as long as petitioner sold all 35 of his gas to Southern. Southern received a return on its capital advanced to petitioner by being able to include in its rate base 10.8 percent of the funds advanced. There was no discussion of interest except in the event petitioner canceled the GPC. Petitioner used the money advanced to produce the gas which he sold to Southern. The only economic benefit he received as a result of the advances was being able to produce and sell gas to Southern at $ 0.55 per million BTUs, all of which he included in his gross income for tax purposes. Neither party intended the unpaid interest to be compensation to petitioner for services rendered or for gas sold or for anything tangible that has been suggested. We are of the opinion that in this transaction the tax implications should be determined from the agreement as made by the parties. 836 See Frank Lyon Co. v. United States, 435 U.S. 561">435 U.S. 561, 583 (1978).Respondent points to section 61(a) which defines gross income as "all income from whatever source derived" and to Commissioner v. LoBue, 351 U.S. 243">351 U.S. 243 (1956), rehearing denied 352 U.S. 859">352 U.S. 859 (1956), and other cases which have interpreted that section to mean that Congress intended to tax all instances of gain 328 regardless of the form, unless specifically excluded. Petitioners correctly point out that the courts have consistently held that not every economic benefit constitutes income. See Helvering v. Horst, 311 U.S. 112">311 U.S. 112 (1940); Palmer v. Commissioner, 302 U.S. 63 (1937); Eisner v. Macomber, 252 U.S. 189">252 U.S. 189 (1920). An economic benefit is not usually considered income until it is realized. Here, the alleged economic benefit is the use of money without payment of interest. Respondent disclaims that the benefit is interest income, but he puts no label on it. We agree that a borrower does not receive interest income, but we believe that is what respondent is, in reality, attempting to charge to petitioners. Here there is no gain resulting from an exchange of property, payment of indebtedness, relief from liability, or other profit realized from the completion of 37 a transaction, to paraphrase from Helvering v. Bruun, 309 U.S. 461 (1940). And if, in fact, respondent is attempting to include in petitioners' income imputed interest, we concluded in Dean that petitioners would be entitled to an offsetting deduction for imputed interest paid.Respondent also suggests that the Federal Power Commission, in allowing a percentage of these interest-free advance payments to be included in Southern's rate base, 9*38 intended them to be a supplement to the interstate rate petitioner could receive for his gas. This is too far fetched for us to accept. Southern realized a benefit from including a percentage of the advances in its rate base, but respondent has pointed to no benefit petitioner received as a result thereof. Furthermore, petitioner was required to repay the advances in full.We find no reason to deviate from our reasoning and rationale expressed in Dean and Greenspun in this transaction.Our conclusion on the first issue makes it unnecessary for us to consider whether petitioners are entitled to an interest deduction under section 163.Because of other adjustments conceded,Decision will be entered under Rule 155. Footnotes1. The deficiency for 1971 is not clearly explained. We assume it also results from the elimination of a net operating loss carryback from 1973 and that resolution of the issue for 1973 will also resolve the deficiency for 1971.1. The deficiency for 1971 is not clearly explained. We assume it also results from the elimination of a net operating loss carryback from 1973 and that resolution of the issue for 1973 will also resolve the deficiency for 1971.↩1. The deficiency for 1971 is not clearly explained. We assume it also results from the elimination of a net operating loss carryback from 1973 and that resolution of the issue for 1973 will also resolve the deficiency for 1971.↩2. All section references are to the Internal Revenue Code of 1954, as amended and in effect in the years in issue, unless otherwise indicated.↩3. Initially, intrastate transmission companies were approached rather than interstate transmission companies because, as a part of any loan, the Mallard group would be required to sell its gas to the transmission companies. Due to the absence of Federal regulation, intrastate transmission companies could pay about three times as much for the gas as would an interstate transmission company.↩4. To reimburse Southern for an overpayment.↩5. This figure was stipulated by the parties, but it appears to be in error.↩6. See also Martin v. Commissioner, T.C. Memo. 1979-469, decided this same day.7. Perhaps respondent meant "instead" of investing his money in some other income-producing venture. The return on capital "invested" is usually in the form of profit, gain, or dividends.↩8. We wonder whether respondent would allow petitioner to include the amount of this esoteric economic benefit in his cost of goods sold.9. This would suggest that the FPC considered the tax-free advances to be a justifiable additional cost to Southern rather than a supplement to the price petitioner received for the gas sold to Southern. Under the agreement of the parties, Southern was to absorb this cost. Petitioner would realize no economic benefit unless he used the advances for something other than the production of gas he sold to Southern at a fixed rate, which he included in income.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621135/	Joseph H. Imeson, Petitioner, v. Commissioner of Internal Revenue, RespondentImeson v. CommissionerDocket No. 22219United States Tax Court14 T.C. 1151; 1950 U.S. Tax Ct. LEXIS 173; June 14, 1950, Promulgated 173 Decision will be entered under Rule 50. 1. The petitioner has alleged error by the respondent in disallowing as expenses $ 67.50 for 11 1/4 days of business travel in the United States. He was actually on such travel 14 3/4 days, for which he was reimbursed by his employer at the rate of $ 6 per day. In the absence of proof that his expenses were in excess of $ 6 per day for the 14 3/4 days, it is held that the petitioner is not entitled to any deductions for traveling expenses for travel in the United States.2. The petitioner took a deduction of $ 2,805 as traveling expenses for 121 days of foreign travel. He was on foreign travel for 128 days, of which he was reimbursed in the taxable year for 109 3/4 days at the rate of $ 8 per day. The respondent allowed $ 729 of the deduction taken. In the absence of proof that the petitioner's traveling expenses were in excess of his reimbursements plus the amount allowed by the respondent, held that the petitioner is not entitled to any additional allowance for traveling expenses for foreign travel.3. Held, that part of the deficiency was due to fraud, with the intent to evade tax. Robert J. Hawkins, Esq., for the petitioner.Edward M. Woolf, Esq., for the respondent. Turner, Judge. TURNER 1152 The respondent determined a deficiency in income tax against the petitioner for 1945 of $ 788.31 and a 50 per cent addition to tax for fraud of $ 1,088.65. The apparent discrepancy as to amounts is brought about by the fact that the deficiency of $ 788.31 as determined is after allowance for tax withheld by petitioner's employer and $ 400 paid on the basis of estimated tax, the $ 1,088.65 being 50 per cent of the difference between the tax reported by petitioner on his return and the amount determined as the correct tax by the respondent. The errors as alleged by petitioner are (1) the disallowance of the deduction of $ 67.50 as expenses for 11 1/4 days in domestic travel, (2) the disallowance of the deduction of175 $ 1,024 as expenses for 128 days of foreign travel, and (3) the determination of fraud.FINDINGS OF FACT.The petitioner's 1945 income tax return, showing his mailing address as c/o Maury-Henry Company, 1811 H Street, N. W., Washington, D. C., and his home address as 1641 Summerdale Street, Chicago, Illinois, was filed with the collector for the first district of Illinois on March 15, 1946.The petitioner has been a commercial air-line pilot since 1929 and for more than ten years has been employed by Transcontinental & Western Air, Inc., sometimes hereafter referred to as TWA. His first work as a pilot was in St. Louis, Missouri, and he was in and out of that city until he was employed by TWA in 1939. His first work with TWA was between Kansas City, Missouri, and Chicago, Illinois. In 1940 he went to Chicago, where he stayed until in 1941, when he went to Pittsburgh, Pennsylvania, and stayed until the domicile there was closed in the spring of 1942. He returned to Chicago and then took a special assignment at Homestead, Florida. In the fall of 1943 he returned to Chicago, where he was assigned by TWA until February 1, 1945.During 1945 TWA was under contract with the Air 176 Transport Command as a common carrier of passengers and cargo to foreign bases. Pursuant to that contract the intercontinental division of TWA was set up. On February 1, 1945, TWA assigned petitioner to its intercontinental division, with Washington, D. C., designated as his base. The petitioner's family consisted of himself and wife. When the petitioner was assigned to the Washington base, his wife was living at 5220 Blackstone Street in Chicago, where she continued to stay for 1153 three or four months and then went to the home of her family in St. Louis. The petitioner never visited his wife in St. Louis during 1945, as they "were more or less at odds." The Summerdale Street address in Chicago given by the petitioner on his return was that of the home of his sister and her husband, where he stayed when in Chicago. From February 1 to the end of 1945 the petitioner was in Chicago about eight or ten days, going there between trips made from his Washington base. In 1945, after his assignment to Washington, the petitioner resided with five other pilots in an apartment in Arlington, Virginia.For the year 1945 petitioner was reimbursed by his employer, TWA, for traveling 177 expenses at the rate of $ 8 per day for foreign travel and $ 6 per day for domestic travel. For the purpose of reimbursement for traveling expenses, all of the petitioner's intercontinental flights started from Washington.In his 1945 income tax return the petitioner reported total compensation received in that year from TWA as $ 12,710.94, deductions therefrom totaling $ 5,624.84, and net compensation of $ 7,086.10. In addition to the $ 7,086.10, the petitioner reported dividends and interest amounting to $ 56.59, making a total of $ 7,142.69. In arriving at net income on the return the standard deduction of $ 500 in lieu of itemized deductions for contributions, interest, taxes, losses, medical and dental expenses, and miscellaneous items was taken. The tax computed and shown on the return was $ 1,587.09. Payments by withholding from wages and on declaration of estimated tax were shown as totaling $ 2,976.08 with an indicated overpayment of $ 1,388.99.The deductions of $ 5,624.84 were explained as follows in a schedule attached to the return:Travel Expense:U. S. Travel -- Columbus, Dayton, Topeka, Indianapolis, St. Louis, Kansas City, Washington, D. C., Detroit, Toledo, 178 Pittsburgh, New York, Los Angeles, Minneapolis, San Francisco, Miami, New Hampshire, Virginia:168 days at $ 11.95 per day$ 2,007.60Dues and CAA Physicals112.00Supplies and equipment389.50Equipment maintenance208.00Railroad fares258.10Comm. ration car travel 8,780 miles at 5 cents439.00Plane liability insurance and TWA insurance376.64Foreign travel -- Newfoundland, Azores, Iceland, Ireland, Scotland, England, Wales, France, French Morocco, Libia, Egypt, Iran, Judea, Greece, Italy, Bermuda:121 days at $ 15.00 [sic]$ 2,805.006,595.84Less partial reimbursement971.005,624.841154 In determining the deficiencies in controversy the respondent, for lack of substantiation and lack of evidence showing any official domestic travel by petitioner for TWA, disallowed the deduction of $ 2,007.60 taken by the petitioner as traveling expenses for 168 days of travel in the United States at $ 11.95 per day. Because of the absence of records showing actual expenditures in excess of $ 729, the respondent disallowed $ 2,076 of the deduction of $ 2,805 taken by petitioner as traveling expenses for 121 days of foreign travel. The other deductions179 shown in the schedule, amounting to $ 1,783.24 were disallowed by the respondent for lack of substantiation and because the petitioner had elected to take the optional standard deduction.In 1945 the petitioner was during the month of January away from Chicago on domestic travel in the course of his employment for TWA and during the rest of the year away from Washington on domestic travel for his company a total of 14 3/4 days, for which he was reimbursed at the rate of $ 6 per day in the total amount of $ 88.50. During the remaining 153 1/4 days for which expense deductions for domestic travel were claimed by petitioner on his return he was either at his residence in Arlington, Virginia, or on personal business or pleasure trips at various places in the United States, but away from Chicago. The petitioner kept no records of his expenses and the amount of $ 11.95 per day claimed in his return was an estimate of his expenditures for personal living expenses.With respect to foreign travel during 1945, petitioner was reimbursed for 109 3/4 days at the rate of $ 8 per day, or a total of $ 878, by TWA. Petitioner was actually in foreign travel during 1945 for a total of 128 days. 180 He was not reimbursed by TWA in 1945 for 18 1/4 days. Whether he was reimbursed at a later date for such travel is not shown.During 1945 the petitioner made trips to England, Scotland, Wales, France, Morocco, Italy, Greece, Egypt, Iran, and India. On such trips he made stops at times in Newfoundland, Labrador, Bermuda, and the Azores. At most of the places visited on such trips, Army barracks were available for petitioner and his crew. They were crowded and noisy and were not conducive to rest. The number of men present sometimes ranged from 4 in a cubbyhole to 32 in one big room. Hotels or better accommodations were available in most places and, where they were available, the petitioner did not stop at the Army barracks, but instead preferred to spend the extra money for quieter and more comfortable accommodations. Amounts expended for such accommodations in excess of the $ 8 allowed by TWA were paid from petitioner's own funds. In determining the deficiency the respondent allowed a deduction of $ 729 as expenses of petitioner in foreign travel. Petitioner kept no records of such expenditures and 1155 the $ 15 per day at which such expenses were computed in making 181 his return was an estimated amount.The item of $ 112 taken as a deduction for dues and CAA physicals represented $ 100 dues paid by the petitioner to the Airline Pilots Association of which he was a member, and $ 12 for two physical examinations.The deduction of $ 389.50 for supplies and equipment represented an estimate of the cost of the petitioner's Army uniform, navigation kits, computers, chronometers, replacement of lost items, baggage, wear and tear. Except for the uniform, the petitioner was not required by either TWA or the Army to have such equipment.The item of $ 208 taken for equipment maintenance represented the estimated cost of uniform maintenance, cleaning and mending equipment, loss of equipment, chronometers, etc.The deduction of $ 258.10 taken as railroad fares represented an estimate by the petitioner of the amounts expended for personal travel on trains and air lines. The amount of $ 439 taken as commercial ration car travel represented the estimated cost of the operation of petitioner's automobile for personal travel between his apartment and the airport and on personal trips elsewhere. The rail and plane fares and the cost of operating the automobile away182 from Washington were for pleasure and personal reasons and were not in the course of his duties with TWA. The trips included pleasure trips to New York, Pittsburgh, and possibly St. Louis.The amount of $ 376.64 deducted as plane liability insurance and TWA insurance represented premiums paid by petitioner on his accident and life insurance policies.The first income tax return filed by the petitioner was for 1939. He personally prepared that return and the returns filed by him for subsequent years through 1944. After the close of 1945 he prepared his income tax return for 1945, in which he claimed certain undisclosed deductions as expenses. This return showed a tax due of $ 350, or $ 400 in addition to the $ 400 he had paid on the declaration of estimated tax and the tax that had been withheld during the year from his compensation. After preparing this return he submitted it for examination to some undisclosed person or official stationed in the post office or other Government building in Alexandria, Virginia. The petitioner was about to mail this return, but decided before doing so that he would consult Bernard P. Nimro to see if Nimro could help him effect a savings in his183 tax. During 1945 the petitioner had heard of Nimro through pilot acquaintances. He had heard that Nimro was a tax expert who could save pilots considerable sums of money by deductions to which they were entitled and that he had saved some pilots substantial amounts on their taxes.1156 Early in March, 1946, the petitioner consulted Nimro, who had an an office with the Maury-Henry Co. in Washington. The petitioner had no record of his expenses and consequently was only able to furnish Nimro with approximations. Petitioner also gave Nimro approximations as to his travel time, both foreign and in the United States. After talking with the petitioner, Nimro prepared a 1945 return for him. Some of the deductions taken in the return represented estimates made by Nimro and others represented estimates made by the petitioner. After preparing the return Nimro forwarded it to the petitioner at the latter's Arlington, Virginia, address. Upon examining the return the petitioner questioned certain of the deductions taken, particularly the deductions for travel in the United States. Thereupon, he consulted Nimro again, who advised him that for income tax purposes Chicago was his home184 and that he was entitled to deduct all expenses while away from Chicago. After this conference he signed and filed the return as prepared by Nimro. His fee arrangement with Nimro was a retainer of $ 25 and 10 per cent of any refund of 1945 income tax that the petitioner might receive.Nimro was disbarred from the practice of law in the District of Columbia in 1937, subsequent to his being convicted of embezzlement and being sentenced to imprisonment for a term of from 15 to 30 months. At a still later date and after he had advised petitioner as shown above, he was convicted of larceny and embezzlement and sentenced to serve a term for the misappropriation of funds entrusted to him for tax purposes by an employee of the United States Department of State.Part of the deficiency was due to fraud, with intent to evade tax.OPINION.As to the deficiency determined, we do not find that petitioner has shown any error on the part of the respondent. In that respect only two errors were alleged, one that disallowance of the deduction of $ 67.50 as traveling expenses for 11 1/4 days of domestic travel and the other the disallowance of $ 1,024 as expenses paid and incurred by petitioner in185 foreign travel. As to the domestic travel, there is nothing in the record which would in any way substantiate any claim that petitioner expended more than the $ 6 per day allowed and paid to him by his employer. For foreign travel the petitioner was reimbursed by TWA to the extent of $ 8 per day for 109 3/4 days and in determining the deficiency the respondent has allowed a deduction of $ 729 as amounts expended by petitioner from his own funds. While we do believe that the petitioner's expenses while on foreign travel 1157 most likely exceeded the $ 8 per day allowed to him by his employer, the evidence of record is not sufficient to supply any basis for concluding that the amounts expended in excess of the $ 8 per day allowed to him by TWA were greater than the $ 729 which the respondent has allowed in determining the deficiency. As to the other deductions claimed by petitioner which were disallowed, the petition contains no allegation of error, possibly because of a recognition on the part of his counsel that such claim would be futile in view of the fact that in making the return the standard deduction provided for by the statute in lieu of itemized deductions had been186 claimed.With respect to the determination of fraud, the conclusions of the respondent and his contentions made at the hearing and on brief center largely around the deductions claimed for expenses while on domestic and foreign travel. In making his return petitioner had claimed $ 2,805 for expenses while on foreign travel as representing 121 days at $ 15 per day. He claimed $ 2,007.60 for expenses while on domestic travel as covering 168 days at $ 11.95 per day. He also claimed a total of $ 797.10 to cover his estimate of cost of travel by train, plane, and automobile. The amounts so claimed were reduced by $ 971 as being the amount for which he was reimbursed by his employer. On its face the amount claimed for foreign travel was excessive in the amount of $ 990. The claim was stated as being for 121 days at $ 15 per day and the total was shown as $ 2,805 instead of $ 1,815, the correct mathematical result. The respondent, however, makes no point about the matter, and there is nothing in the record which would indicate that the agent or anyone else noticed the mathematical discrepancy. It is also apparent that the respondent was of the view that the petitioner did have expenses187 in foreign travel in excess of the amount for which he was reimbursed by his employer. Taking the amount of reimbursement and the amount allowed by the respondent in his determination with respect to foreign travel, it is to be noted that the total is fairly close to the amount that would have been shown from an accurate mathematical computation for 109 3/4 days of foreign travel at $ 15 per day, 109 3/4 days being the foreign travel allowed by respondent in his computation. The main item accordingly upon which the respondent rests his determination of fraud is the claim with respect to domestic travel and possibly the claim of deductions for other expenses made by petitioner in connection with his employment.Petitioner concedes that in his return he claimed deductions to which he was not entitled. It is his contention, however, that in making the return his claim of those deductions was not due to fraud with intent to evade tax, but rather that he was of the view that Nimro 1158 was experienced and competent in tax work and that he signed and filed the return which Nimro had prepared after being assured that all of the expenses listed as having been made by him while away188 from Chicago were allowable deductions. He admits that the amounts were in practically every instance estimates, but believes that they are substantially correct.But for the inclusion of the items totaling $ 797.10 covering the cost of pleasure and other unexplained personal trips by train, plane, and automobile, we should have no difficulty in arriving at the conclusion that the respondent has failed to prove his case. The petitioner was an air pilot, regularly employed by TWA. In that employment his post of duty was Chicago, and had been Chicago for approximately two years. On the 1st of February he was assigned to duty which by its nature indicated that so long as it lasted his operations would be from Washington. It was evident, however, that with or shortly after the conclusion of the war such duty would come to an end, and if petitioner continued in his employment with TWA he would either be returned to his old post in Chicago or receive some other assignment suitable to TWA. A claim to the effect that while on such war duty with his post in Washington petitioner was away from home on business within the meaning of section 23 (a) (1) of the Internal Revenue Code is neither189 novel nor startling. As a matter of fact, such a view as to the meaning of the statute was quite prevalent and the conclusion that such view was not within the meaning of the statute was not received in the decided cases without widespread differences of opinion and without recognition that very respectable arguments could be made in support of the opposite conclusion. In that state of affairs we are unable to find any force in the respondent's view that the mere claiming of deductions covering petitioner's living expenses and traveling expenses in the course of his employment while away from Chicago is necessarily an indication of fraud. The same view also applies to that portion of petitioner's deductions for transportation cost which represents the cost of operating his automobile from his place of abode to the airport or other places he was required to visit in the course of his employment. See and compare Charles C. Rice, 14 T.C. 503">14 T. C. 503.We do have difficulty, however, with certain portions of the deductions claimed by petitioner covering transportation cost. With respect to a substantial part of those expenditures the petitioner testified that190 they represented cost of trips made for pleasure and for personal reasons. Except to the extent that the recreation indulged in might tend to maintain for him a state of physical and mental well-being and thereby enable him to perform his duties as an airplane pilot, those expenditures could have no relation whatever to petitioner's 1159 business or profession, and in his testimony he admitted that at the time of making his return he had some question about his right to claim those amounts as deductions. His only excuse is that Nimro convinced him that he was entitled to deduct all of his expenses while away from Chicago, even though personal and for pleasure. We are able to understand how it might be conceivable for one to have such ideas about the cost of his meals and lodging, since those were items which would necessarily continue whether he remained in Washington at his post of duty, which he considered as being away from home because he was away from Chicago, or whether he happened to be in New York for pleasure and recreation. It is extremely difficult, however, to comprehend how a man of petitioner's apparent intelligence, ability, and experience could possibly believe, 191 even with the assurance of Nimro, that the cost of pleasure trips to New York and pleasure and personal trips to Pittsburgh or St. Louis could be regarded as expenses sufficiently related to the conduct of his business as a pilot for TWA to believe that they were traveling expenses while away from home in the pursuit of his trade or business so as to entitle him to a deduction therefor in the computation of his income tax.All of this brings us to two alternatives -- either he knew he was not entitled to the deductions and, knowing they were not proper deductions, he excused himself in the claiming of them because of the advice of Nimro and proceeded to sign a false return with fraudulent intent of evading a portion of his just income tax, or he was a very gullible man and not of such experience and capacity for thinking correctly as might have been expected of one in his position. It is an unpleasant and difficult task to conclude that either is the case. We have listened attentively to the testimony of the petitioner and we have examined and reexamined the evidence of record, and it is our conclusion that the petitioner did not believe or think that in computing the amount of *192 his tax he was entitled to deduct from gross income amounts expended by him for travel for personal pleasure. He knew that such items were not expenditures in the course of his employment, and, rather than being convinced that they were allowable deductions, it is our conclusion that he persuaded himself or allowed himself to be convinced that they would not be checked, but would be overlooked, to the end that he would not have to pay the full amount of his tax. The deficiency was due in part to fraud, with intent to evade tax.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621136/	Greggar P. Sletteland and Virginia M. Sletteland, Petitioners, v. Commissioner of Internal Revenue, RespondentSletteland v. CommissionerDocket No. 516-63United States Tax Court43 T.C. 602; 1965 U.S. Tax Ct. LEXIS 132; February 8, 1965, Filed February 8, 1965, Filed 132 Decision will be entered under Rule 50. Held, that the principal petitioner is not entitled to a deduction, under section 642(h) of the 1954 Code, for a claimed excess of the deductions over the gross income of the estate of his deceased father for the year of termination of the estate. Said excess of deductions amounted to only $ 36.73, and not $ 17,512 claimed by petitioner; and, since petitioner was not a beneficiary of the estate, even this reduced excess is not available to him as a deduction. Greggar P. Sletteland, pro se.Jerry M. Reinsdorf, for the respondent. Pierce, 135 Judge. PIERCE 602 OPINIONThe respondent determined a deficiency in the income taxes of the petitioners for the taxable calendar year 1960 in the amount of $ 4,442.74.The sole issue for decision is whether section 642(h) of the 1954 Code and the regulations promulgated thereunder furnish warrant for the principal petitioner's deduction of $ 17,512 on his 1960 return, representing an alleged excess of deductions over gross income of the estate of his deceased father, upon the asserted termination of the estate in its fiscal year ended February 20, 1960.All of the facts were stipulated. The stipulated facts, together with the exhibits identified therein, are incorporated herein by reference. A summary of the stipulated facts is as follows:The petitioners, Greggar and Virginia Sletteland, are husband and wife, residing in Glenview, Ill. They filed a joint Federal income tax return for the calendar year 1960 with the district director of internal revenue in Chicago. Greggar Sletteland will be hereinafter referred to as the petitioner.In about the year 1951, petitioner's father, Perry A. Sletteland (hereinafter called Perry), became liable as endorser on a series of promissory136 notes which he had endorsed in earlier years as a member of a partnership whose business had failed. The amount of such liability in 1951 was $ 27,487.70. At about this same time, Perry assigned to the noteholders the cash surrender value of several insurance policies on his life, as collateral security for the payment of his liability to the noteholders. In addition, the proceeds of said policies payable upon Perry's death, while payable to his wife (and petitioner's mother, Margaret T. Sletteland, hereinafter called Margaret), were also encumbered in favor of the noteholders.Thereafter, while he lived, Perry paid $ 10,467.82, plus interest, on these notes, which payments were claimed as deductible business losses 603 by Perry on his tax returns for the years when he made payment. The deductions so claimed were not disallowed by the Internal Revenue Service.On February 20, 1959, Perry died while a resident of Carmel, Calif., and his will, wherein Margaret was named executrix and sole beneficiary, was filed with the county clerk of Monterey, Calif. However, pursuant to the laws of California relating to the administration of small estates, Perry's estate was administered137 without formal probate.The only assets left by Perry were a bank account having a balance of $ 36.73; personal effects of nominal value; and claims of Perry against third parties, which were then estimated to be worth no more than $ 2,000. The insurance policies mentioned above had, immediately prior to Perry's death, a total cash surrender value of $ 15,651.22; and the proceeds payable upon his death were $ 26,050.99. Also, at the time of Perry's death, the balance of his obligations on the above-mentioned notes which he had endorsed, was $ 17,019.88, plus current interest.Following Perry's death, and prior to July 31, 1959, Margaret used her own personal assets to discharge Perry's indebtedness. This action relieved Perry's estate of all liability on the notes; and it freed the insurance policies from the burdens of the assignment as collateral, and it also freed the proceeds thereof from the encumbrance to which they had been subjected by Perry. Margaret then elected to receive the entire $ 26,050.99 of proceeds as annuities during her life.The total amount so expended by Margaret in paying off the notes and interest was $ 17,475.64, consisting of $ 17,019.88 for principal138 and $ 455.76 for interest. The balance of the accrued interest on the notes, $ 36.73, was paid by means of the funds in Perry's bank account at the time of his death. Margaret also used her own personal assets to pay the expenses of Perry's last illness and burial, which payments were also made prior to July 31, 1959. There were no other administration expenses or expenses of any nature, connected with closing the estate.Margaret retained Perry's personal effects. However, in an instrument drafted by her son (the petitioner herein) in August 1959, which he thereupon transmitted to Margaret for her signature, which she orally assented to by telephone at some date between January 1 and February 20, 1960, and which she thereafter signed and returned to petitioner on October 10, 1960 -- Margaret, acting both individually and as executrix of Perry's estate, "sold, assigned, transferred and set over" to the present petitioner, "all of my rights, title and interest in and to the property (other than personal effects) and claims against others (including U.S. Income Tax refund claims) of Perry A. Sletteland, deceased, bequeathed to me as sole beneficiary under his Last Will 604 139 and Testament." This instrument also contained, inter alia, the following provisions:[in] consideration of the legal and other services of Greggar P. Sletteland, including tax accounting, and other related services, of an estimated value of not less than Five Thousand Dollars ($ 5,000.00), heretofore performed and to be performed during the remainder of 1959, in connection with the following: interim management and dissolution of Slatausin Syndicate, a partnership in which Margaret T. Sletteland was the principal partner; all matters connected with the Estate of Perry A. Sletteland, deceased; and all matters connected with management of the investments of Margaret T. Sletteland; * [Here followed the words of sale, assignment, and transfer to the petitioner, which are quoted in the last preceding paragraph of text.]On or about May 31, 1960, a "U.S. Fiduciary Income Tax Return" (Form 1041) was filed for the estate of Perry A. Sletteland, deceased, by Margaret T. Sletteland, executrix. On said return, there was no gross income reported; however, there were deductions claimed for interest in the amount of $ 721.74 and capital losses of $ 17,019.88, aggregating a "taxable140 loss" of $ 17,741.62 which was marked "distributable to beneficiary." Margaret, as executrix, attached a statement to the fiduciary return, wherein she stated that the above deductions had not been allowed as deductions from the gross estate of the decedent under the applicable Federal estate tax law, and that she waived all right to have such items allowed at any time as deductions for Federal estate tax purposes.Petitioners, on their joint Federal income tax return for the calendar year 1960, reported as income the claims assigned by Margaret to petitioner, in the amount of $ 2,000 (their then estimated value), as professional income of petitioner. On said return, petitioner deducted $ 17,512 as "Excess deductions for termination year of the Estate of Perry A. Sletteland taken as beneficiary succeeding to the property of said estate under Section 642(h) of the Internal Revenue Code." No other income was reported on petitioners' return for services rendered to, or on behalf of, Margaret, either as executrix or in her individual capacity.The respondent, in his statutory notice of deficiency herein, determined that the claimed deduction of $ 17,512 was not allowable; and he explained141 his disallowance as follows:It is held that the claimed deduction does not qualify under Section 642(h) of the Internal Revenue Code, and the applicable regulations. You have not established that you were a beneficiary of an Estate, that you bore any burdens relating to an Estate's loss or deduction, that you succeeded as a beneficiary to any Estate property, nor that the claimed excess deductions were in the last taxable year of the Estate ending in 1960. * *605 The claims against third parties mentioned in the instrument of assignment consisted of a claim for Federal income tax refunds of approximately $ 1,000, as well as claims against Perry's former partner and others. The tax refunds were later received and retained by Margaret, but no collections were ever made on the other claims. Petitioner discovered in March 1964 that Perry's estate was not entitled to any portion of the tax refunds paid to Margaret for the reason that these refunds related to her separate income. Petitioner also discovered in March 1964 additional information, which revealed that the other claims assigned to him were already valueless at the time of assignment and should not have been taken142 into his income.Section 642(h) of the 1954 Code was a new provision, having no counterpart in the 1939 Code or prior revenue acts (see Mary C. Westphal, 37 T.C. 340">37 T.C. 340, 344, appeal dismissed 317 F. 2d 365 (C.A. 8); H. Rept. No. 1337, 83d Cong., 2d Sess., pp. 62, A201; S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 83, 343). The provisions of the section are set out in the margin. 1143 Petitioner places reliance upon paragraph (2), which deals with the excess of deductions over gross income of an estate for the year of its termination, rather than upon paragraph (1), which deals with an estate's net operating loss carryover and capital loss carryover. An examination of the text of the statute makes it appear that for petitioner to prevail in the instant case, at least three elements must be established: (1) The estate of Perry Sletteland must have had an excess of deductions over gross income; (2) the estate's year of termination must have ended in 1960; and (3) petitioner must have been a beneficiary succeeding to the property of Perry's estate. The respondent asserts that none of these elements is present in the instant case; and accordingly that petitioner's claimed deduction has been properly disallowed.Judicial authorities construing section 642(h)(2) are almost nonexistent. The only such case that our research has yielded is that of Mary C. Westphal, supra, which dealt with the question of the year of termination of the estate there involved. We do have the congressional 606 committee reports to aid us in applying 144 the statute in the instant case. The report of the House Ways and Means Committee that accompanied the bill which ultimately was enacted as the 1954 Code, stated, in part, as follows:Under subsection (d) [the House provision was sec. 662(d), which by Senate amendment was moved to sec. 642(h)] any * * deductions in excess of gross income * * * upon the termination of an estate or trust are made available, in accordance with regulations, to the beneficiaries or remaindermen succeeding to the property. Under existing law, these unused loss carryovers are lost when the estate or trust terminates (Cf. Charles Neave, 17 T.C. 1237">17 T.C. 1237). [H. Rept. No. 1337, supra at A201.]The report of the Senate Finance Committee was to the same effect, stating in part:Under this provision [sec. 642(h)] unused loss carryovers and deductions in excess of gross income in the year of termination of the estate or trust are made available to the remaindermen to whom the property is distributed. Under existing law these unused carryovers and excess deductions are wasted when the estate or trust terminates.* * * This provision is comparable to section 662(d) of the House145 bill, except that it limits the amount of deductions in excess of gross income which are made available to the beneficiaries to the deductions allowable in the final year of the estate or trust. * * * [S. Rept. No. 1622, supra at 83, 343.]In the Neave case, cited in the House committee report, this Court had sustained the Commissioner's denial to the taxpayer, a remainderman-beneficiary of an inter vivos trust and of a testamentary trust created by his father, the right to deduct: (1) The excess over income of sundry administration expenses of the trusts which had been incurred and paid following the father's death but prior to winding up and making final distributions, and (2) certain capital loss carryovers from prior years that were available to the trusts but which were not of any tax benefit to said trusts, for the reason that the deductions mentioned in (1) exceeded the incomes of the trusts and there was nothing against which to offset the capital loss carryovers.Bearing the foregoing in mind, we turn to a consideration of the particular facts and circumstances of the instant case. We think it would be well to discuss them within the framework of the three elements, 146 mentioned above, which we feel were comprehended by section 642(h).1. Deductions in Excess of Gross Income of the Estate. -- In the case at bar, the estate of Perry A. Sletteland filed a fiduciary income tax return for a fiscal year ending February 20, 1960. On that return it reported no income whatsoever; but it claimed deductions for two items: (1) One was for so-called capital losses, in the amount of $ 17,019.88, and (2) the other was for interest in the amount of $ 721.74. The first and larger of these two items represented the decedent 607 Perry's liability as endorser on a series of promissory notes of a partnership of which he had been a member and which had failed and been liquidated many years prior to Perry's death. The second item represented interest on these liabilities. If these two deduction items represented proper deductions on the estate's income tax return, then it would seem that the first element had been satisfied. But, we do not think they were properly deductible by the estate on its fiduciary income tax return.Section 641(b) of the 1954 Code provides that the taxable income of an estate or trust shall be computed in the same manner as147 in the case of an individual, except as otherwise provided in part I, subchapter J, dealing with the taxation of estates, trusts, and beneficiaries. The larger item of $ 17,019.88, that for Perry's liability as endorser on the partnership notes, was not an expense of the estate. The noteholders were claimants against the estate, just as any other creditors would have been. But claims are among the items that are deductible from a decedent's gross estate in computing his taxable estate for estate tax purposes (see sec. 2053(a)(3), allowing a deduction for claims against a decedent's estate), and are not charges against the income earned by an estate during the period of administration such as would, we think, be deductible under section 641(b), above mentioned.In the case of Estate of Jacob S. Hoffman, 36 B.T.A. 972">36 B.T.A. 972, the decedent at the time of his death was liable for his contributory share of a debt upon which he was a coguarantor. The debt was paid by the estate; and it claimed a loss deduction in respect thereof, on an income tax return filed for the 11 1/2-month period following the death of the decedent. The Board of Tax Appeals (predecessor148 of this Court) sustained the respondent's disallowance of the deduction insofar as it was made up of the principal and the interest accrued up to decedent's death; and the Board explained its holding as follows (36 B.T.A. at 973-974):The petitioner, the estate, claims the right to deduct $ 94,344.21 as a loss. The estate is a different taxpayer from the decedent. It is entitled only to those deductions allowed in the statute. The statute allows deduction for losses sustained during the taxable year:"(1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * " The petitioner has not been specific in its claim as to whether (1) or (2) above applies. But it is clear that (1) does not apply because there is no showing that the estate was engaged in any trade or business. The estate in no way benefited by the transaction. It is obvious that the loss was not incurred in any trade or business of the estate because it was an old debt at the date of the death of the decedent and had no relation to any activity of the estate.Nor does (2) apply. This taxpayer came149 into existence at the death of the decedent. The decedent became indebted to his coguarantor prior thereto. 608 The obligation to pay did not result from any transaction entered into by the estate for profit. (2) refers to a transaction entered into by the taxpayer for profit. When this taxpayer came into existence it had a certain amount of capital. Its capital consisted of the net estate of the decedent. Money then due the estate was a part of that capital and its later receipt did not represent the receipt of income by the estate, although it would have been income to the decedent. Nichols v. United States, 64 Ct. Cls. 241; Ernest M. Bull, Executor, 7 B.T.A. 993">7 B.T.A. 993; Walter R. McCarthy, Executor, 9 B.T.A. 525">9 B.T.A. 525; William K. Vanderbilt et al., Executors, 11 B.T.A. 291">11 B.T.A. 291; E. S. Heller et al., Executors, 10 B.T.A. 53">10 B.T.A. 53; Estate of A. Plumer Austin, 10 B.T.A. 1055">10 B.T.A. 1055; Ella C. Loose, Executrix, 15 B.T.A. 169">15 B.T.A. 169, affd., 74 Fed. (2d) 147; Mellie Esperson Stewart, 18 B.T.A. 1010">18 B.T.A. 1010.150 Debts owed by the estate at that time likewise have no effect upon the income of the estate when later they are paid, although they might have been deductible by the decedent had he paid them. John M. Brown, Executor, 11 B.T.A. 1203">11 B.T.A. 1203; Roy J. O'Neil et al., Administrators, 31 B.T.A. 727">31 B.T.A. 727; Herbert G. Perry et al., Executors, 32 B.T.A. 513">32 B.T.A. 513; Florence O. R. Lang et al., Executors, 32 B.T.A. 522">32 B.T.A. 522. It is only increases or decreases in the net estate with which this taxpayer started that affect its income.* * * Apparently this debt was then an old one, as is shown by the amount of the interest then due. Its amount was then fixed as is shown by the stipulation and by the fact that it was claimed and allowed as a deduction in determining the amount of the estate tax due. But however old the debt may have been, the present taxpayer took the estate of the decedent encumbered by this particular obligation in the amount of $ 93,827.24 and had it paid no more than $ 93,827.24 in discharging the debt, it would have suffered no loss whatsoever. * * To the same effect, see151 also Langford Investment Co. v. Commissioner, 77 F.2d 468">77 F. 2d 468, 471-472 (C.A. 5), affirming 22 B.T.A. 822">22 B.T.A. 822, and Sanborn v. United States, 74 F. Supp. 894">74 F. Supp. 894 (D. Mass.).To the extent of the principal amount of the notes at Perry's death, it is our opinion that this was not a proper deduction on the income tax return of Perry's estate. However, as to any interest with respect to these notes that may have been paid by the estate, this would, as we shall show hereinafter, be a proper deduction by the estate, under the authority of section 691(b).But there is yet another reason which impels us to the conclusion that neither the principal nor the bulk of the interest was a proper deduction on the estate's income tax return. This reason is that, except for the minor amount of $ 36.73 of interest which was paid through utilization of that sum that was left in Perry's bank account, the estate did not pay any of the principal or interest. These amounts were paid by Perry's widow, Margaret, from her own personal assets. And while it is true that Margaret became entitled to receive sufficient insurance152 proceeds to reimburse her, these proceeds, under California law, did not pass through or become assets of Perry's probate estate. The cases make no distinction for that portion of the proceeds which equals the cash surrender value of the policy prior to the insured's death. In re Burnett's Estate, 47 Cal. App. 2d 464">47 Cal. App. 2d 464, 118 P. 2d 298; Prudential Ins. Co. of America v.609 , 39 Cal. App. 2d 355">39 Cal. App. 2d 355, 103 P.2d 241">103 P. 2d 241. Hence we cannot say that actually or by implication Perry's estate made any payment to Perry's creditors, except to the extent of $ 36.73; and with that small exception, it could not properly claim any deductions.It is true that section 691(b) permits an estate to deduct amounts paid by it in respect of a decedent's obligations, if the decedent had never taken a deduction and would have been able to do so if he had made payment prior to his death. However, section 691(b) is specifically limited to deductions or credits authorized by Code sections 33, 162, 163, 164, 212, or 611. In the instant case, Perry's payment of the principal amount of his obligations on the notes153 would have been deductible either under section 165 (as a loss) or under section 166(f) as a bad debt; and therefore these relief provisions would not apply to the amounts paid by the estate in discharge of the principal amount of Perry's obligations on the notes. As above indicated, section 691(b) would furnish warrant for the estate's deduction of the interest on these notes, since interest is deductible under section 163, one of the sections specifically mentioned in section 691(b). However, this warrant for deduction is largely unusable by the estate, since (except for the minor amount of $ 36.73), the estate did not pay any interest.In summary, on this first point, we hold that the excess over gross income of deductions properly taken, for the fiscal year of Perry's estate ending February 20, 1960, was no more than $ 36.73.2. We come to a consideration of another of the above-mentioned elements, to wit: That it was incumbent upon the petitioner to establish that he took the property from the estate of his father as a beneficiary. We do not think that the record will sustain his contention that he did so take the property.What happened, as our summary of the stipulated facts154 shows, is that petitioner's mother, Margaret, was the sole beneficiary under the will of her husband, Perry. Subsequently, she "sold, assigned, transferred and set over" to petitioner the claims of Perry's estate against third parties, in consideration of petitioner's legal services that fell into three categories: (1) Matters connected with the management and dissolution of the partnership in which Margaret, individually, was the principal partner; (2) matters connected with Margaret's individual investments; and (3) matters connected with Perry's estate. In his own 1960 return, petitioner included in income $ 2,000 (the then estimated value of these claims), as fees for services to Margaret.We believe that the foregoing establishes that petitioner acquired the claims property, not in the capacity of a beneficiary of an estate, but rather as an attorney for services rendered to a client. Put another way, he acquired said property by purchase, wherein the consideration moving from him as purchaser was his legal services.610 Moreover, it seems evident that the underlying purpose of section 642(h) was to afford some measure of relief to heirs and those designated as takers155 under a decedent's will, who take diminished interests in a decedent's property as the result of the incurrence of expenses and losses by the estate. Thus the following regulations promulgated pursuant to the specific authority of section 642(h), provide:Sec. 1.642(h)-3 Meaning of "beneficiaries succeeding to the property of the estate or trust".(a) The phrase "beneficiaries succeeding to the property of the estate or trust" means those beneficiaries upon termination of the estate or trust who bear the burden of any loss * * . * * (c) In the case of a testate estate, the phrase normally means the residuary beneficiaries (including a residuary trust), and not specific legatees or devisees, pecuniary legatees, or other nonresiduary beneficiaries. However, the phrase does not include the recipient of a specific sum of money even though it is payable out of the residue, except to the extent that it is not payable in full. On the other hand, the phrase includes a beneficiary (including a trust) who is not strictly a residuary beneficiary but whose devise or bequest is determined by the value of the decedent's estate as reduced by the loss or deductions in question. * In156 the instant case, not only was petitioner not designated as a taker under Perry's will, but his interest in the property was in no way diminished as the result of the payment of Perry's obligations. True, it ultimately turned out that he did not realize anything on the claims which he acquired from Margaret; but this loss was occasioned by the insolvency of the third parties and by the fact that the income tax refund claim actually was Margaret's rather than Perry's and so should not have been transferred to petitioner in the first place. In short, petitioner did not suffer any loss by the payments in question. The parties have stipulated that the $ 2,000 estimated value of the claims assigned to petitioner, which he included in his own income tax return for 1960 as amounts received for services, will be eliminated from such income.We hold that petitioner was not a beneficiary "succeeding to the property of the estate," as those words are used in section 642(h). Consequently, he is not entitled to deduction under its provisions -- not even to the extent of $ 36.73 excess mentioned in our consideration of the first element.3. In the light of the foregoing, it seems to us unnecessary*157 to pass on the third element comprehended by section 642(h) -- that the excess deductions be in the year of the termination of the estate.To permit effect to be given to the above-mentioned stipulated adjustment,Decision will be entered under Rule 50. Footnotes1. SEC. 642. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.(h) Unused Loss Carryovers and Excess Deductions on Termination Available to Beneficiaries. -- If on the termination of an estate or trust, the estate or trust has -- (1) a net operating loss carryover under section 172 or a capital loss carryover under section 1212, or(2) for the last taxable year of the estate or trust deductions (other than the deductions allowed under subsections (b) or (c)) in excess of gross income for such year,↩then such carryover or such excess shall be allowed as a deduction, in accordance with regulations prescribed by the Secretary or his delegate, to the beneficiaries succeeding to the property of the estate or trust.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621137/	FAIRMONT HOME FURNITURE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fairmont Home Furniture Co. v. CommissionerDocket No. 30540.United States Board of Tax Appeals23 B.T.A. 909; 1931 BTA LEXIS 1805; June 29, 1931, Promulgated 1805 DEDUCTIONS - BAD DEBTS. - Upon the record it is determined that certain uncollectible accounts of petitioner were determined by it to be worthless in the calendar years here in question and were charged off upon the books in those years after a manner consistent with petitioner's method of accounting, and it is held, that such accounts represent proper deductions from gross income in those years. J. V. Blair, Jr., Esq., for the petitioner. Arthur Carnduff, Esq., and S. B. Anderson, Esq., for the respondent. TRUSSELL 909 OPINION. TRUSSELL: Respondent has determined an overassessment in respect to petitioner of $63.39 for 1922 and deficiencies of $5,453.77 for 1923 and $4,430.34 for 1924. Petitioner's appeal asks redetermination 910 for all three of these years, but at the hearing, upon motion of respondent, the appeal is as to 1922 dismissed for lack of jurisdiction, there being no deficiency determined for that year. Several errors were assigned by petitioner, but at the hearing all but one were abandoned. This remaining issue is in respect to respondent's disallowance of certain deductions representing alleged bad1806 debts claimed by petitioner. The petitioner is a West Virginia corporation, with principal office at Fairmont, and was engaged during the taxable years in selling furniture and other merchandise, mainly upon the installment plan. It kept a separate account with each customer, showing the dates and amounts of the several debits and credits and, when any one of such accounts was determined to be not collectible, such fact and the reason therefor, together with the date on which such information had been ascertained, was noted upon the face of the account. The uncollectible accounts were allowed to remain open upon the books and were not ruled off or closed by entry charging off the balance. The accounts receivable ledgers contained loose leaves, and in 1929 the leaves containing the uncollectible accounts were removed from the ledgers and segregated in a separate holder. The several accounts receivable ledgers contained in all an average of about 1,400 open accounts. In accounting for repossession of merchandise from customers who had defaulted, petitioner valued the merchandise recovered and credited the account of the customer with that value, leaving open the balance of the1807 account, with notation that the merchandise had been repossessed. Petitioner endeavored to promptly ascertain and record the fact of uncollectibility of an account in order to save collection expense and for the information of its credit manager. Petitioner's accounts were not well kept. Merchandise inventories were taken yearly and valued at cost. It was customary to make up balance sheets for the purposes of the board of directors in which the assets were revalued and these balance sheets were entered upon the minutes. The accounts receivable reported on these balance sheets were made up of the good and doubtful accounts, those deemed to be uncollectible being not included. Petitioner filed returns for the taxable years upon the installment sales basis, no consideration being given therein to bad debts. These returns reported net income of $2,250.85 for 1923 and a loss of $9,487.24 for 1924. These returns were investigated in 1926 by a revenue agent, the accounting records being examined for the years 1922 to 1925, inclusive. This agent rejected the method of computing percentage of gross profit derived in collections which was used in the returns, assigning as his reason1808 for the rejection that the 911 computation included sales for cash and sales on credit to wholesalers. The agent recommended the computation of income upon the accrual basis, stating that there were some 1,400 individual open accounts receivable and it would be practically impossible to analyze them and determine the factors necessary for computation of the rate of gross profit upon installment sales, and reported that the cost of goods sold could not be separately determined for the different classes of sales. For purposes of computing income this agent accepted the balance sheets entered upon the minutes, corrected by adjustment of the merchandise inventories and adjustment for capital transactions and for nondeductible items. The increase or decrease of net worth in each of the years as so computed was accepted by him as the net income received or the loss sustained in such years. The deficiencies here in question have been determined upon this basis. Subsequent to this examination petitioner's records were damaged by fire and water and are now undecipherable. Petitioner accepts the adjustment by respondent of its accounts to an accrual basis and the only issue now1809 presented is its right to deduct in each of the years certain uncollectible accounts alleged to have been ascertained to be worthless in those years. Respondent makes three objections to such allowance, the first being that these accounts receivable are not shown to have been previously reported as income, but in this it has been overlooked that the installment sales method of reporting income has been rejected, and that the accrual method substituted results in the inclusion in income of all of the sales in the years when made. In other words, the adjustment of the accounts to the accrual basis eliminates from income of the years before us sales made in prior years and on which the unpaid balances are claimed by petitioner to have been ascertained to be uncollectible and charged off in the taxable years under review. If these amounts represent income for prior years, as claimed by respondent, petitioner's right to deduct as bad debts these uncollectible balances can not be denied merely because respondent has not made what would be an idle gesture in carrying further his adjustment to determine correct income for the prior years in question, and determine probable deficiencies1810 in tax uncollectible because of the running of the statute of limitations. By respondent's adjustment of accounts to the accrual basis these particular accounts receivable are held to have represented income of the years in which the sales were made and respondent can not hold them to be income for those years and at the same time deny petitioner the rights that accrue to him by such allocation. Respondent's objection as framed is that these accounts are not shown to have been 912 included in income, but, when analyzed, it would seem to be merely that the income represented thereby is not shown to have been taxed. If subject to tax a deficiency may be determined and collected if not barred by the limitation of the statute, and, if barred, such condition has no bearing on petitioner's right to deduct from gross income in later years such of these accounts as then became worthless and were charged off. We think that these accounts, if worthless, are properly deductible from income if so determined and charged off in the taxable years here involved. Respondent's second contention is that the determination of worthlessness must have been arrived at within the taxable year1811 in which the deduction is sought. Upon this point we think the evidence is satisfactory that these accounts were uncollectible and that fact was definitely ascertained and entered upon the records within the taxable year for which petitioner asks deduction. Respondent's other contention is that these accounts were not charged off within the taxable year, but after careful consideration of the record we are satisfied that the accounts under consideration were clearly and unmistakably recorded to be worthless in the year for which the deduction is asked by a procedure consistent with the method of accounting followed by petitioner. Moreover, worthless accounts were eliminated from the balance sheets prepared each year and entered upon the minutes and which have been accepted and used as the basis for the reconstructed accounts for each year in determining these deficiencies. We think the respondent has failed to give due consideration to the fact that the books were kept on a so-called installment sales basis and in all fairness the intention of the petitioner must govern rather than a rule of bookkeeping under a different method of accounting to which the accounts were subsequently1812 adjusted. We conclude that the uncollectible accounts here in question in the total of $31,996.32 for 1923, and $25,637.20 for 1924, as set out in petitioner's Exhibit No. 4, are properly allowable as deductions from income for those years. Such deductions will result in no net income remaining and there are consequently no deficiencies for 1923 and 1924. Decision will be entered of dismissal of the petition as to 1922 for lack of jurisdiction, and of no deficiencies for 1923 and 1924.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621138/	Estate of Charles D. Murphy (Deceased), Donor, E. B. McDaniel, Jr., Special Administrator, Ad Colligendum, et al. * v. Commissioner. Estate of Charles D. Murphy v. CommissionerDocket Nos. 34828-34831.United States Tax Court1954 Tax Ct. Memo LEXIS 330; 13 T.C.M. (CCH) 17; T.C.M. (RIA) 54022; January 14, 1954330 Held, gifts to a fraternal association were made in trust for charitable purposes and, consequently, are exempt from gift taxation under section 1004 (a) (2) (B), I.R.C.Lawrence Dumas, Jr., Esq., and M. C. O'Neal, Esq., for the petitioners. S. J. Levison, Esq., for the respondent. 331 BLACK Memorandum Findings of Fact and Opinion The Commissioner has determined the following deficiencies and penalty in the gift taxes of Charles D. Murphy, now deceased: 25% Penalty forFailure to TimelyFile Return(Sections 1018,YearDeficiency3612(d)(1))1945$4,755.00$1,188.7519479,279.00 He has asserted the deficiencies and penalty against the decedent's estate (Docket No. 34828), and against the following donees, as transferees under section 311 (a) (1), I.R.C.: Irene Moody (Docket No. 34829), Dothan Masonic Fraternal and Benevolent Association (Docket No. 34830), and E. G. McDaniel, Jr., Trustee, (Docket No. 34831). The only issue raised by the pleadings in the aforementioned four dockets is the liability of the deceased donor, the donees conceding that they are liable as transferees if the Commissioner's determination against the donor is found to be correct. The deficiencies in 1945 and 1947 result from the Commissioner's determination that gifts of cash and remainder interests in realty to the Dothan Masonic Fraternal and Benevolent Association are not exempt from taxation as "charitable" 332 gifts under section 1004 (a) (2) of the Code. The Commissioner also made the following adjustments for 1947: (1) increased the value of life interests in real estate given to Irene Moody, and (2) disallowed the $3,000 exclusion claimed under I.R.C., section 1003 (b) (3) for gifts to E. B. McDaniel, Jr., trustee, since those gifts were of future interests. Petitioners do not contest these latter adjustments and, if it is determined that the gifts to Dothan Masonic Fraternal and Benevolent Association are exempt from taxation, those adjustments alone will not result in a deficiency. Findings of Fact Charles D. Murphy (hereinafter referred to as the donor) was, until his death in 1948, a resident of Dothan, Alabama, and his gift tax returns for 1945 and 1947 were filed with the Collector of Internal Revenue for the District of Alabama. His return for 1945 was filed by the administrator of his estate on November 30, 1950. Donor was born on October 24, 1879. From 1906 until his death, a period of over forty years, he had been extremely active in Masonic work and had held a variety of offices in the different Masonic bodies at Dothan. When he died he was Illustrious333 Grand Master of the Masonic Grand Council of the State of Alabama. On June 24, 1930, the Dothan Masonic Fraternal and Benevolent Association (hereinafter referred to as the Association) was incorporated as a nonbusiness corporation, for the purpose of promoting knowledge and benevolence and for other like purposes, under sections 7167 through 7192 of the Code of Alabama of 1923, as amended. It was never chartered by the Grand Lodge of the Masons. During the years in issue the Association was run by four trustees, each one of whom was elected by one of the four Masonic lodges in Dothan. The operations of the Association consisted of performing the following functions as trustee for the four lodges: (1) constructed and held title to the Masonic Temple, and its contents, used by the lodges for meetings and other functions, (2) rented the first floor of the Temple to a business college, (3) planned, administered, and supervised repairs, alterations and improvements of the Temple, and (4) raised money to pay off the indebtedness on the Temple. On November 30, 1931, the Commissioner exempted the Association from income taxes, under the forerunner of section 101 (14) of the Code, as a corporation334 organized exclusively to hold title to property and turn over the entire net income therefrom to an organization which was itself exempt from income taxes under that section. In his letter of exemption the Commissioner, among other things, stated: "Evidence submitted discloses that your organization was organized during 1930 under broad powers but that its activities consist of holding the title to property for the Masonic Fraternal Association of Dothan. It is shown that no activities other than the holding of title to real estate and cash being accumulated for the purpose of building a Masonic temple for the use of the Masonic bodies of Dothan are engaged in. Capital stock has been issued upon which no dividends are paid. None of your income inures to the benefit of any private member or individual." On July 7, 1945, donor went to the office of Arthur D. Ussery, his insurance agent and a trustee of the Association. Donor then and there changed the beneficiary of three of his life insurance policies, naming the Association as the new beneficiary and stating to Ussery that the gifts of the policy proceeds were for charitable purposes. Donor said that he was making the Association335 the beneficiary, rather than the Masonic lodge of which he was a member, because the Association trustees were elected for longer terms than the lodge officers and were elected for their ability and efficiency in Masonic work. The taxability of those gifts of insurance policy proceeds is not here in issue. On September 28, 1945, the donor, along with Ussery, W. J. Renfroe, and J. S. Talley, three of the Association trustees, went to the First National Bank of Dothan. Donor also wished J. W. Blakey, the remaining trustee, to accompany him but Blakey could not be reached. At the bank donor drew a certified check for $80,000 on his account making it payable to the Association. The $80,000 was deposited in a special account in the Association's name at that bank and, pursuant to donor's desires, could only be withdrawn upon the signatures of the four trustees or their duly elected successors. At the time of making the gift donor stated that he wanted to do something, by way of charity, to be remembered for when he was gone and that he wished Masonry to have a part in it. At a later date donor told Ussery that there were no strings attached to the $80,000 gift in that the trustees had336 final discretion in selecting the particular charitable objects of the gift. Donor also told C. E. Blakey, a trustee who was first elected in 1946, that the $80,000 gift was to be used to relieve the suffering of mankind. On July 28, 1947, donor was in the Moody Hospital in Dothan with what proved to be his last illness. He requested J. S. Talley, who was then visiting him, to secure the presence of Ussery. When Ussery arrived donor turned over to him, in front of Talley who acted as witness, six cashiers checks made out to donor, totaling $20,900. Donor said the money was to be kept with the $80,000 previously given. The checks were deposited to the account of the Association in the Dothan Bank and Trust Company on August 21, 1947. The donor mentioned to the trustees at various times that he wanted his gifts used for charitable purposes after his death, but that he wished no talk about, or praise for, those gifts while he was alive. One day, following the making of the above gifts, Ussery visited the donor in the Moody Hospital. Donor at that time made the following statement embodying his intent in making gifts to the Association which Ussery, for his own remembrance and guidance, 337 dictated to his secretary as soon as he returned to his office: "Now, I come toward the end of the road, and I realize that my life has been a failure, because I have made my main objective the making of money. None of my family care a thing in the world about me, (my wife is the cause of that,) except for what they can get out of me. The real friends that I have are my Masonic friends, except a very few other social friends, and I am counting on you Masons, and particularly the Masonic Corporation, of which you are the chairman, to make good my failure to do the things I should have done while I was living. "I have given the corporation some money and more will be added to it, and I want you to see that it is spent wisely and to do good with it, to relieve suffering and to compensate for my failure during my lifetime. Make it last a long time for my failures are many." On or about December 18, 1947, donor, after being transferred to a hospital in Birmingham, Alabama, executed a deed conveying two properties to Irene Moody for life with remainder to the Association. At the date of the gift the fair market value of the life estates totaled $9,280 and the fair market value of the338 remainders totaled $6,720. Donor then wished to make a statement to all the Dothan Masons regarding his gifts but his health prevented him from doing so in person. Consequently, pursuant to the donor's instructions, his attorney drafted a letter to the trustees of the Association which was dated January 9, 1948, and signed by donor. The letter, which is quoted below, was publicly read at a banquet of all the Dothan Masonic organizations: "Dothan, Alabama, January 9, 1948 "TO THE TRUSTEES OF DOTHAN MASONIC FRATERNAL & BENEVOLENT ASSOCIATION, Dothan, Alabama. "My dear Brethren: "Before this time I had planned to have you and many other Masons from all the Bodies in Dothan present with me to the end that I could put in writing and state to you in person what I am now writing to you. "Some forty-one years ago I was made a Master Mason. The fine principles and wonderful teachings of this Ancient Order and the Higher Bodies from the Entered Apprentice to the Knight Templer Masons have been a lamp to my feet through these years. A good many years ago into my mind and heart came the thought: is there anything I can do to help perpetuate the ideals, teachings and principles of these339 great Orders? The answer came that a fund might be established out of my resources to alleviate human misery, disease, and to distribute some sums of charity to those who are in misery and have disease and are worthy objects of charity on account of circumstances beyond their control. "To this end some years ago I began to make contributions to Dothan Masonic Fraternal and Benevolent Association. This has been followed by the execution of my will by the terms of which I have left substantially all of my estate further to carry out this purpose. "I ask you as trustees, and your successors in office, that out of these funds no loans be made and no contributions be made to various drives made for charitable and eleemosynary purposes. I want the funds used primarily for the benefit of Masons and their dependents and descendants, but same not to be confined to them. The purpose of the fund is to include all classes and not to include those who may be the objects of the bounty of churches, other societies, institutions, organizations and political subdivisions. It is asked that you as such trustees select the objects on whom this fund is to be bestowed and the suggestion is made that340 you not depend on others to guide you in such selection and that you not be guided by petitions and requests from other people, organizations and bodies. My idea and wish is that the funds be used to alleviate human misery, to palliate and cure human disease and to meet overwhelming emergencies in the lives of the persons referred to and chosen by you. Particularly, do I want you to help persons who are temporarily in distress and peril and suffering - such persons to be selected by you and your successors in office, and I want that you and your successors in office be the sole judges of such persons and their needs, always keeping in mind these words of the Master: 'Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me.' "I make bold to make this request and to give this injunction to you and your successors in office and to the various Masonic Bodies in the City of Dothan who are empowered to elect your successors in office: "Choose as Trustee of Dothan Masonic Fraternal and Benevolent Association men of good and tried business ability, who are capable of making wise investments and of handling large sums of money and large affairs and341 yet men who will be sympathetic toward the general plan of this fund as set out herein. "I suggest that the Trustees and their successors in office, at their discretion, invest such part of the funds before this time given and also given and devised in my last will and testament as will lead to the perpetuation of this fund and trust. I hope that you and your successors in office can hold intact that part of my property which is valuable and productive, but yet not so handle the same as to impede progress and, of course if necessary, you will invest and reinvest the funds and property already mentioned in this letter. "I desire and hope and trust that you and your successors in office will so stimulate interest in this trust and these funds that others from time to time will add to the same. I urge that this request be given earnest heed. "I ask that you transmit a copy of this letter to the four Bodies of the Order who are empowered to elect Trustees of Dothan Masonic Fraternal and Benevolent Association. "Yours fraternally, "(Signed) Charles Dorsey Murphy." The aforementioned letter contained in substance what donor had told the trustees at various times during the period342 in issue and the letter was accepted and approved by the trustees. In fact, the trustees had always understood that the gifts were only to be used to relieve the suffering of mankind and for other charitable purposes and, at a meeting held sometime prior to the writing of the letter, had agreed to use them only for those purposes. They had also, prior to the writing of the letter, decided upon the procedure to be followed in handling the gifts and making grants therefrom. The funds received from donor were always kept separate from other funds and property of the Association and, after donor's death the Charles D. Murphy Masonic Foundation was established with those funds and property interests. Only two grants have been made from the donor's gifts. Shortly prior to his death donor requested the trustees to make some use of the fund so that he would have an opportunity to observe how they exercised their discretion. The trustees thereupon paid some of the medical expenses of a tenant farm boy who was born with a cleft palate. Following donor's death the trustees received word from donor's sister that his 90-year old mother, who lived in Kentucky, was in dire need. After verifying343 that report and consulting their attorney to determine the propriety of their proposed action, the trustees gave donor's mother $200 to cover medical and other expenses. Further use of the fund following donor's death was, it appears, prevented by litigation in which donor's successors challenged the validity of the gifts to the Association. In addition to the aforementioned gifts, donor, in 1947, made two conveyances of future interests in real estate to E. B. McDaniel, Jr., in trust for certain persons. The then fair market value of those gifts totaled $15,000. Opinion BLACK, Judge: In 1945, donor gave an $80,000 cash gift to the Association. In 1947, he gave the Association a $20,900 cash gift and remainder interests in realty with a then aggregate fair market value of $6,720. The question for decision is whether those gifts qualify for exemption from gift taxation, under any of the provisions of Internal Revenue Code section 1004 (a) (2), as gifts made for charitable or like purposes. In determining that question reference to cases decided under the similar charitable contribution provisions of the income and estate tax portions of the Code 1 is apt344 since section 1004 (a) (2) was patterned after those provisions. H. R. Rep. No. 708, 72d Cong., 1st Sess., p. 30 (1939-1 CB, Part 2, p. 478); Sen. Rep. No. 665, 72d Cong., 1st Sess., p. 41 (1931-1 CB, Part 2, p. 526). Section 1004 (a) (2) (B) of the Code provides in part that gifts to a trust organized and operated exclusively for charitable purposes, no part of the net earnings of which inures to the benefit of any private individual and no substantial part of the activity of which is attempting to influence legislation, are exempt from gift taxation. 2 It is our opinion that the gifts here in issue qualify for exemption under that section. 345 Donor, in 1945, first made the Association the beneficiary of three of his life insurance policies, stating that the proceeds were to be used for charitable purposes and that the Association, rather than his own lodge, was made the beneficiary because of the superior qualifications of its trustees. Later in that year donor turned over $80,000 in cash to the Association, requiring that withdrawals of that sum be made only upon signature of the four Association trustees or their duly elected successors. His instruction regarding the cash gift of $20,900 in 1947 was to the effect that it was to be handled along with the $80,000. At various times the donor stated orally to the trustees that the gifts of cash and of the remainder interests in realty (also given in 1947) were to be used to relieve human suffering and for other charitable purposes. Moreover, the trustees understood and accepted the gifts as being for those purposes. In fact they held a meeting at which the whole matter was discussed and at which they established a procedure for administering the trust fund and making grants therefrom. Finally, following his gift of the realty interests and just before his death, donor sent346 a signed letter dated January 9, 1948, to the trustees setting forth, in substance, the terms of the trust. The letter was read at a banquet of the Dothan Masonic organization and was accepted and approved by the trustees. Its particularly pertinent provisions follow: " * * A good many years ago into my mind and heart came the thought: is there anything I can do tp help perpetuate the ideals, teachings and principles of these great [Masonic] Orders? The answer came that a fund might be established out of my resources to alleviate human misery, disease, and to distribute some sums of charity to those who are in misery and have disease and are worthy objects of charity on account of circumstances beyond their control. "To this end some years ago I began to make contributions to Dothan Masonic Fraternal and Benevolent Association. "* * * I want the funds used primarily for the benefit of Masons and their dependents and descendants, but same not to be confined to them. * * * My idea and wish is that the funds be used to alleviate human misery, to palliate and cure human disease and to meet overwhelming emergencies in the lives of the persons referred to and chosen by you. Particularly, 347 do I want you to help persons who are temporarily in distress and peril and suffering - such persons to be selected by you and your successors in office, and I want that you and your successors in office be the sole judges of such persons and their needs, always keeping in mind these words of the Master: 'Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me.'" After donor's death the trustees established the Charles D. Murphy Masonic Foundation with the gifts given by donor. It is clear to us that the gifts in issue were made in trust and that the trust was for charitable purposes. A fair consideration of the above facts is consistent with no other conclusion. A charitable trust is valid under the laws of Alabama (the jurisdiction in which the instant trust was established), Code of Alabama, 1940, Title 47, section 145, and an oral trust of personalty is valid both under Alabama law and for purposes of the federal taxing statutes. Moore v. Campbell, 113 Ala. 587">113 Ala. 587, 21 So. 353">21 So. 353; Pierce Estates, Inc., 3 T.C. 875">3 T.C. 875. As regards the realty interests we believe that the evidence, especially donor's letter of January 9, 1948 to348 the trustees and the trustees' acknowledgment of the trust, is sufficient to satisfy the Alabama statute of frauds applicable to trusts concerning lands. Code of Alabama, 1940, Title 47, section 149; Howison v. Baird, 145 Ala. 683">145 Ala. 683, 40 So. 94">40 So. 94; Wiggs v. Winn, 127 Ala. 621">127 Ala. 621, 29 So. 96">29 So. 96. Finally, since the donor neither orally nor in the January 9, 1948 letter reserved power to revoke the trust, it is irrevocable as is required under the gift tax provisions of the Code. See First National Bank of Boston, Administrator, 25 B.T.A. 252">25 B.T.A. 252. We need not concern ourselves with whether the trust was already organized and in operation at the time donor made his gifts, nor with the fact that no more than one grant was made by the trust during donor's life. Deductibility of the gifts in issue is not effected by those factors. E.T. 15, 1 C.B. 234">1940-1 C.B. 234; Bok v. McCaughn, (C.A. 3) 42 Fed. (2d) 616; Eppa Hunton, IV, 1 T.C. 821">1 T.C. 821; Proctor Patterson et al., Executors, 34 B.T.A. 689">34 B.T.A. 689. Nor is it of importance that the one grant during donor's lifetime was made in response to donor's request that the trustees demonstrate349 for him the manner in which they would exercise their discretion to choose beneficiaries. Proctor Patterson et al., Executors, supra.We also note that the $200 grant to donor's 90-yearold mother following his death does not, in view of all the facts, indicate that the trust was established for other than exclusively charitable purposes. The grant was made only after a correct determination by the trustees that donor's mother was in fact indigent and in reliance upon their attorney's opinion that such grant would not be inimical to the trust. A trust which otherwise meets the requirements of a charitable trust under the revenue laws may not be attacked solely because some of its funds are distributed to a relative of the donor, if that relative is a legitimate member of the class of beneficiaries for which the trust was established. Schoellkopf v. United States (C.A. 2), 124 Fed. (2d) 982. Respondent argues that the gifts in question are not exempt from gift taxes because the Association itself does not fall within the class of donees, specified in section 1004 (a) (2) of the Code, to whom gifts are exempt. Even if this argument is conceded it is not in350 point since the gifts were made to the Association, not outright for its own use, but rather in trust for certain charitable purposes. It seems clear to us from the evidence that the gifts in this case were gifts in trust. If the gifts had been made to the Association for its own use, rather than the trust, it would be necessary to consider whether the Association itself was organized and operated exclusively for religious, charitable, scientific or educational purposes. The gifts, however, were not outright gifts to the Association; the gifts were made to the Association as trustee. The testimony is that the funds were held as trust funds separate and apart from the other funds of the Association. The record in this case demonstrates, we think, that each and every gift was made by the decedent to the Association in trust exclusively for the relief of the suffering of the poor and needy. The evidence convinces us that the donor manifested his intention as to the purpose of the trust at the time each gift was made, that the gifts were understood by the trustees of the Association to be in trust for such charitable purpose and were so accepted by them on behalf of the Association, 351 and that the funds were held and used by the Association in trust exclusively for such charitable purpose. Gifts in trust for charitable purposes are deductible under section 1004 of the Code irrespective of whether or not the trustee is a charitable organization. The trustee may be a bank, trust company, or individual, none of which is specified in section 1004. The gift will nevertheless be deductible under that section if made in trust for charitable purposes. For these reasons we hold for petitioners on this issue. Respondent made the following additional adjustments in donor's return for 1947: (1) determined that the value of life estates given Irene Moody in two parcels of real estate totaled $9,280, rather than $8,000 as reported by donor, and (2) disallowed the $3,000 exclusion claimed under section 1003 (b) (3) of the Code for gifts to E. B. McDaniel, Jr., Trustee, since those gifts were of future interests. These adjustments are not contested by petitioners and we hold that they are correctly determined. Finally, respondent asserted a penalty of 25 per cent of donor's 1945 gift tax for donor's failure without reasonable cause to timely file a return for that year. I.R.C., sections 1018352 , 3612 (d) (1). The effect of our decision on the main issue is that the donor was not required to pay any gift tax for 1945. Consequently, no such penalty can be assessed. Decisions will be entered under Rule 50. Footnotes. The following proceedings are consolidated herewith: Estate of Charles D. Murphy (deceased) donor, Irene Moody, transferee; Estate of Charles D. Murphy (deceased) donor, Dothan Masonic Fraternal and Benevolent Association, Transferee; and Estate of Charles D. Murphy (deceased) donor, E. B. McDaniel, Jr., trustee and transferee.↩1. I.R.C., sections 23(o), 812(d)↩.2. SEC. 1004. DEDUCTIONS. * In computing net gifts for the calendar year 1943 and subsequent calendar years, there shall be allowed as deductions: (a) Residents. - In the case of a citizen or resident - * (2) Charitable. Etc., Gifts. - The amount of all gifts made during such year to or for the use of - * (B) a corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and 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. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621140/	APPEAL OF FRED S. STEWART CO.Fred S. Stewart Co. v. CommissionerDocket No. 5975.United States Board of Tax Appeals5 B.T.A. 436; 1926 BTA LEXIS 2867; November 10, 1926, Decided 2867 Laurence Graves, Esq., for the petitioner. J. Arthur Adams, Esq., for the Commissioner. LITTLETON436 LITTLETON: This appeal is from the determination of deficiencies of $5,456.77 and $34.71, respectively, for the fiscal years ended January 31, 1920 and 1921. The Commissioner increased petitioner's opening inventory of shoes and hosiery for the year beginning February 1, 1919, in the amount of $6,310.10, the closing inventory at January 31, 1920, in the amount of $11,882.64, and the closing inventory at January 31, 1921, in the amount of $11,641.23, upon the 437 ground that the inventory was taken neither upon the basis of cost nor upon the basis of cost or market, whichever was the lower. Petitioner claims that its inventories were consistently taken upon the basis of cost or market, whichever was lower. FINDINGS OF FACT. The petitioner is a Massachusetts corporation engaged in selling shoes at retail, with principal office at Atlanta, Ga. It was organized in 1910, since which time it has followed a consistent method of pricing its inventories on the basis of cost or market, whichever was the lower. At the end of each year a physical2868 inventory of all shoes and hosiery on hand was taken at actual cost, in which the various kinds and grades of shoes and the hosiery were listed and priced separately. The figures shown by this inventory were then extended by Fred S. Stewart, who had been president of the company for many years and who was thoroughly familiar with the cost and the market of the shoes and hosiery at the time the inventories were taken, so as to show the cost and the market value of the merchandise when the market value was less than the cost. In some years no change would be made in the inventories of certain departments taken at cost. On January 31, 1919, the total physical inventory of the fifteen departments in which the various kinds of merchandise were carried, taken at cost, amounted to $65,748.20. The figures on this inventory were then extended by Stewart and the merchandise valued by him at cost or market, as follows: Department.Total inventory.Reduction to cost or market.Closing inventory.A$11,031.30$1,282.75$9,748.55B1,453.601,010.15443.45C6,114.401,329.604,784.80D1,950.151,134.00816.15E3,476.353,476.35F1,623.851,623.85G2,025.602,025.60H858.00858.00J6,961.326,961.32K2,920.672,920.67L1,010.201.010.20M6,964.806,964.80O1,782.011,782.01Hosiery6,658.536,658.53Basement10,917.421,553.609,363.8265,748.206,310.1059,438.102869 At January 31, 1920, the total inventory at cost amounted to $101,338.67. This figure was reduced by Stewart to $89,456.03 to bring it to cost or market, whichever was lower, the reduction being $11,882.64. 438 The total inventory at cost and the amount by which it was reduced to bring it to the basis of cost or market at January 31, 1921, follow: Department.Total inventory.Reduction to marketClosing inventoryA$19,532.15$4,136.10$15,396.05B16,567.85925.4515,642.40E9,113.451,493.857,619.60F5,993.301,150.854,842.45G2,481.19166.852,314.34J4,590.4063.154,527.25K7,888.35291.697,596.66L6,026.00393.105,632.90M5,767.07341.355,425.72O2,802.07461.982,340.09Hosiery9,801.821,408.098,393.73Basement10,430.32808.779,621.55100,993.9711,641,2389,352.74The reasons given by the Commissioner for refusing to approve the petitioner's inventories were that "The adjustments made to inventories represent mark-downs from the purchase price of the goods affected. The greater part of the mark-downs shown in the inventory as at January 31, 1920, represent arbitrary*2870 mark-downs at $1,000 each and not taken on any particular goods. It further appears that the inventory was not taken at cost or market whichever [was] lower, as required by the law, and that you have failed to establish that the mark-down price represents actual market or replacement cost." Judgment will be entered for the petitioner upon the issues raised on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621141/	CENTRAL TERESA SUGAR CO. OF MARYLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Central Teresa Sugar Co. v. CommissionerDocket No. 14254.United States Board of Tax Appeals14 B.T.A. 270; 1928 BTA LEXIS 3002; November 15, 1928, Promulgated 3002 1. Deduction, under the loss provision of the statute, disallowed of an amount paid out by a corporation in 1920 to a surety on certain of its trust notes to compensate him for an alleged loss of the amount of the enhancement in value, after its sale by the trustee, of certain shares of stock which the surety had pledged as collateral on the trust notes and which were sold by the trustee under the terms of the trust agreement upon default of the principal in the payment of the trust notes. 2. Invested capital for the taxable year should be reduced by the amount paid out from the date of payment. R. Kemp Slaughter, Esq., and Hugh C. Bickford, Esq., for the petitioner. J. E. Mather, Esq., and F. T. Jones, Esq., for the respondent. SMITH 270 This proceeding is for the redetermination of a deficiency in income and profits tax for the fiscal year ended July 31, 1920, in the amount of $64,577.31. The petitioner was affiliated with Central Teresa Sugar Co. of New Jersey for the fiscal year in question and with that company filed a consolidated income and profits-tax return. The deficiency determined against the petitioner arose in3003 part from the disallowance by the Commissioner of a deduction from the gross income of the Central Teresa Sugar Co. of New Jersey of $167,425.05, which represented liquidated damages and interest thereon paid by such New Jersey Co. to Alfred W. Gieske. This amount was claimed as a deduction from gross income by the New Jersey Co. and the resulting loss of that company was claimed as a deduction from gross income on the consolidated return filed for the affiliated group. The Commissioner disallowed the deduction claimed by the New Jersey Co. and the petitioner being aggrieved by such disallowance brings this proceeding. FINDINGS OF FACT. The petitioner is a corporation organized and existing under the laws of Maryland. Its business is the raising of sugar cane and the manufacture and sale of sugar cane products. The New Jersey Co. was, for the fiscal year ended July 31, 1920, a subsidiary of the West India Sugar Corporation, hereinafter referred to as the West India Co., which owned all of the capital stock except qualifying shares. Prior to June 12, 1918, the New Jersey Co. had issued 6 per cent collateral trust sinking fund gold notes of an aggregate value of $1,000,000. 3004 The notes were dated June 12, 1917, and became due June 12, 1918. On the due date $400,000 of such notes were paid 271 in cash from funds contained in a sinking fund previously created. On the same day, the New Jersey Co. executed to the Fidelity Trust Co., trustee, a new deed of trust which provided for the issuance of 6 per cent collateral trust sinking fund gold notes of the aggregate par value of $600,000, payable on the 12th day of December, 1918. The trust instrument referred to provides in part as follows: THIS INDENTURE, dated the twelfth day of June, nineteen hundred and eighteen, between the CENTRAL TERESA SUGAR COMPANY, a corporation under the laws of the State of New Jersey (hereinafter called the "Company"), party of the first part; the WEST INDIA SUGAR CORPORATION, a corporation under the laws of the State of Virginia (hereinafter called the "Corporation"), party of the second part; ALFRED W. GIESKE, of the City of Baltimore, State of Maryland, party of the third part, and THE FIDELITY TRUST COMPANY (Baltimore, Md.,) a corporation under the laws of the State of Maryland (hereinafter called the "Trustee"), party of the fourth part. WHEREAS, the Company, 3005 for the purpose of raising monies to refund the issue of its notes maturing on June 12th, 1918, and for other corporate purposes, has determined to issue its notes in the aggregate principal amount of six hundred thousand dollars, to be dated June 12th, 1918, and to be payable on December 12th, 1918; and WHEREAS, to secure the payment of said notes, the performance of the covenants and agreements in this indenture contained and to pledge the property hereinafter described, this indenture is executed by the Company and to further secure the payment of said notes, the performance of said covenants and agreements and to pledge as collateral security for the payment of the same, the property hereinafter described, as well also to evidence its and his guarantee of the payment of said notes, this indenture is likewise executed by the Corporation and by the said Alfred W. Gieske; and * * * NOW, THEREFORE, THIS INDENTURE WITNESSETH, That, in consideration of the premises, the issue of said notes, and the purchase thereof and payment therefor, the sum of one dollar by each party hereto to the other paid and of other good and valuable considerations from each party hereto to the other, 3006 the parties hereto of the first, second and third parts do hereby covenant and agree with The Fidelity Trust Company (Baltimore, Md.), Trustee, as follows: * * ARTICLE II. Agreement to Pay Principal, Taxes and to Carry Insurance.The parties hereto of the first, second and third parts agree to pay the principal of said notes, when and as the same become due and payable according to their tenor, and they further covenant and agree to pay any taxes which may become due and payable on the property covered by this Indenture, and by it conveyed or pledged, and on the debt by it secured or intended to be and on the interest of the Trustee hereunder, and to keep the vessel property in this indenture described fully insured against all fire and marine risk, and against all war risk whenever the same sail between any ports other than those on the Island of Cuba and Mexican or United States ports located on the Gulf of Mexico, all such policies of insurance to be payable to owner of the property insured and the Trustee, as their respective interest may appear, and 272 to pay the premiums on such insurance as they become due, and further, to present to the Trustee, promptly3007 upon the execution of this Indenture, a list of such policies, and to notify the Trustee promptly of any changes therein. In the event of destruction or injury to any vessel property pledged hereunder, the proceeds of the insurance thereon, paid on account of said loss or injury to the Trustee, shall be held by it as part of the sinking fund provided for by Article III, and be used only to retire notes issued and outstanding hereunder as provided in Article III hereof. * * * ARTICLE IV. Property Pledged.The parties hereto of the first, second and third parts, each according to their respective interests therein, do hereby bargain, and sell, convey, assign, transfer and deliver over unto the Trustee, its successors and assigns, forever, the following described property: * * * (c) 30,000 shares of the common capital stock of Cosden and Company of the par value of $5.00 per share, certificates therefor, endorsed in blank, being deposited with the Trustee simultaneously with the execution and delivery of this agreement. * * * ARTICLE V. Release and Replacement of Pledged Property.The owners of the various properties pledged hereunder shall have the right3008 to withdraw the same and have them released from the operation and effect of this indenture by payment to the Trustee for the respective properties the following amounts, viz: * * For the shares of stock of Cosden & Company --- $210,000.00 Provided, that any of the aforementioned property pledged can be redeemed or withdrawn separately, and that the stock of Cosden and Company can be redeemed as an entirety or can be redeemed in part and from time to time upon payment of seven dollars per share for each share withdrawn. * * * The Trustee shall have the right, but in its discretion, to permit the substitution for the stock of Cosden and Company or for any part of it, and from time to time, or other shares of stock, bonds or notes acceptable to it. * * * ARTICLE VI. Guarantee.The parties hereto of the second and third parts, and each of them, covenant, agree and guarantee to pay all of the notes issued hereunder as they respectively become due and payable, and each of them does further agree to make said payment on presentation of said notes, and upon demand for payment thereof, at the office of the Trustee, without requiring demand for the payment of the same3009 upon the party hereto of the first part, and without 273 requiring that any proceedings looking to the payment of the same shall have been instituted under this indenture or otherwise, and without requiring the exhaustion of any collaterals pledged hereunder as a prerequisite to the payment of said notes by them. * * * ARTICLE VIII. Possession of Property Until Default.SECTION 1. - Until some default shall have been made in the payment of the notes issued hereunder, or any of them, or until default shall have occurred in the performance of any of the covenants or agreements of this Indenture by the parties of the first, second or third parts hereto, the party hereto of the third part shall be entitled to retain actual possession of the vessel property hereby pledged and use the same and collect the earnings thereof; there shall also be reserved to the parties of the first and third parts, until such default, the right to vote the shares of stock of the Central Car Company (subject, however, to the provisions of Article V hereof with reference to voting the said stock in favor of a sale of the tank cars of that company) and of Cosden & Company, respectively, pledged3010 hereunder and to receive any cash dividends paid thereon. * * ARTICLE IX. Remedies in Case of Default.Upon any default in the payment of any of the notes issued hereunder as the same become due and payable, or upon any breach of any of the covenants or conditions of this Indenture, in which case, upon the demand of the Trustee made either before or after a sale of the pledged property or part of it the notes issued hereunder shall become due and payable, and if such default or breach shall continue for fifteen days the Trustee may, in its discretion, and shall, upon the written demand of twenty-five per cent. in amount of the notes issued and outstanding hereunder sell the properties hereby conveyed and pledged, as follows, to wit: The said stock of Cosden and Company and of the Central Car Company shall be sold upon the Baltimore Stock Exchange, or the New York Curb Market, without notice. * * * ARTICLE X. Proceeds of Sale of Mortgaged Property.The proceeds of any sale of the mortgaged property, together with any sums which may be then held by the Trustee or be payable to it under any of the provisions of this mortgage or indenture as part of the3011 trust estate, shall be applied in the order following: First: To the payment of all costs and expenses of such sale, the fees and other charges of, and a reasonable compensation to the Trustee, its agents and attorneys and to the payment of all expenses and liabilities incurred or disbursements made by the Trustee, and of all taxes, assessments or liens prior to the lien of these presents, except any taxes or other superior liens subject to which such sale shall have been made. 274 Second: To the payment of the whole amount owing upon the notes for principal and interest, whether said notes have actually matured or not. Third: Any surplus then remaining to the parties hereto of the first, second and third parts as their respective interests may appear. * * * In TESTIMONY WHEREOF the Central Teresa Sugar Company has caused these presents to be signed by its President and its corporate seal to be hereto affixed, attested by its Secretary; the West India Sugar Corporation has caused these presents to be signed by its President and its corporate seal to be hereto affixed, attested by its Secretary; and the said Alfred W. Gieske has affixed his signature and seal hereto; 3012 and the said The Fidelity Trust Company, Trustee, has caused these presents to be signed by its Vice-President and its corporate seal to be hereunto affixed, attested by its Secretary, as of the day and year first herein written. * * The notes in the aggregate amount of $600,000, provided for by the above deed of trust were duly issued in denominations of $1,000 and $5,000 each and the proceeds derived therefrom were used to pay off the remainder of the previous issue of notes. The 30,000 shares of the common capital stock of Cosden & Co. mentioned in the foregoing deed of trust were the property of Alfred W. Gieske. These shares of stock had been pledged by Gieske, originally, on December 12, 1916, to secure payment of the $1,000,000 issue of notes of the New Jersey Co. and referred to above, in accordance with a plan of financing contained in a letter from Gieske to the New Jersey Co., which reads as follows: BALTIMORE, MD., December 6, 1916. CENTRAL TERESA SUGAR COMPANY, Jersey City, N.J. GENTLEMEN: Referring to the proposed issue by your Company of $1,000,000.00 of Collateral Trust Sinking Fund Notes of date December 12th, 1916, payable June 12th, 1917, at3013 The Fidelity Trust Company of Baltimore, Maryland, I hereby offer to purchase said notes from you upon the following terms and conditions: (1) I will unite with your Company in the deed of trust to The Fidelity Trust Company of Baltimore, Maryland, to secure the same and pledge certain property thereunder and guarantee the payment of said notes, all as set forth in the form of the deed of trust submitted with this proposition. (2) Upon the delivery of said notes I will pay to your Company the sum of $320,000.00. (3) Upon the payment by your Company of all of said outstanding notes and the release of the obligation on my part for the payment thereof and the release to me of the property pledged thereunder, I will transfer and make over to you free and clear of all liens and encumbrances, and on good condition and repair, the two vessels in said deed of trust described, and until default be made in the payment of said notes or any of them, or in the discharge of any of the covenants or conditions of said deed of trust, you may have the full and complete use of said boats, - subject always to the terms and conditions of said deed of trust and without expense to me; it being of3014 course, understood that you cannot have the use of the tank boat until the same is completed and delivered to me. 275 (4) It is understood that the transaction is to be consummated as of December 12th, 1916, and should there by any delay in the delivery of such notes, my cash payments to you shall be adjusted in accordance therewith. It must be distinctly understood that the title to said boats shall remain in me until the release of the deed of trust as above set forth, in order to protect my guarantee of said notes. This plan was consummated as outlined in the above letter. Gieske acquired the original notes and subsequently sold them to a firm of bankers. The shares of Cosden & Co. stock belonging to Gieske were again pledged under the renewal of January 12, 1917, and are the same shares of stock mentioned in the foregoing deed of trust dated June 12, 1918. On December 12, 1918, the New Jersey Co. defaulted in the payment of the aforesaid notes issued June 12, 1918. Thereafter, on the following dates, the trustees sold the shares of Cosden & Co. stock pledged by Gieske, rendering a statement of such sales to the New Jersey Co. and applying the proceeds thereof3015 against the payment of the overdue notes, as follows: DateSharesPriceNet1918December 164,3006 7/8$29,285.15Do1,00076,935.50December 181,00076,935.60Do1006 7/8681.05December 201,10077,629.05December 235,100735,371.05December 242,8006 7/819,069.40December 271,8006 7/812,258.90December 309,1006 7/861,975.551919January 64,4506 7/830,306.70Net proceeds210,447.95While these sales were being made Gieske called upon his attorney and complained that his stock was being thrown overboard. He was advised by his attorney, who was also the attorney for the New Jersey Co., that the stock had been loaned to the New Jersey Co. for deposit by it as collateral on its obligations and that he was entitled to recover from the New Jersey Co. the stock so loaned, or, in the event of its inability to return the stock, then the market value thereof at the time demand should be made. The attorney likewise advised him that, inasmuch as the company did not have sufficient funds at that time, he should delay making his demand until such time as the company did possess sufficient funds. At3016 that time the West India Co. was paying some of the obligations of the New Jersey276 Co. in connection with its trust notes and charging the same to it. Such charges were later liquidated by the New Jersey Co. The minutes of a meeting of the board of directors of the New Jersey Co. held on June 12, 1919, read in part as follows: At this point Mr. Gieske asked Mr. France to take the chair, and Mr. Gieske withdrew from the meeting. Mr. France thereupon announced that Mr. Gieske had offered to assign to this Company all his liquidated claims against the West India Sugar Corporation, excepting therefrom any claim for the enhancement in value of 30,000 shares of the common capital stock of Cosden & Company, upon the delivery to him of notes of this Company in an equivalent amount, maturing eighteen months after date. He pointed out that this Company is indebted to the West India Sugar Corporation in the sum of $931,424.13, representing payments made by said West India Sugar Corporation as guarantor for this Company under certain Indentures and Agreements with The Fidelity Trust Company, and that said West India Sugar Corporation at the same time is indebted to A. W. Gieske3017 in the sum of $549,120.28, by reason of loans and advances made from time to time, irrespective of any contingent liability by reason of enhancement in the value of 30,000 shares of common capital stock of Cosden & Company, and that the effect of such offer and the issue of such notes would be to simplify the financial relations of the parties. Thereupon, on motion duly made, seconded and carried, it was RESOLVED that the offer of A. W. Gieske be and the same is hereby accepted, and upon the assignment by him to this Company of the liquidated indebtedness due him by West India Sugar Corporation, amounting to $549,120.28, the proper officers of this Company be and they hereby are authorized to issue to said Gieske the note of this Company dated June 12th, 1919, payable eighteen months after date, in the sum of $549,120.28. BALTIMORE, MD., June 12, 1919.WEST INDIA SUGAR CORPORATION to A. W. GIESKE, Dr. To net amount due on loans and advances to and including March 31, 1919$276,838.96To net proceeds of sale of 30,000 shares of Common Capital Stock of Cosden and Company, pledged under indenture of West India Sugar Corporation et al to The Fidelity Trust Company, Trustee, dated December 12, 1918210,447.95To balance due on Salary Account to June 1, 19195,833.37To loans made from April 1, 1919 to date56,000.00Total549,120.283018 Notes were duly issued to Gieske by the New Jersey Co. in the amount of $549,120.28 as provided for in the foregoing resolution. On September 29, 1919, Gieske, by claim filed with the New Jersey Co., made demand for payment of the then value of the Cosden & Co. stock, which he had pledged, as follows: September 29, 1919. THE CENTRAL TERESA SUGAR COMPANY In account with A. W. GIESKE, FOR LIQUIDATED DAMAGES ON ACCOUNT OF SALE OF COSDEN AND COMPANY COMMON STOCK, SEPTEMBER 29, 1919. Value of Stock:30,750 Shares, at $12.00$369,000.00Less: Commission (1/16)$1,921.88Tax (1/5)61.501,983.38Net Value$367,016.62Proceeds of Sales: DateShares PriceNet1918December 164,300 6 7/8$29,285.15December 161,000 76,935.50December 181,000 76,935.60December 18 100 6 7/8681.05December 201,100 77,629.05December 235,100 735,371.05December 242,800 6 7/819,069.40December 271,8006 7/812,258.90December 309,100 6 7/861,975.551919January 64,450 6 7/830,306.70Net Proceeds210,447.95Damages156,568.67277 Claim was also made for interest3019 in the amount of $10,856.38. The minutes of a meeting of the board of directors of the New Jersey Co., held October 2, 1919, provide in part as follows: At this point Mr. Gieske called Mr. France to the chair and retired from the meeting. The Treasurer presented a statement received from Mr. Gieske showing the amount due him by this Company on account of 30,000 shares of the capital stock of Cosden and Company loaned to it as security under an Indenture dated June 12, 1918, to The Fidelity Trust Company, Trustee, which stock had been sold by said Trustee in accordance with the provisions of said Indenture. The Treasurer further stated that demand had been made for the payment of the amount of said account. After full discussion, it was, on motion duly made, seconded and carried. RESOLVED that the Treasurer of this Company be and he is hereby authorized and directed to pay from the funds of this Company the account due A. W. Gieske, according to the statement presented, and hereby ordered filed with the minutes of this meeting, together with interest thereon upon such basis as may be agreed by the Treasurer and said Gieske. Thereafter, on October 8, 1919, the company paid3020 to Gieske by check the sum of $167,425.05, which represented liquidated damages in the amount of $156,568.67 and interest in the amount of $10,866.38 computed in accordance with the foregoing resolution. 278 In his personal income-tax return for the calendar year 1919 Gieske reported the said amount of $167,425.05 as a part of the sales price of his shares of Cosden & Co. stock. The said amount of $167,425.05 was entered on the books of the New Jersey Co. as a loss and was claimed as a deduction from gross income in the consolidated income and profits-tax return of the petitioner and affiliated companies for the fiscal year 1920. The Commissioner has disallowed the deduction of such amount and has reduced the invested capital of the consolidated group by a like amount as at the beginning of the fiscal year. OPINION. SMITH: The petitioner alleges in its petition that, (1) the Commissioner erred in disallowing Central Teresa Sugar Co., a New Jersey corporation, and a subsidiary of the petitioner, the Central Teresa Sugar Co. of Maryland, a deduction from gross income of $167,425.05 paid by Central Teresa Sugar Co. of New Jersey to Alfred W. Gieske, the endorser of3021 and pledgor under certain of its notes, to reimburse the said Gieske for losses suffered by reason of the sale of certain collateral pledged by him; and (2) the Commissioner erred in reducing invested capital of the taxpayer by $167,425.05 on the assumption that Alfred W. Gieske withdrew the said amount, presumably as a stockholder when he was not, except for one qualifying share. The petitioner claims in this proceeding that the New Jersey Co., a company affiliated with the petitioner, sustained a deductible loss for the fiscal year ended July 31, 1920, in the amount of $167,425.05 representing the enhancement in value of the Cosden & Co. stock from the date of sale by the Fidelity Trust Co., trustee, in December, 1918, and January, 1919, to September 29, 1919, the date upon which Gieske made demand upon the New Jersey Co. for the payment of damages and interest. The petitioner claims the benefit of the deduction by reason of the fact that it filed a consolidated return with the New Jersey Co. The deduction is claimed as a loss sustained by the New Jersey Co. in the year 1919. The deduction of the loss is resisted by the respondent upon various grounds, one being that the evidence3022 does not prove the fair market value of the Cosden & Co. stock either at the date of sale by the trustee or on September 29, 1919, the date upon which Gieske made a demand for damages. It is not necessary, however, for us to decide the question upon the point of lack of evidence. The petitioner contends that Gieske entered into a contract with the New Jersey Co. in support of the agreement of June 12, 1918, referred to in the findings of fact; that under this agreement the 279 New Jersey Co. was obligated to return to Gieske the collateral put up by Gieske with the Fidelity Trust Co. for the benefit of the New Jersey Co. The evidence does not, however, support the contention that Gieske under a separate contract lent his stock to the New Jersey Co. The record contains no evidence of any separate contract or agreement between Gieske and the New Jersey Co. relating to the pledging of the stock. The minutes of a meeting of the board of directors of the New Jersey Co., at which the payment of Gieske's claim was authorized, stated: At this point Mr. Gieske called Mr. France to the chair and retired from the meeting. The Treasurer presented a statement received from Mr. 3023 Gieske showing the amount due him by this Company on account of 30,000 shares of the capital stock of Cosden and Company loaned to it as security under an Indenture dated June 12, 1918, to The Fidelity Trust Company, Trustee, which stock had been sold by said Trustee in accordance with the provisions of said Indenture. * * * (Italics ours.) There is no testimony or other evidence that there was any agreement involved other than the deed of trust executed June 12, 1918. The evidence does not show the cost of the Cosden & Co. stock to Gieske. It does show, however, that the trustee sold this stock in December, 1918, and January, 1919, and that the net proceeds therefrom were $210,447.95. This amount was credited to the New Jersey Co. in respect of its indebtedness on the notes. Gieske knew of the sales of this stock at the time they were being made. There is no evidence that the shares of stock were not sold by the trustee at market price. Gieske consulted his own attorney, who was likewise the attorney of the New Jersey Co., at the time that the sales were being made as to his rights in the matter. He was advised that inasmuch as the company did not have sufficient funds3024 at that time he should delay making his demand until such time as the company did possess sufficient funds. Gieske, accordingly, delayed making his demand until September 29, 1919. What is the measure of the damages which may be claimed by bailor or surety in respect of pledged property which has been sold by the bailee or principal in accordance with the terms of the contract under which the property was pledged? It is stated in 32 Cyc. 272 that: Prima facie the amount due from the principal to the surety is the face value of the claim of the creditor; but the surety is not allowed to speculate on his principal, and can not collect any more than the amount actually paid by him, although he may have taken an assignment of the claim. The same rule governs between a supplemental surety and a surety. The surety can not recover for remote and indirect losses suffered by him which could have been avoided by payment of the debt. See . 280 In ; 3025 , it was stated: The general rule is, undoubtedly, that a surety can recover of the principal only the amount or value which the surety has actually paid. If he has paid in depreciated bank-notes taken at par, he can recover only actual value of the bank-notes so paid and received. If he has paid in property, he can recover only the value of the property. If he has compromised, he can recover only what the compromise has cost him. The rule is that he shall not be allowed to "speculate out of his principal." * * Upon the conversion of chattels the measure of the pledgor's damages is the market value of the chattels at the time of conversion. ; ; Kilpatrick v. Dean, 3 N.J.Supp. 60. In the case of a sale of stocks the pledgor is ordinarily entitled to receive the highest value reached by the stocks between the date of sale and a reasonable time after he has received notice of it so as to enable him to replace the stocks. 3026 ; . In Maryland, however, the rule is that the measure of damages is the value of the stock at the time of its conversion and this is the rule whether the action is an action in tort or one in assumpsit. ; ; . Gieske clearly had notice of the sale of his Cosden & Co. stock at the time it was sold and the evidence indicates that it would not have been difficult for him to replace the stock at the market price in December, 1918, or January, 1919. The measure of the damages to which he was entitled was therefore not in excess of the price at which the stock was sold was sold by the trustee. That price was $210,447.95 and the petitioner is making no claim with respect to any loss upon that amount. Nor could such claim be made, because the New Jersey Co. was credited with that amount upon the books of the trustee. Nor is there any claim for interest in respect of the amount realized by the trustee upon the sale of the Cosden & Co. stock. Any claim3027 for interest that Gieske might have made against that company was settled by the agreement of June 12, 1919, whereby Gieske received notes of the West India Co. in the amount of $549,120.28. We can not find that there is any merit in the petitioner's claim for the deduction of the $167,425.05. The amount was not a liability of the New Jersey Co. Why the company paid the amount to Gieske is not clear from the evidence. The relationship of Gieske to the petitioner and the West India Co. is not shown by the record. Gieske was president of both the West India Co. and the New Jersey Co., and during the year 1919 received a salary from each. The record indicates that the transaction between Gieske and the several corporations which he controlled were not arm's-length transactions. The payment by the New Jersey Co. to Gieske of $167,425.05 may have been nothing more than a distribution to Gieske of a portion of the profits of that company for the taxable year involved, the distribution 281 being made directly to Gieske rather than through the West India Co. The action of the respondent in disallowing the deduction of $167,425.05 from the gross income of the New Jersey Co. 3028 for the fiscal year ended July 31, 1920, is sustained. The Commissioner has reduced the consolidated invested capital of the petitioner and affiliated companies for the taxable year ended July 31, 1920, by the amount paid to Gieske in October of that year by the New Jersey Co. from the beginning of the fiscal year. This was error, since, as we found, there existed no liability on the part of the New Jersey Co. at the beginning of the year in respect of the amount later paid to Gieske. The invested capital of the consolidated group should be reduced from the date the payment was made. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621142/	Precision Industries, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentPrecision Industries, Inc. v. CommissionerDocket No. 6273-73United States Tax Court64 T.C. 901; 1975 U.S. Tax Ct. LEXIS 81; August 19, 1975, Filed 81 Decision will be entered for the respondent. Petitioner, an accrual basis taxpayer with a fiscal year ending Mar. 31, adopted a Master Profit-Sharing Plan on or about Mar. 10, 1970, and contributed $ 100 to the trust at the time. Under the plan petitioner's board of directors was to determine before the end of each year the amount it would contribute to the plan and accrue its liability therefrom on its books and records. The plan did not prescribe a contribution formula. Petitioner's directors did not formally determine or record on its books before Mar. 31, 1970, the amount it would contribute to the plan for fiscal 1970 but before filing its return for that year petitioner contributed an additional $ 16,200 to the trust, which was the maximum amount allowable for fiscal 1970. Held: Petitioner's liability to contribute the additional $ 16,200 to the trust was not fixed as of Mar. 31, 1970, and it was not accruable in fiscal 1970. The $ 16,200 contribution is not deductible in petitioner's fiscal year ending Mar. 31, 1970. Allan Hull, for the petitioner.James E. Dunn, Jr., for the respondent. Drennen, Judge. DRENNEN902 Respondent determined a deficiency in petitioner's income tax for the taxable year ended March 31, 1970, in the amount of $ 8,457.73.The sole issue for determination is whether petitioner, an accrual basis taxpayer, had incurred a fixed liability in the fiscal year ended March 31, 1970, to contribute the sum of $ 16,200 to a qualified profit-sharing plan. If petitioner was obligated to make this payment as of the end of the fiscal year, then it could properly deduct the contribution in that year under section 404, I.R.C. 1954.FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioner Precision Industries, Inc. (hereinafter Precision), is a corporation with its principal place of business located at 13410 Enterprise Avenue, Cleveland, Ohio.During the years in issue, petitioner's president and chief executive officer was Otto A. Ahlegian (hereinafter Ahlegian), and his wife, Dorothea Ahlegian, was vice president and secretary-treasurer of Precision. 84 Otto and Dorothea Ahlegian were the only directors of petitioner.Petitioner is on the accrual method of accounting with its fiscal year ending March 31. Petitioner filed its Federal income tax return for the taxable year ending March 31, 1970, with the Internal Revenue Service Center, Cincinnati, Ohio, on September 10, 1970, pursuant to an extension of time granted until September 15, 1970.903 Euclid National Bank of Cleveland, Ohio, established a Master Profit-Sharing Trust Agreement and Plan on August 15, 1969. Petitioner formally adopted this plan, effective as to it on April 1, 1969, by executing an adoption agreement sometime during its fiscal year ended March 31, 1970. It contributed $ 100 to the bank as trustee under the plan on March 10, 1970.Under article I of this plan, the term "corporation" was defined as any corporation that has elected to adopt this plan and has executed the adoption form. Petitioner, by executing the adoption form, came within this definition.Article 4 of the plan provides guidelines for contributions by the corporation. Section 4.2 of the plan provides in pertinent part:4.2 In addition, the Corporation from time to time may pay to 85 the Trustee as contributions to the Trust such further amounts as it deems fit, which shall be received, administered and disbursed by the Trustee for the purposes of and in accordance with the provisions of this Agreement; provided, however, that such contributions shall not exceed the maximum amount allowable as a deduction for such year under Section 404 of the Internal Revenue Code or other applicable statute as the same now exists or may hereafter be amended. * Additionally, section 4.6 states:4.6 Prior to the close of each year commencing with the first year with respect to which contributions shall be made to this trust, the Board of Directors of the Corporation shall determine the amount to be contributed for such year, if any, as provided in Paragraph 4.2 above, and shall cause such amount to be accrued as a liability to the trust on the books of the Corporation. The term "Income" as used in Paragraph 4.1 above, shall mean net operating profits of the Corporation or earned surplus.The parties agree that the plan constituted a qualified profit-sharing plan as defined by section 401 of the Internal Revenue Code of 1954. 186 Following the end of its fiscal year of March 31, 1970, and before its tax return was due under the extension granted by the Commissioner, the petitioner, on July 27, 1970, contributed an additional $ 16,200 to the profit-sharing plan. This additional contribution plus the initial $ 100 constituted 15 percent of the total compensation of the employees participating in the plan (apparently 17 in number) for the petitioner's fiscal year ended March 31, 1970.904 On March 31, 1970, the petitioner's books and records contained no formal resolution of the board of directors specifying how much would be contributed to the profit-sharing plan relative to the taxable year ended March 31, 1970, nor was any such formal resolution in existence on that date.Petitioner, in its return for the taxable year ended March 31, 1970, claimed a deduction for the entire $ 16,300 contributed to the profit-sharing plan. Respondent disallowed this deduction to the extent of $ 16,200 based on his determination that petitioner did not obligate itself to pay this additional amount in the fiscal year ended March 31, 1970. Respondent concluded that since petitioner did not accrue a liability of $ 16,20087 prior to March 31, 1970, it could not claim a deduction for this amount in that taxable year.OPINIONThe petitioner, Precision, is an accrual basis taxpayer with a fiscal year ended March 31. Sometime in either February or March of 1970, petitioner adopted the master employee profit-sharing plan of Euclid National Bank of Cleveland. The plan had no definite contribution formula, but allowed the directors of the corporation to establish for each year the amount to be contributed to the plan provided that the contributions shall not exceed the maximum amount allowable as a deduction for such year under section 404.On March 10, 1970, during the fiscal year ended March 31, 1970, petitioner contributed $ 100 to the profit-sharing plan. On July 27, 1970, during the fiscal year ended March 31, 1971, petitioner contributed an additional $ 16,200 to the profit-sharing plan.The only issue for resolution is whether the contribution of $ 16,200 can be deducted by petitioner for its fiscal year ended March 31, 1970.Section 404(a) of the Code provides that contributions paid by an employer to or under a qualified profit-sharing plan shall be deductible under that section, subject to certain88 conditions and limitations. Section 404(a)(3)(A) places limits on deductible contributions to profit-sharing plans and states in pertinent part:(A) Limits on deductible contributions. -- In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect 905 to which the trust is exempt under section 501(a), in an amount not in excess of 15 percent of the compensation otherwise paid or accrued during the taxable year to all employees under the stock bonus or profit-sharing plan. * * Section 404(a)(6) covers taxpayers on an accrual basis and states that for purposes of paragraph 404(a)(3) --a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).Section 1.404(a)-1(c), Income Tax Regs., specifies that section 404(a)(6) --is intended to permit a taxpayer on the accrual method to deduct such accrued contribution or compensation89 in the year of accrual, provided payment is actually made not later than the time prescribed by law for filing the return for the taxable year of accrual (including extensions thereof) but this provision is not applicable unless during the taxable year on account of which the contribution is made the taxpayer incurs a liability to make the contribution, the amount of which is accruable under section 461 for such taxable year. * * Additionally, this Court has consistently held that the contribution must have been properly accrued, in the sense that accrual is understood for tax-accounting purposes, in the year for which the deduction is claimed. West Virginia Steel Corp., 34 T.C. 851 (1960); Abingdon Potteries, Inc., 19 T.C. 23">19 T.C. 23 (1952); Chesapeake Corp. of Virginia, 17 T.C. 668">17 T.C. 668 (1951). 2 In order for the item to be properly accrued, all events must have occurred which fixed the amount of the contribution and the petitioner's liability to pay it. United States v. Anderson, 269 U.S. 422 (1926).90 The only issue before this Court is whether the petitioner incurred the liability to make the contribution in the amount of $ 16,200 prior to March 31, 1970, so that it could be properly accrued for that fiscal year. Petitioner contends that it was so obligated, but we must rather reluctantly disagree. There is simply insufficient evidence to prove that petitioner became obligated on or before March 31, 1970, to contribute any specific amount to the plan for that year.The parties have stipulated that on March 31, 1970, petitioner's books and records contained no formal resolution of the board of directors specifying how much would be contributed to the plan relative to the year ending March 31, 1970, nor was 906 any such formal resolution in existence of that date. The only evidence we have relative to that point is the uncorroborated testimony of Ahlegian.Otto A. Ahlegian, the president of petitioner and one of its two directors, testified that prior to his execution of the adoption form of the bank's master profit-sharing plan on behalf of Precision in February or March 1970, his wife, the other director of petitioner, was aware of the proposed adoption and consented 91 to it.Ahlegian also testified that he orally informed the employees of petitioner on two separate occasions that the corporation was going to make contributions to a profit-sharing plan in the amount of 15 percent of their compensation. According to Ahlegian, it was known by the summer of 1969 to both the management and employees of petitioner that the fiscal year ending March 31, 1970, was going to be extremely profitable. Furthermore, he asserted that due to the favorable business conditions, the employees would expect a raise and the profit-sharing plan was conceived to assuage this desire.Ahlegian contends that he first told the employees that an amount equivalent to 15 percent of their compensation would be paid into a profit-sharing plan benefiting them prior to the employees' vacation in the last week of July and the first week of August of 1969.He also testified that he again told the employees of the proposed contribution after he executed the adoption form of the bank's master plan and paid the initial $ 100 contribution. This would have occurred after March 10, 1970, but we do not know if it was prior to the end of the fiscal year on March 31, 1970.Petitioner argues92 that these oral representations to the employees coupled with the informal agreement by the directors to adopt the plan clearly establish that Precision incurred an accruable liability in fiscal year ended March 31, 1970, to pay 15 percent of the employees' total contribution into the plan.We cannot agree. First, we cannot find that Ahlegian's uncorroborated testimony regarding these statements to the employees constitutes sufficient evidence to show categorically that these oral notices were in fact made. Additional testimony from any of the employees to whom the statements were allegedly made 907 would have greatly aided petitioner. 3 Moreover, even assuming that such oral representations were made to the employees, under the existing evidence, we cannot conclude that such statements by themselves would establish a liability of petitioner which would be properly accrued and deductible for the fiscal year ended March 31, 1970.Clearly, 93 the second alleged communication to the employees is of little aid to petitioner because we do not even know whether it was given prior to March 31, 1970. And the first oral notice was allegedly given to the employees before petitioner adopted the plan -- in fact before the bank formally established the plan by signing the trust agreement and plan on August 15, 1969. There is no evidence that Ahlegian knew what the "maximum contribution" under the plan would be at that time. Certainly no liability could have been incurred by petitioner to contribute any amount to the plan prior to the time it was established, its terms were known, and it was adopted by petitioner.The plan itself provides that prior to the close of each year commencing with the first year with respect to which contributions will be made to the trust, the board of directors of the corporation-participant shall determine the amount to be contributed for such year; and this would be normal corporate procedure where the plan had no definite formula for contributions, as was the case here. Yet there is no evidence that the board of directors of petitioner even considered the amount to be contributed prior to March 94 31, 1970. The plan also provided that after the directors determine how much is to be contributed they shall, prior to the close of each year, "cause such amount to be accrued as a liability to the trust on the books of the Corporation." There is no evidence that this requirement was met prior to March 31, 1970. We realize that in a small, closely held corporation such as petitioner actions taken by the board of directors are often informal, but there should be some positive evidence that action was taken that incurred a liability. The plan had no definite contribution formula and did not require the contribution of any amount, so no liability could have been incurred by petitioner by the terms of the plan itself.Petitioner has cited and relies on three revenue rulings to sustain its position that oral notification to the employees of the 908 amount to be contributed to the plan in the year in question is sufficient to create an accruable liability. Rev. Rul. 61-127, 2 C.B. 36">1961-2 C.B. 36; Rev. Rul. 57-88, 1 C.B. 88">1957-1 C.B. 88; Rev. Rul. 55-446, 2 C.B. 531">1955-2 C.B. 531.95 These revenue rulings are inapposite to the case at bar.The crucial distinction which renders those revenue rulings inapplicable is that the plan under consideration in each of the revenue rulings contained a specific formula for determining the amount of the contribution. Consequently, under the facts in those rulings, further action by the directors of the corporation in the taxable year in question to fix the liability of the corporation was unnecessary. In those situations, the deductible contributions were definitely determinable through a formula in effect prior to the end of the taxable year and the employer had definitely obligated itself, prior to the end of the taxable year, to make the payment by giving oral or written notice to the employees.Under circumstances similar to those here involved, this Court has cited with approval Rev. Rul. 63-117, 1 C.B. 92">1963-1 C.B. 92, 93, for the proposition that "where an employees' profit-sharing plan provides that an employer may or may not contribute a prescribed amount, there is no definite commitment and no accruable liability." 4 That proposition is applicable here, and in the absence of any96 evidence that petitioner had taken any positive action prior to April 1, 1970, that would bind it to contribute an additional $ 16,200 to the profit-sharing trust for its fiscal year ending March 31, 1970, we cannot find that its liability became fixed or that that amount was accruable in its fiscal year 1970.It is unfortunate that if petitioner intended to contribute to the trust for the benefit of its employees the maximum amount allowable under the law for its fiscal year 1970 that it did not take the requisite action to obligate itself to do so before the end of that year. But petitioner agrees that in order to get the deduction for fiscal 1970 its liability for the contribution must have become fixed, and thus accruable, by the end of the year, and that payment alone within the grace period provided by section 404(a)(6) is not enough. Since we conclude that petitioner's liability to make the additional contribution was not fixed by March97 31, 1970, we must agree with respondent that the *909 $ 16,200 contribution to the trust made on July 27, 1970, is not deductible in petitioner's fiscal year ending March 31, 1970.Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954 effective in 1969 and 1970, unless otherwise indicated.↩2. See also Subscription Television, Inc., T.C. Memo 1974-107">T.C. Memo. 1974-107; Misceramic Tile, Inc., T.C. Memo. 1968-31↩.3. Compare Aero Rental, 64 T.C. 331">64 T.C. 331↩ (1975).4. See Subscription Television, Inc., supra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621144/	WILLIAM B. TURNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTurner v. CommissionerDocket No. 10294-78.United States Tax CourtT.C. Memo 1980-74; 1980 Tax Ct. Memo LEXIS 513; 39 T.C.M. (CCH) 1241; T.C.M. (RIA) 80074; March 17, 1980, Filed William B. Turner, pro se. Judith L. Pickholz, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined a deficiency of $427.45 in petitioner's Federal income tax for the taxable year 1975. Two questions, which are interrelated, require decision: (a) whether petitioner was entitled to claim his mother as a dependent under section 151 1 and (b) whether petitioner was entitled to the benefit of head-of-household rates under section 1(b). Additionally, disposition must be made of a motion to enter a decision in favor of petitioner. Some of the facts have been stipulated and are found accordingly. Petitioner had his legal residence in Lynbrook, N.Y., at the time his petition herein was filed. During the taxable year 1975, petitioner's mother lived with him at 41 Manor Road, Lynbrook, N.Y.Prior to the call of this case for trial, petitioner filed a motion to end the case and enter a decision for petitioner on the515 ground that the attorneys for respondent had engaged in activities which he claimed were criminal in nature and in violation of petitioner's rights. For reasons hereinafter set forth, petitioner's motion is denied. At the trial, petitioner conceded that his mother had in excess of $750 in gross income during the 1975 taxable year and that he had no other person for whom he could claim a dependency exemption living with him during that year. Indeed, he stated that he had long since told respondent that such was the case, and his main complaint in connection with his motion is that respondent nevertheless continued to pursue the case and failed to answer or otherwise deal with various questions he asked. The threshold requirement of section 151(e)(1)(A) is that no claim of a dependency exemption may be allowed if the person so claimed had in excess of $750 of gross income during the taxable year at issue. In view of petitioner's concession, he is clearly not entitled to the claimed exemption for his mother. If this requirement is not satisfied, it is immaterial that petitioner may have provided more than half of his mother's support during that year. 2,516 affg. per curiam a Memorandum Opinion of this Court; ; . Not being entitled to claim his mother as a dependent and having no other person living with him in the same household, petitioner is likewise not entitled to head-of-household rates. Section 2(b)(1)(B) provides that such rates apply only to a taxpayer who "maintains a household which constitutes for such taxable year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction * * * for such father or mother under section 151." Finally, we turn our attention to petitioner's motion. We find it unnecessary to deal with petitioner's allegations in respect of said motion. Ordinarily, this Court will not look behind a deficiency notice and evaluate the actions of respondent or his agents. ;*517 . But, even if we were to do so herein (cf. , we would not declare respondent's notice of deficiency void, which would be the effect of granting petitioner's motion; the most we would do would be to shift the bruden of proof to respondent. See . See also , where we merely shifted to the respondent the burden of going forward with evidence. Under the circumstances herein, petitioner's concession as to the level of his mother's gross income satisfies any burden which might have been shifted to respondent. In view of the foregoing, petitioner's motion will be denied and 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 taxable year at issue.↩2. As a consequence, no portion of the trial was devoted to determining whether petitioner in fact had provided more than half of his mother's support as required by section 152(a).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4598667/	La Fera Contracting Company v. Commissioner.La Fera Contracting Co. v. CommissionerDocket No. 424-70.United States Tax CourtT.C. Memo 1971-161; 1971 Tax Ct. Memo LEXIS 171; 30 T.C.M. (CCH) 691; T.C.M. (RIA) 71161; July 12, 1971, Filed Martin D. Cohen, 744 Broad St., Newark, N.J., and Samuel Klein, for the petitioner. John J. Hopkins, for the respondent. QUEALYMemorandum Findings of Fact and Opinion QUEALY, Judge: The respondent determined a deficiency in petitioner's income tax for the taxable year ended September 30, 1964 in the amount of $5,214.02. Other issues having been previously disposed of, the parties filed a stipulation at trial in which the petitioner conceded the respondent's disallowance of the petitioner's claimed salary deductions. This stipulation of the parties also sets forth their agreement concerning the disposition of a preferred stock redemption issue. They agreed that with respect to this issue, they would be bound by the ultimate judicial*172 determination in the consolidated trial of Joseph Miele, et al., 56 T.C. No. 45. (Docket Nos. 405-70, 421-70, 422-70, 423-70). In the Miele case, we found and held that the preferred stock redemptions were essentially equivalent to a dividend and did not qualify as a distribution or payment in exchange for stock under section 302(a). Therefore in accordance with the stipulation of the parties, we hold the preferred stock redemptions in question in the instant case were essentially equivalent to a dividend and do not qualify for section 302(a) treatment. Decision will be entered under Rule 50.	01-04-2023	11-20-2020
https://www.courtlistener.com/api/rest/v3/opinions/4597270/	Andrew Little, Jr., and Myrn H. Little, Petitioners, v. Commissioner of Internal Revenue, RespondentLittle v. CommissionerDocket No. 61201United States Tax Court34 T.C. 156; 1960 U.S. Tax Ct. LEXIS 160; May 6, 1960, Filed 160 Decision will be entered that there is a deficiency of $ 10,866.62 in the petitioners' income tax for 1951. 1. Sale of Culls From Breeding Herd -- Inventory -- Basis -- Eliminated From Opening Inventory. -- Petitioners used a unit-livestock-price method of inventorying their livestock, including that held for breeding purposes. They must eliminate the inventory basis of breeding culls from opening inventory when culls are sold and long-term capital gain under section 117(j) is computed.2. Net Operating Loss Deduction -- Reduction of Net Operating Loss Carryback by 50 Per Cent of Capital Gains of the Tax Year -- Sec. 122(c). -- Section 122(c) of the 1939 Code requires that a net operating loss carryback from another year be reduced by the 50 per cent of the tax year capital gains in computing the net operating loss deduction. Oscar I. Koke, C.P.A., for the petitioners.John D. Picco, Esq., for the respondent. Murdock, Judge. MURDOCK 157 OPINION.The Commissioner determined a deficiency of $ 18,482.39 in the income tax of the petitioners for 1951. The parties state that the first issue is whether the petitioners, in computing long-term capital gains from the sale of breeding stock, may use a zero basis as the petitioners contend or must use the adjusted inventory basis as the Commissioner contends. This statement is inadequate and misleading. The only other issue is whether 50 per cent of the 1951 net long-term capital gains which escaped tax is to be subtracted from the 1952 net operating loss carryback in computing the net operating loss deduction for 1951 under section 122(c), where the tax for 1951162 is computed by the use of the alternative tax-computing method whereby the tax on capital gains is separately computed as provided in section 117(c). The facts have been presented by a stipulation which is adopted as the findings of fact.The petitioners, husband and wife, filed a joint income tax return for 1951 with the collector of internal revenue for the district of Idaho. Andrew Little, Jr., has been engaged in the business of raising and selling sheep and cattle since 1942. He had large breeding herds of cattle and sheep in 1951 and 1952. He sold lambs and steers which he raised and he also sold wool sheared from his sheep. Selected ewes and buck lambs and heifer calves which he raised were added to the breeding herds each year. Registered male animals were purchased to improve his stock. Some animals which he had raised were culled from the breeding herds and sold at times.Andrew has used an accrual method of accounting including the "unit-livestock-price" inventory method since he took over the business in 1942. The breeding animals which he raised were included in his inventories. He has never requested or obtained permission from the Commissioner to change to 163 the cash basis system of accounting. The petitioners consistently reported the proceeds of sales of culled breeding stock as ordinary income on their returns through the year 1952.158 The petitioners claim and the Commissioner concedes that the gains from the sales in 1951 of breeding stock held for more than 6 months may be reported as long-term capital gains. The petitioners contend that they are entitled to use a zero basis in computing their net long-term capital gains for 1951 from the sale of raised breeding stock, while the Commissioner insists that they must use their adjusted inventory valuation basis. Obviously a false issue is thus presented because the net long-term capital gains and the tax thereon would be greater under the petitioners' theory than under the Commissioner's theory if there were no more to the issue than the parties have stated. The Commissioner is not claiming an increased deficiency, and, of course, the petitioners are not claiming that their tax should be increased. We could stop at this point and merely agree with the parties that the petitioners are entitled to compute their tax by regarding the sales of raised breeding herd culls as long-term164 capital gains and agree with the Commissioner that the adjusted inventory basis should be used in computing those gains.However, it might be appropriate to point out before leaving this subject that the tax result which the Commissioner would reach is the correct one under either theory. The petitioners, relying upon , argue that the inclusion of the raised breeding stock in Andrew's inventories under the "unit-livestock-price" method was improper. Cf. . The parties have stipulated the adjusted inventory bases of the raised breeding herd culls sold in 1951. The total of those bases is $ 7,280.62. If it was wrong to inventory those animals, then that amount could not be a proper part of the opening inventory for 1951. The Court must assume if it is not already clear from the stipulation, that the amount was included in the opening inventory for 1951. It must be removed from the opening inventory and the petitioners' tax will be larger than the amount for which the Commissioner is contending if the long-term capital gains here in 165 question are computed on a zero basis.On the other hand, if the inventory method consistently used by Andrew with regard to raised breeding herd was proper, then again the $ 7,280.62 item must be removed from the opening inventory and used as a basis in computing long-term capital gains, as the Commissioner contends. . A double deduction of this amount would otherwise result under this computation.Thus, the Commissioner's computation arrives at the correct amount of tax, regardless of whether the raised breeding herd is included in inventory or is to be excluded from inventory.There is no reason to conclude that Andrew was forced to use the 159 "unit-livestock-price" method of inventorying his sheep and cattle. He had some choice in this matter when he undertook this business. There are advantages in using such a method. There may be years, particularly while such a business is in its formative stage, when expenses exceed income and deductions are not beneficial. Taking raised breeding animals into inventory under the "unit-livestock-price" method would result in reporting some income for those years to offset166 expenses. The amount taken into inventory in any year is available as a basis when culls are sold and is also a basis against which to compute depreciation while the animals are used for breeding purposes. There are no doubt other advantages to taxpayers using such an inventory method. This Court is in no position to say in this case that the inventory method which Andrew chose and consistently followed and which the Commissioner has followed in computing the gain from the sale of these culled cattle was an improper method.The second issue is whether the one-half of the 1951 long-term capital gains which escapes taxation is to reduce the net operating loss carryback from 1952 in computing the net operating loss deduction for 1951. It is stipulated that the amount of the 1952 net operating loss which is a carryback to 1951 is $ 11,962.92. The Commissioner reduced that amount by $ 10,363.37, representing one-half of the 1951 long-term capital gain of $ 20,726.74, in computing the 1951 net operating loss deduction. The net operating loss deduction allowed under section 23(s) is computed under section 122. Subsection (c) is entitled "Amount of Net Operating Loss Deduction." It167 provides that the amount of that deduction shall be the aggregate of the net operating loss carryovers and of the net operating loss carrybacks to the taxable year (here $ 11,962.92), "reduced by the amount, if any, by which the net income (computed with the exceptions and limitations provided in subsection (d) (1), (2), (3), and (4)) exceeds, in the case of a taxpayer other than a corporation, the net income (computed without such deduction)." One of the exceptions and limitations of subsection (d) is "(4) Gains and losses from sales or exchanges of capital assets shall be taken into account without regard to the provisions of section 117(b)." Section 117(b) provides that in the case of an individual, 50 per cent of the amount of the excess of net long-term capital gains over net short-term capital loss shall be a deduction from gross income. It appears here that the Commissioner followed those provisions of the law precisely in arriving at a net operating loss deduction of $ 1,599.55. It is wholly immaterial that the petitioners computed their 1951 tax under the provisions of section 117(c)(2). .160 168 The parties have stipulated that there will be a deficiency of $ 10,866.62 for 1951 in case the Commissioner wins on both of the litigated issues.Decision will be entered that there is a deficiency of $ 10,866.62 in the petitioners' income tax for 1951.	01-04-2023	11-20-2020
https://www.courtlistener.com/api/rest/v3/opinions/4512547/	Case: 19-11647 Date Filed: 03/04/2020 Page: 1 of 18 [DO NOT PUBLISH] IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT ________________________ No. 19-11647 Non-Argument Calendar ________________________ D.C. Docket No. 1:16-cv-01940-MLB CHARLOTTE MOORE, Plaintiff-Appellant, versus GWINNETT COUNTY, a political subdivision of the State of Georgia, DAVID A. LEIGH, JUSTIN C. RICHEY, JENNIFER L. ROBERTS, K.M. LAW, Defendants-Appellees. ________________________ Appeal from the United States District Court for the Northern District of Georgia ________________________ (March 4, 2020) Case: 19-11647 Date Filed: 03/04/2020 Page: 2 of 18 Before JILL PRYOR, BRANCH, and ANDERSON, Circuit Judges. PER CURIAM: Charlotte Moore appeals the district court’s grant of summary judgment to four police officers on her § 1983 claims alleging several Fourth Amendment violations. This case stems from two separate incidents where Gwinnett County police investigated disputes between Moore and sublessees of her rented home. Regarding the first incident, three officers—Roberts, Leigh, and Richey—arrested Moore for theft after she admitted to unlawfully moving a sublessee’s personal property to a self-storage unit. The officers initiated the arrest while Moore stood halfway outside her front door. But when Moore suddenly bent down behind the door into a dark foyer in direct defiance of their commands, the officers grabbed her arms and entered the home. Moore resisted arrest, and then Richey used a taser to subdue her. Later, Moore asserted § 1983 claims against the officers for false arrest, warrantless entry, and excessive force. Regarding the second incident, Officer Law investigated another dispute between Moore and a different sublessee where Moore had locked out the sublessee from the house. Officer Law obtained an arrest warrant for Moore after she refused to allow the sublessee to re-enter the home to obtain personal property. Because Moore complied with police requests, however, Law never executed the warrant. Later, Moore filed a claim of false 2 Case: 19-11647 Date Filed: 03/04/2020 Page: 3 of 18 arrest against Law. 1 The district court granted all four officers qualified immunity on summary judgment. 2 We affirm on all counts on appeal. 3 I. Background Moore rented a home in Gwinnett County and her lease allowed her to sublet rooms to others. The two incidents giving rise to this suit involve disputes between Moore and sublessees when police officers were called to intervene. A. The First Incident (2014) During the summer of 2014, Moore began having conflicts with one of her sublessees, Christopher Lawrence. On July 14, after several weeks of tension, Moore entered Lawrence’s locked room without permission by using a master key. She collected Lawrence’s belongings and transferred most of them to a storage facility. Moore also changed the locks to the house. At this time, Moore did not have a dispossessory warrant. 1 Officer Law did not file a brief in this appeal, but we may review this issue nonetheless. See 11th Cir. R. 42-2(f) (“When an appellee fails to file a brief by the due date . . . the appeal will be submitted to the court for decision without further delay.”). 2 The district court found in the alternative that Moore failed to state a claim against Officer Law because she asserted her claim against him in the fact section of her amended complaint. The district court also found that Moore abandoned any argument that she had a cognizable claim against Law by failing to respond to Law’s motion for summary judgment on the grounds that her amended complaint stated no claims against him. We affirm on the merits and need not address these alternative holdings. Pioch v. IBEX Eng’g Servs., Inc., 825 F.3d 1264, 1275 (11th Cir. 2016) (noting that we may affirm a grant of summary judgment on any ground supported by the record, including an alternative “merit-based ground”). 3 Moore also asserted § 1983 claims against Gwinnett County on which the district court granted summary judgment. Moore does not appeal this ruling and we do not address it. 3 Case: 19-11647 Date Filed: 03/04/2020 Page: 4 of 18 When Lawrence returned home from work and discovered he was locked out, he called the police. Roberts, Leigh, and Richey arrived soon after, and Lawrence explained that Moore had removed his property. Lawrence showed the officers a document Moore had provided him listing the address of the storage facility. Officer Leigh confirmed that the storage facility was closed for the night and thus Lawrence could not access his property. The three officers approached Moore’s front door, and Leigh knocked. Moore answered by opening the door far enough to put her left arm out. After a brief discussion in which Moore admitted she took Lawrence’s belongings to the storage locker without his permission, the officers told her she was under arrest for theft by taking and commanded her to step outside. Moore did not comply, and quarreled over the reason for her arrest. Roberts repeated the instruction for Moore to step out, and Moore responded, “I don’t have shoes or nothing on.” An officer replied, “We’ll get your shoes.” The back and forth over Moore’s shoes and the reason for her arrest continued, and tempers on both sides quickly rose. What happened next is somewhat disputed. Moore testified that she suddenly bent down behind the door to get her shoes. She then “blacked out,” only to regain consciousness a few moments later while lying on the floor of her foyer with an officer holding one of her arms behind her back. An officer threatened, “Ma’am, if you do not turn around, you’re gonna get tased . . . again.” At that 4 Case: 19-11647 Date Filed: 03/04/2020 Page: 5 of 18 moment Moore blacked out again, but came to a few seconds later. Moore concedes that throughout this struggle she engaged in “passive resistance,”4 but she denies “attempt[ing] to hit or kick the officers.” Eventually, the officers stood her up and placed her in handcuffs. Moore testified that she was tased three or four times in total during the course of these events. The officers’ account of the arrest is mostly compatible with Moore’s, with two significant exceptions. The officers testified that, as Moore retreated into the dark foyer, Leigh grabbed her left arm (which, again, had been outside of the door) to stop her from “reaching for a nightstand” and thus prevent her from obtaining “whatever item, whether it was a gun or shoes.” At that same moment, Roberts grabbed Moore’s right arm, and Moore “pulled” Roberts inside the house. Leigh and Richey immediately came inside to help Roberts complete the arrest. Contrary to Moore’s version of the events, the officers assert that Moore resisted by “thrashing” and “kicking,” and ignored their repeated commands to place her hands behind her back. Richey claims that Moore then kicked him in the groin, at which point he determined the situation might warrant use of his taser to subdue her. Roberts then loudly warned Moore that she would get tased if she did not comply. After the officers repeated commands to Moore for her to put her 4 Roberts described Moore’s behavior as “noncompliant” but not “aggressive,” that is, she was “using her strength to prevent me from putting her hands behind her back” and “trying to wrench away.” 5 Case: 19-11647 Date Filed: 03/04/2020 Page: 6 of 18 hands behind her back and seeing no compliance, Richey “drive stunned” Moore on her lower back—that is, he removed the probes and applied the taser directly to her person while administering a shock. Also in variance with Moore’s testimony, Richey contends that he pulled the taser’s trigger only once. This single pull initiated a five-second, continual tase. Because Moore pulled away from the taser as soon as it began shocking her, Richey quickly re-applied the device to her back as it continued the same five- second release. Corroborating Richey’s testimony, the taser’s log file confirms that the device was fired just once. After being handcuffed, Moore told Richey and a sergeant (who had been called to the scene) that she had no complaints of injuries and did not require medical assistance. Moore was then transferred to jail. Leigh sought an arrest warrant on the bases of theft and obstructing an officer. The magistrate judge declined to issue a warrant on the theft charge because the judge had spoken with Moore at an earlier time and advised her to place Lawrence’s property in a storage facility. This prior communication between the judge and Moore came as a surprise to the officers. The magistrate nevertheless issued the warrant on the basis of felony obstruction. Accordingly, Moore was charged with obstructing or hindering of a law enforcement officer in violation of Georgia law.5 5 The State later dismissed the charge. 6 Case: 19-11647 Date Filed: 03/04/2020 Page: 7 of 18 B. The Second Incident (2015) A year and a half later, on November 27, 2015, Moore had a dispute with a different sublessee, Shannon Daley. Officer Law and two other officers were called to the scene and quickly learned that Moore had self-evicted Daley without a dispossessory warrant. Daley was willing to leave but needed to re-enter the house to obtain personal property that was still in his room. Because Moore initially refused Law’s instructions to allow Daley to re-enter the house to obtain his property, Law obtained a warrant for her arrest, charging her with trespassing pursuant to O.C.G.A. § 16-10-24(a). While Law left the scene to retrieve the warrant, another officer spoke with Moore through a window of the house. Officers warned Moore that they had obtained an arrest warrant and would arrest her unless she allowed Daley to re-enter the house to obtain his property. Moore complied and let Daley in with an officer escort. Immediately after Daley and an officer exited the home, Law recalled the warrant. 6 C. Procedure Moore filed the instant complaint against officers Roberts, Leigh, Richey, and Law on June 10, 2016. She alleged violations of her Fourth Amendment rights pursuant to 42 U.S.C. § 1983. Counts I and III of her amended complaint asserted 6 The parties disagree as to whether Law entered the home with Daley. It is unnecessary for us to resolve this factual dispute because it is immaterial to the issue of whether Officer Law had probable cause to arrest Moore. 7 Case: 19-11647 Date Filed: 03/04/2020 Page: 8 of 18 that Roberts, Leigh, and Richey committed false arrest. Count II asserted that these same officers’ entry into Moore’s home was a warrantless entry without exigent circumstances. Count IV asserted that Roberts, Leigh, and Richey used excessive force during the arrest. Lastly, in the fact section of her amended complaint, Moore also asserted that Law’s actions constituted false arrest in violation of her Fourth Amendment rights. The district court granted all four officers qualified immunity on all claims. II. Standard of Review & Background Law “We review the district court’s grant of summary judgment de novo, ‘view[ing] all the evidence and draw[ing] all reasonable inferences in the light most favorable to the non-moving party.’” Marbury v. Warden, 936 F.3d 1227, 1232 (11th Cir. 2019) (quoting Caldwell v. Warden, 748 F.3d 1090, 1098 (11th Cir. 2014)) (alterations in original). Summary judgment is appropriate when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). To claim qualified immunity, a defendant must first show she was performing a discretionary function. See Whittier v. Kobayashi, 581 F.3d 1304, 1307–08 (11th Cir. 2009). “Once discretionary authority is established, the burden then shifts to the plaintiff to show that qualified immunity should not apply.” Lewis v. City of W. Palm Beach, 561 F.3d 1288, 1291 (11th Cir. 2009). A plaintiff 8 Case: 19-11647 Date Filed: 03/04/2020 Page: 9 of 18 demonstrates that qualified immunity does not apply by showing “(1) the defendant violated a constitutional right, and (2) [the] right was clearly established at the time of the alleged violation.” Whittier, 581 F.3d at 1308. III. Discussion A. Claims Against Officers Roberts, Leigh, and Richey for the 2014 Incident 1. False Arrest Claims We first address Moore’s contention on appeal that the district court erred by granting summary judgment on her false arrest claims. “An arrest does not violate the Fourth Amendment if a police officer has probable cause for the arrest.” Wood v. Kesler, 323 F.3d 872, 878 (11th Cir. 2003). “This standard is met when the facts and circumstances within the officer's knowledge, of which he or she has reasonably trustworthy information, would cause a prudent person to believe, under the circumstances shown, that the suspect has committed, is committing, or is about to commit an offense.” Id. An officer seeking qualified immunity “need not have actual probable cause, but only ‘arguable’ probable cause.” Grider v. City of Auburn, Ala., 618 F.3d 1240, 1257 (11th Cir. 2010) (quoting Brown v. City of Huntsville, Ala., 608 F.3d 724, 735 (11th Cir. 2010). “Arguable probable cause exists where ‘reasonable officers in the same circumstances and possessing the same knowledge as the Defendants could have believed that probable cause existed to arrest Plaintiff.’” Id. (quoting Kingsland v. City of Miami, 382 F.3d 1220, 1232 9 Case: 19-11647 Date Filed: 03/04/2020 Page: 10 of 18 (11th Cir. 2004)). This standard is objective, and it “does not include an inquiry into the officer's subjective intent or beliefs.” Grider, 618 F.3d at 1257. Furthermore, “[w]hether an officer possesses arguable probable cause depends on the elements of the alleged crime and the operative fact pattern.” Id. An officer need not prove every element of a crime in order to show she had arguable probable cause. Id. We find that the officers had probable cause to arrest Moore in 2014. The officers arrested Moore for theft by taking in violation of O.C.G.A. § 16-8-2, which prohibits a person from “unlawfully tak[ing] or . . . appropriat[ing] any property of another with the intention of depriving him of the property, regardless of the manner in which the property is taken or appropriated.” Georgia law “defines the crime of theft by taking as the act of unlawfully taking another’s property with the intent to withhold it ‘permanently or temporarily.’” Sorrells v. State, 267 Ga. 236 (1996) (emphasis in original) (quoting O.C.G.A. § 16-8- 1(1)(A)). Moore admitted to the officers at the scene of the arrest that she had taken and transported Lawrence’s property to a storage locker without his permission. The officers knew that the storage facility was closed for the night, and thus Lawrence was deprived of access to his property. Accordingly, it is clear from Moore’s admission that the officers had probable cause to arrest. 10 Case: 19-11647 Date Filed: 03/04/2020 Page: 11 of 18 Moore’s only argument to the contrary on appeal is that the officers lacked probable cause because her dispute with Lawrence was a “civil matter” and a judge “had already denied a warrant for [her] arrest.” But her decision to take and relocate Lawrence’s property without his permission and without a dispossessory warrant was not a mere civil matter. This action reasonably appeared to the officers to violate the Georgia criminal theft statute. And although a judge later denied a warrant for her arrest on this basis, the officers had not yet sought that warrant. Thus, the officers could not possibly have known at the time they made the arrest that Moore’s seeming theft would not serve as a basis for probable cause. Based on the totality of circumstances within the officers’ knowledge at the time of Moore’s arrest, then, a reasonable officer in their shoes would believe that Moore had committed theft in violation of O.C.G.A. § 16-8-2. Accordingly, the officers had probable cause to arrest Moore. 2. Warrantless Entry Claim Moore next contends that the district court erred by granting summary judgment on her warrantless entry claim.7 “Because ‘the physical entry of the home is the chief evil against which the wording of the Fourth Amendment is 7 The district court also found that Moore waived any argument concerning exigent circumstances by failing to respond to the officers’ exigent-circumstances justification in her summary judgment response. We need not decide the issue of waiver here because exigent circumstances clearly justified the officers’ entry into her home to complete the arrest. 11 Case: 19-11647 Date Filed: 03/04/2020 Page: 12 of 18 directed,’ it is ‘a basic principle of Fourth Amendment law that searches and seizures inside a home without a warrant are presumptively unreasonable.’” Bates v. Harvey, 518 F.3d 1233, 1239 (11th Cir. 2008) (quoting Payton v. New York, 445 U.S. 573, 585–86 (1980)). The Constitution allows some exceptions to the general prohibition against warrantless entry into a home, including where “exigent circumstances” exist. Id. Exigent circumstances may include “danger to the arresting officers . . . .” Id. at 1245 (quoting United States v. Edmondson, 791 F.2d 1512, 1515 (11th Cir. 1986)). The district court found that the warrantless arrest was justified by exigent circumstances because it was reasonable for the officers to conclude they faced imminent risk of serious injury when Moore turned away from them towards her home’s dark foyer after being told she was under arrest. We agree. Although an audio recording of the incident demonstrates that Moore claimed she wanted merely to grab her shoes, the officers were not obligated to take her at her word. As an objective matter, the officers’ reluctance to trust Moore is supported by the fact that Moore had spent several minutes quarreling with them regarding the basis of her arrest and ignoring their commands to come outside. Moreover, they told her to not grab the shoes. Accordingly, upon our own review of the record and viewing it in the light most favorable to Moore, we hold that the district court did 12 Case: 19-11647 Date Filed: 03/04/2020 Page: 13 of 18 not err in finding that exigent circumstances justified the officers’ warrantless entry into Moore’s home. 3. Excessive Force Claim Moore contends on appeal that the district court erred in granting the officers qualified immunity on her excessive force claim. 8 “The Fourth Amendment's freedom from unreasonable searches and seizures encompasses the plain right to be free from the use of excessive force in the course of an arrest.” Lee v. Ferraro, 284 F.3d 1188, 1197 (11th Cir. 2002). Like other Fourth Amendment inquiries, judicial scrutiny of an officer’s use of force “requires balancing of the individual’s Fourth Amendment interests against the relevant government interests.” County of Los Angeles v. Mendez, 137 S. Ct. 1539, 1546 (2017). “The operative question in excessive force cases is ‘whether the totality of the circumstances justifie[s] a particular sort of search or seizure.’” Id. at 1546 (alteration in original) (quoting Tennessee v. Garner, 471 U.S. 1, 8–9 (1985)). We assess the reasonableness of the force used under an objective rubric that “must be judged from the perspective of a reasonable officer on the scene, rather than with the 20/20 vision of hindsight.” Id. 8 We note that it is not clear from Moore’s brief whether she appeals the district court’s judgment on the excessive force issue as to all officers or as to Richey only. Although her brief references “the Appellees” and states that she was “attacked by all three officers inside her home,” she points only to “the use of a taser” as a violation of her constitutional right against excessive force. The uncontroverted record shows that only Richey used a taser. We need not decide the issue of which of the three officers are included in this claim, however, because we find on review of the entire record that none of the three officers involved in Moore’s arrest applied excessive force in violation of her Fourth Amendment right. 13 Case: 19-11647 Date Filed: 03/04/2020 Page: 14 of 18 (quoting Graham v. Connor, 490 U.S. 386, 396 (1989)). We conduct a three-part inquiry to facilitate our constitutional evaluation of an officer’s use of force by considering: “(1) the need for the application of force, (2) the relationship between the need and amount of force used, and (3) the extent of the injury inflicted.” Stephens v. DeGiovanni, 852 F.3d 1298, 1324 (11th Cir. 2017) (quoting Vinyard v. Wilson, 311 F.3d 1340, 1347 (2002)). The district court found that all three Stephens factors favor the officers. After reviewing the record in the light most favorable to Moore, we agree. First, Moore’s conduct and the circumstances of the arrest reasonably demonstrated a need for the application of force. In spite of the officers’ numerous commands that she place her hands behind her back and submit to the arrest, Moore exerted what she describes on appeal as “passive resistance.” As they struggled together on the ground, Roberts loudly warned Moore that she was “going to get tased,” and officers repeated their commands for Moore to put her hands behind her back seven times. Furthermore, the setting and situation itself contained an element of potential danger. The officers struggled to arrest Moore in the dark foyer of her home. And Moore had spent several minutes preceding the arrest ignoring their directives that she step outside. We have affirmed the use of a taser in circumstances where an officer undertook far fewer attempts to control the subject without resorting to a taser. For 14 Case: 19-11647 Date Filed: 03/04/2020 Page: 15 of 18 instance, in Draper v. Reynolds, 369 F.3d 1270, 1277–79 (11th Cir. 2004), we upheld the use of a taser after a suspect refused a police officer’s instruction to get paperwork five times. Here, the officers gave at least seven commands for Moore to submit to the arrest once they were in her foyer before using a taser—and that number balloons if one counts the commands for Moore to come outside peacefully in the first place. Although the exact number of ignored commands is not dispositive, we have held that “noncompliance or continued physical resistance to arrest justifies the use of force by a law enforcement officer.” Wate v. Kubler, 839 F.3d 1012, 1021 (11th Cir. 2016). Moore was unquestionably noncompliant here. Furthermore, the officer in Draper used his taser outdoors on the side of a highway, 369 F.3d at 1272, whereas here the officers struggled with Moore in a setting unfamiliar to them but intimately familiar to her. This disparity of familiarity is significant because the officers did not know whether Moore had a gun in the nightstand by the door. Accordingly, based on the uncontroverted facts alone, the officers reasonably believed they needed to use a taser to subdue Moore.9 Second, the use of a single taser shock in this situation was not disproportionate to the need for force. Although Moore claims that Richey tased 9 We note that our analysis does not require us to consider the factual dispute over whether Moore kicked Richey in the groin. 15 Case: 19-11647 Date Filed: 03/04/2020 Page: 16 of 18 her more than once, she provides no evidence other than her testimony to support this claim. Whereas under the applicable standard of review we might have been obligated to accept her version of the story where only the officers’ testimony stood in opposition, we need not do so where, as here, hard evidence contradicts her testimony. See Singletary v. Vargas, 804 F.3d 1174, 1183 (11th Cir. 2015) (“[W]hen ‘opposing parties tell two different stories, one of which is blatantly contradicted by the record, so that no reasonable jury could believe it,’ a court should not adopt the contradicted version for purposes of ruling on a motion for summary judgment.” (quoting Scott v. Harris, 550 U.S. 372, 380 (2007))). The taser log shows that the taser was fired only once. And the audio recording of the arrest also suggests that Richey used the taser once. We therefore affirm the district court’s conclusion that Richey fired the taser only once. In Draper, we found that a “single use of [a] taser gun may well . . . prevent[] a physical struggle and serious harm” to officers in a tense situation where a suspect was repeatedly noncompliant. 369 F.3d at 1278 (emphasis added). This principle applies with even greater force here, where a physical struggle has ensued and the risk of officer harm is thereby heightened. Accordingly, we find that Richey’s single use of a taser under the circumstances was not disproportionate to the officers’ need for Moore to submit to the arrest. 16 Case: 19-11647 Date Filed: 03/04/2020 Page: 17 of 18 Third, Moore does not allege that Richey’s use of a taser caused her any injury sufficient to tip the scale in her favor. The uncontroverted evidence shows that Richey asked Moore if she needed medical attention immediately after the arrest and she stated that she did not. On appeal, Moore alleges that she “loss conscious [sic]” and received “permanent scars” as a direct result of the tasing. Without wading into any credibility determinations about these asserted injuries, we conclude that Moore’s temporary loss of consciousness and some scarring are not enough on their own to show that Richey’s use of a taser was unjustified in light of the totality of the circumstances. Accordingly, after examining the record in the light most favorable to Moore, we find that Moore has not met her burden of showing that the officers used excessive force in violation of her constitutional rights. B. Claims Against Officer Law for the 2015 Incident Finally, we turn to Moore’s false arrest claim against Law. Moore asserts that the district court erred in dismissing her claim against Law arising from the incident on November 27, 2015. The district court found dispositive the fact that Law did not “execute[] the warrant” to arrest Moore. Moore contends on appeal that the fact the warrant was not executed cannot resolve this case. Rather, she argues that pursuant to an objective, reasonable man standard, Law’s actions constituted “house arrest.” Specifically, she argues that “she knew she was not 17 Case: 19-11647 Date Filed: 03/04/2020 Page: 18 of 18 free to leave” because her home was “surrounded by police officers to prevent her from leaving” and because Law told her that he had obtained a warrant for her arrest. We need not decide the merit of Moore’s argument that she was, in fact, arrested because Law’s actions placed her under “house arrest.” A false arrest claim is not cognizable where, as here, police have obtained an arrest warrant. See Rodriguez v. Ritchey, 539 F.2d 394, 401 (5th Cir. 1976) (“The law is plain that an officer who arrests someone pursuant to a valid warrant has no liability for false arrest . . . .”); see also Brown, 608 F.3d at 734 (“An arrest without a warrant and lacking probable cause violates the Constitution and can underpin a § 1983 claim, but the existence of probable cause at the time of arrest is an absolute bar to a subsequent constitutional challenge to the arrest.”) (emphasis added). Here, it is undisputed that Law obtained a warrant, and Moore does not challenge whether the police had a sufficient basis of probable cause to support that warrant. Accordingly, even if she could show that Law’s actions constituted an arrest, the existence of a lawfully obtained and valid warrant precludes her claim for false arrest. We therefore affirm the district court’s dismissal of her claims against Law. AFFIRMED. 18	01-04-2023	03-04-2020
https://www.courtlistener.com/api/rest/v3/opinions/4512548/	DISTRICT COURT OF APPEAL OF THE STATE OF FLORIDA FOURTH DISTRICT YANPING MING a/k/a HELEN MING, Petitioner, v. NS FOA, LLC and CONGWEI XU, Respondents. No. 4D19-3477 [March 4, 2020] Petition for writ of prohibition to the Circuit Court for the Nineteenth Judicial Circuit, Indian River County; Janet C. Croom, Judge; L.T. Case No. 312019CA000008. Michael A. Tessitore and Jason P. Del Rosso of Moran Kidd Lyons Johnson Garcia, P.A., Orlando, for petitioner. Michael J. Pugh and Jason M. Pugh of Pugh Law Office P.A., Orlando, for respondents. KUNTZ, J. Yanping Ming petitioned for a writ of prohibition after the presiding circuit judge denied her motion to disqualify the judge. Assuming the facts pled in the verified motion to disqualify are true, as we must, we grant the petition. In her verified motion to disqualify the judge, Ming alleged the judge has a “very substantial and extended professional and business relationship with” the respondent NS FOA, LLC’s co-counsel. Ming also alleged co-counsel “recently served as an attorney representing the interests of [the judge], her husband and her son (or step-son) . . . in a high profile litigation with very high stakes.” The court denied the motion without comment. We review the legal sufficiency of the motion to disqualify de novo. City of Hollywood v. Witt, 868 So. 2d 1214, 1216-17 (Fla. 4th DCA 2004). A motion to disqualify is legally sufficient “if it alleges facts that would create in a reasonably prudent person a well-founded fear of not receiving a fair and impartial trial.” Id. at 1217 (citing MacKenzie v. Super Kids Bargain Store, Inc., 565 So. 2d 1332 (Fla. 1990); Rogers v. State, 630 So. 2d 513, 515 (Fla. 1993)). When the motion alleges facts sufficient to create such a fear, prohibition is the appropriate remedy. J & J Towing, Inc. v. Stokes, 789 So. 2d 1196, 1198 (Fla. 4th DCA 2001). Here, the respondents strongly object to the facts alleged in the motion to disqualify. But, in this case, we are not tasked with adjudicating the truthfulness of the facts in the motion; we are tasked only with determining whether those facts, if true, would create a fear in the mind of a reasonably prudent person of not receiving a fair and impartial trial. The facts alleged in Ming’s motion were sufficient, and disqualification was appropriate. See, e.g., J & J Towing, 789 So. 2d at 1198. We grant the petition and quash the court’s order. Finally, the judge entered two orders after we entered an order staying proceedings in the circuit court. Generally, a disqualified judge can perform the ministerial task of entering an order already orally announced. Ross v. Ross, 77 So. 3d 238, 239 (Fla. 4th DCA 2012) (citations omitted). But it is unclear if that is what occurred here. After we stayed further proceedings, the court was not permitted to take any action. See Plavnicky v. Deluicia, 954 So. 2d 1178, 1178 (Fla. 4th DCA 2007) (citing Leslie v. Leslie, 840 So. 2d 1097 (Fla. 4th DCA 2003)) (holding that orders entered during a stay are a nullity). Therefore, the two orders entered during the stay are quashed, and the successor judge shall consider the issues de novo. Petition granted; orders quashed. WARNER and CIKLIN, JJ., concur. * * * Not final until disposition of timely filed motion for rehearing. 2	01-04-2023	03-04-2020
https://www.courtlistener.com/api/rest/v3/opinions/2448529/	939 S.W.2d 546 (1997) DIVISION OF FAMILY SERVICES, Appellant, v. Bennie CADE, Respondent. No. WD 52347. Missouri Court of Appeals, Western District. February 25, 1997. 548 Shelley Thomas-Benke, Mo. Dept. of Social Services, Jefferson City, for appellant. Maureen McCarthy Franz, Franz & Franz, P.C., St. Louis, for respondent. Before BRECKENRIDGE, P.J., and HANNA and LAURA DENVIR STITH, JJ. LAURA DENVIR STITH, Judge. Bennie Cade, an employee of the Missouri Department of Social Services, Division of Family Services (DFS), received notice in August 1993 that he would be suspended without pay for 20 days while DFS investigated charges of sexual harassment made against him. Mr. Cade appealed his suspension to the Missouri Personnel Advisory Board (PAB), alleging DFS did not give him adequate due process notice of the basis for the suspension. On September 28, 1993, before the PAB had considered Mr. Cade's appeal and the day following the conclusion of the suspension, Mr. Cade was given notice by DFS that it had concluded its investigation and determined that some of the charges against him were substantiated. The notice also informed Mr. Cade that he was given a twenty-day disciplinary suspension, but that the suspension would be retroactively concurrent with the suspension he had just completed serving. A few weeks later, Mr. Cade requested and was granted transfer to a different, lower paying job in DFS. More than a year later the PAB heard Mr. Cade's appeal. Following a hearing it determined that Mr. Cade had not received adequate notice of his August 1993 suspension. It further considered the merits of the charges against him and determined that DFS had not shown by competent and substantial evidence that Mr. Cade had engaged in sexual harassment. It ordered Mr. Cade to receive back pay for the period of his suspensions. It further found that his voluntary transfer should be treated as an involuntary demotion and ordered him reinstated to the position he had held before his transfer, with back pay. DFS appeals. We affirm the PAB's finding that Mr. Cade received inadequate pre-suspension notice of his August 1993 suspension. We also find that he received no pre-suspension notice of his September 1993 suspension, as it was ordered to run retroactively. Because of these rulings, we affirm the portion of the PAB's order finding the suspensions were invalid and ordering Mr. Cade to receive back pay for the period of the suspensions. We do so without reaching the merits of the claims of sexual harassment against Mr. Cade. We reverse so much of the PAB's order as finds that Mr. Cade's transfer should be treated as an involuntary demotion and that he was therefore entitled to reinstatement. I. FACTUAL AND PROCEDURAL BACKGROUND Mr. Cade has been employed by the Missouri Department of Social Services, Division of Family Services (DFS), since 1980. Beginning on approximately July 26, 1993, Mr. Cade was put on paid administrative leave pending investigation of allegations of sexual harassment made by several fellow employees. On August 27, 1993, he received a letter from DFS which notified him that effective September 1, 1993, he would be suspended without pay for twenty days while DFS investigated the allegations against him. The letter stated: You are hereby notified of your suspension without pay for twenty (20) working days from the Division of Family Services (DFS) subject to your right to show reasons why this suspension should not be effected. You may answer in person ... before August 31, 1993, or you may present your case in writing ... You are being suspended pending further investigation of charges of alleged sexual harassment of fellow employees by your actions which are perceived by them as creating a hostile work environment that is not conducive to their being able to successfully perform their work requirements. 549 If you consider your suspension improper you are advised that you have the right to appeal under 1 CSR 20-3.070(3).... (emphasis added). The suspension was ordered to run the twenty working days from September 1, 1993 through September 27, 1993. During the period of this suspension, Mr. Cade informally appealed the suspension to the PAB. On September 28, 1993, before the PAB heard his appeal, Mr. Cade received a second letter from DFS notifying him that DFS had completed its investigation of the allegations against him. The letter stated that in its investigation DFS had substantiated allegations that Mr. Cade sexually harassed co-workers by: (1) touching them; (2) making inappropriate and unwelcome remarks about their clothing, hair, and figures; (3) putting his foot up on chairs or desks and touching his genital/crotch area while speaking with them; and (4) having a conversation about sex and incest with a coworker without a work-related reason to discuss the topic. DFS's letter further noted that Mr. Cade had admitted to its investigators that he had hugged co-workers (side-to-side), commented on their clothing and hair, placed his foot on desks and chairs, and picked up a co-worker and carried her part of the way across a street to avoid a snowdrift, without her permission. DFS letter also stated that during its investigation it found that Mr. Cade violated agency policy by excessively reimbursing a benefits recipient. The letter concluded that a twenty-day suspension without pay was merited. Because Mr. Cade had just served a twenty-day suspension without pay, the letter said, DFS considered this to be sufficient punishment. DFS declined to take further disciplinary action. A few weeks after receiving this letter, Mr. Cade requested a transfer to another job because he said the atmosphere in his office had become uncomfortable as a result of the allegations against him. He was aware that the job he requested to be transferred to was a demotion. The transfer was granted. In late 1994 and early 1995, the PAB held hearings both on Mr. Cade's appeal of his twenty day "investigatory" suspension pursuant to the August 27, 1993, letter and on the merits of the September 28, 1993, disciplinary suspension for sexual harassment.[1] The PAB issued its decision in May 1995, concluding that Mr. Cade gave both male and female co-workers what it styled as "compliments, friendly consolation, and assistance" at nearly every opportunity. These included hugging co-workers side-to-side, touching their shoulders, arms, and back, and repeatedly complimenting or commenting on their clothes. Mr. Cade would stop his comments about a particular person if she complained, and would apologize, but would continue to make similar comments about other women. He also admitted he had a "bad habit" of putting his leg up on a chair and of "hitching up" his pants when he did so by pulling them up at the crotch area. It concluded, however, that there was no evidence that Mr. Cade's conduct was motivated by a sexual purpose, that intra-office politics may have played a role in some of the allegations, and that his conduct thus did not constitute sexual harassment. It therefore found that his suspension was not for good cause and not for the good of the service. The PAB further found that Mr. Cade had been denied due process in the suspension 550 process because DFS did not give Mr. Cade an adequate pre-suspension opportunity to contest the allegations against him by failing to inform him in the letter of suspension of the factual basis for the allegations. More specifically, the PAB's ruling stated: The letter of suspension ... failed to give [Mr. Cade] an opportunity prior to the suspension to show reasons why such suspension should not be effected. The letter of suspension did not inform [him] about the events or acts that demonstrated the conduct that supported the charges against him. The failure of the letter to so inform [him] prevented him from preparing a response that would show reasons why such suspension should not be effected. The failure of the letter to so inform [him], along with the Appointing Authority's [DFS's] orders to [him] that obstructed [his] efforts to otherwise inform himself, also hindered and obstructed his preparation of an informed appeal from the twenty day suspension during the thirty day appeal period that followed the effective date of the twenty day suspension. As a remedy, the PAB ordered Mr. Cade to receive the wages lost during the suspension. It further found that Mr. Cade's request for a transfer really constituted an involuntary demotion since it arose out of the alleged sexual harassment. It therefore ordered Mr. Cade be reinstated to the position from which he had requested a transfer, and the payment of back wages he would have earned had he remained in that position. DFS appealed the PAB's decision to the circuit court, which affirmed. DFS now appeals to this Court, alleging that: (1) it satisfied the requirements of due process by notifying Mr. Cade on August 27, 1993, that he was being suspended because of allegations of sexual harassment by co-workers and by telling him how he could appeal the suspension; (2) the PAB did not have the power to order Mr. Cade's reinstatement to his prior position; and (3) the PAB erred in finding that Mr. Cade's conduct did not constitute sexual harassment. II. STANDARD OF REVIEW On appeal, we review the decision of the PAB, not the decision of the circuit court. McCall v. Goldbaum, 863 S.W.2d 640, 642 (Mo.App.1993); Prenger v. Moody, 845 S.W.2d 68, 75 (Mo.App.1992). We generally give great deference to the decisions of administrative agencies such as the PAB on questions of fact, and do not substitute our judgment for that of the agency unless its action exceeds its authority; is not based on substantial and competent evidence on the record as a whole; is unreasonable, arbitrary or capricious; involves an abuse of discretion; or is otherwise unlawful. § 536.140, RSMo 1986;[2]Hattervig v. de la Torre, 870 S.W.2d 895, 897 (Mo.App.1993); Prenger, 845 S.W.2d at 73. We are not bound by the PAB's decision on questions of law. McCall, 863 S.W.2d at 642. III. DFS VIOLATED MR. CADE'S DUE PROCESS RIGHTS IN FAILING TO ADEQUATELY NOTIFY HIM OF THE ALLEGATIONS AGAINST HIM The first issue before us is whether DFS's August 27, 1993, letter notifying Mr. Cade of his twenty-day suspension pending investigation of the allegations against him failed to fulfill the requirements of due process because it did not adequately inform Mr. Cade of the events or acts supporting the allegations against him, thereby preventing him from contesting the suspension or making an informed appeal of the suspension. DFS argues that it satisfied the requirements of due process in its letter of suspension by informing Mr. Cade of the fact that he was being suspended pending an investigation of sexual harassment charges, by stating that he could respond to the suspension before it went into effect, and by notifying him of his right to appeal the suspension. A. Missouri Requires Specific Pre-Suspension Notice. DFS asserts that it should not be required to tell a person accused of sexual 551 harassment any details about the nature of the allegations of sexual harassment before it investigates them. In support, it argues that if it had to give the suspended employee information about the nature of the charges then it would, in effect, have to conduct some investigation of the charges before an employee could be suspended pending investigation, for absent such a presuspension investigation it could not delineate the events and acts supporting the allegations it was investigating. This, it argues, would be circular and would deprive it of a toolsuspension pending investigationnecessary to protect fellow workers. DFS also suggests that Section 36.370(1) specifically permits it to suspend employees before it has conducted any investigation. The portion of this statute relied on by DFS states: An Appointing Authority [such as DFS] may, for disciplinary purposes, suspend without pay any employee in his division for such length of time as he considers appropriate, not exceeding twenty working days.... In case of a suspension, the director shall be furnished with a statement in writing specifically setting forth the reasons for such suspension. Upon request, a copy of such statement shall be furnished to such employee. With the approval of the director, any employee may be suspended for a longer period pending the investigation or trial of any charges against him. ... § 36.370(1) (emphasis added). We disagree with DFS's contention that this section of the statute permits it to suspend an employee during an investigation without giving the employee notice of the allegations against the employee. The statute authorizes suspension of an employee by an appointing authority, but only up to a limit of twenty days and only for disciplinary reasons.[3] Moreover, Section 36.370 specifically requires that in the case of any suspension over five days in length, an employee so requesting shall be furnished with a copy of "a statement in writing specifically setting forth the reasons for such suspension " (emphasis added). Thus, Section 36.370 itself requires that specific reasons for the suspension must be given to the employee. In addition, we note that the Code of State Regulations (CSR) implements Section 36.370 by setting out detailed procedures which appointing authorities (such as Mr. Cade's DFS supervisors) must follow in suspending an employee. These regulations required DFS to provide Mr. Cade with both specific reasons for his suspension and an opportunity to respond to the reason prior to his suspension, stating: Any employee being suspended shall be furnished with a statement in writing specifically setting forth the reasons for the suspension. A copy of the statement shall be furnished to the director. No suspension of a regular employee for a period longer than five (5) workdays shall take effect unless prior to the effective date, the appointing authority gives to the employee a written statement setting forth in substance the reason, informs the employee of appeal rights, provides the employee with an opportunity to respond to the reason prior to the effective date, and files a copy of the statement of the reason with the director. Any regular employee who is suspended more than five (5) workdays may appeal in writing to the board within thirty (30) days after the effective date thereof setting forth in substance reasons for claiming the suspension was for political, religious or racial reasons or not for the good of the service, as provided in 1 CSR 20-4.010(1)(D) and section 36.390, RSMo. 1 CSR 20-3.070(3)(A) (emphasis added). Rules and regulations, if duly promulgated, have the force and effect of law. Prenger, 845 S.W.2d at 78; Boot Heel Nursing Ctr., 552 Inc. v. Missouri Dep't of Social Servs., 826 S.W.2d 14, 16 (Mo.App.1992). DFS offers no reason why it was not required to abide by this regulation. We find that it failed to do so. While Missouri cases have not addressed the specificity required to meet the requirements of Section 536.370 and 1 C.S.R. 20-3.070(3)(A), we have construed a similar "specificity" requirement in Section 36.380, which governs the dismissal of employees. We have found that "the purpose of the requirement of the statute that the substance of the reason for dismissal be set forth, and under [the supplementing regulation] that specific instances be set forth as to incompetency or inefficiency, is so [the employee] can protect himself ...." Holley v. Personnel Advisory Bd., 536 S.W.2d 830, 832 (Mo.App.1976) (emphasis added). See also Brixey v. Personnel Advisory Bd., 607 S.W.2d 825, 827 (Mo.App.1980); Giessow v. Litz, 558 S.W.2d 742, 749 (Mo.App.1977). Similarly, under Section 36.370, Mr. Cade was required to have sufficiently detailed notice so that he could protect himself from unfair suspension. The notice he received on August 27, 1993, did not meet that standard. B. Mr. Cade Had A Property Interest in His Job. Our interpretation of these statutes and regulations is in accordance with, and indeed is required by, fundamental principles of due process. Due process also assists us in determining just what kind of notice was required to be given to Mr. Cade. To invoke the protections of procedural due process, a person must have been deprived of a property or liberty interest recognized and protected by the Due Process Clauses of the United States and Missouri Constitutions. Moore v. Bd. of Educ., 836 S.W.2d 943, 947 (Mo. banc 1992). Property interests are created and defined by rules or understandings that originate in sources such as state law.[4] For employees to have a property interest in their employment, they must have a legitimate claim of entitlement to it.[5] This claim typically arises from contractual or statutory limitations on the employer's ability to terminate an employee. The hallmark of a property interest is an individual entitlement grounded in state law which cannot be removed except "for cause."[6] Mr. Cade was a regular employee under the state merit system. § 36.020(10). Because regular, nonprobationary employees of the state may be discharged only "for cause," under state law he had a constitutionally protected property interest in his continued employment.[7] As such, under Missouri law he had a right to notice and a hearing prior to being discharged from his employment. Moore, 836 S.W.2d at 947; Belton, 708 S.W.2d at 137-38; Chapman v. Bd. of Prob. & Parole, 813 S.W.2d 370, 371 (Mo. App.1991). Indeed, the United States Supreme Court has gone so far as to say that "the root requirement" of the Due Process Clause is "that an individual be given an opportunity for a hearing before he is deprived of any significant property interest." Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 542, 105 S. Ct. 1487, 1493, 84 L. Ed. 2d 494, 503-04 (1985) (quoting Boddie 553 v. Connecticut, 401 U.S. 371, 379, 91 S. Ct. 780, 786, 28 L. Ed. 2d 113 (1971)) (emphasis in original). Prior Missouri cases have not had occasion to address whether an employee's property interest in his job also entitles him to protection from suspension without due process. Courts in other jurisdictions, however, have repeatedly held that state laws giving employees the right to certain notice or procedures before suspension, or allowing suspension only for cause, thereby create a property interest in the job which entitles the employee to adequate due process protections prior to suspension.[8] As noted above, Missouri statutes such as Section 36.370(1) similarly give employees who are to be suspended for more than five days the right to specific written notice prior to suspension and permit suspension only for certain causes set out 1 CSR 20-3.070(2). We thus find that Missouri government employees are similarly entitled to due process protections of their property interest in their jobs prior to suspension for more than a five-day period. C. What Notice Was Required. Having determined that due process protections were implicated by Mr. Cade's suspension without pay, we must now determine whether the notice received by Mr. Cade was adequate. In order to so determine, we in effect must decide how much pre-suspension process is due an employee. Loudermill, 470 U.S. at 541, 105 S. Ct. at 1492, 84 L.Ed.2d at 503; Belton, 708 S.W.2d at 137. At the most fundamental level, due process requires that a person facing the deprivation of a property interest must receive notice and an opportunity for a hearing "appropriate to the nature of the case." Moore, 836 S.W.2d at 947; Belton, 708 S.W.2d at 137 (citing Loudermill and Roth). The opportunity to be heard must be given at a meaningful time and in a meaningful manner. Id. The Supreme Court has adopted a balancing test to be used in determining the degree of process one must be accorded. See Mathews v. Eldridge, 424 U.S. 319, 335, 96 S. Ct. 893, 903, 47 L. Ed. 2d 18, 33 (1976). The Mathews test balances three interests: (1) the private interest affected by the action; (2) the risk of an erroneous deprivation of that interest under the procedures being used; and (3) the government's interest in resolving the matter without being unduly burdened by additional or substitute procedural requirements. In analyzing the first Mathews factor, we find that Mr. Cade's interest in his job was significantly affected by the suspension imposed by DFS. Mr. Cade had an important and protected interest in seeing that his employment and receipt of the benefits of that employment was not interrupted for a significant period. Belton, 708 S.W.2d at 138. The 554 twenty day suspension was for more than five days and was without pay, thereby depriving Mr. Cade of a primary benefit of his employment. In Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 105 S. Ct. 1487, 84 L. Ed. 2d 494 (1985), the Supreme Court noted the importance of depriving a person of pay, stating it had previously "recognized the severity of depriving a person of the means of livelihood." Id. at 543, 105 S. Ct. at 1494. Cf. Federal Deposit Ins. Corp. v. Mallen, 486 U.S. 230, 240, 108 S. Ct. 1780, 1789, 100 L. Ed. 2d 265, 277 (1988) (noting that an employee's interest in remaining employed should not be "interrupted without substantial justification"). We conclude that Mr. Cade's suspension for twenty days without pay significantly affected his property interest in his job and that he thus had a due process right to adequate notice prior to being suspended without pay. In regard to the second Mathews factor, we find that there was a substantial risk of an erroneous deprivation of Mr. Cade's interest by DFS's use of the very general kind of notice provided to Mr. Cade in the August 27, 1993, letter of suspension ("You are being suspended pending further investigation of charges of alleged sexual harassment of fellow employees by your actions which are perceived by them as created a hostile work environment...."). To require only notice of such broad generalities would be to render Mr. Cade's due process protections worthless. Almost any type of vague allegation could be used to temporarily suspend an employee, no matter how groundless or unsupported by facts, and the employee would have insufficient information to prepare a meaningful response. A direct relationship exists between the information provided the employee and the risk of erroneous deprivation: the less specific the information provided to the employee, the greater the risk of erroneous deprivation. Requiring more specific notice of the allegations will reduce this risk. In regard to the third Mathews factor, we find that giving employees such as Mr. Cade additional and more detailed notice will not unduly burden DFS or other government agencies. Indeed, as we have already noted, applicable Missouri statutes and regulations already require that an employee be given specific reasons for suspension prior to the time the suspension becomes effective. While we agree with DFS that it has a great interest in ensuring that its personnel are not menacing others or violating the law, it has offered no evidence that providing Mr. Cade with a more detailed description of the allegations and allowing him a reasonable time to respond to them before the suspension without pay took affect would prevent it from protecting that interest. To the contrary, DFS had already placed Mr. Cade on paid administrative leave; he was not even in contact with employees or clients of DFS at the time of his suspension. While courts have recognized that there may be emergency situations in which an immediate suspension is required, such a suspension was therefore not needed here. Even had it been, numerous courts have suggested that the various interests involved can all be protected by suspending the employee with, rather than without, pay.[9] Applying these principles here, we find that Mr. Cade's initial twenty day suspension was invalid because he did not receive pre-suspension notice adequate to allow him to understand the nature of the allegations sufficiently to defend against them and oppose the suspension. We affirm the PAB's order to the extent that it so held. In so holding we do not, as DFS suggests, require a full hearing on the merits of the allegations against Mr. Cade before he could have been suspended during DFS's investigation. Rather, we mean simply that he was entitled to pre-suspension notice adequate to permit him to be heard at a meaningful time and in a meaningful manner by allowing him enough information to be able to defend the allegations and to present conflicting evidence in a timely manner. As the Eighth Circuit noted in addressing a similar issue regarding the type of pre-suspension notice 555 required, procedural due process requires, at a minimum, that the employee should have been given "an opportunity, prior to suspension and discharge, to make a rebuttal to the charges made against him." Kennedy v. Robb, 547 F.2d 408, 415 (8th Cir.1976). This amounts to more than the type of conclusory notice given here, but does not require a full evidentiary hearing. Id. Because the August 27, 1993 notice provided by DFS did not meet this standard, it did not give Mr. Cade adequate due process notice of his suspension. Accordingly, the suspension was invalid. Turning to DFS's twenty day disciplinary suspension of Mr. Cade on September 28, 1993, we find that it too failed to protect Mr. Cade's due process rights, for the suspension it ordered ran retroactively. He thus had already served the suspension before he received any notice of it at all. For the reasons just discussed, such post suspension notice does not comport with due process. The September 28, 1993 suspension was therefore also invalid.[10] Because of our resolution of the notice issue and our consequent determination that Mr. Cade's suspensions were invalid, we do not reach the issue whether Mr. Cade's conduct constituted sexual harassment which would have justified a suspension should proper notice have been given. We simply hold that, should DFS decide to pursue the merits of the sexual harassment allegations against Mr. Cade further, it must first give him proper notice as required by Missouri statutes and by due process.[11] As noted earlier, the PAB also ruled that Mr. Cade should be reinstated to his old position with back pay because he requested transfer only due to the unpleasant working environment created by the allegations against him. We agree with DFS that the PAB did not have the power to order such relief under Section 36.390(5). That section provides that state employees who are dismissed, involuntarily demoted, or suspended may appeal as follows: Any regular employee who is dismissed or involuntarily demoted for cause or suspended for more than five working days may appeal in writing to the board within thirty days after the effective date thereof, setting forth in substance his reasons for claiming that the dismissal, suspension or demotion was for political, religious, or racial reasons, or not for the good of the service. Upon such appeal, both the appealing employee and the Appointing Authority whose action is reviewed shall have the right to be heard and to present evidence at a hearing which, at the request of the appealing employee, shall be public. At the hearing of such appeals, technical rules of evidence shall not apply. After the hearing and consideration of the evidence for and against a suspension or demotion, the board shall approve or disapprove such action and in the event of a disapproval the board shall order the reinstatement of the employee to his former position and the payment to the employee of such salary as he has lost by reason of such suspension or demotion. ... § 36.390(5) (emphasis added). The statute thus permits reinstatement of an employee who has improperly been involuntarily demoted and who has appealed his demotion. Mr. Cade voluntarily chose to request a demotion rather than continue to work with those who had made accusations against him. DFS did not require him to do so, however. Moreover, even had we believed the transfer was the equivalent of an involuntary demotion, it was not the subject of an appeal by Mr. Cade. He therefore was *556 not entitled to reinstatement, and the PAB erred in ordering him reinstated to his former position with back pay. For the reasons stated above, we reverse so much of the PAB's order as required Mr. Cade to be reinstated in his old position with back pay and as reached the merits of the question whether Mr. Cade engaged in sexual harassment. We affirm so much of the PAB's decision as found that Mr. Cade received inadequate due process notice of his suspension and that both of his suspensions were improper and he is entitled to receive back pay for the period of his suspension. We remand for further proceedings in accordance with this opinion. All concur. NOTES [1] Mr. Cade did not separately appeal his September 28, 1993, retroactive disciplinary suspension. DFS did not object to consideration of the merits of that suspension at the hearing before the PAB, however. Quite to the contrary, at the hearing, both parties agreed that the PAB should reach the merits of the suspension and offered evidence on the merits. Now, on appeal, DFS argues that because of the lack of a separate appeal of the September 28, 1993, order, we should not consider the merits of the suspension. We disagree. Under Sections 536.063.3 and 36.390.5 this issue was tried by consent and is thus properly before us. For similar reasons, we reach Mr. Cade's claim on appeal that he received inadequate notice of his August 1993 suspension, despite the fact that at the hearing he told the hearing officer he would waive that issue so that the hearing officer could reach the merits of the allegations of harassment. We find that the issue of the adequacy of the notice Mr. Cade received is nonetheless properly before us by consent of the parties under Sections 536.063.3 and 36.390.5 because evidence as to it was adduced, the hearing officer and the PAB ruled on the issue, and both parties have briefed this issue in detail in this Court. [2] All statutory citations are to Missouri Revised Statutes 1986, as supplemented in 1993, unless otherwise stated. [3] Longer suspensions are permitted only if approved by the Director "pending the investigation or trial of any charges against him." Id. We need not decide whether such a longer suspension pending investigation of the sexual harassment claims against Mr. Cade is permitted by the latter language, or whether, as Mr. Cade suggests, the use of the word "charges" means this longer suspension applies only to "criminal" charges. This is irrelevant, for here Mr. Cade was suspended only for twenty days. [4] Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 538, 105 S. Ct. 1487, 1491, 84 L. Ed. 2d 494, 501 (1985); Board of Regents v. Roth, 408 U.S. 564, 569-70, 92 S. Ct. 2701, 2705, 33 L. Ed. 2d 548 (1972); Belton v. Bd. of Police Comm'rs, 708 S.W.2d 131, 136 (Mo. banc 1986); Walker v. Personnel Advisory Bd., 670 S.W.2d 1, 3 (Mo.App. 1984). [5] Roth, 408 U.S. at 577, 92 S. Ct. at 2709, 33 L.Ed.2d at 561; Pace v. Moriarty, 83 F.3d 261 (8th Cir.1996); Winegar v. Des Moines Indep. Community Sch. Dist., 20 F.3d 895, 899 (8th Cir.), cert. denied, 513 U.S. 964, 115 S. Ct. 426, 130 L. Ed. 2d 340 (1994). [6] Logan v. Zimmerman Brush Co., 455 U.S. 422, 430, 102 S. Ct. 1148, 1155, 71 L. Ed. 2d 265, 274 (1982); Walker, 670 S.W.2d at 3; see Bishop v. Wood, 426 U.S. 341, 344, 96 S. Ct. 2074, 2077, 48 L. Ed. 2d 684 (1976); Winegar, 20 F.3d at 899. [7] McCall, 863 S.W.2d at 642; Prenger, 845 S.W.2d at 77-78; Chapman v. Bd. of Prob. & Parole, 813 S.W.2d 370, 371 (Mo.App. 1991); see Kennedy v. Robb, 547 F.2d 408, 413 (8th Cir. 1976) (so ruling under Missouri law), cert. denied, 431 U.S. 959, 97 S. Ct. 2687, 53 L. Ed. 2d 278 (1977); Belton, 708 S.W.2d at 137 (ruling that under section 84.600 nonprobationary police officers have a property interest in continued employment since they may be discharged or removed only "for cause"). [8] See Goss v. Lopez, 419 U.S. 565, 573-74, 95 S. Ct. 729, 735-36, 42 L. Ed. 2d 725, 734 (1975) (ruling that a state law giving students entitlement to public education created a property interest preventing suspension without due process); Jones v. City of Gary, 57 F.3d 1435, 1440-41 (7th Cir.1995) (ruling that a city ordinance allowing firemen to be suspended only "for cause" created a protected property interest); Winegar, 20 F.3d at 899 (noting the parties' agreement that a teacher had a protected property interest stemming from a state law establishing a continuing contract that prevented his four-day suspension without pay without due process); Bartlett v. Fisher, 972 F.2d 911, 915 (8th Cir.1992) (ruling that due process standards explained in Goss apply to suspension of Missouri highway patrol trooper who has a property interest in retaining his job); Bailey v. Kirk, 777 F.2d 567, 574-75 (10th Cir.1985) (ruling that city personnel policy allowing suspensions only "for cause" created a property interest preventing a sheriff's four-day suspension without pay without due process); Best v. Boswell, 696 F.2d 1282, 1290 (11th Cir.) (ruling that state law investing state merit system employees with a protected property interest required notice and a hearing before they can be suspended), cert. denied, Best v. Eagerton, 464 U.S. 828, 104 S. Ct. 103, 78 L. Ed. 2d 107 (1983); cf. Listenbee v. City of Milwaukee, 976 F.2d 348, 353-54 (7th Cir.1992) (ruling that a city employee's property interest in employment did not extend to suspensions because the state statute governing the suspension of city employees allowed them to be suspended for any reason); Hughes v. Whitmer, 714 F.2d 1407, 1415 (8th Cir.1983) (ruling that under a Missouri law leaving transfer decisions to the discretion of the Superintendent, a state trooper had no property interest in his troop assignment preventing transfer without a hearing), cert. denied, Hughes v. Hoffman, 465 U.S. 1023, 104 S. Ct. 1275, 79 L. Ed. 2d 680 (1984). [9] See Loudermill, 470 U.S. at 545, 105 S. Ct. at 1495, 84 L.Ed.2d at 505-06 (suggesting that government employers could avoid potential problems in suspending employees by suspending them with pay); Everett v. Napper, 833 F.2d 1507, 1512 (11th Cir.1987). [10] Because we hold that the September 28, 1993 notice did not constitute pre-suspension notice at all, we do not reach the question whether the information it provided him about the allegations against him would have been adequate if the notice had been given to him prior to suspension. [11] Because it may be relevant in any further proceedings, however, we also note that the PAB committed an error of law when it determined in its decision below that, while Mr. Cade did engage in conduct which fell within the terms of DFS's sexual harassment policy, he did not violate the policy because his purpose in engaging in the conduct was not sexual. As has been repeatedly recognized, the purpose of the conduct need not be sexual in nature. See, e.g., Hall v. Gus Constr. Co., Inc., 842 F.2d 1010, 1014 (8th Cir.1988).	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4474772/	OPINION. Leech, Judge: We pass the first two grounds of petitioner’s attack on the respondent’s determinations and proceed to a consideration of the third. The stipulated facts disclose that a new partner was admitted as of April 1, 1944, and another as of June 1, 1944. It is the contention of petitioner that the admission of new partners did not have the effect of dissolving the petitioner. The respondent, on the other hand, argues that the old partnership was dissolved and a new partnership was created upon the admission of each new partner. Under the Uniform Partnership Law in effect in the State of Michigan during the pertinent period, the entrance of a new partner with the consent of the old did not dissolve the partnership.2 In Helvering v. Archbald, 70 Fed. (2d) 720; certiorari denied, 293 U. S. 594, it is stated: * * * Whatever was the rule at common law, the entrance of a new partner with the consent of all the old partners is not now a cause of dissolution under the Partnership Law of New York (Consol. Law N. Y. c. 39) §62; Cameron v. Com’r., 56 F. (2d) 1021 (C. C. A. 3).3 We hold that petitioner was not dissolved by the entrance of a new partner. Section 20.29 of the Uniform Partnership Act of Michigan, which provides for dissolution “caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business,” relied upon by the respondent, is not applicable here in any event because no partner ceased to be associated in the carrying on of the business during the entire period January 1 to June 1,1944. Section 403 (c) (6) of the Renegotiation Act as amended by section 701 of the Revenue Act of 1943 furnishes respondent with his only authority to make the contested determinations. That section 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 * * . Section 403 (a) (8) defines the term “fiscal year” as the taxable year of the contractor or subcontractor under chapter 1 of the Internal Revenue Code. Section 48 (a) of chapter 1 of the code defines the “taxable year” as the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed. While a partnership is not a unit for taxation, it is a tax computing unit. Section 187 of the code requires a partnership to make a return for each taxable year, as a basis for determining the distributive share of the partnership profits taxable to each partner. It has been stipulated that petitioner’s taxable year commenced on January 1, 1944. And, since the admission of a new partner did not terminate the partnership, it follows that respondent had no authority to determine excessive profits for either of the two periods in question, that there could be no excessive profits determined under the law for those two respective periods, and that, accordingly, there are no excessive profits under the law for those two periods. Mrs. Grant Smith, 26 B. T. A. 1178; Oklahoma Contracting Corporation, 85 B. T. A. 232; Estate of Cyrus H. K. Curtis, 36 B. T. A. 899. It is true that the three cited cases involve redeterminations of income tax deficiencies in which this same question as to fiscal year was raised under the Internal Revenue Code as is raised here under the Renegotiation Act involving redetermination of determinations of excessive profits. However, the similarity in the proceedings before this Court of those arising under the Renegotiation Act to those arising under the code is sufficiently great, we think, to render those cases strongly persuasive, if not controlling, authorities for our position here. In Maguire Industries, Inc., 12 T. C. 75 (on appeal, App. D. C.), we dismissed the proceeding for lack of jurisdiction because, for one reason, the determination had not been made “with respect to a fiscal year.” But the basis of our jurisdiction there was section 403 (e) (2)4 of the Renegotiation Act as added by section 701 of the Revenue-Act of 1943, whereas the basis of our jurisdiction here is section 403 (e) (1) of the Renegotiation Act as added by section 701 of the Revenue Act of 1943.5 No such requirement appears in the latter provision. Reviewed by the Court. Decisions will be entered for the petitioners. Michigan Ann. Stat., vol. 14, sec. 20.31 (C. L. 29, § 9871). Sec. 62 of the Partnership Law of New York is identical with section 20.31 of the Uniform Partnership Act of Michigan. * * Any contractor or subcontractor * * * aggrieved by a determination of the Secretary made prior to the date of the enactment of the Revenue Act of 1943, with respect to a fiscal year ending before July 1, 1943, as to the existence of excessive profits, which is not embodied in an agreement with the contractor or subcontractor, may * * * file a petition with The Tax Court of the United States for a redetermination thereof * * . Sec. 403 (e). (1) Any contractor or subcontractor aggrieved by an order of the Board determining the amount of excessive profits received or accrued by such contractor or subcontractor may, within ninety days (not counting Sunday or a legal holiday in the District of Columbia as the last day) after the mailing of the notice of such order under subsection (c) (1), file a petition with The Tax Court of the United States for a redeter-mination thereof, * *	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621149/	ROBERTA SCHREIBER ULMER, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Ulmer v. CommissionerDocket Nos. 12602-91, 14026-91, 14348-91, 14349-91United States Tax CourtT.C. Memo 1994-234; 1994 Tax Ct. Memo LEXIS 241; 67 T.C.M. (CCH) 3008; May 26, 1994, Filed 241 R determined that the Estate of C (EC) was liable for gift and estate taxes that arose from alleged gifts made by C to C's children, petitioner R (PR) and petitioner M (PM), during the taxable period ending June 30, 1979. Sec. 2501, I.R.C. Specifically, R asserts that C entered into an enforceable contract to make gifts to PR. PR denies that C was obligated to transfer property under New York law. R also asserts that C sold an interest in the family business to PM for less than adequate consideration. PM argues that adequate consideration was provided for the transfer of the business interest. R has also asserted that PR and PM are liable as transferees for gift taxes owed due to taxable transfers during that period. Sec. 6324(b), I.R.C. R also asserts that EC is liable for a fraud penalty pursuant to sec. 6653(b), I.R.C.1. Held: EC is not liable for gift tax owed for a transfer of property from C to PM during the period in issue. No gift tax liability arose because the promised transfer did not occur during that period. 2. Held, further, EC is not liable for gift tax owed for gifts made by C to PR during the period in issue. No gift tax liability arose242 because C was not obligated under New York law to make transfers to PR during that period. 3. Held, further, PR is not liable as a transferee under sec. 6324(b), I.R.C.4. Held, further, PM is not liable as a transferee under sec. 6324(b), I.R.C.5. Held, further, EC is not liable for a fraud penalty pursuant to sec. 6653(b), I.R.C., because R has not carried her burden of proving liability. Rule 142(b), Tax Court Rules of Practice and Procedure.For petitioners: Matthew F. Sarnell, Stanley L. Kantor, Gregory A. Robinson, and Melvin Paradise. For respondent: Frances Ferrito Regan and Pamela L. Cohen. HALPERNHALPERNMEMORANDUM FINDINGS OF FACT AND OPINION HALPERN, Judge: Respondent has determined deficiencies in both estate tax and gift taxes, and additions to tax in connection with the gift taxes, against petitioner Estate of Cecil Rosenblatt, Deceased, Roberta Schreiber Ulmer, Hannah Goldstein, and Iris Gruenebaum, Administratrices, C.T.A. (the Estate). Respondent has also determined that petitioners Roberta Schreiber Ulmer (Roberta) and Marvin Rosenblatt (Marvin) are liable as transferees of the property of Cecil Rosenblatt (Cecil) for243 a deficiency in gift tax, and for an addition to tax, for the calendar quarter ended June 30, 1979. Because these cases involve common questions of fact, they have been consolidated for trial, briefing, and opinion. The deficiency in estate tax determined by respondent against the Estate in docket No. 14349-91 is $ 187,490.73. The deficiencies in gift tax and additions to tax determined by respondent against the Estate in docket No. 14348-91 are as follows: Additions to TaxPeriod Ending Gift Tax6653(b) 2June 30, 1979$ 1,751,979.70$ 875,989.85December 31, 19793,393.001,696.50June 30, 198018,217.509,108.75September 30, 198017,360.718,680.36December 31, 19801,332.50666.25March 31, 198141,650.0020,825.00June 30, 198145,488.9522,744.48December 31, 198184,706.0442,353.02December 31, 198287,633.8543,816.93December 31, 198431,375.3015,687.65Total2,083,137.551,041,568.79244 The liability as a transferee determined by respondent against Roberta in docket No. 12602-91 is $ 600,000. The liability as a transferee determined by respondent against Marvin in docket No. 14026-91 is $ 1,800,000. The parties have settled numerous issues and have left for our decision only the ramifications of certain events occurring during June 1979. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the taxable period in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some facts have been stipulated and are so found. The stipulation of facts filed by the parties and accompanying exhibits are incorporated herein by this reference. ResidencesAt the time the petitions in these cases were filed, the residence of Marvin was in New York, New York, and the residence of Roberta was in Baltimore, Maryland. The FamilyCecil was the wife of William Rosenblatt, deceased (William). Their children were Marvin, Roberta, Hannah Goldstein (Hannah), and Iris Gruenebaum (Iris) (collectively, the children). Cecil died on May 12, 1986. William's DeathWilliam predeceased245 Cecil, dying on January 31, 1977. At the time of William's death, he owned a 90-percent interest in the William Rosenblatt partnership (WR), and Marvin owned the remaining 10-percent interest. The business of WR was to purchase and sell unmounted diamonds and to create diamond jewelry for sale to various jewelry dealers and retailers. William died testate. Pursuant to his last will and testament (the will), William made the following bequests: He bequeathed $ 10,000 to each of the children. He also bequeathed $ 60,000 in trust for the benefit of each of Roberta, Hannah, and Iris (but not Marvin). 3 He bequeathed a portion of the residue of his estate outright to Cecil. He bequeathed the remaining portion in trust (the residuary trust) for the benefit of Cecil and the children. 246 Cecil had a life interest in the residuary trust. She also had a particular power to appoint trust assets to the children. The children were to share in the remainder of the residuary trust on the death of Cecil. RenunciationsFollowing William's death, in April 1977, each of the children renounced his or her interest in the residuary trust and Roberta, Iris, and Hannah each renounced her interest in the $ 60,000 bequeathed in trust for her benefit. The residuary trust was neither established nor funded, and the entire residue of William's estate passed outright to Cecil. William's partnership interest in WR was included in the residue. That interest was valued on the estate tax return for William's estate at $ 632,607. That amount was accepted after audit of the return by the Internal Revenue Service. In consideration of Marvin's renunciation of his interest in the residuary trust, he received an additional 11.25-percent interest in WR, which increased his interest to 21.25 percent. Successor PartnershipIn January 1978, Cecil and Marvin formed a partnership under the name of William Rosenblatt (WR2) to continue the business of WR. The initial capital of 247 WR2 consisted of the net worth of WR. That capital was shown in the WR2 partnership agreement (the partnership agreement) as having been contributed 78.75 percent by Cecil and 21.25 percent by Marvin. The partnership agreement provided that, initially, Cecil was to have a 90-percent interest in the profits and losses of WR2 and Marvin was to have a 10-percent interest. The partnership agreement further provided that, beginning in the second year of the partnership, and concluding in the fifth year of the partnership, Cecil's interest in profits and losses was to be decreased (in 10-percent increments, annually), and Marvin's increased (similarly), until each was to receive 50 percent of profits and losses. In June 1978, Marvin's interest in the capital of WR2 was increased from 21.25 percent to 28.37 percent in consideration of his contributing certain pieces of jewelry to the partnership. The June 1979 Agreement and the Supplemental AgreementOn June 30, 1979, Cecil and Marvin entered into two agreements, one an untitled three-page agreement (the June 1979 agreement) and the second a supplement thereto (the supplemental agreement). By way of the June 1979 agreement, Cecil248 and Marvin agreed that (1) in consideration of receiving $ 270,000 from Marvin, Cecil would sell to him a 46.63-percent interest in WR2 (increasing his capital interest therein from 28.37 percent to 75 percent) and (2) the partnership agreement would be modified, as set forth. In part the June 1979 agreement provides: WITNESSETH:WHEREAS, the parties hereto did form a partnership under the firm name WILLIAM ROSENBLATT * * ; and * * WHEREAS, CECIL ROSENBLATT has agreed to sell to MARVIN ROSENBLATT so much of her interest in the partnership as shown on the books of the partnership as of this date to enlarge MARVIN ROSENBLATT'S partnership capital interest to 75% and reduce her capital interest in the partnership to 25%, for $ 270,000 NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, it is agreed as follows: 1. CECIL ROSENBLATT agrees to accept, concurrent with the signing hereof, the sum of $ 270,000.00 from MARVIN ROSENBLATT for the sale by her to MARVIN ROSENBLATT of a 46.63% interest in the partnership doing business under the name WILLIAM ROSENBLATT, it being agreed: (a) That effective June 1, 1980, after payment of the first promissory249 note provided for in Subparagraph (d) of this paragraph, the partnership interests of the parties hereto and the division of net profits and losses of the partnership shall be: MARVIN ROSENBLATT75%CECIL ROSENBLATT25%(b) That after June 1, 1980, the net profits and losses of the partnership shall be divided * * in accordance with the capital interests as set forth in Subparagraph (a) of this paragraph. * * * (d) The $ 270,000.00 purchase price shall be evidenced by a series of five promissory notes * * * The first four of said notes shall be in the sum of $ 50,000 each, payable June 1, 1980, June 1, 1981, June 1, 1982, and June 1, 1983; the fifth note shall be in the sum of $ 70,000, payable June 1, 1984.The supplemental agreement provides: SUPPLEMENTAL AGREEMENT TO AGREEMENT DATED JUNE 30, 1979, BY AND BETWEEN CECIL ROSENBLATT AND MARVIN ROSENBLATTWith respect to the interests of the parties over and above their partnership interest in the firm conducted under the partnership name of WILLIAM ROSENBLATT * * * the parties agree as follows: 1. With respect to the three daughters of CECIL ROSENBLATT, to wit: ROBERTA, IRIS and HANNAH, 250 it is agreed that they will be paid out the balance due them pursuant to the understanding made at the time of the death of WILLIAM ROSENBLATT, by June 30, 1980, and that after they are paid out the full amount which was promised to them as aforesaid, no funds of the partnership conducted under the name of WILLIAM ROSENBLATT will be paid to any of the said daughters of CECIL ROSENBLATT, except by mutual consent of the parties hereto. If, after they have been paid out the full amount promised to them, business funds of the partnership conducted under the name of WILLIAM ROSENBLATT are paid to any of the said girls without the consent of MARVIN ROSENBLATT, such advances shall be charged against the capital account of CECIL ROSENBLATT in the said partnership. 2. MARVIN ROSENBLATT agrees and does hereby renounce any and all right he may have to contest the Last Will and Testament of CECIL ROSENBLATT, his mother, it being agreed and understood that CECIL ROSENBLATT shall have the right to dispose of her Estate as she sees fit, without interference or claims on the part of MARVIN ROSENBLATT.Dated: June 30, 1979 CECIL ROSENBLATT MARVIN ROSENBLATT The December 1979 Agreement251 In December 1979, Cecil and Marvin entered into another untitled agreement, whereby Cecil agreed to sell to Marvin her remaining 25-percent interest in WR2 for $ 109,601. The sale was to be effective January 1, 1980, and Marvin was to pay for the transfer by delivering to Cecil a series of promissory notes. Also, Cecil agreed to waive paragraph 1(a) and (b) of the June 1979 agreement, so that, effective January 1, 1980, all profits and losses of WR2 would belong to Marvin. Marvin's NotesBefore negotiating the June 1979 agreement and the supplemental agreement, Marvin prepared a list of issues to be taken up with Cecil. Among the items on the list are: Payout the girls within 9 months, by Dec. 31, 1979, amount agreed upon. * No further business funds to girls - except if mutually agreed and that it reduces your equity. Raise my percent of business to 75%, by Dec. 31, 1979, by signed amendment to partnership agreement (the payout of the girls represents over 50% of original value of business without consideration for taxes, fees and expenses) * Thereafter, I may use all business funds as I choose. * As previously agreed, all 'other' funds are mine, now 252 and in the future You retain 25% of business, with the same buy-out provisions of our partnership agreement, except that I have the option for a total buyout after X (to be determined) number of years. You receive approximately $ 270,000 - in cash or short-term promissory notes secured by the business, by Dec. 31, 1979 (to raise my equity to 75% of an assumed business value of $ 600,000 of recent accounting record. I must pay the difference between 75% of $ 600,000, or $ 450,000, and the approximately 30%, or $ 180,000, which I now possess $ 450,000 - 180,000 = $ 270,000)The Ledger CardsAt the time of Cecil's death in 1986, three sets of ledger cards (the ledger cards) were found in a locked cabinet among her papers at WR2's offices. Each set of ledger cards is titled Roberta, Hannah, or Iris, respectively. The entries on the ledger cards were handwritten by Cecil. The information contained on the ledger cards is attached to this report as an appendix. When summed, the amounts shown on the ledgers titled "Roberta", "Iris", and "Hannah" total $ 571,117, $ 574,473, and $ 602,214, respectively. OPINION I. IntroductionMany of the issues presented in253 these consolidated cases have been settled by the parties. The remaining issues all turn on our analysis of certain events occurring during June 1979. Respondent maintains that, by virtue of two agreements entered into by Cecil and her son, Marvin, in June 1979 (the June 1979 agreement and the supplemental agreement), Cecil made taxable gifts to Marvin in the amount of $ 1,800,000 and to each of his sisters, Roberta, Hannah, and Iris, in the amount of $ 600,000 apiece. Respondent also maintains that the underpayment in gift tax for the calendar quarter ended June 30, 1979 (the June 30 quarter), resulting from Cecil's failure to report such gifts, was due to fraud. Petitioners deny that any such gifts were made and deny any fraud. Marvin and Roberta are petitioners only because respondent has determined that each is liable as a transferee of the property of Cecil for the gift tax liability (and addition to tax) for the June 30 quarter. II. Respondent's DeterminationsIn respondent's notice of deficiency issued to the Estate with respect to the gift tax, respondent states simply that she has determined that, during the June 30 quarter, Cecil (1) made a gift of 50 percent254 of a jewelry business with a fair market value of $ 1,800,000 to her son Marvin and (2) made cash gifts of $ 600,000 (taking into account certain settled issues) to each of her daughters, Roberta, Hannah, and Iris (collectively, the daughters or sisters, as appropriate). In her answer, at trial, and on brief, it has become clear that respondent's determination of gift tax liability for the June 30 quarter, is not as straightforward as her notice of deficiency would suggest. Respondent's determination is based on her assumption that the jewelry business in question (WR2, a partnership business) was, at the time of the claimed gifts, worth in excess of $ 3,600,000, and that, by virtue of the June 1979 agreement and the supplemental agreement, Cecil (1) made a bargain sale of a portion of her interest in WR2 to Marvin for $ 1,800,000 less than that portion was worth and (2) obligated herself to pay $ 600,000 to each of her daughters. We will address, in turn, respondent's determinations of gifts made by Cecil to (1) Marvin and (2) his sisters. Our decisions on those issues make it unnecessary for us to address the valuation issue raised by respondent's determinations. III. 255 Gift to MarvinA. IntroductionDuring 1979, the gift tax was imposed for each calendar quarter on the transfer of property by gift during that quarter. Sec. 2501. Section 2512 concerns itself with the valuation of gifts. In pertinent part, section 2512 provides: (a) If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift. (b) Where the property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar quarter.Respondent's position is simple: On June 30, 1979, pursuant to the June 1979 agreement, Marvin purchased from Cecil a 46.63-percent interest in WR2, paying for that interest $ 1,800,000 less than it was worth. As explained more fully below, in section IV, respondent has determined that the interest was worth $ 1,800,000 more than Marvin paid for it because respondent believes that Cecil contemporaneously made an equal gift to her daughters. Petitioners' principal position256 also is simple: Marvin paid full value for the partnership interest, thus negating the possibility of a gift. B. AnalysisRespondent's focus is on June 30, 1979. Respondent argues that, on that date, by virtue of the June 1979 agreement, Marvin received a 46.63-percent interest in WR2 from Cecil. As a result, respondent claims that, had WR2 been liquidated at the close of business on June 30, 1979, Marvin would have been entitled to receive 75 percent of the capital of WR2: Cecil transferred complete dominion and control of a 46.23% [sic.] interest in the capital account of WR2 to petitioner Marvin on June 30, 1979. * * * If Cecil had died between June 30, 1979 and June 30, 1980, the assets of the partnership, after payments of debts to other creditors, would have been distributed to petitioner Marvin pursuant to the capital account. SeeN.Y. Partnership L. § 71(c) (McKinney 1988).We do not quarrel with respondent's interpretation of New York partnership law. We disagree, however, that, on June 30 1979, pursuant to the June 1979 agreement, Cecil made a contemporaneous transfer of any percentage of her partnership interest to Marvin. The June 1979 agreement257 states that Cecil has agreed to sell to Marvin so much of her interest in WR2 as "to enlarge MARVIN ROSENBLATT'S partnership capital interest to 75% and reduce her capital interest in the partnership to 25%". In consideration of the transfer of a 46.63-percent interest in WR2 to Marvin (to increase his partnership interest to 75 percent), Marvin is obligated to pay to Cecil $ 270,000, by delivering to her five notes in that total amount. Marvin's partnership interest in WR2 is not to increase to 75 percent immediately, however. The pertinent provision of the June 1979 agreement is as follows: That effective June 1, 1980, after payment of the first promissory note provided for in Subparagraph (d) of this paragraph, the partnership interests of the parties hereto and the division of net profits and losses of the partnership shall be:MARVIN ROSENBLATT75%CECIL ROSENBLATT25%[Emphasis added.] Respondent recognizes the difficulty that paragraph 1(a) presents to her. She insists, however, that, contrary to the inference to be drawn from that paragraph, Marvin's interest in WR2 immediately increased to 75 percent. She argues that: "According to the Forms258 K-1 that were filed with WR2's federal partnership return for the taxable year ending December 31, 1979, the partnership reported that petitioner Marvin had a 75 percent interest in the partnership's capital account and that Cecil had only retained a 25 percent interest." Petitioners argue that respondent has failed to take account of another agreement entered into between Cecil and Marvin subsequent to the June 1979 agreement and before the Forms K-1 in question were filed. Pursuant to that agreement, entered into on December 31, 1979 (the December 1979 agreement), among other things, (1) Cecil agreed to sell to Marvin her remaining 25-percent interest in WR2 and (2) Cecil waived paragraph 1(a) of the June 1979 agreement. That last provision of the December 1979 agreement, argues petitioner, would account for the 75-percent capital interest shown for Marvin on the Forms K-1. The provision of the December 1979 agreement in question reads as follows: CECIL ROSENBLATT hereby waives the provisions of Paragraphs (1)(a),(b),(c) and (e) of the June 30, 1979 Agreement between the parties, it being understood and agreed that all profits and losses effective January 1, 1980 of the259 business hereafter conducted under the name WILLIAM ROSENBLATT shall belong to MARVIN ROSENBLATT. [Emphasis added.]Because Cecil's waiver was not effective until January 1, 1980, we do not agree with petitioners that the December 1979 agreement adequately explains the entries on the 1979 Forms K-1. Nevertheless, and although the Forms K-1 are some evidence to the contrary, we find that Marvin's partnership (capital) interest in WR2 did not increase from 25 percent to 75 percent on June 30, 1979. In making that finding, we rely primarily on the June 1979 agreement, which we believe contemplates that Marvin's partnership interest would remain at 25 percent until June 1, 1980, or later, if he were to default on the first promissory note. Such a delayed effective date makes sense to us when we consider Marvin's notes made in anticipation of negotiating with Cecil, Marvin's testimony, and the supplemental agreement. As discussed more fully in section IV, below, Marvin understood that, before June 30, 1980, Cecil was free to withdraw money from WR2 to meet certain obligations of hers to her daughters. It is clear to us that Marvin acknowledged the existence of that obligation, 260 but wanted it satisfied out of partnership assets that he did not view as his. Again as explained more fully below, we view the delayed effective date provision as a method both to allow and to control Cecil's use of partnership funds to satisfy her obligation to her daughters. To the extent that the Forms K-1 indicate that Marvin's interest in the capital of WR2 increased to 75 percent before January 1, 1980, we believe that they are in error. Respondent has asserted no theory with regard to the claimed gift by Cecil to Marvin other than that, on June 30, 1979, as a result of the June 1979 agreement, Marvin received a gift from Cecil because Marvin's capital interest in WR2 increased by 46.63 percent on that date. In particular, respondent has not argued that a transfer by gift constituted a binding promise to transfer a capital interest to Marvin in the future. Such a theory would give rise to difficult questions of valuation, based, in part, on Cecil's control of her capital interest during the interim. Clearly, respondent knows how to argue that a binding promise constitutes a transfer by gift. That is precisely the argument that respondent makes with regard to the daughters. 261 Because respondent has not argued a gift by promise, and because of the valuation difficulties presented, we will not go beyond respondent's theory that Marvin's capital interest in WR2 increased by 46.63 percent on June 30, 1979. Having found that, as a result of the 1979 agreement, Marvin's capital interest in WR2 did not increase during the June 30 quarter, we hold that there was no transfer by gift from Cecil to Marvin during that quarter on account of the sale by Cecil to Marvin of a 46.63-percent interest in WR2. IV. Gifts to the DaughtersA. IntroductionRespondent has determined transfers by gift, by Cecil, of $ 600,000 to each of the daughters during the June 30 quarter, although respondent states on brief that payment of such amounts occurred between August 1979 and the end of 1983. Respondent explains that seeming discrepancy by arguing that, in June 1979, Cecil made a binding promise to make a gift, which itself constitutes a transfer by gift. We agree that a binding promise to make a gift can constitute a transfer by gift for purposes of section 2501; we do not agree, however, that such a binding promise was made here. B. Promises to Make a Gift262 The rule with regard to a promise to make a gift has been well stated by the Court of Appeals for the Second Circuit, in Rosenthal v. Commissioner, 205 F.2d 505">205 F.2d 505, 509 (1953), revg. and remanding 17 T.C. 1047">17 T.C. 1047 (1951): "a binding promise to make a gift becomes subject to gift taxation in the year the obligation is undertaken and not when the discharging payments are made." That was the view of the Tax Court in Rosenthal v. Commissioner, 17 T.C. 1047">17 T.C. 1047 (1951), which was revd. and remanded by the Court of Appeals for the Second Circuit, 205 F.2d 505">205 F.2d 505 (2d Cir. 1953), to determine whether the binding promise in question was made in consideration of the release of the taxpayer from an earlier binding promise. See also Estate of Copley v. Commissioner, 15 T.C. 17">15 T.C. 17, 20 (1950) (payments made in 1936 and 1944, pursuant to a binding contract (an antenuptial agreement) entered into in 1931, were not taxable as gifts in 1936 and 1944), affd. 194 F.2d 364">194 F.2d 364 (7th Cir. 1952). C. The Supplemental AgreementRespondent finds binding263 promises to make gifts to the daughters in the supplemental agreement. The supplemental agreement was entered into in connection with the June 1979 agreement, whereby, among other things, Cecil agreed to sell to Marvin a 46.63-percent interest in WR2. The pertinent language of the supplemental agreement is as follows: 1. With respect to the three daughters of CECIL ROSENBLATT, to wit: ROBERTA, IRIS and HANNAH, it is agreed that they will be paid out the balance due them pursuant to the understanding made at the time of the death of WILLIAM ROSENBLATT, by June 30, 1980, and that after they are paid out the full amount which was promised to them as aforesaid, no funds of the partnership conducted under the name of WILLIAM ROSENBLATT will be paid to any of the said daughters of CECIL ROSENBLATT, except by mutual consent of the parties hereto. * * Neither the supplemental agreement nor the June 1979 agreement spells out either (1) the understanding made at the time of the death of William Rosenblatt or (2) any balance due pursuant thereto. Respondent has proposed a finding that there was an agreement between Cecil and the children that she would distribute to them the264 assets left in her control after the death of William. Based on the ledger cards found among Cecil's papers after her death, respondent theorizes that the agreement was to pay to each daughter $ 600,000 (and to Marvin $ 1,800,000). Reading the supplemental agreement together with the June 1979 agreement, respondent concludes that the daughters are third party beneficiaries of an agreement between Cecil and Marvin, with an enforceable right to receive $ 600,000 apiece. D. The Daughters' PositionThe daughters' position is clear: While all of The Daughters received some financial support or gifts from Decedent at times, which gifts are the subject of settled issues in this case, none of them ever received a promise of payment of $ 600,000.00 each and none of them ever received property or money with value anywhere near $ 600,000.00.While the daughters' position leaves open the possibility that they were promised, and received, some amount (still substantial), but nowhere near $ 600,000, we need not explore that possibility. The daughters challenge directly respondent's fundamental premise that the supplemental agreement constituted a binding promise to make gifts265 to them: "The Supplemental Agreement created no enforceable promise to transfer money or property by gift to The Daughters, as third party beneficiaries, as the promise was too vague and ambiguous to be enforceable." Fundamentally, we agree with the daughters. E. Analysis1. Third Party BeneficiariesThe Court of Appeals for the Second Circuit (to which an appeal in this case might lie) has recently summarized pertinent aspects of the law of New York (the applicable law) concerning third party beneficiaries: An intended third party beneficiary will be found when it is appropriate to recognize a right to performance in the third party and the circumstances indicate that the promisee intends to give the third party the benefit of the promised performance. Restatement (Second) of Contracts § 302 (1981). New York has adopted the Restatement approach in determining whether a third party beneficiary exists. Septembertide Publishing, B.V. v. Stein & Day, Inc., 884 F.2d 675">884 F.2d 675, 679 (2d Cir 1989); Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38">66 N.Y.2d 38, 44-45, 495 N.Y.S.2d 1">495 N.Y.S.2d 1, 5, 485 N.E.2d 208">485 N.E.2d 208, 212 (1985).266 In determining third party beneficiary status it is permissible for the court to look at the surrounding circumstances as well as the agreement. Septembertide, 884 F.2d at 679; Fourth Ocean, 66 N.Y.2d at 45, 495 N.Y.S.2d at 5, 485 N.E.2d at 212. Moreover, it is well-settled that the obligation to perform to the third party beneficiary need not be expressly stated in the contract. Vista Co. v. Columbia Pictures Indus., Inc., 725 F. Supp. 1286">725 F.Supp. 1286, 1296 (S.D.N.Y. 1989); see also Strauss v. Belle Realty Co., 98 A.D.2d 424">98 A.D.2d 424, 426-27, 469 N.Y.S.2d 948">469 N.Y.S.2d 948, 950 (2d Dep't 1983) (to enforce promise third party need not be identified in contract but need only show intent of contracting parties to benefit third party), aff'd65 N.Y.2d 399">65 N.Y.2d 399, 492 N.Y.S.2d 555">492 N.Y.S.2d 555, 482 N.E.2d 34">482 N.E.2d 34 (1985).Trans-Orient Marine Corp. v. Star Trading & Marine, Inc., 925 F.2d 566">925 F.2d 566, 573 (2d Cir. 1991). Restatement, Contracts 2d, sec. 302 (sec. 302), distinguishes an "intended" 267 beneficiary, who acquires a right by virtue of a promise, from an "incidental" beneficiary, who does not. See Restatement, Contracts 2d, secs. 304, 315. Sec. 302 provides: Intended and Incidental Beneficiaries (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance; (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.2. Cecil's Promise; Marvin's IntentCecil was the promisor and Marvin was the promisee. We must determine whether the sisters were intended or incidental beneficiaries of a promise by Cecil to Marvin to pay money to them. There is convincing evidence that (1) Marvin believed that his mother was obligated to his sisters and (2) the supplemental agreement manifested his intent for her to meet her obligations. 268 4 Marvin testified that his "intention was to have her meet her obligations * * within a brief period of time." Cecil signed the supplemental agreement. We thus have no trouble in concluding that the first requirement of sec. 302 is met: The daughters could show that recognition of a right to performance in them (to have Cecil discharge her obligation to them) "is appropriate to effectuate the intention of the parties". Sec. 302(1). Nevertheless, we believe that the evidence contradicts the second requirement of sec. 302: Either (1) "the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary" or (2) "the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance". Sec. 302(1)(a) and (b), respectively. 269 Respondent has not argued (nor would we agree) that Marvin had any obligation to his sisters. Rather, respondent argues: Petitioner Marvin's stated purpose in signing the Supplemental Agreement was to require his mother to meet her obligation to his sisters based on a promise that she had made to them at the time of the death of their father. Petitioner Marvin intended that his sisters would benefit from this contract. The plain meaning of the Supplemental Agreement is evidence of petitioner Marvin's intent to make the contract enforceable by the sisters.We infer that respondent believes that the conditions of sec. 302(1)(b) are satisfied. We disagree. We do not believe that Marvin intended to give his sisters the benefit of the promised performance, except incidentally. Indeed, Marvin testified that, after his father's death, "I wasn't on very close terms with, particularly, two of my three sisters." We believe that Marvin intended to give himself the benefit of the promised performance, by limiting what money his mother could take out of WR2 to benefit his sisters, and by providing a limited period during which she could do that. On cross examination, Marvin 270 testified as follows: Q When you started negotiating with your mother to obtain the controlling interest in William Rosenblatt -- A Yes. Q -- was it a concern of yours that your mother had given support to your sisters in the past? A Yes. Q During these negotiations, were you concerned that, if she continued to give considerable support, she would be taking money from the business to do so? A Could you repeat the question? Q Were you concerned, during these negotiations, that if she continued to give large amounts of money to your sister[s] -- were you concerned that she would take it out of the business if she retained an interest in the business? A I was concerned that any money she took out of the business was partially mine and she shouldn't do that because -- without my approval, small or large sums. * * * Q Was your purpose for entering into * * * [the supplemental] agreement with your mother to assure that you would limit her access to business funds to make any payments to your * * * sisters? A No, not to make any. I think it states that, if I accepted her withdrawals, that it would be okay, but it would be debited to her account. I think 271 that's plainly stated. Q So when I say -- but -- but in other words, the purpose of the agreement was to limit and control your mother's withdrawal from the business to make payments to your sister -- sisters. In other words -- A I wanted to -- Q -- they were controls put on your mother, this agreement. A The purpose of this was basically to go public. It's just to formalize something, where it was said specifically that she could not. Now, that didn't mean that she pilfered the cookie jar. It just meant the I wanted it recorded. I wanted it said, written down. * * Q Did you enter into this agreement because you felt it was necessary that the -- that some kind of controls be put on your mother withdrawing funds? A I would term it necessary. As I said, I wanted to go public. I believed that, if I went totally public in the sense that -- a document -- she would live up to it.We think that Marvin's intent is well summed up in the final exchange between respondent's counsel and Marvin. Marvin intended to memorialize how and when his mother could take money out of the business to benefit his sisters. For a year, she was free to do so without his assent, 272 subject only to the implicit limitation that, were she to take too much money out of WR2, Marvin might refuse to honor his notes given to her in consideration for the 46.63-percent interest he was to receive from her on June 1, 1980. Thereafter, the supplemental agreement required Marvin to consent if Cecil wanted to pay out WR2 funds to her daughters. All of this, we believe, was principally for Marvin's benefit. Marvin testified that he did not know whether his sisters were aware of the supplemental agreement. Roberta and Iris testified that they did not have knowledge of the supplemental agreement at any time before the death of Cecil in 1986. That the daughters were not aware of the supplemental agreement is consistent with Marvin not having their benefit as his principal concern. Moreover, in large part because Marvin did not tell them about it, and based on the record as a whole, we do not believe that he intended to vest in his sisters a right to enforce the supplemental agreement, and we so find. We find that Cecil's daughters were incidental beneficiaries of the agreement between Cecil and Marvin, with that agreement giving them no enforceable rights against Cecil. 273 Cf. Burke v. North Huntingdon Twp. Municipal Authority, 390 Pa. 588">390 Pa. 588, 136 A.2d 310">136 A.2d 310, 315 (1957) (contract stating that third party's claims would be paid out of the purchase price of property "simply purports to set up an intra-party plan for the payment of the seller's obligations"). Therefore, we hold that Cecil made no transfer by gift to them during the June 30 quarter pursuant to the June 1979 agreement and supplemental agreement. As previously stated, we do not have before us those periods during which respondent claims there were actual transfers of funds to the daughters pursuant to the obligations that respondent claims arose from the 1979 agreement and supplemental agreement. 5274 V. Transferee Liability and FraudSince we hold that no taxable gifts were made by Cecil to petitioner Roberta or to petitioner Marvin during the period in issue, we must conclude that no transferee liability is imposed on Marvin and Roberta under section 6324(b). Furthermore, respondent has not carried her burden of proof with respect to whether petitioner Estate of Cecil is liable for the fraud penalty for fraudulent underpayment of gift tax during the period in issue. Sec. 6653(b); Rule 142(b). VI. ConclusionInasmuch as we have found that petitioners have carried their burden of proof that no taxable gifts occurred during the period in issue, it necessarily follows that respondent's transferee liability and fraud penalty determinations cannot be sustained. We do not uphold respondent's determinations in any respect. To reflect the foregoing and due to agreements between the parties, Decisions will be entered under Rule 155. AppendixEntries on the ledger cards found among Cecil Rosenblatt's papers after her death. The ledger titled "Roberta" contains the following entries:DATEITEMAMOUNTAug/79$ 360,000 Oct 4/795,000 1/6/80Dep25,000 3/20/8015,000 4/16/8015,000 1/1/8130,000 6/15/8130,000 8/24Watch250 8/26Diam Choker6,000 10/26Gave Storagerfor Paintings4,720.8010/26CR Gave Ck to Hackett4,268.50Jan/82Dep10,000 1/15/82CR check to Hackett4,509 1/8/82Lisa500 3/5Pearls486 illegibleillegible383 1/10/83Dep30,000 6/16Dep30,000 The ledger titled "Iris" contains the following entries:DATEITEMAMOUNTAug/79$ 360,000 9/5/795,000 2/7/8025,000 3/24/80Broach & Chain6,500 5/7/80Gold [illegible]125 5/27/80Ring & Brac.2,350 5/27/80Diam. Earclips2,500 6/13/80Cash5,000 6/13/80Gold Choker500 8/4/80Mary's Saph. Ring1,650 8/28/80Star Earclips2,500 9/15/80Watch1,800 Cartier Gold Brac.1,000 9/18/80Cufflinks600 9/23/80Lapis Brac & Clips550 Pr. Pearl Earclips550 9/23/80Diam. Bracelet4,500 10/2/80Silver Box & Brac.100 10/28Ruby Earrings(Mary)600 12/4Cufflinks140 12/5Chains & Boxes325 12/9/80Cash5,000 12/15/80Repairing Diam &285.65Appraisal1,135 1/1/81Dep.20,000 5/5/81Ruby Rings1,200 Cufflinks100 5/12/8115.20 Emer. Cut30,000 6/9/81Mtg. of 15.20 Em.Cut2,072 6/11/81Jossie Studs400 8/26/81Susan Earrings[illegible]400 9/3/81Pearls1,000 9/8/81Watch A.P.1,000 9/10/81Red Watch900 9/14/81Rolex Watch1,500 9/22/811 Ruby & 1 Saph. Earrings1,200 11/20Choker Diam10,500 11/23C.R. loaned I.G.1,000 1/22/82C.R. loaned I.G.7,000 Cufflinks 2 Pr.300 1/26Gold Brac. lengthen150 3/16Pearl Earclips65 3/31/823 Watches3,900 4/8Saph Ring2,800 5/10Earclips1,075 1/83M.R. Pd.30,000 6/8/8330,000 12/3Cufflinks200 The ledger titled "Hannah" contains the following entries:DATEITEMAMOUNTAug/79$ 360,000 Oct 2/7920,000 Dec 18/795,000 Jan 16/8025,000 Jan 16/80Dep5,000 Feb 8/802,500 Feb 14/802,500 3/11/80loaned by CR to HG1,500 4/9/80loaned to HG by CR15,000 6/20/80by CR7,000 8/15/80by CR5,000 8/28/80by CR1,500 9/29/80by CR1,000 10/20/8by CR5,000 Airline Ticket868 Diam Studs600 11/13/80CK by CR2,500 11/24/80Studs600 12/5/80Ck by CR2,053 12/15/802 Diam Hearts750 2/27/81CK by CR1,500 3/27/81Airline Tickets1,044.904/3/81Ck by CR2,000 4/8/81Ck by CR25,000 6/19/81Ck to HG4,000 6/19/81Ck to HG1,000 8/25/81Gave to HG2,500 10/19/81Ck to HG5,000 12/23/81Ck to HG5,000.903/1/82Ticket to Paris 2/16685 Ticket to LA84 3/4CR [illegible]25,000 Ticket to LA 2/984 Ticket to Geneva260 Ticket to NY 3/1392 5/29Ck to HG5,000 12/7CR sent ck5,000 3,500 1/83MR pd21,500 5/3Airline292 6/6/83MR pd30,000 275 Footnotes1. Cases of the following petitioners are consolidated herewith: Roberta Schreiber Ulmer, docket No. 12602-91; Marvin Rosenblatt, docket No. 14026-91; Estate of Cecil Rosenblatt, Deceased, Roberta Schreiber Ulmer, Hannah Goldstein, and Iris Gruenebaum, Administratrices, C.T.A., c/o Matthew F. Sarnell, Esq., docket Nos. 14348-91 and 14349-91.↩2. I.R.C., sec. 6653(b) was amended by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 325(a), 96 Stat. 324, 616. The TEFRA version of sec. 6653(b) modified the calculation of the fraud addition. The statutory notices with respect to the periods ending Dec. 31, 1982, and Dec. 31, 1984 (after the effective date of TEFRA), do not expressly indicate whether respondent used the post-TEFRA formulation. Since the parties have settled the issues regarding those years, we assume that the parties have taken into account any relevant changes in the law. All citations to sec. 6653↩ are intended to refer to that section as effective during the relevant periods in issue.3. The will explains William's failure to make such a bequest to Marvin by stating that Marvin had been assisted in establishing himself in his own business and was a partner with his father in the William Rosenblatt partnership, from which he would draw a salary until the assets of that business were liquidated.↩4. With regard to the supplemental agreement, Marvin was asked on direct examination: Q And can you tell me, did you have an idea or some comprehension of what was meant by the phrase "pursuant to the understanding made at the time of the death of William Rosenblatt"?He answered: A I believe it meant that my mother had reached some understanding with my sisters based on a promise that she had made to them at that time [at the time of their renunciations of bequests under William's will], and my purpose in signing this and having it -- agreeing to it was to require by mother to meet her obligations to my sisters.↩5. Nor need we consider whether those transfers were not transfers by gift because supported by the consideration of the daughters' previous renunciations of bequests under the will of William Rosenblatt. See, e.g., Rosenthal v. Commissioner, 205 F.2d 505">205 F.2d 505 (2d Cir. 1953), revg. and remanding 17 T.C. 1047">17 T.C. 1047↩ (1951).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621151/	Penley Realty Corp. v. Commissioner. Vernon Avenue Realty Corp. v. Commissioner.Penley Realty Corp. v. CommissionerDocket Nos. 70944, 70945.United States Tax CourtT.C. Memo 1960-193; 1960 Tax Ct. Memo LEXIS 94; 19 T.C.M. (CCH) 1005; T.C.M. (RIA) 60193; September 21, 196094 Alexander M. Inselman, Esq., 261 Broadway, New York, N. Y., for the petitioners. William F. Chapman, Esq., for the respondent. RAUMMemorandum Findings of Fact and Opinion Respondent determined the following deficiencies in income tax for the calendar year 1953: Penley Realty Corp$4,500.00Vernon Avenue Realty Corp.494.11The issue is whether the amounts of $18,000 and $2,400 paid by petitioners Penley Realty Corporation and Vernon Avenue Realty Corporation, respectively, to their officer-stockholders in 1953 constituted "reasonable" compensation for services rendered by them to petitioners within the meaning of Section 23(a)(1)(A), Internal Revenue Code of 1939. Findings of Fact Some of the facts have been stipulated, and, as stipulated, are incorporated herein by reference. Penley Realty Corporation (hereinafter referred to as Penley) is a corporation organized in 1947 under the laws of the State of New York. It was engaged in the business of buying, improving, operating and selling real property. It filed its corporate income tax return for the year 1953 with the director of internal revenue for the first district of New York. 95 Penley's stockholders have at all times been James Newell, Frederick Silva and Dominick Forte, each of whom owns five shares of capital stock of a total of 15 shares issued by the corporation representing a capital investment on its books of $13,930.34. Vernon Avenue Realty Corporation (hereinafter referred to as Vernon) is a corporation organized in 1947 under the laws of the State of New York. It engaged in the business of buying, operating and selling real property. It filed its corporate income tax return for the year 1953 with the director of internal revenue for the first district of New York. Vernon's stockholders have at all times been James Newell, Frederick Silva and Dominick Forte, each of whom owns an equal number of shares of its capital stock representing a capital investment on its books of $3,000. In April 1947, Frederick Silva entered into a contract for the purchase of premises at 53-02 - 37th Street, Long Island City, New York, for $7,000. On June 4, 1947, Silva assigned the contract to Penley and Penley acquired title paying $4,000 cash and executing its purchase money bond and mortgage for $3,000. On July 3, 1953, Penley sold premises 53-02 - 37th Street, 96 Long Island City, New York, for $16,500, taking back a purchase money mortgage for $7,000. On May 5, 1947, Silva entered into a contract to purchase premises 23-81 - 21st Street, Long Island City, New York, for $12,000, subject to a mortgage in the amount of $2,840. Penley acquired title thereto on June 30, 1947, after taking an assignment of the aforementioned contract from Silva. On May 17, 1948, Penley sold premises 23-81 - 21st Street, Long Island City, New York, for $16,000, taking back a purchase money mortgage in the amount of $10,000. On March 28, 1949, Penley purchased land at 56th Road and 48th Street, Long Island City, New York, for $4,000. 48th Street, Long Island City, New York, for $15,384.75. On May 25, 1949, Penley purchased the land and building at 116-120 King Street, Brooklyn, New York, for $50,000, paying $20,000 cash and executing a purchase money mortgage for $30,000. On July 16, 1951, Penley purchased for $29,000 in cash two adjoining buildings at 1084-86 and 1088-1090 Bedford Avenue, Brooklyn, New York. Each building had eight residential tenants. In addition, 1084-1086 Bedford Avenue had two store tenants. 1088-1090 Bedford had two stores occupied97 by one tenant. On May 6, 1953, Penley obtained a mortgage loan of $14,000 from the East New York Savings Bank on premises 1084-1086 and 1088-1090 Bedford Avenue, Brooklyn, New York. In order to obtain the mortgage loan, Penley had to and did deposit with the bank the sum of $500 to be held in escrow until the removal of a notice of violation filed against the building. Penley also had to deposit an additional $600 in escrow with the bank to assure painting of the exterior parts of the building. On January 12, 1953, Penley sold the premises at 1084-1086 and 1088-1090 Bedford Avenue, Brooklyn, New York, for $37,500, taking back a purchase money second mortgage for $18,493.04. In 1947 Dominick Forte purchased a sixfamily dwelling at 5612 Starr Avenue, Long Island City, New York, on behalf of himself, Newell and Silva. In February 1952, Forte executed a deed transferring title to this property to Penley. On November 15, 1951, Penley bid in at an auction sale conducted by the City of New York premises at 134 Franklin Street, Brooklyn, New York, for $4,025. Penley took title thereto on June 4, 1952, and resold the property in July 1952 for $4,500. On July 30, 1952, Penley entered98 into a written contract with Terminal Metal Products Corp., the tenant in possession of premises 116-118 King Street, Brooklyn, New York, to permit Terminal Metal Products Corp. to enter into a contract with Commercial Metals Company for the purchase of certain property on Review Avenue, Long Island City, New York. After the written contract between Penley and Terminal Metal Products Corp. was signed, Terminal Metal Products Corp. did not acquire title to the Review Avenue property and remained in possession of the King Street property as a tenant thereof. On or about March 23, 1949, Penley acquired by purchase from the City of New York for the sum of $3,399.17 assignments of tax liens on the following property, all located in the Borough of Queens, City of New York: Lien No.Sec.BlockLot968573362319685833623296859336233On or about May 23, 1949, Penley assigned the aforesaid tax liens to John E. Sorenson. According to the books of Penley its capital, loans payable to officer-stockholders, officers' salaries and interest on officers' loans for each of the years 1947 through 1953, were as follows: Loans Payableto Officer-StockholdersOfficers'YearCapital StockDecember 31SalariesInterest1947$13,930.34NoneNoneNone194813,930.34$ 1,200.00$ 3,600.00None194913,930.3421,703.95900.00None195013,930.3422,902.053,000.00None195113,930.3445,678.243,000.00None195213,930.3430,507.1912,000.00None195313,930.3417,157.1918,000.00$1,800.0099 The amounts paid by Penley as salaries to its officers in each of the years 1947 to 1953, inclusive, were as follows: NewellForteSilvaTotal1947NoneNoneNoneNone1948$1,200.00$1,200.00$1,200.00$ 3,600.001949300.00300.00300.00900.0019501,000.001,000.001,000.003,000.0019511,000.001,000.001,000.003,000.0019524,000.004,000.004,000.0012,000.0019536,000.006,000.006,000.0018,000.00The following is a schedule showing gross income, as reported by Penley in its Federal income tax returns for 1947 to 1953, inclusive, officers' salaries, and net income after officers' salaries: Net Income(Loss) afterGross In-Officers'Officers'YearcomeSalariesSalaries1947$ 2,585.00None$470.2819486,979.80$ 3,600.00648.5019495,384.62900.0063.5119508,198.973,000.00(256.17)195111,958.403,000.00185.30195227,252.6612,000.00688.13195327,847.6818,000.00179.97In September 1949 Vernon acquired, by purchase, title to premises at 572 Morgan Avenue, Brooklyn, New York. The purchase price for the acquired property100 was $7,031.25 of which the amount of $900 was paid in cash and the balance was represented by a mortgage held by the Greenpoint Savings Bank in the sum of $6,131.25. This was the first purchase of realty by Vernon subsequent to the date of its incorporation. On January 5, 1950, Vernon purchased premises at 154 Grattan Street, Brooklyn, New York, for a purchase price of $5,000. On October 2, 1950, Vernon purchased premises at 56-18 - 46th Street, Laurel Hill, Queens, New York, for $2,100. On January 30, 1953, Vernon sold premises at 572 Morgan Avenue and 154 Grattan Street for a total sales price of $13,500. The sale was subject to a mortgage on 572 Morgan Avenue held by Greenpoint Savings Bank, on which there was then a balance owing of $5,156.25. Vernon took back a second mortgage on the property at 572 Morgan Avenue in the amount of $1,343.75, and a purchase money mortgage on the property at 154 Grattan Street in the sum of $2,000, receiving the balance of $5,000 in cash. Following is a schedule taken from the books of Vernon, showing the capital, loans payable to officer-stockholders, officers' salaries and interest on officers' loans for each of the years 1950 to 1953, inclusive: 101 Loans Payableto Officer-Stock-CapitalholdersOfficers'YearStockDec. 31SalariesInterest1950$3,000.00$4,455.95$1,300.00None19513,000.004,788.45800.00None19523,000.004,372.122,400.00None19533,000.004,036.122,400.00NoneThe amounts paid by Vernon as salaries to its officers in each of the years 1950 to 1953 were as follows: Officers' SalariesNewellForteSilvaTotal1950$300.00$700.00$300.00$1,300.001951400.00None400.00800.001952800.00800.00800.002,400.001953800.00800.00800.002,400.00 No salaries were paid to the officers prior to 1950. The gross income, officers' salaries, and net income after officers' salaries, as reported by Vernon in its Federal income tax returns for the years 1950 to 1953, were as follows: Net IncomeGrossOfficers'(Loss) afterYearIncomeSalariesOfficers' Salaries1950$4,189.93$1,300.00$ 57.4619514,084.50800.00(92.63)19525,556.062,400.00121.4619533,185.682,400.00183.33The following schedule shows the amounts paid102 to James Newell in the years 1947 through 1953, by various corporations with which he was connected: SalaryEarnings1947194819491950195119521953TotalPenley Realty0$1200$ 300$1000$1000$4000$ 6000$13500Vernon Ave.03004008008002300Realty49th Ave.2000160150250900800011460Corp.Newell-Silva370.29370.29(Partnership)American01550235010008001323.482816.679840.15Sawdust Corp.Newell Sawdust$450035001800250500010550& Supply Corp.Totals$4500$8250$4610$2450$2700$7523.48$17986.96$48020.44The following schedule shows the amounts paid to Fred Silva in the years 1947 through 1953, by various corporations with which he was connected: SalaryEarnings1947194819491950195119521953TotalPenley Realty0$1200$ 300$1000$1000$4000$ 6000$13500Vernon Ave.03004008008002300Realty49th Ave. Corp200016015025090080001146020th Ave.0026002600Corp.Newell-Silva370.30370.30(Partnership)American01550235010008001323.482816.679840.15Sawdust Corp.Newell Sawdust$450035001800250500010550& Supply Corp.Totals$45008250$4610$2450$2700$7523.48$20586.97$50620.45103 The following schedule shows the amounts paid to Dominick Forte in the years 1947 through 1953, by various corporations with which he was connected: Salary Earnings1947194819491950195119521953TotalPenley0$1,200$ 300$1,000$1,000$4,000$ 6,000$13,500RealtyVernon070008008002,300Ave.Realty20th Ave.002,6002,600Corp.AmericanSawdustCorp.01,5502,3501,0008001,323.483,635.1710,658.65Totals0$2,750$2,650$2,700$1,800$6,123.48$13,035.17$29,058.65The stock of the Newell Sawdust and Supply Corporation was owned by Newell and Silva. It owned some rental property. Prior to 1947, Newell, Silva and Forte had engaged in the sawdust business for approximately 20 years. After the 5302 - 37th Street property was purchased by Penley in 1947, they made repairs and improvements on the shed and two one-car garages on the property, laid a concrete floor, and rented the property to the American Sawdust Corporation, the stock of which was owned equally by them. Although one purpose of the repairs and improvements was to rehabilitate the property104 for eventual sale, the American Sawdust Corporation would not have rented the property if they had not been made. A fire damaged this property in 1950 and Newell, Silva and Forte worked seven hours a day for a period of two or three weeks replacing beams and siding and making other repairs. They spent approximately three weeks making repairs and improvements on the King Street property after it was purchased by Penley in 1949; about 10 days cleaning, repairing and remodeling the 21st Street property in 1947 after a club occupying part of the property was removed as a tenant; three days painting the fire escape and making repairs on the Bedford Avenue property; and several days constructing a fence around the land purchased by Penley at 56th Road and 48th Street. During the years 1947 to 1953, Newell, Silva and Forte, or one or two of them, looked at many properties offered for sale with the objective of determining whether they would be desirable investments. Many of these properties were rejected for various reasons and others were purchased either by Penley, Vernon, the 49th Street Corporation, the Newell-Silva (partnership), Forte, Silva and another individual named Weiss, or105 Forte individually. Other activities of Newell, Silva and Forte during the period 1947 to 1953 included attempting to find purchasers for properties Penley and Vernon owned during those years; entering into negotiations for the sale of such properties when a prospective purchaser was found; making loans to petitioners; keeping records of income and expenses which were used by an accountant in making entries in books maintained by him for petitioners; showing properties to prospective tenants; negotiating leases; collecting rents; making some repairs and improvements; and rendering some miscellaneous services, such as arranging for removal of an undesirable tenant, filling an "iron fireman" and removing ashes, putting out and taking in garbage cans, and repairing faucets, electric plugs, etc., for tenants. During the year 1953, Newell, Silva and Forte continued their efforts to find properties which would be desirable investments, and showed properties owned by Penley and Vernon to prospective buyers. There were no formal meetings of the board of directors of petitioners. When petitioners were first organized in 1947, Newell, Silva and Forte discussed the question of salaries106 and had an understanding that in the years petitioners "made money" they would "get it in salary". In the return of Penley for the year 1953, it claimed the following deductions for compensation paid its officers: James Newell, Pres.$ 6,000Fred M. Silva, Treas.6,000Dominick Forte, Secy.6,000Total$18,000 The respondent determined that the $18,000 claimed for officers' compensation was excessive and unreasonable to the extent of $15,000, and disallowed the deduction of that amount. In the return of Vernon for the year 1953, it claimed the following deductions for compensation paid its officers: James Newell, Pres.$ 800Dominick Forte, Treas.800Fred M. Silva, Secy.800Total$2,400 The respondent determined that the $2,400 claimed for officers' compensation was excessive and unreasonable to the extent of $1,900, and disallowed the deduction of this amount. Reasonable compensation for the year 1953 for services rendered by Newell, Silva and Forte to Penley was $10,500 and to Vernon $500. Opinion RAUM, Judge: Petitioners contend that the salaries paid by them to their officer-stockholders during the year 1953 were intended107 to compensate them not only for the services rendered by them in 1953, but for the uncompensated or inadequately compensated services rendered in prior years, and that viewed in the light of the services rendered during the years 1947 through 1953, the compensation was fair and reasonable and deductions claimed therefor should have been allowed by respondent. The question of what constitutes reasonable compensation is essentially one of fact. Petitioners had the burden of proving the reasonableness of amounts paid and deducted as compensation for officers in their 1953 returns. The payments made by them to their office-stockholders during 1953 were in proportion to stockholdings. While they should not be disallowed merely because of this fact, they must be scrutinized to ascertain whether they represented, in part, distributions of profits in the guise of compensation. At all times material herein the stock of both Penley and Vernon was owned by Newell, Silva and Forte in equal proportions. During the years 1947 through 1953 neither corporation paid a dividend, and the amounts paid as salaries by each of them to their three officer-stockholders were based upon earnings. 1. As108 to Penley, the evidence shows considerable activity by its officers during the period 1947-1953, including the year 1953. Many of their services required the expenditure of considerable time and effort, and we are satisfied that the officers were not fully compensated for their services in the years prior to 1953, a proper consideration, among others, to be taken into account in determining the reasonableness of the 1953 salaries. We are convinced by the evidence that the Commissioner erred in allowing only $3,000 in toto as reasonable salary deductions for the three officers for 1953. Although we agree with him that the $18,000 claimed on the return was unreasonable, it is our best judgment and we have found as a fact that reasonable compensation for 1953 for the services rendered by the three officers was $10,500. The determination of the Commissioner is therefore approved only to the extent that he disallowed the deduction in excess of that amount. 2. As to Vernon, the evidence shows that the services rendered by the officers were minimal. Even though the amount allowed by the Commissioner was small, we cannot find on this record that his determination was in error. We therefore109 sustain the Commissioner and hold that the $2,400 deduction claimed for officers' salaries was excessive and unreasonable to the extent of $1,900. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621152/	MILO O. KING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.King v. CommissionerDocket No. 5618.United States Board of Tax Appeals10 B.T.A. 1149; 1928 BTA LEXIS 3962; March 1, 1928, Promulgated 3962 The evidence does not indicate that the petitioner actually ascertained debts to be worthless as provided in section 214(a)(7) of the Revenue Act of 1924. Arthur Metzler, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. MURDOCK 1149 MURDOCK: This is a proceeding for the redetermination of a deficiency in income tax for the year 1924, in the amount of $62.31, arising from the disallowance by the Commissioner of a deduction for bad debts in the amount of $1,929.25. The petitioner for many years has been a physician engaged in the general practice of medicine at Rochester, Ind. He kept his own accounts. During the day, as he rendered personal services to any patients, he entered in a day book the amount of the fee which he charged. At the end of the day he transferred these entries from the day book to cards in the name of an individual or head of a family, and this card index system he maintained as his permanent record. He made up his 1924 return on the accrual basis by referring to the entries in the day book, which was not produced at the hearing. He included in this return as his gross income all of the fees3963 which he had charged, regardless of whether or not he had received payment therefor, and deducted $1,929.25 as bad debts for services, all of which were rendered in 1924. At the end of the year he went over his unpaid accounts. If he thought an account was absolutely good, he would not deduct it from his gross income. If he considered that the collection of an account would be slow or questionable, he included it in the list of bad debts. He did not close out any of the accounts and rule them off his records, but instead he carried them along with the hope that some day he would be able to collect them. So far as we know, no effort was made to collect the accounts. The Revenue Act of 1924, in section 214(a)(7), provides: In computing net income there shall be allowed as deductions: * * (7) Debts ascertained to be worthless and charged off within the taxable year * * . The evidence does not indicate that the petitioner actually ascertained these debts to be worthless as provided in the section of the Act set forth above. We therefore affirm the action of the Commissioner in disallowing the amount of $1,929.25 as a deduction. Judgment will be entered for the3964 respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621161/	JOHN E. AND CAROLYN MACKLIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMacklin v. CommissionerDocket No. 11988-77.United States Tax CourtT.C. Memo 1983-293; 1983 Tax Ct. Memo LEXIS 493; 46 T.C.M. (CCH) 242; T.C.M. (RIA) 83293; May 25, 1983. 493 Alan R. Harter, for the petitioners. Ronald D. Dalrymple and Robert T. Hollohan, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Francis J. Cantrel for the purpose of conducting the hearing and ruling on respondent's Motion for Summary Judgment filed herein.After a review of the record, we agree with and adopt his opinion which is set forth below. 1494 OPINION OF THE SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: This case is before the Court on respondent's Motion for Summary Judgment filed on March 28, 1983, pursuant to Rule 121, Tax Court Rules of Practice and Procedure.2Respondent, in his notices of deficiency issued to petitioners on September 23, 1977 determined a deficiency in petitioners' Federal income tax for the taxable calendar years 1972 and 1973 in the respective amounts of $2,158.00 and $4,275.00. The adjustments determined by respondent in his deficiency notices are for unreported tip ("toke") income received by petitioner, John E. Macklin (hereinafter called petitioner) in 1972 and 1973 in the amounts of $11,339.00 and $12,981.00, respectively. In addition, for 1972, statutory adjustments relating to itemized deductions were determined. For 1973, petitioner was allowed "Married Filing Separate" rates, one claimed dependency exemption for his wife, Carolyn, was disallowed, and statutory adjustments relating to itemized deductions were determined. Petitioners timely filed their petition on December 6, 1977 and495 respondent filed his answer thereto on January 19, 1978. Thus, the pleadings are closed. Respondent's motion was filed more than 30 days after the pleadings were closed. See Rules 34, 36, 38, and 121. When respondent's good faith attempts to make arrangements with petitioners' counsel for informal consultations or communications proved unsuccessful, 3 he, not desiring to rest on the pleadings alone, on July 16, 1982, served a 49 paragraph Request for Admissions on petitioners' counsel. 4 Petitioners' counsel at no time served written answers upon respondent nor did he file an original of such answers with the Court. Rule 90(c). Hence, each matter contained in respondent's request for admissions is deemed admitted and conclusively established. 5496 The following findings of fact are based upon the record as a whole, the allegations of respondent's answer admitting allegations in the petition, the matters deemed admitted with respect to respondent's request for admissions, exhibits attached to respondent's motion and three affidavits. FINDINGS OF FACT Petitioners' resided at 1317 Mezpah Drive, Las Vegas, Nevada on the date their petition was filed. They filed a joint 1972 Federal income tax return with the Internal Revenue Service. Petitioner filed an individual 1973 Federal income tax return with the Internal Revenue Service. During 1972 and 1973 petitioner was employed as a blackjack dealer at the Sands Hotel and Casino (hereinafter sometimes referred to as "the Casino"). His normal work shift constituted 8 hours per day and he was only required to work, by his employer, 5 days out of any consecutive 7 day period. His normal days off during this period were Wednesdays and Thursdays. In the course of his employment petitioner received tokes from patrons of the Casino. In accordance with house rules these tokes were routinely pooled by petitioner and other blackjack dealers, roulette dealers, and Big Wheel dealers,497 by placing said tokes in a common toke box before leaving the area of the gaming tables on a break or at the end of a shift. The total amount so pooled was divided at the end of each 24-hour period among the dealers on duty during that 24-hour period. These pooled tokes were divided on the basis of a full share to a dealer for each 8 hour shift. Dealers generally received their share of the pooled tokes in an envelope when they returned to work at the beginning of their next shift. Under house rules some provision was made for allowing a share of the tokes for dealers who were unable to work because of illness. During 1972 and 1973 petitioner participated in and received his equal share of such pooled tokes. Petitioner, in 1972 and 1973 did not maintain a written diary, log, worksheet, or other record, made at or near the time he received tokes, which set forth the date, amount of tokes received, and amounts he may have expended as gratuities to co-workers. Players (patrons) at the Casino did from time to time place bets on petitioner's behalf. Such bets remained under the control of the patron until the winnings, if any, were actually given to petitioner. The patron was498 free to take back the winning bet if he so desired. The Nevada State Gaming Authority regards a bet made by a patron for petitioner as a wager made by and on behalf of the patron. Petitioner was forbidden from gambling or placing bets at the table he was working. Under house rules any winning bets received by petitioner was pooled and distributed. Neither petitioner nor the toke pool was required to reimburse a patron who had placed a losing bet on petitioner's behalf. In both 1972 and 1973 petitioner gambled in his individual and private capacity during his off duty time. He maintained no records which accurately reflected the date, amount of bets and amounts won and lost. Petitioner was paid a salary by his employer in both 1972 and 1973. The salary was in addition to the tokes he received in those years. In 1972 he was paid a salary for 222 8-hour shifts. He was paid for 8-hour shifts when he did not actually work; such shifts did not exceed 2 for 1972. 6 During 1973 he was paid a salary by his employer for 237 8-hour shifts, which included some shifts when he did not actually work; such shifts did not exceed 17 for 1973. 7 Petitioner reported the salary he received499 from his employer on the 1972 and 1973 returns. Petitioner is required by law to report the toke income he receives to his employer. For 1972 and 1973 he reported to his employer that he received toke income in the respective amounts of $464.00 and $ 00.00. 8 In addition, petitioner reported toke income on the 1972 and 1973 returns in the respective amounts of $ 00.00 and $600.00. The amounts so reported to his employer and reported on the 1972 and 1973 returns were based on estimates and not upon any written records. No additional toke income was reported on those returns. The amount of toke income received by petitioner in 1972 averaged not less than $53.65 for each 8-hour shift he actually worked and for 1973 it averaged not less than $61.73 for each 8-hour shift actually worked. Petitioner500 received additional toke income in 1972 and 1973 in the respective amounts of $11,339.00 and $12,981.00, which was not reported on the Federal income tax returns filed for those years. Petitioners do not have knowledge of any material facts which would distinguish this case from those of petitioners, similarly situated, in Williams v. Commissioner,T.C. Memo. 1980-494. Petitioners do not have in their possession or under their control any documentary evidence to support the allegations of their petition that respondent's determinations are arbitrary. Petitioner filed his 1973 return claiming unmarried head of household rates and he claimed his then present wife as an exemption. Petitioner was, in fact, married at the end of the taxable year 1973 and his then present wife had separate earnings in excess of $750.00. Petitioner was not entitled by law to claim his then present wife as an exemption for 1973 and he was not entitled to file as unmarried head of household for that year. OPINION It is well settled that tokes are not gifts but taxable income which must be included in a taxpayer's gross income. Olk v. United States,536 F.2d 876">536 F.2d 876 (9th Cir. 1976);501 9Rodda v. Commissioner,T.C. Memo. 1983-244; Lazaroff v. Commissioner,T.C. Memo 1983-243">T.C. Memo. 1983-243; Whitley v. Commissioner,T.C. Memo 1983-226">T.C. Memo. 1983-226; Capri v. Commissioner,T.C. Memo. 1983-201; Clover v. Commissioner,T.C. Memo 1983-181">T.C. Memo. 1983-181; Foreman v. Commissioner,T.C. Memo 1983-130">T.C. Memo. 1983-130; Parker v. Commissioner,T.C. Memo 1983-87">T.C. Memo. 1983-87; Kurimai v. Commissioner,T.C. Memo 1983-86">T.C. Memo. 1983-86; Parker v. Commissioner,T.C. Memo. 1983-85; Randolph v. Commissioner,T.C. Memo 1983-84">T.C. Memo. 1983-84; Owens v. Commissioner,T.C. Memo 1983-30">T.C. Memo. 1983-30; Williams v. Commissioner,supra. It is conclusively established in this record that petitioner received unreported toke income in 1972 and 1973 in the respective amounts of $11,339.00 and $12,981.00. Petitioners' contention that respondent's determinations are arbitrary is baseless. Here, petitioner kept no records which would accurately reflect the toke income which502 he received in 1972 and 1973. In such circumstance, the Commissioner may, in his notice of deficiency, make a determination based upon any reasonable method where a taxpayer refuses to produce his records or where those records are inadequately maintained. Holland v. United States,348 U.S. 121">348 U.S. 121 (1954); Merritt v. Commissioner,301 F.2d 484">301 F.2d 484, 486 (5th Cir. 1962); Cupp v. Commissioner,65 T.C. 68">65 T.C. 68, 82 (1975), affd. in an unpublished opinion 559 F.2d 1207">559 F.2d 1207 (3rd Cir. 1977); Giddio v. Commissioner,54 T.C. 1530">54 T.C. 1530 (1970); Meneguzzo v. Commissioner,43 T.C. 824">43 T.C. 824 (1965). 10Respondent's determinations herein are presumptively correct and the burden is on petitioners to establish that they are incorrect or arbitrary. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933);503 Avery v. Commissioner,574 F.2d 467">574 F.2d 467, 468 (9th Cir. 1978); Rule 142 (a). Petitioners here totally failed to show that those determinations are incorrect or arbitrary. Rule 121(b) provides that a motion for summary judgment shall be granted if the "pleadings * * admissions and any other acceptable materials, together with the affidavits * * * show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. * * ". [Emphasis supplied.] Here, petitioners have refused to submit any information which contradicts respondent's factual determinations. On the basis of the pleadings, those matters deemed admitted in respondent's request for admissions, the exhibits attached to respondent's motion (which include copies of the 1972 and 1973 returns and a full copy of the notices of deficiency) and respondents' affidavits, respondent has amply demonstrated to our satisfaction that there is no genuine issue as to any material fact present in this record and, thus, that respondent is entitled to a decision as a matter of law. Hence, summary judgment is a proper procedure for disposition of this case. Respondent's504 Motion for Summary Judgment will be granted. An appropriate order and decision will be entered.Footnotes1. Since this is a pre-trial motion and there is no genuine issue of material fact, the Court has concluded that the post-trial procedures of Rule 182, Tex Court Rules of Practice and Procedure, are not applicable in these particular circumstances. This conclusion is based on the authority of the "otherwise provided" language of that rule. The parties were afforded a full opportunity to present their views on the law at the hearing at Washington, D.C. on May 11, 1983. No appearance was made by or on behalf of petitioners nor was a response to respondent's motion filed, albeit a copy thereof and a copy of respondent's affidavits together with a copy of the Court's Notice of Hearing were served on petitioners' counsel by the Court on March 29, 1983. See Rule 50(c), Tax Court Rules of Practice and Procedure.↩2. All rule references are to the Tax Court Rules of Practice and Procedure.↩3. See Odend'hal v. Commissioner,75 T.C. 400">75 T.C. 400↩ (1980); Rule 90(a). 4. The original of that request was filed with the Court on July 19, 1982. Rule 90(b).↩5. See Freedson v. Commissioner,65 T.C. 333">65 T.C. 333, 335 (1975), affd. 565 F.2d 954">565 F.2d 954 (5th Cir. 1978); Rules 90 (c) and (e).See also McKinnon v. Commissioner,T.C. Memo 1982-229">T.C. Memo. 1982-229; Knudson v. Commissioner,T.C. Memo 1982-179">T.C. Memo. 1982-179; Oaks v. Commissioner,T.C. Memo 1981-605">T.C. Memo. 1981-605; Wallace v. Commissioners,T.C. Memo. 1981-274; Myers v. Commissioner,T.C. Memo 1980-549">T.C. Memo. 1980-549; Edelson v. Commissioner,T.C. Memo 1979-431">T.C. Memo. 1979-431; Saba v. Commissioner,T.C. Memo 1979-397">T.C. Memo. 1979-397; Bassett v. Commissioner,T.C. Memo. 1979-14↩.6. The 2 shifts were not included in respondent's determination of additional toke income received by petitioner in 1972. ↩7. The 17 shifts were likewise not included in respondent's determination of additional toke income received by petitioner in 1973.↩8. The amount so reported was reflected on a Form W-2 issued by petitioner's employer, and was included in gross wages.↩9. We observe that venue on appeal of this case would lie in the United States Court of Appeals for the Ninth Circuit.↩10. The method used here by respondent was clearly reasonable. See Williams v. Commissioner,T.C. Memo. 1980-494↩, where on facts virtually indistinguishable from those we consider herein, this Court stated--"We conclude that 'all tokes' received by petitioners, whether directly from the player or through a winning bet, are taxable gratuities".	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621162/	J. A. FOLGER & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FOLGER ESTATE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.J. A. Folger & Co. v. CommissionerDocket Nos. 22212, 30721, 31200, 35147.United States Board of Tax Appeals23 B.T.A. 210; 1931 BTA LEXIS 1913; May 13, 1931, Promulgated 1913 Held that the petitioner and J. A. Folger & Company, a California corporation, were affiliated corporations within section 240 of the Acts of 1918 and 1921, during the periods involved. James S. Y. Ivins, Esq., Joseph H. Brady, Esq., and H. Edwin Nowell, C.P.A., for the petitioners. Eugene Meacham, Esq., for the respondent. LANSDON 211 These consolidated appeals challenge the acts of the respondent in asserting income-tax deficiencies against the petitioners for the three taxable periods ended November 30, 1921, 1922, and 1923. The deficiencies asserted against J. A. Folger & Company are $106,474.09, $32,740.79, and $2,145.78; and against the Folger Estate Company, $1,481.10, $1,681.79, and $1,698.73. As grounds for relief the petitioners allege that the respondent committed error in (1) holding that they were not, in the taxable years, affiliated with J. A. Folger & Company, a California corporation which, in and for these periods, included their income in a consolidated return and paid the taxes due, and (2) in proposing to make the assessments in question after the running of the statute of limitations appertaining thereto. As1914 alternate grounds for relief, in event affiliations are denied, petitioner J. A. Folger & Company contends that on account of liberal purchasing contracts it had with the parent corporation, which enabled it to purchase and resell that company's products, with nominal outlay of capital, abnormalities in income were created which entitles it to special assessment under section 327(d) of the Act of 1921; and both petitioners contend that, in any event, they are entitled to credits against the alleged tax on account of payment made thereon through the parent company. The several dockets have been consolidated for hearing. FINDINGS OF FACT. The petitioner, J. A. Folger & Company, hereinafter sometimes called the Nevada corporation, was organized in 1908 to act as a distributing agent for J. A. Folger & Company of San Francisco, Calif., hereinafter sometimes called the parent corporation. The petitioner, Folger Estate Company, a California corporation, was organized in 1904 by interests closely affiliated with the parent corporation. In the taxable periods, the outstanding common stock of these three corporations was held as shown in the following table: StockholdersJ. A. Fogler & J. A. Folger & Folger Estate Co. (Calif.)Co. (Nev.)Company commoncommon stockcommon stock stockSharesSharesSharesC. E. L. Folger5007882,004 1/3Elizabeth M. Folger3907882,004 1/3E. F. Folger91E. B. F. Tibbitts7102,004 1/3Folger Estate Co1,340J. A. Folger & Co. (Calif.)3,080Others1322,9504,6606,015Emma F. Platt100265A. K. Munson250R. R. Vail175F. P. Atha900Total3,3006,0006,0151915 212 In the same periods the parent corporation had outstanding preferred stock, held as follows: StockholdersNov. 30, 1921Nov. 30, 1922Nov. 30, 1923SharesSharesSharesFolger Estate Co300300300John M. Cunningham200200200E. B. F. Tibbitts200200200C. E. L. Folger150150150Elizabeth M. Folger150150150In hands of public1,854644None.Total2,8541,6441,000The relationship of these parties is as follows: C. E. L. Folger - sister-in-law of president, E. R. Folger. Elizabeth M. Folger - Wife of president, E. R. Folger. E. B. Tibbitts - sister of president, E. R. Folger. Emma F. Platt - Widow of a former pensioned employee of the Folger interests. A. K. Munson - employee of Folger interests from 1880 until death in 1924. R. R. Vail - employee of Folger interests from 1880 until retired on pension December 31, 1921. E. P. Atha - vice president and general manager of the Nevada Company and employee of Folger interests since 1899. John M. Cunningham - son of Mrs. E. L. Folger, under a prior marriage and employed by the California Company. This preferred stock, 1916 under the California laws, had voting powers equal to common stock, but carried no rights of participation in the profits of the corporation in excess of 7 per cent, except in case of liquidation of the corporation, in which event, the holders were preferred to the extent of the par value, plus 2 1/2 per cent. It was all callable by the corporation at 102 1/2 per cent, plus accrued dividends, on any quarterly dividend date upon thirty days notice; and after the date fixed in such notice for such redemption, all rights of the holders, other than to receive the amounts then due, ceased, except in case the corporation defaulted in providing money for redemption. At all times material here the parent corporation was financially able to redeem all of its outstanding preferred stock and to liquidate in cash all of its obligations incident thereto. For the periods involved the parent corporation filed consolidated income-tax returns for itself and these petitioners, which attributed income to the latter companies as follows: Company192119221923J. A. Folger & Co$280,414.98$232,528.03$220,377.14Folger Estate Co16,810.9715,682.2915,589.79213 1917 The consolidated return for the fiscal year ended November 30, 1921, was filed February 16, 1922. Thereafter, on October 19, 1925, the parent corporation and the Commissioner of Internal Revenue entered into an agreement in writing which waived the statutory time for making any assessment of income and war-profits tax due under any return made on behalf of that taxpayer for that period and extended it to December 31, 1926. On March 4, 1926, these petitioners, separately, executed waivers to the Commissioner of Internal Revenue extending the time for making any tax assessments against each of them in respect of the same period until December 31, 1926. On December 14, 1926, new waivers covering this period were executed by all three corporations and the Commissioner of Internal Revenue, which further extended the time for making tax assessments against each taxpayer to December 31, 1927. The deficiency notices for the fiscal year ended November 30, 1921, were mailed to the Folger Estate Company and J. A. Folger & Company on November 12, 1926, and July 20, 1927, respectively. During the periods involved, E. R. Folger was president of these petitioners, as well as of the parent corporation. 1918 In their intercompany dealings, the parent company invoiced its products to the petitioner, E. R. Folger & Company, for sale and distribution in its territory at actual cost, plus 5 per cent, which price was from 7 per cent to 10 per cent below the open market price on like products. In addition to this preference in price which was worth not less than $20,000 per year to the agent on the goods distributed, the parent company extended to this petitioner an unlimited line of credit which enabled it to realize on its sales before paying for the goods. For a number of years prior to 1919, the parent company had been a regular borrower of money from the Wells-Fargo Nevada National Bank of San Francisco, and in the latter part of that year was indebted to the bank in the sum of $600,000. This company was prosperous and in no way embarrassed by these loans, but its officers considered that it was not good business to have so large an indebtedness subject to call and, therefore, decided to liquidate the same by a preferred stock issue. Accordingly, on October 27 of that year, by proper corporate action, this corporation amended its charter so as to authorize the issuance of 4,000 shares1919 of 7 per cent preferred stock having a par value of $100 each. This stock was issued on November 1 and November 3, following, and 1,000 shares were purchased by members of the Folger family. During the month of January, 1920, the corporation repurchased 50 of the shares of its preferred stock which had been sold to the public and, before the end of that fiscal period, additional lots, amounting to 406 shares in all. Further purchases and retirement of this stock were made by this 214 company, amounting in all to 2,594 shares before the end of the fiscal period of 1922. In 1923 none of this stock was in the hands of the public. During all of these periods, the entire issue of preferred stock was voted at all stockholders' meetings by E. R. Folger, president of the three companies, in virtue of proxies held by him from the owners. OPINION. LANSDON: First in importance of the issues presented is the petitioners' claim for affiliation with the parent company, which, if sustained, renders all other questions immaterial to this decision. We will, therefore, consider that issue first. The petitioners and the parent corporation are creatures of the Folger interests, which1920 they were organized to serve and from which they derived their names. Except for two shares, all of the common stock of the Folger Estate Company was owned by C. E. L. Folger, Elizabeth M. Folger, and E. B. F. Tibbitts, who, among them, also owned more than 45 per cent (1,600 of the 3,300 outstanding shares) of the common stock of the parent company. These personal holdings, when added to 1,340 shares owned by their corporation (the Folger Estate Company), made these interests 90 per cent one and the same, in so far as the common stock was concerned. Two of these stockholders, between them, also owned 1,576 shares of the stock of the (petitioner) Nevada corporation, which, added to the 3,080 shares owned by the parent company, controlled as above shown, gave them 77.6 per cent control of that company. To these may be added the holdings of E. F. Folger of 9 shares in the parent corporation and one share in the Nevada corporation; also of Emma F. Platt, who owned 100 shares in the parent company and 265 shares in the Nevada corporation. The record shows but three stockholders in the entire group considered, who, during the period mentioned, held stock in less than two of these corporations1921 at the same time; and even then the corporations were so linked together through cross holdings of each other's stock as to make them interdependent upon each other and their business success mutual. One of these stockholders was A. K. Munson, who began work for the Folger organization in 1880 and continued with its successors until his death in 1924. He owned 250 shares of the parent company's stock. Inasmuch as that company owned more than 50 per cent (3,080 out of 6,000 shares) of the Nevada corporation's stock; and, was itself 89.9 per cent owned by the Folger Estate Company and its stockholders, Munson's interests can not be regarded otherwise than as closely affiliated with those companies. The same may be said of R. R. Vail, who began work for the Folger interests in 1880 and continued until his retirement 215 on pension from the parent company, December 31, 1921. He owned 175 shares of the Nevada corporation's stock. The other of this trio was F. P. Atha, who began with J. A. Folger in 1899, and, upon organization of the Nevada corporation in 1908, was allocated 900 shares of that company's stock and made its vice president and general manager. It seems clear, 1922 unless otherwise affected by the preferred stock of the parent company, as wel shall later discuss, that both ownership and control of substantially all of the stock of these three corporations were, during the periods involved, so interlocked and unified as to make them an affiliated group within the law, as heretofore construed by this Board and the courts. Midland Refining Co. (No. 1),2 B.T.A. 292">2 B.T.A. 292; Abattoir Realty Co.,3 B.T.A. 415">3 B.T.A. 415; Shillito Realty Co.,8 B.T.A. 665">8 B.T.A. 665; affd., 39 Fed.(2d) 830; D. S. Brandon,10 B.T.A. 1118">10 B.T.A. 1118; Boker Cutlery & Hardware Co.,12 B.T.A. 1405">12 B.T.A. 1405; Metasap Chemical Co.,12 B.T.A. 1402">12 B.T.A. 1402; Richfield Oil Co.,13 B.T.A. 1050">13 B.T.A. 1050; affd., 42 Fed.(2d) 360; Great Lakes Hotel Co. v. Commissioner of Internal Revenue, 30 Fed.(2d) 1; United States v. Cleveland, Painsville & Eastern Ry. Co., 42 Fed.(2d) 413. The respondent further contends that during these periods a substantial portion of the parent company's preferred stock was owned by interests outside of the affiliated group and that inasmuch1923 as such stock had equal voting rights with the common stock in the control of that company, such adverse holdings - as he terms them - changed the situation in reference to ownership and control otherwise established through the common stock alone. In reference to this contention, it is obvious that the respondent has overappraised the control that was or could be exercised over all of the stock of this corporation through the outstanding preferred stock. This entire issue was only 2,854 shares, which at no time was more than 1,854 owned by parties outside of the related group. This so-called adverse holding represented at most but 64.96 per cent of the preferred stock, and only 30 per cent of the total voting common plus preferred stock of the company in that year. In 1922 the preferred stock held by outside interests had been reduced through repurchase and retirement to 644 shares; this was 39.17 per cent of the then outstanding preferred stock and slightly less than 14 per cent of the whole voting stock. In 1923, the last of these taxable periods, no preferred stock was owned outside of the Folger interests. Aside from this lack of power in the preferred stock to interfere1924 with the control of the common, the record here shows that the right to vote it was voluntarily delegated by its owners to the president of the parent corporation, who voted it at all stockholders' meetings. This control was further reinforced and made secure by the terms of the stock certificates, which made all preferred stock subject to 216 call at the pleasure of the corporation at any quarterly dividend period, upon thirty days notice. Such domination, we have held, constitutes control within the statute. Cf. Detour Dock Co.,22 B.T.A. 925">22 B.T.A. 925, and cases hereinabove cited. In Bank of Italy,13 B.T.A. 1226">13 B.T.A. 1226, this Board allowed affiliation in a case where the dominant corporation owned 85 per cent of all of the stock of another; but was without any control, contractural or otherwise, over the remaining 15 per cent. Our decision in that case was reversed by the United States Circuit Court of Appeals for the Ninth Circuit in a decision rendered on January 26, 1931, which pointed out such lack of control and distinguished it from the cases cited wherein either through options to purchase or proxies, or both, as in this case, the affiliated*1925 interests controlled the minority stock. The control lacking in the Bank of Italy case, supra, we think, is abundantly established here and it is obvious that the situation meets the requirements of the statute. Shillito Realty Co., supra;Great Lakes Hotel Co. v. Commissioner of Internal Revenue, supra;United States v. Cleveland, Painsville & Eastern Ry. Co., supra; and Commissioner of Internal Revenue v. Richfield Oil Co., supra.We hold, therefore, that these petitioners and the J. A. Folger Company of California were affiliated corporations for Federal tax purposes in and during the taxable periods involved and that their contentions in such respect must be sustained. In view of our findings on this first issue, the remaining assignments of error need not be considered. Reviewed by the Board. Decision will be entered under Rule 50.MORRIS, SMITH, and MURDOCK dissent on the question of affiliation.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621165/	LAURA R. HILTON ET AL., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hilton v. CommissionerDocket No. 40131.United States Board of Tax Appeals21 B.T.A. 3; 1930 BTA LEXIS 1944; October 13, 1930, Promulgated 1944 The petitioners' decedent in 1909 was appointed trustee with power to appoint his successor and also power to change the beneficiaries, both of which powers he exercised on September 17, 1918, when he resigned as trustee, changed the beneficiaries of the trust, fixed the disposition of the corpus and date of the termination of the trust, and made such change of beneficiaries and their interest in the estate irrevocable, and reserved to himself the residue of income of the trust property. Held that under the decision of May v. Heiner,281 U.S. 238">281 U.S. 238, and Frederick Ullman et al.,20 B.T.A. 782">20 B.T.A. 782, the value of the trust property should not be included in the gross estate of the decedent in determining the net estate subject to tax under the Revenue Act of 1921. G. H. Moore, Esq., for the petitioners. Eugene Smith, Esq., for the respondent. BLACK 3 OPINION. BLACK: In this proceeding the only question at issue is the inclusion of estate tax purposes of certain real estate in the gross estate of Manetho Hilton, deceased. The petitioners are the widow and the sole surviving heirs at law of Manetho Hilton, 1945 a former resident of 6 St. Louis, Mo., who died intestate on June 18, 1923. Administration was granted by the probate court of the city of St. Louis and the administratrix filed a timely estate tax return in which was included only personal property, the value of which was not in excess of the statutory deductions. The respondent, upon his redetermination, added to the gross estate real estate belonging to the trust estate created in 1909 by Anna M. Hilton, wherein the decedent was named trustee with certain very broad powers of appointment. The parties hereto agree that the trust estate at the time of the decedent's death had a value of $138,880.01, after deducting all incumbrances. By the inclusion of this trust property, the respondent has determined a deficiency in estate tax in the amount of $2,277.60. The correctness of the determination is not questioned if the trust property is properly includable in decedent's estate. The only evidence offered was the original trust agreement and other instruments executed thereafter in the exercise of the power of appointment contained in such original instrument, all of which we have epitomized in the opinion which follows. 1946 The property which the respondent is seeking to include in the gross estate consists of a number of parcels of real estate situated in the city of St. Louis, Mo., which were originally conveyed to the decedent in trust by his sister on July 26, 1909. This instrument, which recites that it was executed in consideration of and to consummate a contract previously entered into between the decedent and his sister, Anna M. Hilton, whereby Manetho Hilton agreed to have canceled certain indebtedness of his sister amounting to over $160,000 against the property, in return for which she conveyed in trust to the decedent numerous parcels of land in the city of St. Louis, named as the beneficiaries of the trust the decedent's son, Warren Hilton, a son by a former marriage, his then present wife, Laura Randolph Hilton, and their children, Gwendolen Hilton, Ruth Hilton, Randolph Hilton, Cecil Vaughan Hilton, and Grace Vaughan Hilton. The above named beneficiaries, with the exception of Grace Vaughan Hilton, who died prior to the decedent, are the petitioners herein. The trust agreement recites that the decedent was to take complete legal title as trustee, apply the income to the reduction1947 of the existing indebtedness and to the support of his wife and the support and education of their children. The amount to be expended on the wife and children was left entirely to the discretion of the trustee and any unexpended amounts were to be made part of the principal estate. If the income were inadequate for the needs of the beneficiaries, the trustee had full authority to sell or mortgage all or any part of the trust estate. The decedent was given authority to designate a successor trustee and in the event he became unable 5 to serve and failed to appoint a successor, the St. Louis Union Trust Co. was to become trustee. Any successor trustee was to be guided by the discretion of the decedent in the amount he distributed to the wife and children of the decedent. The original trust instrument provided that the decedent, as trustee, "may revoke any of the provisions of this deed as to the powers and duties of the trustee of trustees, with respect to the control and management of said trust estate or modify he same as he shall think fit and judicious, he may alter, change, revoke and make null and void the said use and uses, estate and estates, hereby limited and1948 agreed to and in the said property hereinbefore described, or all or any part or parcel thereof, and may in said conveyance or other written instrument, create, prescribe, define, limit, appoint any other powers, duties, use or uses, estate or estates, trust or otherwise, of and in said property, or any parcel or parcels thereof, in such manner and form as the said party of the second part herein shall think fit and convenient. It is further intended, agreed and understood, as a part of this indenture, by the contracting parties hereto, that the said party of the second part, as trustee, shall have the power of ordering, appointing and distributing and is hereby authorized and empowered to order, appoint and distribute among, or in trust, for some or all of said parties of the third part, or to or in trust for any person or persons not herein named, as beneficiaries, to whom he shall hereafter desire to make the beneficiary or beneficiaries under this trust the fee simple of all of the property hereby granted and conveyed or of any part or any parcel thereof, or less estate therein, legal or equitable, provided the same has not already been granted, sold or disposed of by said trustee. 1949 " This agreement was signed by Anna M. Hilton, settlor of the trust, and Manetho Hilton, trustee. On May 6, 1911, the decedent executed under the powers of the original agreement a trust agreement between himself and Laura Randolph Hilton, his wife, a beneficiary under the trust agreement, providing for the payment out of the income of the trust estate of $150 per month, and on May 30, 1911, the decedent executed another trust agreement with Anna M. Hilton, whereby she became entitled to the sum of $50 per month to be paid her monthly out of the trust estate income. On September 17, 1918, agreeable to the powers of the original trust agreement, the decedent resigned as trustee and appointed Robert C. Miller trustee, vesting in Miller certain powers as to the management of the trust property, and expressly providing in the agreement, among other things, that Laura Randolph Hilton should be paid $200 per month and Anna M. Hilton $50 per month, and that all the remainder of the income should be paid to the decedent. This instrument 6 conveyed all the trust property to Robert C. Miller, trustee, and contained the following provision: The trusteeship of Robert C. Miller, 1950 his successor or successors, shall continue until the first day of September, nineteen hundred and twenty-three (1923), when it shall terminate unless the said undersigned Manetho Hilton shall be then living, in which case the trusteeship shall continue until the death of the said Manetho Hilton, and shall terminate at his death, and when said trusteeship shall be terminated by the happening of one or the other of the said particular events as aforesaid, then and thereupon, the fee simple title of, in and to all and every part and parcel of the real property belonging at that time to said trust estate, and all the right, title and interest of the then trustee, whether legal or equitable, shall vest immediately, without the necessity of any conveyance by the said Robert C. Miller, or the then trustee of said trust estate, in the following named distributees, to-wit, Warren Hilton, Gwendolen Hilton, Ruth Hilton, Randolph Hilton and Cecil Vaughan Hilton, share and share alike, as tenants in common, except as to any one of them who shall have died, and as to each such deceased distributee, if any, the title to his or her undivided proportionate share in said real estate property shall1951 vest in the heirs of such deceased distributee, excepting that neither the said Manetho Hilton nor the said Laura Randolph Hilton shall take anything by inheritance or descent from such deceased distributee; * * * Similar provisions were made as to the disposal of the personal property. The appointment of trustee at paragraph 9 recites as follows: Ninth: For purposes of identification it is hereby expressly understood and agreed that the Warren Hilton, Laura Randolph Hilton, Gwendolen Hilton, Ruth Hilton, Randolph Hilton and Cecil Vaughan Hilton named as beneficiaries herein are the same persons named and described as parties of the third part and beneficiaries in said Trust Deed recorded in Book Twenty-two hundred and seventy (2270) at Page One of the St. Louis Recorder's Office and that said Anna M. Hilton and Manetho Hilton named as beneficiaries herein are the same persons named and described as parties of the first part and second part in said Trust Deed, respectively, and I, the undersigned Manetho Hilton, do hereby specifically renounce the power given me in said Trust Deed to name, order and appoint any other or further beneficiaries than those named and described1952 in this Paragraph Number Nine. The instrument also contains this statement: I do hereby expressly direct and declare that this instrument is and shall be final and conclusive as to the distribution of the income and principal of said trust estate. On July 18, 1919, the decedent, by an instrument in writing duly recorded, revoked all powers of Robert C. Miller and appointed Gwendolen Hilton successor trustee, whereupon Miller resigned and conveyed all of said trust property and delivered the same to his successor trustee, Gwendolen Hilton, who duly qualified and accepted the trust and appointment. She continued to remain as trustee and administered the trust until it was terminated, September 1, 1923, after the death of the decedent. 7 The respondent in his sixty-day letter determined that the property in question was held in trust as of the date of decedent's death under the trust instrument of September 17, 1918, and that by the terms thereof, the transfer of the property by the decedent was made in pursuance of the absolute power of control and disposition given him in the trust instrument of 1909, and that under the terms of the trust agreement of September 17, 1918, the1953 transfer is intended to take effect in possession or enjoyment at or after decedent's death, within the meaning of section 402(c) of the Revenue Act of 1921. The petitioner contends (1) that none of the real estate held under the trust agreement is subject to be considered as part of the taxable estate of the decedent; (2) that no real estate whatsoever located in the County or City of St. Louis, Mo., was subject to be considered as a part of the estate left by Manetho Hilton, which would be subject to Federal estate tax; and (3) that if Manetho Hilton actually owned in fee all of the real estate described in said trust agreement, then no part of said real estate, even though it had been owned in fee by the decedent at the time of his death, would be subject to Federal estate tax, because all of said real estate was located in the City or County of St. Louis, Mo., and real estate in the State of Missouri is not part of the taxable estate of the deceased. As we interpret the trust instruments, the decedent on September 17, 1918, exercised the powers of appointment conferred on him in the original instrument of 1909, in so far as the final disposition of the corpus of the estate1954 was concerned. In the instrument of September 17, 1918, he not only resigned as trustee and appointed his successor, but also designated himself as the beneficiary of the income from the trust to the date of its termination, after paying $200 a month to his wife and $50 a month to his sister, and then transferred the remaining beneficial interest to his children, who, together with their mother, had been the beneficiaries named in the original instrument. In this same instrument he declared that the instrument should be final and conclusive as to the distribution of income and principal of the trust estate, so that from that time on the only power remaining in him was to designate a successor trustee, which he did on July 18, 1919, when he appointed Gwendolen Hilton trustee to succeed Robert C. Miller. This instrument was not executed in contemplation of death within the legal significance of those words. The transfer was not testamentary in character, and was beyond recall by the decedent. At the death of Manetho Hilton no interest in the property held under the trust deed passed from him to the living; title thereto had been definitely fixed by the trust deed itself. See 1955 May v. Heiner,281 U.S. 238">281 U.S. 238; 50 Sup.Ct. 286; Frederick Ullman et al.,20 B.T.A. 782">20 B.T.A. 782. In Minnie I. Mansfield,8 Executrix,17 B.T.A. 335">17 B.T.A. 335, we considered a somewhat similar situation in which the decedent in July, 1917, transferred and conveyed certain real estate by prenuptial deed, reserving to himself "the use, possession, and income of said property during his lifetime." The transferor died June 23, 1923, and we held that, under the decisions of Nichols v. Coolidge,274 U.S. 531">274 U.S. 531; Edward H. Alsop,7 B.T.A. 848">7 B.T.A. 848; James Duggan, Executor,8 B.T.A. 482">8 B.T.A. 482, and Northern Trust Co., Executor,9 B.T.A. 96">9 B.T.A. 96, the value of the property should not be included in the gross estate of the decedent in determining the net estate subject to tax under the Revenue Act of 1921. In Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339, at page 346, the Supreme Court holds that section 402(c) of the Revenue Act of 1921 is inapplicable to a trust created by a decedent in his lifetime, not in contemplation of death, which vested beneficial interests*1956 in others and which he was without power to modify and revoke. Accordingly, since the decedent divested himself of all power of appointment in the instrument dated September 17, 1918, except the power to appoint a successor trustee, under the above quoted decisions, the value of the property here involved should be excluded from the gross estate of the decedent. Having decided that the real estate in question is not property includable in the gross estate under section 402(c) of the Revenue Act of 1921, it becomes unnecessary to discuss the petitioner's other assignments of error, which raise the question of whether real estate situated in Missouri satisfies the requirements of section 402(a) of the Revenue Act of 1921, with respect to its being subject to the payment of administration expenses necessary for its inclusion in the gross estate of a decedent for estate tax purposes. Judgment will be entered for the petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621166/	ST. CHARLES INVESTMENT CO., BURTON C. BOOTHBY, TAX MATTERS PERSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSt. Charles Inv. Co. v. CommissionerTax Ct. Dkt. No. 5793-96United States Tax Court110 T.C. 46; 1998 U.S. Tax Ct. LEXIS 5; 110 T.C. No. 6; February 5, 1998, Filed 5 Prior to Jan. 1, 1991, X was a closely held C corporation, which incurred passive activity losses (PAL's) giving rise to suspended PAL's pursuant to sec. 469, I.R.C. A portion of the suspended PAL's was attributable to depreciation. X reduced the bases of the properties used in the passive activities by the amounts of such depreciation. X elected S corporation status as of Jan. 1, 1991. During 1991, it disposed of several of the passive activities and calculated the gain (loss) from those dispositions using the bases of the properties involved as reduced by the depreciation. X used suspended PAL's allocable to the sold activities which had arisen prior to 1991, in calculating its taxable income for 1991. HELD, sec. 1371(b)(1), I.R.C., precludes X from using its suspended PAL's in 1991, an S corporation year. HELD, FURTHER, X may not recompute the bases of the sold properties to include amounts representing the portions of the suspended PAL's attributable to depreciation. Cathy A. Goodson and William A. McCarthy, for respondent. Darrell D. Hallett, Larry N. Johnson, Robert J. Chicoine, and John M. Colvin, for petitioner. TANNENWALD, JUDGE. TANNENWALD47 OPINIONTANNENWALD, JUDGE: This 6 case comes before us on cross- motions for partial summary judgment by the parties under Rule 121. 1 The issues for decision are: (1) Whether suspended passive activity losses (PAL's) incurred by a closely held C corporation that later elects to be an S corporation may be deducted by the then S corporation in the year the corporation disposes of its entire interest in the activity generating the losses, and if not,(2) whether the basis of the assets used in the activity may be recomputed to restore amounts for portions of the suspended PAL's attributable to depreciation (and the gain or loss from the disposition commensurately recalculated). Summary judgment as to those issues is appropriate in this case because there is no genuine issue of fact, and a decision can be made as a matter of law. Rule 121(b); Northern Ind. Pub. Serv. Co. v. Commissioner, 101 T.C. 294">101 T.C. 294, 295 (1993).BACKGROUNDAt the time the petition was filed, Burton C. Boothby (petitioner) resided in Denver, Colorado, and St. Charles 7 Investment Company (St. Charles) had its principal place of business in Englewood, Colorado. St. Charles filed its 1991 U.S. Income Tax Return as an S corporation with the Internal Revenue Service at Odgen, Utah.Prior to 1991, St. Charles was a closely held C corporation as defined under section 469(j)(1). St. Charles operated rental real estate giving rise to PAL's under section 469 in 1988, 1989, and 1990. St. Charles elected S corporation status effective January 1, 1991. Immediately prior to the effective date of the S corporation election, St. Charles had suspended PAL's from its real estate activities.48 During 1991, St. Charles disposed of certain of the rental properties (the properties). St. Charles reported the sales of the properties and deducted the suspended PAL's arising from the properties on its 1991 S corporation tax return. Six of the seven properties sold produced losses of $ 9,237,752; the seventh produced a gain of $ 6,161.A portion of the suspended PAL's was attributable to depreciation for which St. Charles had adjusted the bases of the properties. St. Charles used these adjusted bases in calculating its gain or loss from the sales of the properties.Effective 8 March 30, 1995, St. Charles elected to terminate its S corporation status and reverted to C corporation status.DISCUSSIONThe parties have locked horns on the impact of sections 469(b) and 1371(b)(1). St. Charles contends that section 469 governs and that section 1371(b) has no application under the circumstances herein. Respondent takes a diametrically opposed position and contends that section 1371(b) controls and that therefore section 469 is inapplicable.Section 469(a) disallows the PAL for the taxable year to any individual, estate or trust, any closely held C corporation, and any personal service corporation. The term "passive activity loss" generally means the amount by which the aggregate losses from all passive activities for the taxable year exceed the aggregate income from all passive activities for such year. Sec. 469(d)(1). However, a closely held C corporation, unlike the other taxpayers to whom section 469 applies, also may use its PAL for a taxable year to offset net active income for such year, and the amount so used will not be disallowed under section 469(a)Sec. 469(e)(2). The term "passive activity" includes any rental activity, with exceptions not relevant herein. 9 Sec. 469(c)(2). Although section 469(a) disallows PAL's, section 469(b) provides: "Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year."Section 469(f)(2) provides: (2) Change in status of closely held C corporation or personal corporation. -- If a taxpayer ceases for any taxable year to be a closely 49 held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable. Section 469(g)(1)(A) provides that, in the taxable year in which a taxpayer disposes of his entire interest in any passive activity in a transaction where all the gain or loss realized on such disposition is recognized, then generally, the excess of -- (i) any loss from such activity for such taxable year (determined after the application of subsection (b)), over(ii) any net income or gain for such taxable year from 10 all other passive activities (determined after the application of subsection (b)),shall be treated as a loss which is not from a passive activity. Thus, the usual result upon a taxable disposition of a passive activity is that the taxpayer may use any remaining suspended PAL allocated to that activity first against passive income from the same activity, then against net passive income from other passive activities, and then as a nonpassive loss.The effect of making an election to be an S corporation is that, generally, an S corporation is not subject to income tax; 2 instead, the shareholders are taxed on their respective shares of the items constituting the S corporation's taxable income. Secs. 1363, 1366. Section 1371(b)(1) provides that "No carryforward, and no carryback, arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation." 311 On the basis of this provision, respondent disallowed the deduction of the suspended PAL's.Before proceeding to discuss the specific arguments of the parties, we think it important to recognize the purposes which underlay the enactment of sections 469 and 1371 and the overall context applicable to those sections. Section 469 was enacted in 1986 by section 501(a) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2233, in response to legislative concern that certain categories of taxpayers were 50 engaging in activities which generated losses and using those losses to shelter income from other activities. See Schaefer v. Commissioner, 105 T.C. 227">105 T.C. 227, 230 (1995). It is essentially a TRANSACTIONAL provision, i.e., it deals with the tax treatment of particular activities. In determining the existence of a PAL, section 469 treats each activity separately.Section 1371 was enacted in 1982 by section 2 of the Subchapter S Revision Act of 1982, Pub. L. 97-354, 96 Stat. 1669, as part of a continuing effort by the Congress to provide a statutory framework whereby shareholders of closely held corporations could obtain substantially the same tax treatment as they would have received if they had conducted their activities as a partnership without 12 being required to accept the personal liability attaching to a partner. Thus, subchapter S, of which section 1371 was a part, dealt with the STATUS OF A TAXPAYER by permitting a corporation to continue as the same corporate entity but treating its income and deductions as those of its shareholders and taxing them accordingly. As we observed in Frederick v. Commissioner, 101 T.C. 35">101 T.C. 35, 43 (1993): conversion from a C corporation to an S corporation does not create a new taxpayer or otherwise involve a transfer of assets and liabilities from one entity to another. Following its S corporation election, Quanta is still the same taxpayer; Quanta merely has subjected its income and expenses to a new taxing regime for Federal income tax purposes. * * * This structural difference, i.e., transactional versus taxpayer status, is a significant element in synthesizing the application of sections 469(b) and 1371(b)(1). It facilitates our ability to take into account the objectives of Congress, namely, (1) including section 469(b) to ease the restrictive thrust of section 469 generally by limiting, but not necessarily eliminating, use of PAL's, and (2) including section 1371(b)(1) to narrow the liberalizing 13 thrust of subchapter S generally, and to prevent abuse by limiting, but not necessarily eliminating, the ability of a corporation to utilize subchapter S status to pass on its C status losses to its shareholders, see Rosenberg v. Commissioner, 96 T.C. 451">96 T.C. 451, 455 (1991).Respondent's position is straightforward. Respondent maintains that section 1371(b)(1) is clear on its face and that the word "carryforward" in that section is not limited and 51 encompasses PAL's. Respondent argues that nothing in the legislative history of either section 1371(b)(1) or 469 casts doubt on respondent's position and that petitioner's attempts to accord a narrow interpretation to the word "carryforward", both directly and by interpolating section 469, are unavailing.Petitioner's arguments fall into two categories: (1) Suspended PAL's are not "carryforwards" within the meaning of section 1371(b)(1), because the PAL rules, set forth in section 469, constitute an accounting method which St. Charles should continue to use after its conversion to an S corporation; and (2) pursuant to principles of statutory construction, the specific language of section 469, particularly subsections (f)(2) and (g)(1)(A), precludes 14 the application of section 1371(b)(1). Petitioner asserts that, unless it is permitted to utilize the suspended PAL's in the year of disposition of the activities giving rise to them, its right to use those PAL's will be lost forever.We deal first with petitioner's position in respect of the proper interpretation of section 1371(b)(1). Clearly, Congress could not have had PAL's specifically in mind when it enacted section 1371(b)(1) in 1982, since section 469 was not enacted until 1986. But even petitioner does not suggest that this factor, in and of itself, is determinative. Rather, petitioner goes on to argue that the word "carryforward" was intended to refer only to those items which are specifically so described in other provisions of the Code. 4 We disagree.In construing the meaning of a statute, we 15 seek the plain meaning of its language, assuming that Congress uses common words in their popular meaning, and relying on the words as generally understood. Norfolk S. Corp. v. Commissioner, 104 T.C. 13">104 T.C. 13, 36-37 (1995) and cases cited thereat, modified 104 T.C. 417">104 T.C. 417 (1995). The language of section 1371(b) ("No carryforward, and no carryback") is broad, unlike that of other sections which specify certain types of carryforwards and carrybacks. See supra note 4. The legislative history of section 1371(b) supports a broad interpretation in that the 52 prohibition reflected in this provision appears in similar terms and follows a list of specific examples of passthrough items. S. Rept. 97-640 (1982), 2 C.B. 718">1982-2 C.B. 718, 725; H. Rept. 97-826 (1982), 2 C.B. 730">1982-2 C.B. 730, 737. Although section 469(b) does not use the term "carryforward", we think the phrase "shall be treated as a deduction * * allocable to such activity in the next taxable year" has the same meaning. We think this is particularly true in the case of a closely held C corporation where passive losses are available as deductions against active losses. Our view in this respect is reinforced by that fact that the Senate Finance Committee 16 report, accompanying the enactment of section 469, states that "Suspended passive activity losses for the year are CARRIED FORWARD indefinitely, but are not carried back" (emphasis added). S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 1, 722; see also H. Conf. Rept. 99-841 (Vol. II) (1986), 1986-3 C.B. (Vol. 4) 1, 137, describing the Senate version of section 469 (there was no House of Representatives version) as providing that "Disallowed losses and credits are CARRIED FORWARD" (emphasis added). Moreover, while we recognize that the use of captions is limited, see section 7806(a), we think it not amiss, in the context of this case, to note that section 469(b) is entitled "Disallowed Loss or Credit CARRIED to Next Year" (emphasis added).Petitioner points to Congress' placement of section 469 within subchapter E, part II of the Code, entitled "Methods of Accounting". Petitioner argues that the PAL rules, like other methods of accounting, such as basis and depreciation, are to be continued after a C corporation becomes an S corporation. As the subject of an accounting method, petitioner argues, PAL's are not carryovers within the meaning of section 1371(b)(1)."The term 'method of accounting' 17 includes not only the overall method of accounting of the taxpayer but also the accounting treatment of any item." Sec. 1.446-1(a)(1), Income Tax Regs. A material item, for purposes of a method of accounting, is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction. Sec. 1.446-1(e)(2)(ii), Income Tax Regs. The legislative history of section 469 expresses concern over the mismatching of deductions and income from passive activities 53 which leads to the sheltering of other income. S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 716-717.An accounting method addresses the TIMING of the deduction of an item, it does not provide for any deduction per se. Sec. 1.446- 1(a)(1), Income Tax Regs., states: "These methods of accounting for special items include the accounting treatment prescribed for research and experimental expenditures, soil and water conservation expenditures, depreciation, net operating losses, etc." Section 1371(b)(1) clearly precludes the carryover of net operating losses (NOL's). Rosenberg v. Commissioner, supra; cf. sec. 1374(b)(2) 5 (allowing NOL carryforward "Notwithstanding section 1371(b)(1)"). Similarly, it 18 appears Congress intended section 1371(b)(1) to apply to carryover of research and other business credits. See sec. 1374(b)(3)(B) (allowing business credit carryforwards "Notwithstanding section 1371(b)(1)"). In short, Congress evinced an intention to recognize specific exceptions, rather than a general exception to the application of section 1371(b)(1). It does not follow, as petitioner suggests, from the fact that the statute specifies certain items to be excluded from the application of section 1371(b) for one purpose, namely built-in gains under section 1374, that other items are excluded from the application of section 1371(b) for other purposes.Thus, even if section 469 is treated as an accounting method, we are still left with the question whether section 1371(b)(1) applies to a particular item, in this case, PAL's. Moreover, we note that, 19 although Congress placed section 469 in a part of the Code entitled "Methods of Accounting", the legislative history indicates that such treatment is not as significant as petitioner would have us believe. The statute itself and the legislative history treat section 469 separately from the provisions dealing with accounting matters. Compare title V entitled "Tax Shelter Limitations; Interest Limitations", which includes the provisions of section 469, with title VIII "Accounting Provisions" of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2233- 2249, 2345-2375; 54 H. Conf. Rept. 99-841 (Vol. II), supra, 1986-3 C.B. (Vol. 4) at 134, 285.We are not impressed by petitioner's attempt to reinforce the "method of accounting" argument that PAL's should not be treated in the same fashion as NOL's under section 1371(b)(1) by pointing to the fact that the regulations under section 469 disallow ratably the deductions which enter into the determination of whether the taxpayer has incurred a PAL. The regulations upon which petitioner bases this argument provide: (ii) ALLOCATION WITHIN LOSS ACTIVITIES -- (A) IN GENERAL. If all or any portion of a taxpayer's loss from an activity is disallowed 20 under paragraph (f)(2)(i) of this section for the taxable year, A RATABLE PORTION OF EACH PASSIVE ACTIVITY DEDUCTION (OTHER THAN AN EXCLUDED DEDUCTION (within the meaning of paragraph (f)(2)(ii)(B) of this section)) of the taxpayer from such activity IS DISALLOWED. * ** * (iii) SEPARATELY IDENTIFIED DEDUCTIONS. "In identifying the deductions from an activity that are disallowed under this paragraph (f)(2), the taxpayer need not account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any taxable year different from that which would result were such deduction not taken into account separately. * * Sec. 1.469-1T(f)(2), Temporary Income Tax Regs., 53 Fed. Reg. 5706 (Feb. 25, 1988); emphasis added. According to petitioner, these regulations make it clear that deductions do not lose their character in determining a PAL but are the items that are carried over under section 469(b) whereas such deductions lose their character in the case of an NOL. We think petitioner reads too much into the regulations and in effect ignores the word "loss" in section 469(b). In this connection, we note that, with respect to section 469, 21 the conference report on the Tax Reform Act of 1986 speaks of "Deductions in excess of income (i.e. losses)" and states: "DISALLOWED LOSSES and credits are carried forward and treated as deductions and credits from passive activities in the next taxable year." (Emphasis added.) H. Conf. Rept. 99-841 (Vol. II), 1986-3 C.B. (Vol. 4) at 137. In sum, we view section 469 as denying the PAL deduction with the regulations merely supplying the mechanics for allocating expenses among the taxpayer's various activities in order to calculate 55 the amount of expenses to be deducted in computing the PAL from a particular activity.Going beyond the "method of accounting" argument, petitioner points to specific provisions of section 469 to support the position that PAL's are not carryovers for purposes of section 1371(b)(1). Petitioner argues that, since PAL's are not personal to the taxpayer but may follow the property as basis adjustments in certain types of transfers, PAL's more closely resemble basis (which does "carry over" from C corporation to S corporation) than NOL's (which do not).In the cases of a disposition of an interest in a passive activity by gift or distribution of such an interest 22 by an estate or trust, the basis of the interest is increased by the suspended PAL's allocated to that activity. Sec. 469(j)(6), (12). However, while the increase in basis affords the recipient the benefit of using the equivalent of the suspended PAL's upon the recipient's disposition of the activity, the original taxpayer is denied any deduction of the suspended PAL's in any taxable year. Sec. 469(j)(6), (12). Where the taxpayer transfers the interest in the passive activity by reason of death, the suspended PAL's allocated to that activity are treated as if there were a sale, but only to the extent that the PAL's allocated to that activity exceed the step-up in basis by reason of death to the transferee. Sec. 469(g)(2). The taxpayer is denied the deduction in any taxable year of the amount of the PAL's allocated to the disposed of activity which equal the amount of the basis step-up. Id.We are not convinced by petitioner's arguments that suspended PAL's of St. Charles should be treated as basis adjustments and therefore should not be considered carryforwards within the meaning of section 1371(b)(1).Finally, petitioner argues that, even if PAL's are carryforwards, section 469 is a 23 specific provision which should prevail over the general provisions reflected by section 1371(b)(1). It is a basic principle of statutory construction that a specific statute controls over a general provision. Bulova Watch Co. v. United States, 365 U.S. 753">365 U.S. 753, 758, 6 L. Ed. 2d 72">6 L. Ed. 2d 72, 81 S. Ct. 864">81 S. Ct. 864 (1961). However, when two statutes are capable of coexistence, "it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective." Vimar Seguros Y. Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528">515 U.S. 528, 533, 132 L. Ed. 2d 462">132 L. Ed. 2d 462, 115 S. Ct. 2322">115 S. Ct. 232256 (1995); see DeSalvo v. IRS, 861 F.2d 1217">861 F.2d 1217, 1219 (10th Cir. 1988).Petitioner points to section 469(b), (f)(2), and (g)(1) to sustain this position. Petitioner argues that the clause "Except as otherwise provided IN THIS SECTION" (emphasis added) in section 469(b) dictates the conclusion that section 1371(b)(1), not being in section 469, does not apply to PAL's and, therefore, St. Charles should be allowed to use the suspended PAL's.As previously noted, see supra p. 5, section 469(b) provides: "Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under 24 subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year."Section 469(b) accomplishes two things: (1) It maintains the deductibility of suspended PAL's activity by activity, important to the overall working of section 469, and (2) it allows the taxpayer further opportunity to take such a loss. Even without the interplay of section 1371(b)(1), section 469(b) does not mean the taxpayer must recognize the loss in the immediately following year; the taxpayer may not have sufficient passive activity income 6 to use all or any of the suspended PAL's in that year. In such case, the unused suspended PAL's are again disallowed and will be similarly treated as a deduction in the next (third) year, and so on. See H. Conf. Rept. 99-841 (Vol. II), supra, 1986-3 C.B. (Vol. 4) at 137; S. Rept. 99- 313, supra, 1986-3 C.B. (Vol. 3) at 722 (where it is specified that suspended PAL's are "carried forward indefinitely").Petitioner further points out that it is only using the suspended PAL's allocated to the properties which were sold, and not those allocated 25 to other activities that St. Charles conducted. Petitioner goes on to argue that the losses at issue stem entirely from the operation of section 469(g)(1)(A), see supra p. 5, not from section 469(a) and (b); that is, they consist solely of excess PAL's that "shall be treated as a loss which is not from a passive activity." This, petitioner argues, is another reason why the losses which respondent disallowed are not carryovers and therefore section 1371(b) is inapplicable.57 The application of section 469(g)(1)(A), however, turns on the meaning of the parenthetical phrase "determined after the application of subsection (b)" which appears twice therein, once with respect to the disposed activity and then with respect to all other passive activities. There is no way to determine the amount of excess PAL's to be treated as nonpassive losses without the application of section 469(b). Indeed, a principal function of section 469(g) is to take into account the suspended PAL's created by section 469(a) and (b). Although the excess PAL' s are no longer treated as PAL's, they are derived from suspended PAL's.In our view, a precondition to the applicability of the parenthetical language in section 469(g)(1)(A)26 is that the suspended PAL's be available under section 469(b). Our previous analysis indicates that section 1371(b) makes the PAL's unavailable in the year at issue and therefore precludes the application of section 469(b) and consequently section 469(g)(1)(A).Petitioner further argues that section 469(f)(2) provides specifically for the situation at issue herein. That section provides: If a taxpayer ceases for any taxable year to be a closely held C corporation * , this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation * . Respondent responds that the legislative history of section 469(f)(2) indicates that this section was meant to apply to closely held C corporations that become "regular" C corporations, not to those that become S corporations.While the legislative history discusses a closely held C corporation that, due to change in stock ownership, is no longer closely held, it does so as an example of the situation that arises "when a corporation * * subject to the passive loss rule ceases to be subject to the passive loss 27 rule because it ceases to meet the definition of an entity subject to the rule." S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 728. Under these circumstances and given the broad statutory language, we think that section 469(f)(2) applies to St. Charles, which ceased to be a closely held C corporation by virtue of its subchapter S election.58 Section 469(f) ensures that once a taxpayer has suspended PAL's, the taxpayer's use of the suspended PAL's continues to be subject to section 469. Thus, section 469(f)(1) provides that, where the activity is no longer passive with respect to the taxpayer, the unused PAL's are to be used to offset income from that activity, and any remaining PAL's shall be treated as arising from a passive activity. Section 469(f)(2) provides that PAL's shall continue to be treated as such where the taxpayer is no longer a closely held C corporation (and otherwise would not be subject to section 469). Thus, the passive nature of St. Charles' PAL's are preserved.Petitioner argues that section 469(f)(2) requires St. Charles to use the suspended PAL's and that, if it is not permitted to use them against the gains from the disposition of the disposed passive activities, 28 it will be denied the use of the PAL's forever. Petitioner seeks to buttress this position by arguing that section 469(b) allows those PAL's disallowed under section 469(a) to be used in subsequent years and that, if section 1371(b)(1) disallows the PAL's, section 469 does not apply because there is no other basis for allowing their subsequent use. Respondent argues that since St. Charles is the same taxpayer, albeit subject to a different taxing regime, section 1371(b)(1) merely prevents it from using the PAL's during the "new regime" but does not preclude their preservation for use by St. Charles when that "new regime" ends and St. Charles becomes a taxpayer subject to section 469, as a closely held C corporation. 7We think petitioner's position as to the dire consequence of applying section 1371(b) is unfounded in that it ignores the pattern reflected by section 1371(b) in its entirety, which provides: (b) No Carryover Between C Year and S Year. --(1) From C year to S year. -- No carryforward, and no carryback, arising for a taxable year for which a corporation is a C 29 corporation may be carried to a taxable year for which such corporation is an S corporation.(2) No carryover from S year. -- No carryforward, and no carryback, shall arise at the corporate level for a taxable year for which a corporation is an S corporation.(3) Treatment of S year as elapsed year. -- Nothing in paragraphs (1) and (2) shall prevent treating a taxable year for which a corporation 59 is an S corporation as a taxable year for purposes of determining the number of taxable years to which an item may be carried back or carried forward. The clear import of section 1371 is that a change in the taxing regime applicable to a taxpayer as it moves from being an S corporation to a C corporation or vice versa should not be an occasion for permitting prior losses of one taxpayer from inuring to the benefit of another taxpayer. Thus, the losses of a C corporation should not inure to the benefit of its shareholders, thereby giving them an opportunity to utilize a deduction which would not otherwise have been available to them. Sec. 1371(b)(1). 831 Similarly, losses of an S corporation, which pass through, i.e., inure to the benefit of, its shareholders should not be taken away from them 30 for tax purposes in order to offset income of their corporation which has forgone its S status. Sec. 1371(b)(2). To round out the picture, section 1371(b)(3) makes it clear that the losses remain available for future use although the clock will continue to tick for the purpose of computing the period of availability. Consequently, the application of section 1371(b)(1) to preclude St. Charles from using its PAL's during the year before does not extend to destroying their availability. See Amorient, Inc. v. Commissioner, 103 T.C. 161">103 T.C. 161, 167 (1994). In this connection, we think it significant that, unlike NOL's, PAL's may be carried over indefinitely. See S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 722. Under section 469(b), contrary to petitioner's contention of permanent loss, they remain available for potential use in subsequent years if and when St. Charles relinquishes its S status.In sum, we are satisfied that PAL's are losses within the meaning of section 1371. Not only is the word "carryforward" in that section unqualified, but PAL's are in effect NOL's albeit computed separately for a particular activity and thus should not be treated any differently than NOL's to which section 1371 unquestionably applies.Taking into account the language of the statute and the legislative history, including the objective of Congress in 60 enacting sections 469(b) and 1371(b)(1), we conclude that St. Charles is precluded from carrying forward its suspended PAL's to the taxable year before us. 9 We emphasize that, as our analysis has revealed, there is no conflict between sections 469(b) and 1371(b)(1) with the result that our preclusion of use in 1991 is grounded on the unavailability of the PAL's during that year and their continued availability for future use.ADJUSTMENT OF BASIS FOR SUSPENDED 32 PAL'SPetitioner argues in the alternative that, if respondent is sustained on the suspended PAL's issue, St. Charles should be allowed to recompute the bases of the disposed properties to restore amounts for the portion of the suspended PAL's attributable to depreciation (and then recalculate the gain or loss realized from the dispositions). According to petitioner, the reductions in basis for depreciation should not have been taken because the depreciation deductions were neither "allowed" nor "allowable". Respondent's position is that the depreciation deductions were allowable; it was the PAL's that were disallowed.To a substantial degree, petitioner's alternative argument is premised upon the assumption that we would hold that the suspended PAL's are lost as a result of the subchapter S election, an assumption which has proved to be erroneous. However, petitioner's arguments suggest that they should also apply even if the suspended PAL's are held to remain available for future use. Consequently, we shall discuss petitioner's alternative position.Taxpayers are required to reduce the basis of property for depreciation by the greater of (1) the amount allowed as deductions in computing 33 taxable income and resulting in a reduction for any taxable year of the taxpayer's taxes or (2) the amount allowable as deductions in computing taxable income whether or not the amount properly allowable would have caused a reduction for any taxable year of the taxpayer's taxes. Sec. 1016(a)(2); sec. 1.1016-3(a)(1)(i) and (b), Income Tax Regs. "'Allowable deduction' generally refers to a deduction which qualifies under a specific Code provision 61 whereas 'allowed deduction', on the other hand, refers to a deduction granted by the Internal Revenue Service which is actually taken on a return and will result in a reduction of the taxpayer's income tax." Lenz v. Commissioner, 101 T.C. 260">101 T.C. 260, 265 (1993).Petitioner asserts that depreciation, which was deducted in computing the PAL's, was neither allowed nor allowable because they were "disallowed". In support of this position, petitioner points to section 1.469-1T(f)(2)(ii), Temporary Income Tax Regs., 5706">53 Fed. Reg. 5706 (Feb. 25, 1988), see supra pp. 12-13, where the method for allocating deductions entering into the calculation of a PAL, is that "a ratable portion of each passive activity deduction * * of the taxpayer from such activity 34 IS DISALLOWED" (emphasis added). Petitioner insists that the phrase "is disallowed" means that the depreciation was neither allowed nor allowable. Noting that the loss to which the depreciation deduction contributed was a nondeductible PAL and therefore produced no tax benefit, petitioner concludes that the depreciation deduction cannot be considered "allowed" or "allowable" within the meaning of section 1016(a)(2).We disagree. To a large degree, our reasons for so doing have been set forth in our analysis of the provisions of the regulations, upon which petitioner relies, in connection with petitioner's assertion that the deductions and not the PAL are the subject of the carryover. See supra pp. 12-13.We are reinforced in our reasoning by the legislative history of section 469, which states: "The determination of whether a loss is suspended under the passive loss rule is made after the application of the at-risk rules and the interest deduction limitation, as well as other provisions relating to the measurement of taxable income." S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 723. The "basis is reduced as under present law, even in the case where deductions are suspended under the 35 passive loss rule." Id. at 723 n.9.In sum, the description of the deductions as being "disallowed" has no independent substantive significance but relates only to the manner of their treatment in the calculation of the PAL.Nor are we persuaded by petitioner's argument that the restoration of depreciation is required by the "proper adjustment62 " of basis language in section 1016. Whatever the impact of that language might be in the context of a disallowance of a deduction for depreciation which has a permanent effect, it has no bearing herein. Our conclusion that the PAL's cannot be utilized in 1991 but remain available to potential future use supplies a critical difference from the situation that existed in Perkins v. Thomas, 86 F.2d 954">86 F.2d 954 (5th Cir. 1936), affd. on another issue 301 U.S. 655">301 U.S. 655 (1937), relied upon by petitioner. The fact that the deduction for depreciation resulted in no tax benefit to St. Charles in 1991 is beside the point. The PAL's, which were increased by the deductions, remain available for potential future use, albeit that the conditions for such use may never occur. In this respect, the PAL situation is strikingly similar to that which exists in the case of an NOL 36 which is increased by a depreciation deduction but which may, but not necessarily, be used in a subsequent year.In keeping with the foregoing, respondent's motion for partial summary judgment is granted, and petitioner's motion is denied.An appropriate order will be issued. Footnotes1. Unless otherwise indicated, all statutory 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.↩2. The exceptions are the taxes imposed on built-in gains under sec. 1374 and on excess net passive income under sec. 1375.↩3. See infra pp. 19-20 for a discussion of the impact of other provisions of sec. 1371(b)↩.4. See, e.g., sec. 170(d)(1) and (2) (charitable contributions); sec. 38(a) (business credit carryforwards and carrybacks); sec. 172 (net operating loss carryovers and carrybacks); sec. 904(c) (foreign tax credit); sec. 1212 (capital loss carrybacks and carryovers); sec. 1374(b)(2) and (3) (net operating loss carryforward, capital loss carryforward, and business credit carryforwards).↩5. Sec. 1374(b) provides limited exceptions for the purpose of calculating the tax on built-in gains, a tax imposed on the S corporation resulting from a subchapter S election by a C corporation which at the time of the election has unrealized gains on its properties. See supra note 2. The instant case does not involve the tax on built-in gains.↩6. For the closely held C corporation, this would include active income as well. Sec. 469(e)(2)↩.7. Although not a fact involved in our analysis, we note that St. Charles reverted to C corporation status in 1995.↩8. We note that St. Charles is not seeking to use its suspended PAL's against gains from the disposition of passive activities. Rather, it seeks to utilize the disposition of those activities at a substantial loss as the occasion for converting the suspended PAL's into losses "not from a passive activity" under sec. 469(g)(1)(A)↩, thereby creating a significant tax benefit to pass through to its shareholders.9. We reiterate that this case does not involve the tax on built-in gain pursuant to sec. 1374, and thus our holding does not extend to the use of suspended PAL's in calculating such gain.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621167/	THE GLOBE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.The Globe, Inc. v. CommissionerDocket No. 46791.United States Board of Tax Appeals28 B.T.A. 119; 1933 BTA LEXIS 1175; May 17, 1933, Promulgated 1175 On its income tax returns, which were filed on the basis of cash receipts and disbursements, the petitioner deducted amounts as salaries which it neither paid nor credited in the taxable years. Held, the deductions should be disallowed and the fraud penalties affirmed. David E. Coffman, Esq., for the petitioner. J. M. Leinenkugel, Esq., and R. B. Cannon, Esq., for the respondent. LANSDON 119 The respondent has asserted deficiencies in income taxes and penalties for fraud as follows: YearDeficiencyFraud penalty1922$994.80$497.401923952.65476.3319241,132.28566.1419251,452.49726.251926$1,681.41$856.8519271,724.49862.241928426.13213.07The deficiencies arise from the respondent's action in disallowing deductions in each of the taxable years for salaries claimed to have been paid to petitioner's officers and for other alleged business expenses. The penalties imposed are for alleged fraudulent understatements of income resulting from deductions as expenses of amounts which were never paid or incurred. FINDINGS OF FACT. The petitioner is a Texas corporation, organized1176 on April 20, 1922, with its principal place of business at Ranger, Texas. During the taxable years it was engaged in the retail clothing business. On its income tax returns for the period ending December 31, 1922, and for the calendar year 1923, the petitioner deducted $6,600 and $7,200, respectively, as salaries paid to its three officers. On its income tax return for each of the years 1924 to 1928, inclusive, it deducted $9,600 as salary paid to its three officers. None of the amounts were, in fact, paid or credited to the officers nor were they charged as an expense on the books of the corporation. In addition to the above amounts the petitioner deducted as salaries paid in the years 1922 to 1928, inclusive, the respective amounts of $3,537.26, $5,676.28, $5,636.50, $6,464.92, $7,589.84, $8,824.65 and $10,440.60, which were actually paid and which the respondent has allowed as a proper deduction. Of such amounts approximately $35 per week was paid to each of petitioner's three officers. The petitioner paid 120 no income tax for the years 1922 to 1925, inclusive, but paid a tax of $56.91 for 1926, $89.98 for 1927 and $154.21 for 1928. The petitioner kept its books1177 and rendered its income tax returns on the basis of cash receipts and disbursements. At the hearing the respondent conceded that the petitioner is entitled to a deduction for bad debts in each of the taxable years 1923 to 1928, inclusive, of $476.50, $567.60, $699.40, $669.75, $709.15 and $1,072.26, respectively. He concedes that it is also entitled to deductions for bad checks in 1926 and 1927 in the respective amounts of $913.34 and $523.14 and to a reduction of gross sales for 1927 in the amount of $3,297.43. OPINION. LANSDON: The respondent has alleged fraud and has submitted evidence sufficient in our opinion to prove it. The facts clearly show that the amounts in question were not paid or credited to the petitioner's officers during the taxable years and that no charges for such amounts were made on the books of the corporation. It is also clear that such amounts were deducted from income on the income tax returns filed by the petitioner for each of the taxable years. The petitioner's president and treasurer have sworn to returns which were false, for the purpose of evading income taxes. The deductions must be disallowed and the penalties approved. Cf. 1178 ; ; and . Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621169/	LAWRENCE J. FLECK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFleck v. CommissionerDocket No. 9130-79.United States Tax CourtT.C. Memo 1980-281; 1980 Tax Ct. Memo LEXIS 307; 40 T.C.M. (CCH) 800; T.C.M. (RIA) 80281; July 29, 1980, Filed Lawrence J. Fleck, pro se. Richard E. Trogolo and Howard Philip Newman, for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Francis J. Cantrel for the purpose of conducting the hearing and ruling on respondent's motion to dismiss this case on the ground that the petition fails to state a claim upon which relief can be granted. After a review of the record, we agree with and adopt his opinion which is set forth below. 1308 OPINION OF THE SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: This case is presently before the Court on respondent's motion to dismiss based upon failure to state a claim upon which relief can be granted filed on August 14, 1979, pursuant to Rules 40 and 53, Tax Court Rules of Practice and Procedure.2Respondent, in his notice of deficiency issued to petitioner on April 6, 1979, determined a deficiency in petitioner's Federal income tax for the taxable calendar year 1977 in the amount of $1,904. Petitioner resided at R.R. 1, Rome City, Indiana, on the date he filed his petition herein. He filed a Federal income tax return for 1977 (Form 1040A) with the Internal Revenue Service. The only income adjustment determined by respondent is for $12,941.81 in wages received in 1977 by petitioner from Newnaim Foundry, a Division of Chromalloy American Corporation, none of which was reported by petitioner on his 1977 return. The petition filed on July 2, 1979, not being in conformance with Rule 34, the Court, after the filing of respondent's pending motion, by order dated August 28, 1979, gave309 petitioner until September 25, 1979, in which to file a proper amended petition. No amended petition has been filed. 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." No justiciable error has been alleged in the petition with respect to the Commission's determination of the deficiency, and no facts in support of such error are extant therein. Rather, petitioner consumes his entire petition raising, in the main, a plethora of frivolous constitutional arguments. Therein, we are advised, interalia, that respondent "erred" in his deficiency determination-- 1. "* * * in computing the taxes for the years above in the amount of $1,904.00 including penalties assessed by authority of 6651(a), 6653(a), and 6654, 3 and that such error was willful, wanton, and malicious and intentional, all in violation of Petitioner's rights secured310 by the U.S. Constitution and the Declaration of Independence, the Magna Carta, and the Northwest Ordinance, and the Common Law." [Footnote added.] 2. "Petitioner believes that the alleged deficiency tax has been computed by using an arbitrary and capricious doctrine. Petitioner did not earn sufficient income in 'Dollars' to warrant a factual assessment in amounts stated by Respondent." Next, petitioner focuses in on and fires at respondent the following affirmative defenses 4--The Statute of Frauds, Laches, Estoppel, Waiver, failure to earn "Dollars" as defined by the U.S. Constitution, accord and satisfaction, failure of jurisdiction over the subject matter and over the petition, and the statute of limitations. 5311 Finally, in addition to the foregoing authorities upon which petitioner relies, he puts the Court on notice that he has the following further support--the King James' Bible, the Federalist Papers, the Mayflower Compact, the Declaration of Resolves, the Declaration of Rights 1765 and 1774, the Declaration of Independence 1776, the Articles of Confederation 1778, and the Virginia Charter 1606. We think it is clear that the multitude of legal and constitutional arguments advanced by petitioner are frivolous and without merit. All of the contentions he has raised have been fully discussed (adversely to petitioner's contentions) in numerous prior opinions of this and other Courts. 6 On this very point, which is totally pertinent to this case, in Hatfield v. Commissioner, 68 T.C. 895">68 T.C. 895, 899 (1977), we had this to say-- In recent times, this Court has been faced312 with numerous cases, such as this one, which have been commenced without any legal justification but solely for the purpose of protesting the Federal tax laws. This Court has before it a large number of cases which deserve careful consideration as speedily as possible, and cases of this sort needlessly disrupt our consideration of those genuine controversies. Moreover, by filing cases of this type, the protesters add to the caseload of the Court, which has reached a record size, and such cases increase the expenses of conducting this Court and the operations of the IRS, which expenses must eventually be borne by all of us. 7Here petitioner bears the burden of proving that the Commissioner's deficiency determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). He has not alleged facts which, if proved, would carry that burden. 8 The document filed as a petition is not in conformance with this Court's Rules of Practice and Procedure and does not state a claim upon313 which we can grant any relief. The absence in the petition of specific justiciable allegations of error and of supporting facts compels this Court to grant respondent's motion. Rule 123(b); cf., Klein v. Commissioner, 45 T.C. 308">45 T.C. 308 (1965); Goldsmith v. Commissioner, 31 T.C. 56 (1958); Weinstein v. Commission, 29 T.C. 142 (1957). On this record, we are compelled to sustain respondent's determination and, therefore, his motion will be granted. 9An appropriate order and decision will be entered.Footnotes1. Since this is a pre-trial motion and there is no genuine issue of material fact, the Court has concluded that the post-trial procedures of Rule 182, Tax Court Rules of Practice and Procedure↩, are not applicable in these particular circumstances. This conclusion is based on the authority of the "otherwise provided" language of that Rule. The parties were afforded a full opportunity to present their views on the law at the hearing at Washington, D.C., on October 10, 1979. Petitioner did not appear nor did he file any response to respondent's motion herein under consideration, albeit a copy thereof together with a copy of respondent's memorandum in support of his motion were served on petitioner by the Court on August 31, 1979.2. All rule references herein are to the Tax Court Rules of Practice and Procedure.↩3. No determination has been made by respondent in his notice of deficiency respecting additions to the tax.↩4. See Rule 39. ↩5. We observe, with respect to the statute of limitations, that the taxable year 1977 is before the Court. The three-year limitation period within which the Commissioner may assess and attempt collection of the deficiency in tax for that year or issue a notice of deficiency with respect thereto will not expire until April 15, 1981. He issued his notice of deficiency herein involved on April 6, 1979, and the petition was filed on July 2, 1979.↩6. Respondent, in his memorandum filed on August 14, 1979, a copy of which was served on petitioner by the Court on August 31, 1979, refutes many of petitioner's arguments citing the pertinent opinions of this and other courts.We see no reason to burden this opinion by reciting those pertinent opinions.↩7. The Court's language in Hatfield↩, so true when stated on September 12, 1977, is all the more impelling today because of the ever increasing caseload of this Court.8. See Ross v. Commissioner, T.C. Memo. 1978-203↩, where many of the same arguments as here were made and rejected.9. Although we considered imposing damages against petitioner pursuant to section 6673, Internal Revenue Code of 1954, as amended, we did not do so since, in our view, no showing has been made in this case that the petition was filed merely for delay. But see and compare, Greenberg v. Commissioner, 73 T.C. 806 (1980), Wilkinson v. Commissioner, 71 T.C. 633↩ (1979), where damages were imposed.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621173/	CLIFFORD F. MACK and HELEN L. MACK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMack v. CommissionerDocket No. 6586-70.United States Tax CourtT.C. Memo 1973-233; 1973 Tax Ct. Memo LEXIS 53; 32 T.C.M. (CCH) 1096; T.C.M. (RIA) 73233; October 23, 1973, Filed 53 Clifford F. Mack, pro se. James C. Lynch, for the respondent. TIETJENSMEMORANDUM FINDINGS OF FACT AND OPINION TIETJENS, Judge: The Commissioner determined a deficiency of $1,835.87 in petitioners' income tax for 1967. The Commissioner has made certain concessions. The questions remaining for decision are: (1) whether certain deposits to petitioners' bank account represented income not reported on their 1967 Federal income tax return; and (2) whether petitioners realized a gain of $127.16 on the sale of stock in 1967. 2 FINDINGS OF FACT Petitioners, Clifford F. Mack (hereafter Clifford) and Helen L. Mack (hereafter Helen), are husband and wife and resided in Dearborn Heights, Michigan, at the time they filed their petition in this proceeding. On their joint Federal income tax return for 1967, the petitioners reported gross income of $3,246. That gross income represented the profits from petitioners' beauty shop business, which, according to the return, had gross receipts of $5,795. The petitioners made the following deposits to their joint checking account: 1967Amount January 17$ 178.54February 25460.00March 41,050.00April 213,394.02July 51,000.00August 151,000.00September 6909.20September 25400.00Total$8,391.7654 None of these deposits represented income from the beauty shop business. In 1967, petitioners sold 748 shares of stock in Investment Company of America for $10,127.92, or $13,54 per share, 3 and received a check payable to Helen for that amount. Their cost basis of those shares was $10,000.76 or $13.37 per share. On March 17, 1967, Clifford cashed the check for $10,127.92 and, at his request, received a $10,000 bill. OPINION Bank Deposits The Commissioner determined that the bank deposits represented taxable income not reported by petitioners on their 1967 tax return. Unexplained deposits may furnish the basis for such a determination. Henry M. Rodney, 53 T.C. 287">53 T.C. 287, 315 (1969). The Commissioner has no obligation to attribute the deposits to identifiable sources. Goe v. Commissioner, 198 F.2d 851">198 F.2d 851 (C.A. 3, 1952), affirming a Memorandum Opinion of this Court, certiorari denied 344 U.S. 897">344 U.S. 897 (1952). When the Commissioner has determined that deposits represent taxable income, the taxpayer has the burden of proving, by evidence of the nature of the deposits, that the Commissioner's determination was erroneous. Henry M. Rodney, supra at 315;55 Thomas B. Jones, 29 T.C. 601">29 T.C. 601, 614 (1957); and O'Dwyer v. Commissioner, 266 F.2d 575">266 F.2d 575 (C.A. 4, 1959), affirming 28 T.C. 698">28 T.C. 698 (1957), certiorari denied 361 U.S. 862">361 U.S. 862 (1959). 4 Petitioners introduced no evidence and no testimony other than Clifford's on this issue. Clifford testified that, in March 1967, he received a $10,000 bill when he cashed the check representing the proceeds of the sale of stock in Investment Company of America. He testified that he asked for a $10,000 bill because such a bill was "the easiest way to keep" the money. He testified that, to cover living expenses, he redeposited portions of the $10,000 from time to time. Clifford's testimony does not convince us that the proceeds from the sale of stock were the source of the deposits. We note that petitioners deposited more than $1,600 before they cashed the check and received the $10,000 bill.Several of the deposit slips indicate that checks, not cash, were deposited. Petitioners did not explain why a $10,000 bill was the easiest way to keep money when they had to use some of the $10,000 within a month of their receipt of the bill. Nor have they explained56 their reasons for keeping cash when they had to deposit portions of it in a checking account to meet expenses. Because petitioners have not presented any reasonable explanation as to the sources of the deposits, they have not 5 met their burden of proving that the deposits did not represent taxable income. O'Dwyer v. Commissioner, supra at 588. Sale of Stock The Commissioner originally determined that petitioners realized a $3,395.92 gain on the sale of stock in Investment Company of America. His determination was based on an estimated basis. Before trial, petitioners asked the Comissioner to contact their broker, from whom the Commissioner learned that the stock had a $10,000.76 cost basis. Accordingly, the Commissioner has conceded all but $127.16 of the $3,395.92. Having asked the Commissioner to contact their broker, petitioners offered no coherent testimony on the amount of gain realized on the sale of the stock. Clifford testified that, in 1965 he received $250 in dividends, which he reported in 1966 and which he used to purchase more stock. But he also said, "I had the stock for two years and I filed $200 and some dollars income for it which I*57 never took out in more stock, and then when I sold it all I got was $10,127.00 for the whole works." Clifford also testified as follows: "All I gained on it [the sale] was $127.00." We are not certain whether Clifford's testimony represents a concession of the issue. We are certain that it is 6 not sufficient to meet the petitioners' burden of proving erroneous the Commissioner's determination, especially in view of the substantial concession which the Commissioenr has made. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621174/	Edgar R. Stix, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lawrence C. Stix, Petitioner, v. Commissioner of Internal Revenue, RespondentStix v. CommissionerDocket Nos. 603, 609, 604United States Tax Court4 T.C. 1140; 1945 U.S. Tax Ct. LEXIS 186; April 17, 1945, Promulgated 186 Decisions will be entered for the respondent. Income of property transferred by petitioners' mother to two trusts, of one of which each of petitioners was designated as "primary beneficiary" and of which the two petitioners were trustees with broad discretionary powers, including authority to distribute income to their children and to invade corpus for their benefit or that of their children, held, taxable to petitioners under section 22(a), notwithstanding that the income was actually paid to the children in the tax years. Edward J. Mallinckrodt, Jr., 2 T. C. 1128; affd. (C. C. A., 8th Cir.), 146 Fed. (2d) 1, followed. Harry Silverson, Esq., and Charles H. Meyer, Esq., for the petitioners.Arthur Groman, Esq., for the respondent. Opper, Judge. Van Fossan, J., dissents. Harron, J., dissenting. Arundell and Black, JJ., agree with this dissent. OPPER1140 In these proceedings the respondent has determined deficiencies in income tax as follows:PetitionerDocket No.193819391940Edgar R. Stix603, 609$ 377.74$ 516.15$ 1,986.18Lawrence C. Stix6041,447.272,035.992,474.33The only contested question is whether the income from certain trusts is taxable to the petitioners.1141 FINDINGS OF FACT.Part of the facts have been stipulated. The stipulation is adopted as part of our findings of fact and is incorporated herein by reference.Edgar R. Stix and Lawrence C. Stix are residents of Scarsdale, New York. For the year 1938 Edgar filed his income tax return with the collector for the third district of New York, and for the years 1939 and 1940 he filed his returns with the collector for the second district of New188 York. For the years 1938, 1939, and 1940 Lawrence filed his returns with the collector for the second district of New York.Petitioners are brothers, sons of Robert L. Stix and Lena Stix. Robert L. Stix died in 1916. He bequeathed his estate, including life insurance, to his wife, Lena Stix. In 1935 the net worth of the assets of Lena Stix was approximately $ 400,000.Lawrence has two sons and Edgar has two sons. The sons of Lawrence are Lawrence C. Stix, Jr., born January 23, 1915, and Edgar R. Stix, 2nd, born January 22, 1920. They were 23 and 18 years of age, respectively, in 1938. The sons of Edgar are Robert L. Stix, born September 26, 1916, and Donald Stix, born January 23, 1920. They were 22 and 18 years of age, respectively, in 1938.In 1935 Lena Stix was 70 years of age. On November 27, 1935, she executed two trust indentures having identical terms except for the differences in the beneficiaries. The trustees under each trust were the same. They were her two sons, the petitioners here, Lawrence and Edgar Stix. Property was not transferred separately to each trust, but each trust was given an undivided one-half interest in cash and securities having a value of 189 $ 200,000 at the time of the creation of the trusts. One trust is for the benefit of Lawrence Stix and his two sons and the second trust is for the benefit of Edgar Stix and his two sons.In one trust Lawrence Stix is designated the "Primary Beneficiary" and in the other trust Edgar Stix is designated the "Primary Beneficiary." Each trust is to endure for the life of the primary beneficiary. Upon his death, the trustee is to distribute the corpus in equal shares to the sons of the primary beneficiary, if they have become 28 years of age, or, to hold each share in trust until such time, unless the primary beneficiary shall have designated in his will that the corpus should be distributed otherwise. The income of each trust is to be paid to the primary beneficiary, a son of the grantor, except that the trustees may in their sole discretion, at any time or from time to time, pay all or any of the income to the sons of the primary beneficiary, the grandsons of the grantor. There are no provisions for accumulating income and adding it to principal. The trustees, in their sole discretion, at any time or from time to time, may pay over a portion or portions of the corpus to the primary190 beneficiary or to either or both of his sons.1142 The indentures provide that there shall always be two trustees under each trust, the original trustees and successor trustees. The original trustees are given broader powers of management of the trust estate than the successor trustees. All powers given to all trustees are discretionary. The original trustees are given the following discretionary powers: To invest any funds of the trust in any bonds, mortgages, real estate, stocks of any kind, and to lend funds to any person, firm, or corporation, and to invest funds in any business, at the risk of the business, and to become a partner or participant in any business, and to lend any of the funds to one of the trustees (one of the petitioners), individually, or to any partnership, enterprise, or corporation in which one of the trustees may be a partner, or participant, or officer, director, or stockholder, or to participate with one of the trustees in any business or venture as a partner or participant, at the risk of such business. The foregoing powers, subject only to the limitation mentioned in clause (10) of article second, shall be absolute, and may be exercised on any191 terms and without restriction, and within the sole discretion of the trustees, notwithstanding the fact that such investment would not be a proper one for trustees, otherwise, and that it may be speculative, hazardous, and nonproductive of income. Clause 10 authorizes the trustees to enter into contracts with one of the trustees individually, provided that the trustees in their capacity of trustees shall not enter into any contract with one of the trustees in his individual capacity unless at least one other trustee has no individual interest therein. The trustees are also authorized to register the securities in the individual names of the trustees or in names of nominees, provided that securities so registered shall be earmarked as trust property by being placed in envelopes which are so marked; to maintain a bank account in the individual names of the trustees, designated as "Special," in which bank account shall be deposited only funds belonging to the trust; to withdraw funds of the trust on deposit in any bank by check signed by either of the trustees alone without the signature of the other trustee, and any bank is authorized to honor a check so signed even if it is payable192 to the trustee signing the checks; to borrow money and guarantee obligations for any purpose connected with the trust, or for any purpose connected with any person, firm, or corporation to whom the trust may have extended credit, or any business or venture in which the trust may be interested as partner or otherwise, and to pledge all or any of the assets of the trust as security therefor.The general powers which may be exercised by a successor trustee, as well as an original trustee in their discretion, are as follows: To retain trust property for as long as they deem advisable, even though the property may be hazardous, speculative, and nonproductive of 1143 income; to sell, mortgage, or exchange any of the trust property upon whatever terms they consider advisable without application to court; to keep funds uninvested for as long as they consider advisable; to invest funds of the trust in the same investments as funds of any other trust are invested of which the trustees may be trustees, and to deposit funds of the trust in the same bank account as funds of such other trusts; to distribute as income the entire interest on securities originally transferred to the trust without193 allocating accrued interest to principal; to distribute as income the entire interest on securities purchased at a premium without setting aside a fund to amortize the premium; to purchase, sell, and exercise conversion, subscription, and other rights; to participate in reorganizations of any business in which the trust has an interest; to determine whether any property or funds constitute principal or income, and whether any sum paid out shall be charged to principal or income; to compromise or settle any claim which may have been made against the trustees.Between November 27 and December 6, 1935, petitioners met, in their capacity as trustees, to decide upon future distributions of income from the two trusts. They determined, orally, that all of the income of one trust was to be distributed to Edgar R. Stix, 2nd, and that all of the income of the other trust was to be distributed to Robert L. Stix. As between the two sons of Lawrence C. Stix, it was decided that income should be distributed to Edgar R. Stix, 2nd, rather than to Lawrence C. Stix, Jr., because the latter was employed and was earning a good income. With respect to the sons of Edgar R. Stix, it was decided that 194 the income should be distributed to Robert L. Stix because he was then at college and was the older of the two children of Edgar R. Stix. The trustees wanted to build up some capital for the time when Robert L. Stix would be graduated from college and would attain his majority.No change was made with respect to the decisions as to the use of the income of the trusts, as set forth above, until the end of 1937. At that time, it was decided to distribute all of the income of one trust to Donald Stix, a son of Edgar, who was then in college. Robert Stix had attained his majority at the end of 1937 and the trustees decided to distribute the income to his young brother. No change was made with respect to the use of all of the income of the other trust. The trustees continued to pay the income to Edgar R. Stix, 2nd.In 1939 petitioners reduced to writing the decisions which they had made orally in 1935 and 1937 as to the distribution of the income of the two trusts.None of the principal of either trust has ever been distributed and petitioners have never received any income from the trusts.1144 During the taxable years the amounts of all of the income of one trust, and the use195 thereof, were as follows:IncomeDistributee1938$ 4,019.93Edgar R. Stix, 2d.19394,627.24"19405,168.52"The above amounts were included in the income tax return of Edgar R. Stix, 2nd, for each of the above years.During the taxable years the amounts of all of the income of the other trust, and the use thereof, were as follows:IncomeDistributee1938$ 4,019.93Donald Stix.19394,627.24"19405,168.52"The above amounts were included in the income tax return of Donald Stix for each of the above years.The income of petitioner Edgar R. Stix for the years 1938, 1939, and 1940 was approximately $ 15,000, $ 15,000, and $ 20,000 respectively. Petitioner Edgar R. Stix fully supported his son Donald during the taxable years and paid for Donald's education, except that Donald contributed towards his education the sums of $ 1,027 in 1939 and $ 1,029 in 1940.The income of petitioner Lawrence C. Stix for the years 1938, 1939, and 1940 was approximately $ 65,000, $ 100,000, and $ 100,000, respectively. During the taxable years petitioner Lawrence C. Stix fully supported his son Edgar R. Stix, 2nd, and paid all of the cost of196 his education.During the taxable years Donald Stix had an income of about $ 400 a year, exclusive of income received by him from the trust, and Edgar R. Stix, 2nd, had an annual income of about $ 1,000 a year, exclusive of the income received by him from the trust. Each maintained his own separate bank account, in which distributions of trust income were deposited. Securities owned by each were registered in their respective names.All decisions concerning distributions from both trusts were made jointly by the two trustees.Petitioners have never been in business together. Neither one has ever been indebted to the other, or under any financial obligation to the other.No loans have ever been made by either trust to anyone, nor has either trust ever made any investments in any business in which either trustee was interested.1145 The cash balances of each trust were kept in a separate bank account under the name Lena Stix Trust and the securities owned by the trust were registered in the same name. A double entry set of books for each trust was kept by a certified public accountant, who submitted semiannual written reports on the financial status of the two trusts.Edgar197 R. Stix has made claims for refunds of overpaid taxes for the years 1938 and 1939, and Lawrence C. Stix has made claims for refunds of overpaid taxes for the years 1938, 1939, and 1940.OPINION.The disposition of this proceeding seems to us to be governed by Edward Mallinckrodt, Jr., 2 T. C. 1128. There, equally, the petitioner was the beneficiary of a trust created for him by another, but he could obtain the trust income by directing the remaining trustees to that effect. His failure to make that direction with the consequent absence of any payment to him was relied upon as requiring the application of section 162, taxing trust income to the trust if undistributed. There were other aspects of control in the petitioner similar to those here, but our decision may be summed up by the statement in the opinion that:Certainly with such powers and rights in and to the trust corpus, and particularly to the income produced, there can be no question that if petitioner were the grantor he would be taxable on the income under section 22 (a), Helvering v. Clifford, supra, and petitioner makes no claim to the contrary. The 198 fact that the powers and rights are not the retained powers and rights of a grantor but were received by the petitioner as beneficiary of the trust and by grant from his father makes them no less substantial. * * The case was affirmed (C. C. A., 8th Cir.), 146 Fed. (2d) 1: * * 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. * * * 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 section 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, at 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. * * Certiorari has been199 denied 324 U.S. 871">324 U.S. 871.In one aspect the present facts vary slightly from those in the Mallinckrodt case. Here, as we read the trust instrument, it was unnecessary for either petitioner to make a request in order for the income from his trust to be paid to him. Only by the affirmative action of the petitioners as cotrustees in exercising their discretion to pay the income to their children would there be the necessary conduct resulting 1146 in a failure on the part of the respective petitioners to receive the entire trust income. That they undertook in the years before us to engage in that affirmative act cannot, it seems clear, place these circumstances in any stronger light than where the failure of the beneficiary to take action has a similar effect. " * * it does not matter whether the permission is given by assent or by failure to express dissent." Corliss v. Bowers, 281 U.S. 376">281 U.S. 376.The only action which could deprive either petitioner of his respective right to the trust income was thus the concurrent action of both as reciprocal trustees in directing the income elsewhere. If the trustees, including in200 each case one of the petitioners, could not agree, the discretion under New York law could not be exercised. In re Johnson's Will, 123 Misc. Rep. 834; 207 N. Y. S. 66; In re Campbell's Will, 13 N. Y. S. (2d) 773; affd., 26 N. Y. S. (2d) 491. And in the absence of that discretionary action the income would be left to the destination directed by the trust instrument and necessarily find its way to the respective petitioner as "primary beneficiary." The failure of either to concur was all that was necessary for him to obtain the income from his own trust. We need not, accordingly, resort to the reciprocal trust theory presented by the Lehman case, 1 for the conclusion that it was within the unhampered power of each petitioner to obtain the current income of the trust if that suited his purpose. See also Edward E. Bishop, 4 T. C. 862.201 Strenuous effort is made to satisfy us that, in spite of the express direction for the distribution of income, the true purpose of the trust was to benefit the grandsons, rather than or at least equally with the petitioners. But the whole tenor of the instrument contradicts any such conclusion, aside from the provisions dealing with income. Each trust is limited to the life of the respective primary beneficiary. Upon the termination of the trust no provision is made for the grandsons except in the event that the primary beneficiary shall have failed to make a valid testamentary disposition as to his trust. Not only are the two primary beneficiaries appointed the only two trustees, but if they resign they may designate successor trustees. And, finally, the duty of the trustees to account is specified to be only to the primary beneficiary during his life. Thus we can not view the trust as establishing an interest in the grandsons paramount to that in petitioners, of which a court of equity would take cognizance. Cf. Phipps v. Commissioner (C. C. A., 2d Cir.), 137 Fed. (2d) 141; see Commissioner v. Irving Trust Co. (Beugler Estate) (C. C. A., 2d Cir.), 147 Fed. (2d) 946;202 Morsman v. Commissioner (C. C. A., 8th Cir.), 90 Fed. (2d) 18; certiorari denied, 302 U.S. 701">302 U.S. 701; Greene v. Greene, 125 N. Y. 506; 26 N. E. 739.1147 But even were the evidence stronger on this point, it would not suffice to distinguish the Mallinckrodt case, where it was recognized that "the grantor's intention in creating the trust was primarily to provide for petitioner's children and grandchildren," and that "the powers conferred upon the petitioner and upon the trustees over the disposition of the income and corpus of the trust were not granted with the thought that they would be exercised for the sole use or benefit of petitioner."Finally, the fact that petitioners chose to make their sons the beneficiaries from year to year can not alter the significance of their command over the income. The situation each year was as though the petitioner-beneficiary determined to assign to the designated grandson his share of the trust income, prior to distribution, without to any extent releasing his basic interest in the trust or his opportunity to grant 203 or withhold similar gifts in the years to come. * * By §§ 161 (a) and 162 (b) the tax is laid upon the income "of any kind of property held in trust," and income of a trust for the taxable year which is to be distributed to the beneficiaries is to be taxed to them "whether distributed to them or not." In construing these and like provisions in other revenue acts we have uniformly held that they are not so much concerned with the refinements of title as with the actual command over the income which is taxed and the actual benefit for which the tax is paid. See Corliss v. Bowers, 281 U.S. 376">281 U.S. 376; Lucas v. Earl, supra; Helvering v. Horst, supra; Helvering v. Eubank, supra; Helvering v. Clifford, supra. It was for that reason that in each of those cases it was held that one vested with the right to receive income did not escape the tax by any kind of anticipatory arrangement, however skillfully devised, by which he procures payment of it to another, since, by the exercise of his power to command the income, he enjoys the benefit of the income on which the tax is laid. [Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, 581.]204 We are of the opinion that respondent correctly charged petitioners with the trust income.Decisions will be entered for the respondent. HARRON Harron, J., dissenting: Respondent has taxed the income of each of the Lena Stix trusts to each petitioner, respectively, although the income was received by other persons who were income beneficiaries named in each trust instrument. The majority have concluded that the income of the trusts is taxable to petitioners under section 22 (a), and that conclusion carries with the further conclusion that section 162 (b) does not apply in the taxation of the income of these trusts. The conclusion by the majority has been made under the egis of Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, and Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. I use the word egis rather than the word rationale, advisedly, because the reasoning of these cases can not be applied to the Lena Stix trusts. 1148 That is because the facts, which must be distilled from the particular income clause of each Lena Stix trust, are not the facts which were found in the trusts created by Corliss and by Clifford. 205 Corliss and Clifford were taxed upon the income of property which each put into trusts but over which each retained so much control and received such economic benefit that the framework of the trusts did not insulate each one from his original ownership of the income. A recent case, the Mallinckrodt case, applied the reasoning of Corliss and Clifford cases in taxing the income of a trust created by a father to the son who was the sole beneficiary of remainder income under the trust, and who, as an individual, was given the right to take the income or to let it be added to principal over which he was given also a power of appointment. Under those facts it was considered proper to tax the income from A's property, transferred to a trust, to B, a beneficiary of the trust because B could not successfully escape the ownership of the income by not taking it into his possession. It was B's income whether or not he asked for it, as the trust was constructed. The Mallinckrodt case is the authority relied upon by the respondent and by the majority as giving legal sanction to taxing the income in question to petitioners.It is an established rule that each case must be decided206 upon its own particular facts, and, where the issue relates to the taxation of trust income, each trust is entitled to receive a fair construction, free from stretching one written clause into the pattern of the written clause found in some other trust instrument previously analyzed in some other case. The Lena Stix trusts contain an income clause which is entirely different from the income clause in the Edward Mallinckrodt, Sr., trust. In these proceedings, the taxpayers are entitled to have the special trusts involved considered upon their special terms. There can be no reconciliation whatever between the interpretation which the majority gives to the income clause in each Stix trust and the interpretation which I feel should be given. The majority view, in my opinion, is tantamount to a conclusion that Lena Stix did not create any trusts at all, but gave property to each petitioner; and that the form of a trust was a sham. In effect, the majority view deletes from the Lena Stix trusts, for all practical purposes, the word "Trustees" following the names of petitioners in the trust instruments, and the words in the fifth clause, "The Trustees hereby accept the trusts and agree207 to execute the same to the best of their ability."In the Mallinckrodt case the trustees of the trust acted under the trust in accumulating the remainder current income. But in each year Mallinckrodt, Jr., was the only person entitled to receive that income if it was distributed. Therefore, he owned it, and he could not avoid tax on the income by resting upon a provision in the trust to the effect that the trustees were required to pay the income to him only if he 1149 asked them to do so. The courts which have considered that trust have held that for tax purposes the provision in the trust which made distribution of certain income by the trustees dependent upon a request from the sole beneficiary was a nullity where the incidence of the tax upon such income came into question, in so far as the taxpayer's argument that it saved him from tax was concerned. Under such provisions, the trust income was taxable to the named beneficiary and not to the trust. While the Circuit Court which considered the Mallinckrodt, Sr., trust adopted the view that the tax should be imposed under section 22 (a) rather than under section 162 (b), a technical choice of alternative statutory208 provisions, an argument had been made that the remainder income could be classed as income "to be distributed currently" and taxed under section 162 (b) to Mallinckrodt, Jr., and I think the practical result of the conclusion of the Circuit Court was to do just that, even though the Circuit Court put its holding under section 22 (a) rather than under section 162 (b).I think there is good cause for caution in selecting the Mallinckrodt case as the authority for the decision of the issue presented here under the Lena Stix trusts. In fact, I think these trusts are distinguishable from the Mallinckrodt trust, and the income in question should not be taxed to petitioners under section 22 (a). Furthermore, the reasons which were given for taxing the undistributed income from the Mallinckrodt trust to Mallinckrodt, Jr., under section 22 (a) can not be found in these trusts. Trusts such as the Lena Stix trusts have not been analyzed and considered before. These proceedings should be considered upon their own special trusts, giving rise to their own special facts.In each trust created by Lena Stix the terms are identical except for names. There are two trustees under each trust. 209 Lena Stix transferred property to the trustees under one trust for the following use and purpose, among others:(1) To receive the income therefrom * * * during the life of Edgar R. Stix, one of the sons of the Grantor, hereinafter referred to as the "Primary Beneficiary", and to pay over said income to the Primary Beneficiary; except that the Trustees may, in their sole and exclusive discretion, at any time or from time to time, pay over all or any of said income to Robert L. Stix and Donald Stix, the sons of the Primary Beneficiary, or either of them.In the other trust the provision is the same, except that the name of Lawrence C. Stix appears as the primary beneficiary, and the names of his sons are set forth, namely, Lawrence C. Stix, Jr., and Edgar R. Stix, 2nd.The majority view stresses a familiar rule, which is followed under the laws of New York, that, where there is more than one trustee and they are given discretionary powers, they must all agree in a decision 1150 made under such powers; one can not act alone. But to state that rule here is only to describe what the trustees were authorized to do under a Lena Stix trust. Bearing the rule in mind, the above 210 clause may be paraphrased, as follows: The trustees are to pay the income to the primary beneficiary, except that they may pay the income to Robert L. Stix and Donald Stix, or either of them, upon their agreement that the income should be so paid.The authorization to the trustees under each Lena Stix trust to pay the income to persons other than the primary beneficiary if the trustees should agree that such disposition should be made constitutes much more than a slight variance in the facts here from those in the Mallinckrodt case. It is error and a tortured construction to construe the above quoted clause in a Lena Stix trust as saying the same thing as was said in the income clause in the Mallinckrodt, Sr., trust. In the trust for the life of Robert L. Stix the trustees were to pay him the trust income unless they agreed in their discretion to pay it to other named beneficiaries. The same was true under the trust for the life of Lawrence C. Stix. The distribution of trust income was not made dependent upon the request of a primary beneficiary. It was not so provided in the Lena Stix trusts. The grant of the discretionary power to the trustees to distribute income to others211 did not write into the Lena Stix trusts any such provision, not even indirectly.There are, however, very important variances in the Stix trusts from the Mallinckrodt trust. One is that income had to be distributed and could not be accumulated. A second is that under each trust two persons (four in all) were named to whom the trustees were authorized to distribute income under the exercise of their sole discretion, other than the two primary beneficiaries. A third is that the trustees were given discretionary powers over the distribution of the principal of each trust during the existence of each trust. The trustees held the trust corpus for the following use:(2) To pay over to the Primary Beneficiary, or to either or both of the aforesaid sons of the Primary Beneficiary, at any time or from time to time, such portions of the principal of the trust, if any, as the Trustees in their sole discretion may consider proper.The majority view is, in substance, that under clause (1), the income clause, an exercise of the discretionary power by the two trustees was not an act by fiduciaries at all, but was an act of one of the trustees, namely, the one who was named as a primary beneficiary; 212 and that he acted in his individual capacity, and that he exercised powers of ownership of trust income; and that the payment of the trust income to the other named beneficiaries was not a distribution by the trustees, but was in reality a gift or an assignment by the primary beneficiary of his own income. Thus, the majority view makes a nullity of the grant 1151 of fiduciary powers under clause (1) of each trust, but says nothing about the fiduciary powers given to the trustees under clause (2). Does this contention mean that a distribution of principal to a son or sons of the primary beneficiary under clause (2) is an act of the trustees, but that a distribution of income to a son or sons of the primary beneficiary under clause (1) is not an act of the trustees, but, instead, is an act of the primary beneficiary, himself? It can not be held that under clause (1) it is an impossibility for the trustees to act in a fiduciary capacity and that under clause (2) it is a possibility, the two clauses having the same quality as authorizations to the trustees from the grantor of the trusts.There is either logical inconsistency in the view expressed by the majority, or the213 majority view is that Lena Stix did not create any trusts, and petitioners were not trustees, but each petitioner was the donee of property purportedly placed in a trust for the duration of his life.The evidence in these proceedings shows that each trustee acting under the Lena Stix trusts was independent of the other, and was active, and was not complacent and amenable to his cotrustee.We have here two trusts created by the mother of petitioners out of her own property. The trustees named in each trust accepted the trust and agreed to exercise it to the best of their ability. In the taxable years they were able to and did exercise the discretionary power they had over the income under clause (1), and they distributed the income to grandsons of the grantor. Thus, they carried out the directives of the grantor; they carried out the trusts. Those who received the income were named as beneficiaries of income if the trustees in their discretion should elect to pay it to them. The income of the trusts was "to be distributed currently" (see section 161 (a) (2)), and it should be taxed under section 162 (b). Under section 162 (b) the income is taxable to those who received it, and214 not to petitioners, who did not receive it directly or indirectly.The income should not be taxed under section 22 (a) to petitioners as individuals. They did not own the trust property, under either trust, and they did not own the income by virtue of any personal dominion and control equal to ownership. The facts under the Lena Stix trusts differ greatly from the facts under the Corliss and Clifford trusts, and the Mallinckrodt trust. The question presented in these proceedings is not controlled by the rationale of the Corliss and Clifford cases. In the Mallinckrodt case, Mallinckrodt, Jr., had a "power * * to receive * * * trust income each year, upon request," which was the equivalent of ownership of the income for purposes of taxation. In these proceedings neither Edgar R. Stix nor Lawrence C. Stix had such "power to receive income upon request." Each one, *1152 under each trust, had only a right to receive income subject to being divested of the right by the joint action of two trustees who were given the authority to pay the income to other persons, in their sole discretion. Footnotes1. Allan S. Lehman et al., Executors, 39 B. T. A. 17; affd. (C. C. A., 2d Cir.), 109 Fed. (2d) 99; certiorari denied, 310 U.S. 637">310 U.S. 637↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621176/	Chatham Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentChatham Corp. v. CommissionerDocket Nos. 529-66, 324-67United States Tax Court48 T.C. 145; 1967 U.S. Tax Ct. LEXIS 112; April 28, 1967, Filed 112 Petitioner filed a pretrial motion requesting the Court to find that its timely statement purporting to comply with the requirements of sec. 534, I.R.C. 1954, was sufficient to place the burden of proof on respondent with respect to the grounds stated therein. Held, motion granted. Chester M. Howe and Herbert Burstein, for the petitioner.James E. Markham, Jr., for the respondent. Tannenwald, Judge. TANNENWALD145 OPINIONThis case involves a determination by respondent that petitioner is subject to the accumulated earnings tax under section 531 1 for the fiscal years ending June 30, 1961, 1962, 1963, and 1964. Respondent sent a notice to petitioner in accordance with section 534(b) and petitioner submitted a timely statement purporting 146 to comply with the requirements of section 534(c). At the call of the case for trial on February 17, 1967, petitioner moved for a ruling that the burden of proof with respect to the grounds set forth in its statement rests upon respondent as provided in section 534(a). Decision was reserved by the Judge before whom the case was originally calendared and trial was continued to be heard by him at a future date.114 In denying a similar motion in Shaw-Walker Co., 39 T.C. 293">39 T.C. 293 (1962), we stated:It may be that a ruling on the burden-of-proof question as a preliminary matter would in some instances serve the convenience of the petitioner, but we think that the interests of both parties as well as that of the Court will best be served by allowing this question to be disposed of at or after trial.In Shaw-Walker, the motion was submitted to the Judge of the motions calendar in advance of trial. By way of contrast, the motion herein has been submitted to the Judge before whom the case is to be tried. Nothing in Shaw-Walker precludes a ruling in such a situation. On the contrary, the above-quoted language specifically recognizes that an advance ruling might issue under appropriate circumstances.Petitioner's statement, consisting of 49 pages, sets forth two grounds, with supporting facts, for retaining its earnings and profits: (a) To finance the expansion of the market for its products by five enumerated means and (b) to provide reserves for the diversification of its business through the development of new products and the acquisition of business enterprises. 115 The amount of funds required for (a) is projected in great detail year by year from 1959 to 1970. With respect to (b), efforts to develop new products are set forth and more than 25 instances of negotiations relating to prospective acquisitions, during the period commencing in the fiscal year 1960, are listed, many of which were pursued simultaneously and were not considered alternative possibilities. Several had price tags attached thereto. The nature of the plans for expansion of markets and six instances of negotiations for acquisition are described in great detail. Names of other business concerns and individuals involved are given in practically every instance. The aggregate of the anticipated expenditures for market expansion, acquisitions to which price tags were attached, and development of new products exceeded the maximum of petitioner's apparent accumulated earnings during the years in question.Respondent asserts that petitioner's statement is insufficient. He makes no claim that the factual elements in the statement are false. Essentially, his arguments are directed to questioning the judgment of petitioner's management. If such judgment was clearly erroneous, 116 we might properly characterize the statement as sham. But such is not the case herein, with the result that we think respondent's assertions 147 are more appropriate to the substantive issues which will be involved in a trial. Nor do we agree with respondent that the fact that all but one of the negotiations failed is necessarily fatal.Under the circumstances, we are not called upon at this point to determine whether the grounds and facts in the statement are true. That will come after trial. Petitioner's grounds are specific and not in the conclusory language of the statute and the supporting facts are substantial, material, definite, and clear. We conclude that the statement is sufficient to shift the burden of proof to respondent with respect to the grounds stated therein. Compare John P. Scripps Newspapers, 44 T.C. 453 (1965), J. Gordon Turnbull, Inc., 41 T.C. 358 (1963), affd. 373 F. 2d 87 (C.A. 5, 1967); and American Metal Products Corporation, 34 T.C. 89">34 T.C. 89 (1960), affd. 287 F. 2d 860 (C.A. 8, 1961); with Wellman Operating Corporation, 33 T.C. 162 (1959);117 I. A. Dress Co., 32 T.C. 93">32 T.C. 93 (1959), affd. 273 F. 2d 543 (C.A. 2, 1960), certiorari denied 362 U.S. 976">362 U.S. 976; and Dixie, Inc., 31 T.C. 415 (1958), affd. 277 F. 2d 526 (C.A. 2, 1960), certiorari denied 364 U.S. 827">364 U.S. 827.Petitioner's motion is granted. Footnotes1. Unless otherwise specified, all references are to the Internal Revenue Code of 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621177/	BROOKLYN TRUST COMPANY, AS TRUSTEE UNDER ITS DECLARATION OF TRUST BEARING DATE APRIL 22, 1929, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brooklyn Trust Co. v. CommissionerDocket No. 71673.United States Board of Tax Appeals31 B.T.A. 1070; 1935 BTA LEXIS 1025; January 17, 1935, Promulgated 1025 The petitioner is a New York banking corporation and pursuant to the laws of that state it conducts a large trust business. In 1929 it organized, by a declaration of trust, a fund known as "Composite Fund, Series A", to which trust funds of both large and small trusts, with the consent of the trustors, were transferred and commingled for investment purposes. The composite fund was managed by a committee composed of senior officers and directors of the petitioner. Certificates of beneficial interest were issued to the petitioner as trustee for the beneficial owners. The profits of the composite fund were computed at the end of every month and credited to or ditributed to the beneficial owners. Held, that in respect of the composite fund the petitioner was, in 1930, an association taxable as a corporation. Francis L. Durk, Esq., for the petitioner. J. M. Leinenkugel, Esq., for the respondent. SMITH 1070 The respondent has determined a deficiency in petitioner's income tax for 1930 in the amount of $23,481.65. The petitioner protests the deficiency upon the ground that the respondent has erroneously determined that it was an association1026 taxable as a corporation. The parties are not in dispute as to any of the basic facts. They have agreed that, with the addition of certain documentary evidence, this proceeding should be submitted upon the evidence adduced in Brooklyn Trust Co. v. Corwin,5 Fed.Supp. 287, which was an action brought by the petitioner in the United States District Court for the Eastern District of New York against the collector of internal revenue for the first district of New York, for recovery of a stamp tax in the amount of $8,752.55, levied pursuant to section 800, Schedule A-2, Title VIII, of the Revenue Act of 1926. The court in that case rendered a decision in favor of the petitioner, holding that the petitioner was not an association or "corporation" within the meaning of that term as used in the section of the statute referred to above. FINDINGS OF FACT. The Brooklyn Trust Co. is a banking corporation, organized and existing under and by virtue of the laws of the State of New York, and having its principal place of business at No. 177 Montague Street, in the Borough of Brooklyn, New York City. Pursuant to authorization contained in its corporate charter and the1027 provisions 1071 of the Banking Law of the State of New York, the petitioner, as trustee, conducts a large trust business involving the handling of all forms of trust estates. On or about April 22, 1929, the petitioner was acting as trustee of a large number of trusts involving trust funds of a value in excess of $250,000,000. Up to that time the funds of each trust were invested separately and the investments were limited to those authorized by the Banking Law of the State of New York for the investment of trust funds. For those reasons small trusts in amounts of less than $20,000 or $25,000 could not be handled profitably and were not accepted by the petitioner. In order to afford the settlors of trusts, by deed or by will, a medium by which relatively small sums of money could be invested in diversified securities without delay or undue expense and under conditions which would permit of ready liquidation of the investment, the petitioner, by declaration of trust dated April 22, 1929, created the so-called "Composite Fund, Series A." The declaration of trust was executed as aforesaid after it had been approved as to legality under the Banking Law of the State of New York1028 by the attorney general and by the superintendent of banks of that state. It was, at all times herein material, valid and subsisting under and pursuant to the Banking Law of the State of New York. The declaration of trust set forth the terms and conditions upon which the petitioner would receive from itself as trustee of personal trusts, and from no one else, trust funds to be deposited in a composite fund for investment. It described in detail the manner in which funds held by the petitioner, as trustee of personal trusts, should be deposited in the composite fund; the certificates evidencing such deposit; the manner in which certificates should be redeemed; the manner in which the net income and principal should be calculated and paid our; the manner in which the trust funds should be invested and reinvested; the method to be employed in keeping books and records; and the method of paying taxes assessed in respect of the composite fund. The declaration of trust provides in part as follows: BROOKLYN TRUST COMPANY hereby declares the terms and conditions upon which it will receive trust funds to be deposited in a COMPOSITE FUND for investment as herein authorized and the right, 1029 title and interest of the several trust estates whose funds are so deposited. ARTICLE I NATURE OF THE FUND The Fund covered by this declaration of trust shall consist of such moneys as Brooklyn Trust Company, acting in a fiduciary capacity and with express authority so to do, shall deposit with itself hereunder for investment and reinvestment 1072 and such other disposition as is specified by this declaration and shall be known as: BROOKLYN TRUST COMPANYCOMPOSITE FUND SERIES A ARTICLE II MANAGEMENT OF THE FUND Brooklyn Trust Company shall manage the Composite Fund without compensation and shall have no financial interest therein. The Trust Company shall defray from the Fund all charges and expenses lawfully incurred in the management thereof, including those defind in Article IX hereof. ARTICLE III CERTIFICATES OF OWNERSHIP For all sums deposited in the Composite Fund Brooklyn Trust Company shall promptly execute and deliver to itself as trustee of the particular trust whose funds have been so deposited a certificate of ownership in form as follows: - CERTIFICATE OF OWNERSHIP BROOKLYN TRUST COMPANYCOMPOSITE FUND SERIES A THIS IS TO CERTIFY1030 that BROOKLYN TRUST COMPANY has received from itself as Trustee under an agreement with dated the sum of Dollars ($ ) to be deposited in its COMPOSITE FUND - Series A - upon all the terms and conditions specified in a Declaration of Trust executed by it and bearing date April 22nd, 1929, which said sum entitles the owner and holder of this certificate to a participating interest in the Composite Fund aforesaid to the extent of units of the face value of $100 each. The terms upon which this certificate shall be valued, redeemed or assigned are fully set forth in the Declaration of Trust aforesaid, the original of which is lodged with Brooklyn Trust Company at its principal office, 177 Montague Street, Borough of Brooklyn, City of New York, and copies of which are available upon request to all persons beneficially interested hereunder. IN WITNESS WHEREOF, BROOKLYN TRUST COMPANY has caused this Certificate to be signed by one of its officers thereunto duly authorized and its corporate seal to be hereunto affixed, this day of , 19 .BROOKLYN TRUST COMPANY, By Vice-PresidentAssistant Secretary.(SEAL) 1073 [On the back of certificate] ASSIGNMENT1031 For and in consideration of the sum of Dollars ($ ), the receipt of which is hereby acknowledged, the undersigned, owner and holder of this Certificate hereby assigns to BROOKLYN TRUST COMPANY as Trustee under an agreement with , dated , all of its right, title and interest in and to this Certificate of Ownership and the Composite Fund therein described. BROOKLYN TRUST COMPANY, as trustee under an agreement with , dated .By Vice-PresidentAssistant Secretary.%(seal)/ Other material provisions of the declaration of trust are: That the composite fund shall consist of units of the face value of $100 each in such number as the petitioner shall determine. (Article IV.) That the owner of any certificate may call for redemption by serving upon the trustee a notice in writing, and cash redemption shall take place thereafter; that certificates may be assigned in the form of assignment printed on the back thereof, and when so assigned shall be presented to the trustee for cancellation and issuance of a new certificate in the name of the assignee; that every assignment shall be made for a cash consideration only, and shall be made only on the business1032 day next succeeding a day on which the net value of the fund shall have been calculated - the cash consideration to be a sum equal to the net value of the units assigned as so calculated; that the trustee shall surrender all canceled certificates to the assignors as evidence of the transaction. (Article V.) Article VI prescribes in what manner the net income of the composite fund shall be calculated and distributed; that such income shall be computed on the last business day of every month by dividing the total amount of income by the number of units of the face value of $100 each, constituting the composite fund on the date of such calculation, and that the amount of income so calculated for each unit shall be credited and, when and if collected, paid over by the petitioner to the owners and holders of certificates of participation outstanding. Article VII provides the manner for calculating the net value of principal of the composite fund and the several participating ownerships therein for the purpose of redemption or assignment of certificates of ownership. Article IX prescribes the following powers to be exercised by the petitioner in managing the composite fund: To invest1033 and reinvest all sums of money deposited in the composite fund; to sell and/or exchange at any time any and all securities belonging to the composite fund; to make such investments were should see fit to select in the exercise of its sole discretion, including common stocks and commercial paper, irrespective of whether such investments were prescribed by law for the investment of trust funds; to vote all stock held in the composite fund, or to issue proxies to vote such stock, or to exercise any other powers in respect of such stock or other securities held in the composite fund; to hold the investments of the composite fund in its own name or, in the exercise of its discretion, in the name of a copartnership as its nominee; and to engage the services of brokers and others not in its employ and defray from the composite fund their reasonable charges and disbursements. 1074 Article X provides that the petitioner might cause the redemption of any certificate of ownership in the composite fund, it being the intention that the right to redeem should be reciprocal as between the petitioner and the holders of the certificates of ownership. By Article XI the petitioner is authorized, 1034 in its discretion, to distribute pro rata at any time any capital gains realized through the management of the composite fund. By Article XII the petitioner's liability is limited in respect of losses of the composite fund to those occasioned by malfeasance or gross neglect of its own employees. Article XIV provides that the petitioner is not liable for taxes on any income or capital gains of the composite fund. After execution of the aforesaid declaration of trust, and in accordance with its provisions, any funds of which the petitioner was trustee might be invested in the composite fund and commingled with the funds of other trusts when so authorized in the specific trust agreement between the petitioner and the trustor. Printed forms were prepared by the petitioner authorizing the investment in the composite fund of trust funds which it already had in its possession and were executed in great number. In every instance the trust funds were invested in the composite fund only by specific agreement between the settlor of the trust and the petitioner as trustee. Likewise, in every instance, the petitioner, as trustee conveyed the funds to the composite fund and issued to1035 itself as trustee the certificates of ownership which it held at all times thereafter, subject to the provisions of the aforesaid declaration of trust. In some instances the petitioner was authorized to invest trust funds of which it was trustee in the composite fund at its own discretion. The composite fund has always consisted only of trust funds of which the petitioner was trustee under separate trust agreements and wills and has never contained any of the petitioner's own funds. The petitioner has never in any way shared in the profits of the composite fund, nor has it ever received any compensation for services in connection with the management and operation of the composite fund, except the commissions prescribed by the separate trust agreements and authorized by law. In other words, the petitioner received no additional financial benefit because of the investment of trust funds in the composite fund. In an advertising pamphlet put out by the petitioner in 1932 it is stated that the composite fund on August 31, 1931, comprised 102 separate securities, exclusive of first mortgages on real estate, including 25 bonds, 32 preferred stocks, and 45 common stocks; that the1036 proportions of total market value represented by the various classes of assets on that date were, bonds, 28.80 percent; preferred stocks, 33.42 percent; common stocks, 22.58 percent; first mortgages, 12.25 percent; and cash, 2.68 percent; that the total value of the composite 1075 fund on August 31, 1931, was $12,135,278; that 143,311 units were then outstanding; that between February 10, 1931, and August 31, 1931, 14 securities were eliminated from the composite fund and 9 were added to it; that of the other issues some were increased and some were reduced; that the composite fund securities were regarded as long term trust investments, and that no attempt was made to trade on short term swings of the market for common stocks. The investments and management of the composite fund at all times have been in charge of a committee composed of the petitioner's president and other senior officers, and the chairman and other members of the board of directors. They meet once or twice a week, or more often if necessary, and decide upon the sales and investments to be made on behalf of the composite fund. Generally, the securities selected for purchase are of the investment type1037 as distinguished from those of a speculative type. Securities are not purchased generally for the purpose of a quick profit, but they are sometimes sold within a short time after their purchase wherever, in the discretion of the committee, it is considered advisable. All purchases and sales of securities on behalf of the composite fund are made in the name of "The Brooklyn Trust Company, Trust Department." Separate and independent accounts are kept for the composite fund. A card or separate sheet is kept for each separate trust in which every investment made on behalf of that trust, including investments in the composite fund, is entered. The same kind of records are kept for all trusts of which the petitioner is trustee, whether the trust funds are invested in the composite fund or not. All of the records pertaining to the composite fund are kept in the petitioner's trust department by its regular employees and form a part of the petitioner's regular trust records. Statements showing the investments and the status of the composite fund are sent out each month on behalf of every trust, the funds of which are invested in the composite fund. After the execution of the declaration1038 of trust as aforesaid, and under date of June 12, 1929, the petitioner sent a communication to the respondent describing the composite fund and requesting his ruling as to whether or not for tax purposes the composite fund would be considered as an extension of its trust services and taxed as a trust. In answer to the petitioner's letter, the respondent, on June 25, 1929, wrote the petitioner as follows: It is evident that the composite fund is not created for profit, but as stated by you "It merely supplements and extends the trust service now being given by Brooklyn Trust Company and other trust companies as trustee in that it permits the commingling of trust funds for purposes of investment in cases where the trust instrument expressly authorizes such action." 1076 In view of the foregoing, it is the opinion of this office that the income and profits credited and paid to the holder of certificates of ownership in the Brooklyn Trust Company Composite Fund, Series A, should be returned by the holder of certificates of ownership. The Brooklyn Trust Company, as Trustee of the composite fund should file a fiduciary return of income, Form 1041, showing the income and distributions1039 made to it as holder of certificates of ownership. Thereafter, the petitioner filed fiduciary returns in accordance with the Commissioner's instructions, in which it reported the operations of the composite fund. Under date of July 20, 1932, the respondent sent a communication to the petitioner stating that his former ruling with respect to the status of the composite fund has been reversed, and that: It is held, therefore, that the trust under consideration is engaged in business in quasi corporate form and that it is, therefore, taxable as an association. The ruling contained in office letter addressed to you under date of June 25, 1929, is, therefore, hereby revoked. On or about July 25, 1932, the collector of internal revenue for the first district of New York served upon the petitioner a formal notice and demand for the payment of $8,752.55 alleged to be due and owing as a documentary stamp tax on the certificates of ownership issued by the petitioner under the aforesaid declaration of trust creating a composite fund. The petitioner paid the amount of $8,752.55 under protest and thereafter brought suit for recovery of the same in the United States District Court for1040 the Eastern District of New York, which action, as stated above, was decided in petitioner's favor in Brooklyn Trust Co. v. Corwin, supra.In his deficiency notice dated March 3, 1933, the respondent stated: After careful consideration of all of the provisions contained in the trust instrument as above described, it is held by this office that the trust under consideration is engaged in business in quasi corporate form and that it is therefore an association as provided by article 1312, Regulations 74, and taxable under section 13 of the Revenue Act of 1928. OPINION. SMITH: The only question for our determination in this proceeding is whether the petitioner in respect of its trusteeship of the composite fund is an association taxable as a corporation. Section 701 of the Revenue Act of 1928 provides in part as follows: (a) When used in this Act - * * (2) The term "corporation" includes associations, joint-stock companies, and insurance companies. 1077 Articles 1312 and 1314 of Regulations 74 are as follows: ART. 1312. Association. - Associations and joint-stock companies include associations, common law trusts, and organizations1041 by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the shareholders on the basis of the capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. A corporation which has ceased to exist in contemplation of law but continues its business in quasi-corporate form is an association or corporation within the meaning of section 701. ART. 1314. Association distinguished from trust. - Where trustees merely hold property for the collection of the income and its distribution among the beneficiaries of the trust, and are not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business, and the beneficiaries have no control over the trust, although their consent may be required for the filling of a vacancy among the trustees or for a modification of the terms of the trust, no association exists, and the trust and1042 the beneficiaries thereof will be subject to tax as provided by sections 161-170 and by articles 861-891. If, however, the beneficiaries have positive control over the trust, whether through the right periodically to elect trustees or otherwise, an association exists within the meaning of section 701. Even in the absence of any control by the beneficiaries, where the trustees are not restricted to the mere collection of funds and their payment to the beneficiaries, but are associated together with similar or greater powers than the directors in a corporation for the purpose of carrying on some business enterprise, the trust is an association within the meaning of the Act. The petitioner contends first that in respect of the composite fund it was not an association taxable as a corporation in 1930, the taxable year before us, but was a trust. It further contends that this issue is res judicata, having been determined by the United States District Court for the Eastern District of New York in Brooklyn Trust Co. v. Corwin,5 Fed.Supp. 287, and, if not, that it should be decided in the petitioner's favor under the doctrine of stare decisis.1043 In deciding that the composite fund did not constitute an "association" and that the certificates of beneficial interest were not subject to the stamp tax imposed on corporate shares, the court, in Brooklyn Trust Co. v. Corwin, supra, expressed the opinion that the composite fund was merely an extension of the trust services performed by the petitioner in accordance with the law of the State of New York. In Investment Trust of Mutual Investment Co.,27 B.T.A. 1322">27 B.T.A. 1322, we held that an organization created for the purpose of carrying on a securities investment business for profit and actively engaged in such business on a large scale was an association taxable as a corporation. 1078 The facts in that case bear a strikingly close resemblance to those in the instant case. In each instance the beneficial shareholders turned over funds to a single trustee for investment purposes and received the profits in the form of dividends or similar distributions. In each instance the trust funds were commingled and the investments made as a single business enterprise. In 1044 Investment Trust of Mutual Investment Co., supra, the taxpayer was organized by an agreement executed by and between the Mutual Investment Co. and the Empire Trust Co. Under the agreement the latter company held the legal title to the funds while the active management was entrusted to the Mutual Investment Co. Certificates were issued to, and the profits from the fund distributed to, the beneficial shareholders. In the instant case the composite fund was created by a so-called declaration of trust executed by the petitioner under the terms of which the petitioner was to act in a dual capacity as trustee for the separate trust funds comprising the composite fund and also as manager of the composite fund. The certificates of beneficial interest here were not issued directly to the beneficial owners, but to the petitioner as trustee for such owners. In our opinion in Investment Trust of Mutual Investment Co., supra, we said: It was apparently the intention of Congress to tax as corporations, associations of men, other than copartnerships, organized for the purpose of carrying on a business. We think that where men associate themselves together1045 and contribute money to a common fund to be held by one or more trustees for a business purpose, the profits thereof to inure to them, the entity thus created is properly classifiable as an association, regardless of the power of control held over the trustee by the associates; of their authority freely to transfer their shares of beneficial interests; or of any orovision for meetings of the certificate holders. Upon the entire record we are of the opinion that the petitioner was an association taxable as a corporation for 1928. On appeal, that case was affirmed by the Circuit Court of Appeals for the Second Circuit without opinion, 71 Fed.(2d) 1009. Since the promulgation of our decision in that case the same court, the Circuit Court of Appeals for the Second Circuit, decided Ittleson v. Anderson, 67 Fed.(2d) 323, affirming Ittleson v. Anderson,2 Fed.Supp. 716, which we relied upon strongly in Investment Trust of Mutual Investment Co., supra. The facts in Ittleson v. Anderson were that a single grantor conveyed to himself and to others as cotrustees certain property, consisting entirely of stocks, 1046 to be held in trust for the benefit of the holders of certificates of beneficial interest. Two certificates representing the entire beneficial interest were issued to the grantor. The trustees received the income from the funds, consisting of dividends and interest, which they either distributed to the sole beneficiary or reinvested. In holding that 1079 the trust was an association taxable as a corporation and that the certificates of interest issued were subject to the capital stock tax, the court said: An examination of these cases [the cases referred to being Hecht v. Malley,265 U.S. 144">265 U.S. 144; Sloan v. Commissioner, 63 Fed.(2d) 666; Merchants' Trust Co. v. Welch, 59 Fed.(2d) 630; Trust No. 5833, Security-First Nat. Bank, v. Welch, 54 Fed.(2d) 323; Little Four Oil & Gas Co. v. Lewellyn, 35 Fed.(2d) 149; United States v. Neal, 28 Fed.(2d) 1022; Lansdowne Realty Trust v. Commissioner, 50 Fed.(2d) 56; Gardiner v. United States, 49 Fed.(2d) 992; 1047 Allen v. Commissioner, 49 Fed.(2d) 717] indicates the rule to be that whether or not a particular trust is taxable as an association depends not so much upon the extent of the powers given to the trustees in the deed of trust, but rather upon the nature of the activities of the trustees and the use they make of the powers given to them. Gardiner v. United States, supra. A distinction is to be drawn between the activities of trustees under a strict trust as distinguished from the activities under a business trust. Even in the strict trust the activities of the trustees, in preserving the trust estate, may partake of the nature of business transactions. It is a matter of degree. When, on the one hand, the trustees promote and conduct a particular business enterprise with the trust estate, it is considered an association. The usual type is a trust for the development of real estate (Trust No. 5833, Security-First Nat. Bank v. Welch, supra ) or for the active management of developed real estate (U.S. v. Neal, supra). When, on the other hand, a trustee is merely engaged in the amount of business activity necessary1048 to preserve the corpus and otherwise discharge the functions traditionally attributable to a strict trust, it is not treated as an association. Lansdowne v. Com'r, supra; Gardiner v. Com'r, supra; Allen v. Com'r, supra. Between these extremes is the field where trustees in the management of trust property engage in considerable business activity, and the question then presented is whether they function as a business organization or merely as trustees under the modern conception of what a strict trustee has a duty and right to do. * * In the modern use of the trust device a trustee of the strict trust, traditionally concerned with preservation, may engage in some activities with a view of an accretion to the corpus. A distinction between a strict and business trust cannot be made solely upon the presence or absence of the profit motive. When that motive exists in a strict trust, it is to a restricted extent. When the trustee of an estate consisting of securities engaged in considerable business activity and is trading those securities and loans and invests the proceeds so that he is in reality conducting an investment business for profit, then the estate is1049 in business and is taxable as an association. * * Activities such as the purchase and sale of stock and bonds of corporations not connected with the corporations represented in the original corpus and the purchase of an interest in an oil syndicate for profit (May Stores stock, U.S. Public Service Bonds; Amster Syndicate) were sufficient upon which to base a finding that this was a business trust, although the other activities of the trustees considered alone might well have been within the limits of a strict trust. In our opinion the question here in issue is substantially the same as that involved in Ittleson v. Anderson, supra, and in Investment Trust of Mutual Investment Co., supra, and under authority of those 1080 opinions we must hold that, in respect of the composite fund, the petitioner was an association taxable as a corporation in the year before us. There can be no doubt that the management and operation of the composite fund, involving the investment and reinvestment of such a large amount of capital and the collection and distribution of interest and dividends, constituted an active business as distinguished from a passive or1050 liquidating trust. We said in Investment Trust of Mutual Investment Co., supra:We also think that it was engaged in a business operation. The petitioner argues that it was not doing business within the meaning of the decisions of the courts which have held the transaction of business a factor of importance in the classification of an organization of the character of the petitioner. In its brief the petitioner states: While the buying and selling of securities may become a business, as the Bureau held, such changes in investment as an active trustee reasonably makes in the trust funds in his care to meet the continually changing important economic and financial conditions is investment and not business, and we most emphatically maintain we are doing no more than a wide-awake Trustee should do. We cannot agree that the investment of funds by an entity organized for that purpose does not constitute the doing of business. The evidence of record shows that the petitioner intended to take advantage of wide swings in the market and, in point of fact, a large percentage of the petitioner's net income for 1928 was from frofit on the sale of securities. The1051 petitioner was doing the business for which it was organized. The fact that most of the work was performed by the managing company and paid for by that company does not make it that the petitioner was not doing business. See also the above quoted language of the court in the Ittleson case upon this point; Twin Bell Oil Syndicate,26 B.T.A. 172">26 B.T.A. 172; affd., 70 Fed.(2d) 402; Russell Tyson et al., Trustees,25 B.T.A. 520">25 B.T.A. 520; affd., 68 Fed.(2d) 584; certiorari denied, 292 U.S. 657">292 U.S. 657. Cf. Morriss Realty Co. Trust No. 1,23 B.T.A. 1076">23 B.T.A. 1076; affd., 68 Fed.(2d) 648. We are not unmindful that the conclusion thus reached by us in this proceeding is, in effect, contrary to that reached by the United States District Court in Brooklyn Trust Co. v. Corwin, supra. With all due respect for the decision of the court in that case, however, we are of the opinion that, in so far as it may stand for the proposition that the petitioner in respect of the composite fund is not to be classified as an association taxable as a corporation for income tax purposes, it is not in harmony with the1052 majority of the authorities, particularly the Ittleson and the Investment Trust of Mutual Investment Co. cases discussed above. We are also of the opinion that the issue as to whether the petitioner is an association taxable as a corporation for income tax purposes is not res judicata by reason of the decision of the United 1081 States District Court for the Eastern District of New York in Brooklyn Trust Co. v. Corwin, supra.The Supreme Court has held that a judgment in a suit to which the collector of internal revenue is a party does not conclude the Commissioner or the United States Government. Tait v. Western Maryland Ry. Co.,289 U.S. 620">289 U.S. 620; Bankers' Pocahontas Coal Co. v. Burnet,287 U.S. 308">287 U.S. 308. Moreover, the question involved in Brooklyn Trust Co. v. Corwin, supra, was whether the petitioner was liable for the stamp tax upon the certificates issued by the composite fund, whereas the instant proceeding involves the petitioner's liability for income tax under a different provision of the statute. We are of the further opinion that there is no merit in the petitioner's contention1053 that it is entitled to a judgment in the instant proceeding under the doctrine of stare decisis. We do not understand that the principle of law which the petitioner seeks to apply in this proceeding has been established by the courts of last resort so as to render applicable the doctrine of stare decisis.Reviewed by the Board. Judgment will be entered under Rule 50.GOODRICH GOODRICH, dissenting: Both Investment Trust of Mutual Investment Co., supra, and Ittleson v. Anderson, supra, upon which the majority opinion relies, bottom upon facts so divergent from those in the instant proceeding that those decisions, save for reiteration of principles, offer little basis for the determination of this controversy. These questions must be answered here: Do funds held by petitioner as trustee under instruments creating strict trusts change character when commingled for investment? Does the investment (and reinvestment) of separate trust funds, which is an activity clearly within the duties of the trustee of a strict trust, become a different thing when done on a large scale and simultaneously for a number of such trusts? And do the1054 commingling of funds, and the carrying on of investment and reinvestment in bulk, so to speak, transform into a quasi-corporate operation such as these statutory provisions aim at, the performance of the duty to which petitioner, as trustee, is committed respecting each separate, strict trust? I am not ready, as apparently are the majority of my brethren, to answer these questions affirmatively and so reach their conclusion in this case. Moreover, I cannot comprehend the composition of the association which, according to the prevailing opinion, here exists. Who is in it? The settlors of the various strict trusts? Not they, for they don't know each other in this arrangement; they have no control of the fund nor voice in its management; they don't have 1082 even an evidence of an interest in it. Or is the association composed of petitioner, standing on one foot as trustee of the several strict trusts, and on the other as manager of the composite fund? If that be the theory, it is one too novel for me to accept without considerably more elucidation, especially since it necessarily was considered and already has been rejected by the district court in its decision on this*1055 issue - Brooklyn Trust Co. v. Corwin, supra.It is immaterial whether, as respondent asserts and petitioner denies, this arrangement under the declaration of trust creating the composite fund was planned to obtain for petitioner the advantages resulting from the operation of an investment trust and yet avoid classification and taxation as an association. That is its effect. And we would do better to recognize the result rather than nullify it by a conclusion so plainly erroneous. ARUNDELL, VAN FOSSAN, MCMAHON, MATTHEWS, and LEECH agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621178/	DENNY L. JOHNSON and MARY JANE JOHNSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; DENNY L. JOHNSON FARMS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJohnson v. CommissionerDocket Nos. 7592-83, 7593-83.United States Tax CourtT.C. Memo 1985-175; 1985 Tax Ct. Memo LEXIS 457; 49 T.C.M. (CCH) 1203; T.C.M. (RIA) 85175; April 8, 1985. Patrick B. Mathis and John J. Vassen, for the petitioners. Frank Agostino, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined deficiencies in petitioners' Federal income tax as458 follows: TaxpayerTaxable YearDeficiencyDenny L. Johnson andMary Jane Johnson1979$737.00Denny L. Johnson andMary Jane Johnson1980826.00Denny L. JohnsonYear endingFarms, Inc.February 29, 1980330.91Denny L. JohnsonYear endingFarms, Inc.February 28, 1981406.37After concessions, the issues for decision are: (1) whether the individual petitioners, Denny L. Johnson and Mary Jane Johnson, may exclude from gross income under section 1191 dividend income equal to the fair market value of the residence they occupied which was owned by the petitioner employer-corporation for the taxable years 1979 and 1980; and (2) whether petitioner Denny L. Johnson Farms, Inc., was entitled to deduct depreciation on the residence provided to the individual petitioners, for the taxable years ending February 29, 1980, and February 28, 1981, under the provisions of section 167. FINDINGS OF FACT Some of the facts have been459 stipulated. The stipulations of facts and accompanying exhibits are so found and incorporated herein by reference. Denny L. Johnson and Mary Jane Johnson, husband and wife (also hereinafter referred to as petitioners or Mr. Johnson and Mrs. Johnson), were residents of Arcola, Illinois, during the taxable years 1979 and 1980, and at the time the petition in this case was filed. Petitioners have resided on what is presently the Denny L. Johnson Farms, Inc., farmstead since 1961. In 1976, petitioners incorporated their family-owned farm into Denny L. Johnson Farms, Inc. (also hereinafter referred to as the corporation), which is a corporation incorporated under the laws of the State of Delaware, with its principal place of business in Arcola, Illinois. Mr. and Mrs. Johnson own 900 and 100 shares of the corporation, respectively, representing all of the outstanding shares of Denny L. Johnson Farms, Inc. Petitioners timely filed their joint Federal income tax returns for the taxable years 1979 and 1980 with the Internal Revenue Service Center in Kansas City, Missouri. The corporation timely filed Federal income tax returns for the taxable years ending February 29, 1980, and February 28, 1981, at460 the same location. During the periods at issue, the corporation owned 200 acres of land, custom farmed 80 acres, and rented 40 acres of farmland. The corporation also leased 703 acres of farmland under "share-crop" arrangements. By oral and written agreements between the landlords and the corporation, the gross proceeds of crops sold from the farmland and the cost of seed and fertilizer were shared on an equal basis. The landlords paid the property taxes related to the property. The landlords of the various properties were: LandlordRelationship to PetitionersMary AdamsonNoneFirst National BankMr. Johnson owns one-thirdof Mattoonbeneficial interest inIllinois land trustJames Nolan, Est.NoneHelen B. GaylordNonePaul CombsNoneWilliam CombsNoneMrs. Wilburn JohnsonMr. Johnson's motherRobert and Thomas HarlanNoneDonald BuckalewMr. Johnson'sbrother-in-lawDuring the entire period at issue, the corporation was engaged in the farming of grain, which is a business with a low profit margin that requires efficient operation. The corporation produced the following crops: Taxable YearGrainBushelsYear ending February 29, 1980Corn48,990Year ending February 29, 1980Soybeans16,532Year ending February 28, 1981Corn40,700Year ending February 28, 1981Soybeans16,926461 During the taxable years ending February 29, 1980, and February 28, 1981, the corporation sold grain for $219,734 and $255,320, respectively. The corporation stored soybeans and corn in bins upon the corporate property in the following amounts: BushelsQuarterEndingSoybeansCornTotal03-01-7910,20411,90822,11206-01-797,7287,72809-01-795,0755,07512-01-808,42517,74626,17103-01-8017,06017,06006-01-8011,06111,06109-01-806,2016,20112-01-807,9567,95603-01-807,9567,956The approximate value of the stored grain was $89,597 and $100,600 for the taxable years ending February 29, 1980, and February 28, 1981, respectively. At all times relevant hereto, commercial grain elevators operated in the area in which grain was stored for a fee. During the taxable years ended February 29, 1980, and February 28, 1981, the corporation owned equipment used in the farming operation with approximate fair market values of $6,150 and $7,776, respectively. During the same taxable years, the corporation leased farm equipment from Mr. Johnson with approximate fair market values of $194,100 and $206,800, 462 respectively. Under a provision of the farm equipment lease, the corporation was responsible for maintenance and repair of the leased equipment, damages to such equipment, and risk of loss, and was obligated to keep such equipment insured. All of the equipment was insured and stored on the corporation's farmstead. The corporation's grain business entailed the planting, cultivation, harvesting, drying, storage, and sale of corn and soybeans. The grain operation begins with planning for the planting of the year's crops; purchasing of seed corn, soybeans, herbicides, and fertilizer; and the maintenance of equipment in preparation for the planting season. Corn and soybeans are planted during the spring of the year. In planting, soil and weather conditions are carefully monitored in order to plant the crops as close as possible to the optimum planting period. Peanting is not carried out on a continual, day-to-day basis because of delays caused by inclement weather. During the planting season, there are days in which only a few hours are available for planting. Under ideal conditions, the acreage owned, rented, or leased by the corporation could be planted in a total of 100 hours, 463 or the equivalent of ten 10-hour days, but such conditions seldom occur. During the growing season, the crops are monitored for insects and weed infestation, with cultivation of the crops, spraying for weeds, and insect control continuing throughout this period. Fluctuating contitions affect cultivation in a fashion similar to the manner in which they affect planting, i.e., cultivation may not be possible for more than a few hours on any one particular day. Under ideal conditions, cultivation of the land worked by the corporation's employees could be accomplished in ten to fifteen 10-hour days. Cultivation, however, follows the inspections and monitoring, and is, therefore, done throughout the growing season. Harvesting of crops begins in September and ordinarily runs through November, although it may extend for a longer period. After grain is harvested, it is dried in grain storage bins. The drying process involves the drying of grain with electric motors pushing air, supplemented with gas or electric heat, through the corn. The temperature is monitored by a thermostat similar to that found in a home heating system. In the event that th electricity fails, the drying motors464 in the drying bins do not restart automatically, but must be restarted manually. If the motors stop, the drying process is delayed, but not stopped. During the drying process, the grain bins are monitored several times each day to see whether the optimal moisture content has been attained. If the moisture content is too high, the crops will rot in storage; if too low, the corporation will incur unnecessary drying expense and shrinkage, with consequent reduced sale proceeds. During the drying season, Mr. Johnson checked the drying bins several times each day for continued operation and moisture content. Once the grain is dried, it is stored in a grain elevator or storage bin until sale; in this case, such storage was primarily in the corporation's storage bins. The corporation employed seven people during the taxable year 1979, seven people in the taxable year 1980, and nine people in the taxable year 1981. The corporation, which was owned solely by petitioners, employed Mr. Johnson under an employment contract dated January 2, 1976, as amended on March 1, 1977, March 1, 1978, January 1, 1979, January 1, 1980, and March 1, 1981. Mr. Johnson's responsibilities included making465 decisions as to the management and operation of the farm and devotion of his "full time, energy, skills and effort to the furtherance of the business of the company." Under the terms of the employment contract, the corporation provided living accommodations to Mr. Johnson and his family, and paid all of the expenses of such accommodations. Mr. Johnson was required by the contract to occupy the accommodations provided. The reasons provided in the contract for requiring Mr. Johnson to live on the premises were so that Mr. Johnson could manage the general operations of the farm; secure equipment owned and leased by the corporation; supervise the drying and storing of grain; and perform all of these duties on a 24-hour-per-day basis. At all times relevant to this case, petitioners and three of their children lived on the corporation's land in a residence furnished to them by the corporation. The residence was built in 1961 at a cost of $32,586 and contains 2,256 square feet of living space. The fair rental value of the residence provided by the corporation to petitioners during the taxable years at issue was $250 per month. The corporation's land is located 3 miles from Humboldt, 466 Illinois, 8 miles from Mattoon, Illinois, 8 miles from Charleston, Illinois, and 4-1/2 miles from Arcola, Illinois. At all times relevant hereto, there were residences comparable to the one in which petitioners resided available for rental in Charleston and Mattoon. In Coles County, Illinois, where the corporation's farmstead, rented land, and share-cropped land are located, farmers generally reside on the farm when valuable farm equipment and a grain-drying operation are on the premises. The presence of a manager-operator on the property for 24 hours a day provides security for the equipment; insures continued operation of the grain dryers; and allows for a more efficient operation. On January 4, 1983, the Commissioner timely issued statutory notices of deficiency to petitioners and the corporation, in the amounts and for the taxable years listed above. The Commissioner determined that petitioners received dividends from the corporation equal to the fair rental value of the residence they occupied. In addition, he determined that petitioners were not entitled to exclude such dividends in excess of the dividends received exclusion under the provisions of section 119.The Commissioner467 disallowed the deductions for depreciation of the residence claimed by the corporation on its income tax returns. ULTIMATE FINDINGS OF FACT Petitioner Denny L. Johnson was required to be available for duty at all times in connection with his responsibilities as operator-manager of the corporation's farm operation. It was both necessary, and a condition of his employment, that petitioner Denny L. Johnson reside upon the farm premises in order to properly perform the duties of his employment. Petitioners resided on the farm for the convenience of the employer-corporation. OPINION After concessions, 2 the issues for decision are: (1) whether the individual petitioners may exclude from gross income under section 119 dividend income equal to the fair market value of the residence they occupied which was owned by the petitioner employer-corporation; and (2) whether petitioner corporation was entitled to deduct depreciation on the residence provided to the individual petitioners, under the provisions of section 167. 468 The Commissioner's determination in his statutory notice of deficiency is presumptively correct, and petitioners have the burden of disproving each individual adjustment. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). During the taxable years at issue, the corporation provided lodging to petitioners without charge. The fair market value of such lodging constituted dividend income to petitioners and must be included in their gross income under section 301, unless specifically excluded. Under section 119, the value of lodging furnished to an employee, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer is excluded from gross income, but only if the employee is required to accept the lodging on his employer's business premises as a condition of his employment. Sec. 1.119-1(b), Income Tax Regs., amplifies469 the requirements for exclusion: The value of lodging furnished to an employee by the employer shall be excluded from the employee's gross income if three tests are met: (1) The lodging is furnished on the business premises of the employer, (2) The lodging is furnished for the convenience of the employer, and (3) The employee is required to accept such lodging as a condition of his employment. The requirement of subparagraph (3) of this paragraph that the employee is required to accept such lodging as a condition of his employment means that he be required to accept the lodging in order to enable him properly to perform the duties of his employment. Lodging will be regarded as furnished to enable the employee properly to perform the duties of his employment when, for example, the lodging is furnished because the employee is required to be available for duty at all times or because the employee could not perform the services required of him unless he is furnished such lodging. If the tests described in subparagraphs (1), (2), and (3) of this paragraph are met, the exclusion shall apply irrespective of whether a charge is made, or whether, under an employment contract or statute470 fixing the terms of employment, such lodging is furnished as compensation. * * The parties agree that the first condition, that the lodging be on the employer's premises, and the second condition, that the provisions of such lodging be for the convenience of the employer, are met. The parties disagree, however, on whether the third condition is met. Petitioners assert that Mr. Johnson must be available for duty at all times, both to perform his duties under his employment contract, and to obtain the optimum financial return. Respondent contends that it is unnecessary for Mr. Johnson and his family to live on the corporation's land on the basis that: (1) many farmers do not live on the property that they farm; (2) few, if any, duties require the presence of a manager for 24 hours a day; and (3) Mr. Johnson's duties could be performed just as easily if he commuted from a residence in one of the nearby communities. Respondent also argues that the corporation is not an independent entity due to its ownership by petitioners. Corporations are separate and distinct from their shareholders, 471 Moline Properties, Inc. v. Commissioner,319 U.S. 436">319 U.S. 436 (1943), and there is no evidence in the record before us which would require or allow us to disregard the separate nature of the taxpayers before us. The corporation lacks neither economic reality nor substance, and there is thus no parallel to the family trust cases exemplified by Markosian v. Commissioner,73 T.C. 1235">73 T.C. 1235 (1980). Respondent attempted, on brief, to contend that an alternate ground for disallowing the exclusion under section 119 was that the arrangement described above was, in some fashion, an attempt at tax avoidance under section 269. No determination of tax avoidance purpose under section 269 was contained in the notices of deficiency, nor were such allegations contained in answers to the petitions. Further, to address this issue at this late date would be to allow respondent, in effect, to change his position subsequent to trial without affording petitioners the opportunity to refute this contention. We will not, therefore, consider this ground. Seligman v. Commissioner, 84 T.C. (Feb. 12, 1985). The issue before us is, therefore, whether petitioners were required472 to accept lodging furnished to them as a "condition of * * * employment." The proper inquiry is not whether the employee was contractually required to reside on the employer's premises, or whether housing was available nearby, but whether the lodging was furnished to petitioners because the nature of Mr. Johnson's job required that he "be available for duty at all times." Sec. 1.119-1(b), Income Tax Regs. The question is primarily one of fact to be resolved by a consideration of all of the circumstances before us. Three experts testified 3 on the issue of whether a resident manager was indispensable to the operation of the corporation's farm. Louis Christen, an agricultural extension advisor for Coles County for 26-1/2 years, is thoroughly and personally familiar with the particular farm at issue. Coles County is the location of all of the property farmed by the corporation. His opinion was that the constant presence of a manager was both "highly desirable" and "highly necessary" in order to make the maximum profit, particuarly in the last several years when good management has made the difference between a small profit and no profit at all. Mr. Christen473 lives on a farm where he conducts drying operations and stores equipment, and has a tenant farmer who does not live on the property. Mr. Christen stated that if he moved to town, a tenant would be required to live on the farm. Royce Marble is senior vice-president and trust officer at the Charleston National Bank responsible for the management of approximately 15,000 acres of farm land, most of which is leased on a "share-crop" basis. If a farm has a residence and improvements such as grain bins and machine sheds, the bank routinely requires that the tenant live upon the property. A "courtesy rent" of between $100 and $300 a year is normally charged. He also testified that having a resident farmer improves the bottom line. The bank does not build a residence upon a vacant property if there are no improvements upon it. Respondent's expert witness, Elmer E. 474 Rankin, has been an agricultural extension advisor for Sangamon County, Illinois, since November of 1980, and testified pursuant to a subpoena served upon him by respondent. He testified that, in general, most land owners do not live on their farms, and that the majority do not require their tenants to live on the farms. Upon cross examination, however, he conceded that he knew of no nonresident farmers who had either grain drying operations or large amounts of equipment and supplies stored on the premises. He also conceded that the presence of a resident manager would make the farm operate more efficiently. This evidence is sufficient to sustain petitioners' burden of proof, thus distinguishing this case from Caratan v. Commissioner,52 T.C. 960">52 T.C. 960 (1969), revd, 442 F.2d 606">442 F.2d 606 (9th Cir. 1971). We find as a fact that petitioners were required to reside on the corporation's farmstead in order to properly manage and operate the farm, and that occupying the residence upon the farmstead was a condition of Mr. Johnson's employment. A farming operation of the complexity set forth above is not a 9-to-5 business; it requires that a manager be available to*475 make the necessary decisions, solve the necessary problems, and direct the necessary labor. In this case, the grain-drying operation required constant, if not continuous, monitoring and work. Further, while insurance does, of course, reduce the out-of-pocket cost of replacing expensive equipment, the presence of a manager-operator makes less likely the need to replace stolen or vandalized equipment. 4We also find, as a corollary and as a result of the above finding, that the habitation upon the farmstead is used in the corporation's business as a residence for its on-site manager-operator. The corporation is, therefore, entitled to the depreciation deduction disallowed by the Commissioner. Sec. 167. Decisions will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, and attendant regulations as amended and in effect for the relevant years, and all rule references are to this Court's Rules of Practice and Procedure.↩2. The corporation's claim in its petition to a $300 "rent expense" disallowed by the Commissioner was not argued on brief, nor was any evidence presented on the matter at trial. The corporation is deemed to have conceded this issue.↩3. This case is a companion to J. Grant Farms, Inc., et al. v. Commissioner,T.C. Memo. 1985-174↩, in that the testimony of the non-petitioner witnesses in this case was incorporated into the record of the companion case. The two cases were not otherwise consolidated for trial, briefing, or opinion.4. McDowell v. Commissioner,T.C. Memo. 1974-72↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621180/	Appeal of DAKOTA CENTRAL TELEPHONE CO.Dakota Cent. Tel. Co. v. CommissionerDocket No. 703.United States Board of Tax Appeals1 B.T.A. 1002; 1925 BTA LEXIS 2721; April 13, 1925, decided Submitted March 25, 1925. 2721 Alfred L. Geiger, Esq., for the taxpayer. A. Calder Mackay, Esq., for the Commissioner. 1002 Before GRAUPNER, LANSDON, and LITTLETON. This appeal presents the single question whether the Commissioner erred in the determination of the invested capital allowed the taxpayer for 1917. To the petition filed, the Commissioner interposed in his answer a plea in bar in respect to the year 1917. Arguments of counsel on the Commissioner's plea were heard on January 20, 1925, and the plea was denied by formal order entered on February 13, 1925. The appeal was restored to the calendar for hearing on its merits on March 25, 1925. At this hearing counsel for the Commissioner read a stipulation of facts into the record. From the petition and answer filed and the stipulations of counsel the Board makes the following FINDINGS OF FACT. 1. The taxpayer is a South Dakota corporation with its principal office at Aberdeen, S. Dak. A deficiency letter was mailed to the taxpayer September 26, 1924, in which the Commissioner set forth his determination of the taxpayer's liability as follows: Deficiency in tax.Overassessment.1909 waiver$313.981910 waiver223.131911 waiver301.271917$27.281918 waiver3,424.481919386.0319205,729.161921160.95Total6,728.493,837.79Net additional tax2,890.702722 1003 2. For the calendar year 1917 the Commissioner reduced the invested capital claimed in the return filed by the taxpayer by eliminating from earned surplus amounts representing reserve for Federal taxes and increasing depreciation for years prior to 1917. This elimination was made on the basis of a report of a field agent of the Bureau of Internal Revenue, dated January 24, 1919, in which he recommended a reduction in invested capital as of January 1, 1917, on the ground that the taxpayer had failed to take adequate deduction for prior years. After reducing the invested capital, refunds of $313.98 for 1909, $223.13 for 1910, and $301.27 for 1911 were granted the taxpayer. 3. On July 10, 1924, the taxpayer filed a waiver with the Commissioner, consenting to a determination, assessment, and collection of the amount of income, excess-profits, and war-profits taxes due for the years 1909 to 1917, the waiver to be in effect for only one year from the date it was signed. By virtue of this waiver the Commissioner, in the deficiency letter of September 26, 1924, proposes to reassess the refunds granted to the taxpayer for the years 1909, 1910, and 1911. 4. No claim*2723 for refund has been filed by the taxpayer for taxes paid for 1917. DECISION. The determination of the Commissioner is approved. The taxpayer failed to adduce satisfactory evidence to show that its invested capital as fixed by the Commissioner was incorrect.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474798/	OPINION. Black, Judge: There is but one issue in this proceeding, and that is whether for income tax purposes Frances G. Theurkauf should be recognized in the taxable year 1944 as a partner in the partnership of F. A. Marsily & Co. The Commissioner does not dispute that a partnership under that name existed and he has recognized Frances G. Theurkauf and James E. Kearney as partners, but has refused to give recognition to the interest claimed by Frances and has taxed her claimed interest in the partnership profits to her husband, the petitioner herein. The Commissioner contends that the instant case is controlled directly by the Supreme Court’s decision in Commissioner v. Tower, 327 U. S. 280, since Frances performed no services for the partnership and since, as he contends, she contributed no capital to it .which originated with her. The respondent says in his brief: “Except for the modification of the partnership in 1941, this case is practically on all fours with Commissioner v. Tower, supra.” The Supreme Court stated the facts in the Tower case, in part, as follows: In 1937 substantial profits pointed to increased taxes. Respondent’s attorney and his tax accountant advised him that dissolution of the corporation and formation of a partnership with his wife as a principal partner, would result in tax saving and eliminate the necessity of filing various corporate returns. The suggested change was put into effect. August 25, 1937, respondent transferred 190 shares of the corporation’s stock to his wife on the condition that she place the corporate assets represented, hy these shares into the new partnership. Respondent, treating the stock transfer'to his wife as a gift valued at $57,000, later paid a gift tax of $213.44. Three days after the stock transfer the corporation was liquidated, a limited partnership was formed and a certificate of partnership was duly filed for record as required by Michigan law. According to the books, the value of the donated stock became the wife’s contribution to the partnership. The formation of the partnership did not in any way alter the conduct of the business, except that both Amidon and Tower ceased to draw salaries. By an agreement made shortly thereafter, a readjustment was made in the amount of profits each partner was to receive, under which Ami-don’s share became the equivalent of, if not more than, the amount of the salary he had previously drawn. Under the partnership agreement the respondent continued to have the controlling voice in the business, as to purchases, sales, salaries, the time of distribution of income, and all other essentials. Respondent’s wife, as a limited partner, was prohibited from participation in the conduct of the business. So far as appears, the part of her purported share of the partnership business she actually expended was used to buy what a husband usually buys for his wife such as clothes and things for the family or to carry on activities ordinarily of interest to the family as a group. [Italics supplied.] In Francis E. Tower, 3 T. C. at page 401, we made a finding of fact as follows: The gift of 190 shares of the corporate stock of the R. J. Tower Iron Works, Inc., made by petitioner to his wife in 1937 was not valid and complete in that the wife did not gain full dominion and control over the shares. * * * Based upon this finding of fact, in our opinion in the Tower case, at page 404, we said: Here, the transfer of the corporate stock by petitioner to his wife was more fanciful than actual, since there was no purpose to transfer the stock to her apart from the agreed plan that the gift would determine her interest in the partnership. The gift, however, was not an absolute and unconditional one. Its purpose and intent was not to vest absolute dominion over the shares in the wife, since she had no untrammeled freedom in their disposition and they were not subject to her own control and desires. In view of the fact that the gift of the corporate stock by petitioner to his wife was not valid nor complete, it follows that she made no capital contribution to the partnership, and, since she admittedly rendered no services, it must be held that she was not a bona fide partner. We think the facts in the instant case are distinguishable from those present in the Tower case, supra. As pointed out by the Supreme Court in the portion of its opinion from which we have quoted above and by our findings of fact in the Tower case, Tower transferred 190 shares of the corporation’s stock to his wife on the condition that she place the corporate assets represented by these shares into the partnership business. There was no such condition attached to the gift in the instant case. Petitioner testified that, when on or about October 9, 1936, he .made a gift to his wife of one-half of the stock of the F. A. Marsily & Co., no conditions whatever were attached to the gift, and that it was his intention to make the gift complete and irrevocable. On the strength of petitioner’s testimony, we have made a finding in our findings of fact that his gift of the stock to his wife was made “with intent to vest full, complete, and irrevocable legal ownership of the stock in Frances G. Theurkauf,” and that “she thereupon became the owner of the shares covered by the certificate issued to her and no conditions or limitations were attached to her ownership of them.” Under these facts, when subsequently on October 31,1936, by agreement between Theurkauf and his wife Frances, the sole stockholders of F. A. Marsily & Co., the corporation of F. A. Marsily & Co. was liquidated and dissolved and its assets were transferred by the corporation, joined by petitioner and Frances as the sole stockholders of the corporation, to the new partnership of F. A. Marsily & Co., Frances made a contribution of capital to the partnership which belonged to her and she became a partner and was the owner of the interest which it was agreed she should have in the written partnership agreement. If this was true, as we think it was, in the organization of the first partnership on November 1, 1936, it would certainly be true in 1941, when the old partnership was dissolved because of the retirement of one of the partners, Peter Albert. It is the partnership organized in 1941, five years after the dissolution of the old corporation, with which we are presently concerned. As we have already stated, the Commissioner relies heavily upon the Supreme Court’s decision in the Tower case, supra. In our opinion the substance of the Supreme Court’s decision in the Tower case was that the test in determining the bona fide character of a family partnership is to ascertain whether the partners really and truly intended to join together for the purpose of carrying on a business and sharing its profits, or whether the partnership was a mere sham, utilized for the purpose of reducing a taxpayer’s true tax liability by a pretended distribution of income. Such, in our view, is the interpretation given to the Tower case in the recent decision of the Supreme Court in Commissioner v. Culbertson, 337 U. S. 733. In the Culbertson case the Supreme Court said: The Tax Court’s isolation of “original capital” as an essential of membership in a family partnership also indicates an erroneous reading of the Tower opinion. We did not say that the donee of an intra-family gift could never become a partner through investment of the capital in the family partnership, any more than we said that all family trusts are invalid for tax purposes in Helvering v. Clifford, supra. The facts may indicate, on the contrary, that the amount thus contributed and the income therefrom should be considered the property of the donee for tax, as well as general law, purposes. * * * In the instant case we think the facts do show that the amount of capital which Frances contributed to the partnership and her agreed percentage of the partnership profits should be considered her property for tax as well as other purposes. We have so found. The Supreme Court also said in the Culbertson case: * * * If, upon a consideration of all the facts, it is found that the partners joined together in good faith to conduct a business, having agreed that the services or capital to be contributed presently by each is of such value to the partnership that the contributor should participate in the distribution of profits, that is sufficient. * * * The instant case was heard and the briefs were filed before the Supreme Court decided Commissioner v. Culbertson, supra, but, of course, we must take notice of the Supreme Court’s decision in this later case. We think that, under the facts as detailed in our findings of fact and under the rationale of the Supreme Court’s decision in the Culbertson case, Frances should be recognized as a partner in the partnership of F. A. Marsily & Co. See O. H. Delchamps, 13 T. C. 281. The evidence in this case does not show affirmatively that Mrs. Theurkauf was paid or credited with her share of the 1944 profits of the business amounting to $7,833.43. However, the Commissioner made no point either at the hearing or in his brief that she was not paid or credited with her share of the profits. Apparently she has been recognized as a partner in the business for several years and we have no reason to believe that she was not credited or paid her share of the profits from time to time. As we said at the beginning of this opinion, respondent bases his entire contention that Frances was not a partner in the business during 1944 on the fact that she did not render any services to the business and did not, to use his language, “contribute any capital which originated with her,” relying strongly on the Tower case, supra. For reasons already stated, we think the Tower case is not applicable to the facts of the instant case. Petitioner and the other active partner, James E. Kearney, were paid salaries commensurate with the value of their services to the partnership. Petitioner was paid $500 per month for his services, and Kearney was paid $75 a week for his services. Petitioner has reported for taxation $18,833.42 as his income from the partnership. This includes his salary of $6,000 and $7,833.42 as his share of the partnership profits. For reasons we have stated above, we hold that petitioner is not taxable on the $7,833.43 of the profits of the partnership which belonged to his wife under the partnership agreement. On this issue the Commissioner is reversed. Reviewed by the Court. Decision will be entered for the petitioner.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621182/	WILLIAM C. LUCAS AND JOSEPHINE D. LUCAS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLucas v. CommissionerDocket No. 24445-87United States Tax CourtT.C. Memo 1995-341; 1995 Tax Ct. Memo LEXIS 339; 70 T.C.M. (CCH) 191; July 26, 1995, Filed 339 Decision will be entered under Rule 155. William C. Lucas, pro se. For respondent: John Aletta. DAWSON, ARMENDAWSON; ARMENMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Robert N. Armen, Jr., pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the Opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE ARMEN, Special Trial Judge: Respondent determined deficiencies in, and additions to, petitioners' Federal income taxes for taxable years 1980 and 1983 as follows: Additions to TaxSec.Sec.Sec.Sec.Sec.YearDeficiency6653(a)6653(a)(1)6653(a)(2)6659(a)6661(a)1980$ 3,637$ 182----$ 1,091--19839,045--$ 45211,9842 $ 608340 Respondent also determined that petitioners are liable for the increased rate of interest under section 6621(c), formerly section 6621(d), for both of the taxable years in issue. The issues for decision are: (1) Whether petitioners' investment 2 in the Saxon Energy Brain System leasing program (the Saxon leasing program or the Program) should be disregarded for Federal income tax purposes; (2) whether petitioners are liable for additions to tax for negligence under sections 6653(a), 6653(a)(1), and 6653(a)(2); (3) whether petitioners are liable for additions to tax for a valuation overstatement under section 6659(a); (4) whether petitioners are liable for an addition to tax for a substantial understatement of income tax under section 6661(a) for the taxable year 1983; and (5) whether petitioners are liable for the increased rate of interest under section 6621(c). FINDINGS OF FACT Some of the facts341 have been stipulated, and they are so found. At the time that the petition was filed, both petitioners resided in Cuyahoga County, Ohio. Petitioner William C. Lucas (petitioner) is a college graduate. Petitioner Josephine D. Lucas (Mrs. Lucas) attended college, but did not receive a degree. During 1983, petitioner was employed as an air traffic controller and was a member of the National Association of Air Traffic Specialists. During 1983, Mrs. Lucas was employed as a computer systems analyst. Petitioners have no specialized training in either accounting or taxation. Petitioners' 1980 and 1983 Federal income tax returns were prepared by a certified public accountant, Ron Berardinis (Berardinis), who was associated with Graham & Associates, Inc. (Graham & Associates). Berardinis provided both tax and investment advice through Graham & Associates. Petitioner did not participate in the PATCO air traffic controllers' strike which was in effect during 1983. Due to the PATCO strike, petitioner worked overtime and earned more money in 1983 than he had in his earlier years of employment as an air traffic controller. Prior to 1983, petitioners had invested in mutual funds, in silver, and342 in various stocks and bonds. In 1983, petitioners began to seek other investment opportunities. Berardinis recommended that petitioners consult Graham & Associates for investment advice. Petitioners met with Thomas Graham (Graham), the president of Graham & Associates, at some point in 1983. In their contacts with Graham & Associates, petitioners dealt primarily with Graham. Petitioners made a minimal effort to determine Graham's expertise as an investment adviser. Their investigation was limited to a single contact with the local chamber of commerce and a review of a document entitled "Business Advisor's Questionnaire" (the questionnaire) provided to them by Graham. In describing his present occupation and field of professional specialization, Graham wrote: President -- Graham & Associates -- four (4) years. Tax Planning and Tax Advantaged InvestmentsIn describing his experience in the questionnaire, Graham wrote that he had "12 years experience in investing in Tax Advantaged Real Estate, Equipment Leasing and Oil & Gas projects." Graham advised petitioners of a variety of "tax-advantaged" investment opportunities. Graham did not subject petitioners to "pressure tactics". 343 Instead, he assured them that they could invest in the opportunities he was offering or wait to examine other opportunities. Petitioners chose to enter into four investments presented to them by Graham. Petitioners used available funds rather than borrowed money to invest. One of the investment opportunities proposed by Graham involved the Saxon Energy Corp. (Saxon). Saxon was a corporation formed in 1981 to lease energy management systems, such as the Energy Brain/Fuel Optimiser System A-1 (the Energy Brain System), to the public. See Schillinger v. Commissioner, T.C. Memo. 1990-640, affd. per order 1 F.3d 954">1 F.3d 954 (9th Cir. 1993) (discussing the Saxon leasing program in some detail). Petitioners had no experience or knowledge with respect to the acquisition, lease, production, installation, marketing, or use of energy management systems during the taxable years in issue. The only information petitioners received about the Energy Brain System was given to them by Graham & Associates. No documents relating to the Energy Brain System were introduced into evidence. In addition to Graham, petitioner also conferred with Berardinis344 regarding the risks and benefits of entering into the Saxon leasing program. In his conversations with Berardinis, petitioner was particularly concerned that "as applicable to my tax returns, * * * we could count on * * * [Graham's] advice as being reliable." Petitioner did not show Berardinis the documents provided to petitioners by Graham because Berardinis indicated that, as an associate of Graham's, he had access to those documents. Petitioners conducted no independent investigation into the Saxon leasing program or into the value of the Energy Brain System, choosing to rely instead on Graham's representations and Berardinis' assurances as to their prospective investment in the Saxon leasing program. Petitioners understood that in order to receive tax benefits from an investment in the Energy Brain System in 1983, a payment would have to be made prior to the end of the taxable year. On or about December 29, 1983, an Agreement of Lease (the lease) was entered into by petitioners as lessees and Saxon as lessor. The lease involved a one-half interest in the Energy Brain System, an energy management device. The term of the lease was 20 years. The other one-half interest in the 345 Energy Brain System was held by Steven and Marsha Tracey (the Traceys). Graham arranged for petitioners and the Traceys to share an interest in the Energy Brain System. Petitioners have never met the Traceys nor have they ever spoken to them. Under the terms of the lease, petitioners were required to pay an advance guaranteed rental for the period December 31, 1983 through 1984, in the amount of $ 6,750 for their one-half interest in the Energy Brain System. 3 On or about December 29, 1983, petitioners signed a form entitled "Election to Pass Investment Tax Credits from Lessor to Lessee". This form was not signed by any representative of Saxon. Petitioners never intended to use the Energy Brain System themselves. Instead, petitioners planned to engage a management company which would locate an end-user. The346 end-user would pay for the Energy Brain System by sharing the amount of energy savings equally with petitioners. The management company was to retain a fee of 15 percent of petitioners' share of the energy savings and remit the balance to petitioners. Petitioners were then required to pay Saxon 75 percent of the remaining net income. Petitioners entered into a management agreement (the management agreement) with ALH Energy Management Corp. (ALH) as the management company for the Energy Brain System. An initial payment in the amount of $ 337.50 was contemplated. 4 Petitioners relied upon Graham to select ALH as the management company. Petitioners understood that Graham would be overseeing ALH's management activities. By letter dated July 18, 1984, K.M. Fereg (Fereg) of ALH notified petitioners that the 347 Energy Brain System had been placed in service in December 1983. The location of the Energy Brain System was identified in that letter as Our Lady of Lourdes Church & School, which was in Bettendorf, Iowa. After petitioners entered into the lease, communications regarding petitioners' investment in the Energy Brain System related primarily to petitioners' concerns about the viability of the investment as a tax shelter. Petitioners "kept no * * meticulous records of events or conversations" relating to their investment in the Energy Brain System. Four experts (the experts) in the fields of energy management systems, design engineering evaluation methods, and energy system modeling prepared a study for respondent entitled "An Assessment of the Fair Market Value and the Profit Potential of the Energy Brain 1983A, 1 through 4" (the Experts' Study). In evaluating the fair market value and the profit potential of the Energy Brain System, the experts considered, among other things, the Information Memorandum and other promotional literature provided by Saxon (the Information Memorandum), the terms of the lease entered into by petitioners and Saxon, and publicly available trade catalogs348 and magazines. They also had an opportunity to examine an Energy Brain/Fuel Optimiser System A-1, as well as energy management systems being marketed by other companies. On the basis of the Experts' Study, the experts concluded that the fair market value of the Energy Brain System did not exceed $ 795. They also concluded, on the basis of the Experts' Study, that over a 10-year period an individual leasing the Energy Brain System would incur an economic loss of $ 50,000. The Experts' Study concluded as follows: Without the substantial tax benefit of the investment tax credit based on the Saxon Energy evaluation of worth, the taxpayer can only lose money on the Saxon Energy lease arrangement under the terms of the lease and over the reasonable life of the equipment.Petitioners do not seriously dispute these conclusions. We think the conclusions are supportable, and we adopt them as our own. See Schillinger v. Commissioner, T.C. Memo. 1990-640. During 1982 and 1983, there were many products comparable to the Energy Brain System being marketed due to the nation's energy conservation needs. Energy management systems were available at the retail349 level, for prices ranging from a few hundred dollars to hundreds of thousands of dollars. The variation in prices of energy management systems was the result of differences in the number of functions controlled by each such system. For example, a more elaborate system would control heating, air conditioning, lighting, and ventilation. Such a system would likely also serve other purposes, such as security, fire protection, and various monitoring functions. The Energy Brain System controlled only heating, a fact that was indicated in the Information Memorandum. Accordingly, it would properly have been considered a relatively low-end model. Petitioners timely filed their income tax returns for the taxable years 1980 and 1983. Petitioners attached to their 1983 income tax return, which was prepared by Berardinis, Form 3468 (Computation of Investment Credit). On that form, petitioners reported a value of $ 102,500 for their one-half interest in the Energy Brain System. On the basis of that valuation, petitioners claimed an investment credit in the amount of $ 10,250. 5350 Petitioners also attached a Schedule C in respect of their Saxon investment to their 1983 return. On the Schedule C, petitioners claimed as deductions a number of expenses, including lease expenses of $ 6,750 and a management fee of $ 338. Petitioners reported no gross receipts or sales in respect of the Saxon investment on the Schedule C. On Form 1045, Application for Tentative Refund, filed with respondent, petitioners claimed an investment credit carryback pertaining to their investment in the Saxon leasing program to the taxable year 1980 in the amount of $ 3,637. 6OPINION We351 begin by noting that, as a general rule, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S 111, 115 (1933). As a general rule, the taxpayer also bears the burden of proof as to each of the additions to tax and the increased rate of interest. Rule 142(a); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791 (1972). If we conclude that petitioners are not liable for the addition to tax under section 6659(a) for 1983, then respondent will bear the burden of proving that petitioners are liable for the addition to tax under section 6661(a) for the increased amount asserted in her amended answer. Rule 142(a). Deficiencies in Income TaxesRespondent determined deficiencies in petitioners' Federal income taxes for 1980 and 1983 in the respective amounts of $ 3,637 and $ 9,045. The deficiencies are based on respondent's disallowance of all credits and expenses claimed by petitioners with respect to their investment in the Energy Brain System. At trial, petitioners withdrew their concession that they are352 liable for these deficiencies. We consider the deficiencies determined for both years together because the deficiencies relate to petitioners' 1983 investment in the Energy Brain System. In determining whether petitioners' investment in the Saxon leasing program should be disregarded for Federal income tax purposes, we apply a two-part test. Pasternak v. Commissioner, 990 F.2d 893 (6th Cir. 1993), affg. Donahue v. Commissioner, T.C. Memo. 1991-181; Peat Oil & Gas Associates v. Commissioner, 100 T.C. 271">100 T.C. 271 (1993), affd. sub nom. Ferguson v. Commissioner, 29 F.3d 98 (2d Cir. 1994). The threshold question is whether the transaction has economic substance. If the answer is yes, the question becomes whether the taxpayer was motivated by profit to participate in the transaction. Rose v. Commissioner, 868 F.2d 851">868 F.2d 851, 853 (6th Cir. 1989); Mahoney v. Commissioner, 808 F.2d 1219">808 F.2d 1219, 1220 (6th Cir. 1987). If, however, the court determines that the transaction is a sham, the entire transaction is disallowed for353 federal tax purposes, and the second inquiry is never made. The proper test for whether "a transaction is a sham is whether the transaction has any practicable economic effects other than the creation of income tax losses." If the transaction lacks economic substance, then the deduction [or credit] must be disallowed without regard to the niceties of the taxpayer's intent. [Pasternak v. Commissioner, supra at 898].Although already noted above, we must emphasize that the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S 111, 115 (1933). At trial, petitioners argued vigorously that no deficiencies exist because petitioners had a subjective economic profit objective. Petitioners did not, however, address the first prong of the applicable test, namely, whether their investment in the Saxon leasing program had any economic substance. In fact, petitioners essentially conceded that the conclusions of the Experts' Study were accurate. Petitioners presented no evidence to challenge those conclusions, 354 and we have adopted those conclusions as our own. In evaluating the fair market value and the profit potential of the Energy Brain System, the experts considered, among other things, the Information Memorandum and other promotional literature, the terms of the lease entered into by petitioners and Saxon, and publicly available trade catalogs and magazines. They also had an opportunity to examine an Energy Brain/Fuel Optimiser System A-1, as well as energy management systems being marketed by other companies. The experts concluded that the fair market value of the Energy Brain System did not exceed $ 795. They also concluded that over a 10-year period an individual leasing the Energy Brain System would incur an economic loss of $ 50,000. The Experts' Study concluded that Without the substantial tax benefit of the investment tax credit based on the Saxon Energy evaluation of worth, the taxpayer can only lose money on the Saxon Energy lease arrangement under the terms of the lease and over the reasonable life of the equipment.On the basis of the evidence before us, we are compelled to conclude that the Saxon leasing program which petitioners entered into had no practical 355 economic effects other than the creation of tax benefits. Because such program was an economic sham and petitioners' investment therein had no practical economic effects other than the creation of tax benefits, we also conclude that such investment must be disregarded for Federal income tax purposes. Pasternak v. Commissioner, supra; Illes v. Commissioner, 982 F.2d 163">982 F.2d 163, 166 (6th Cir. 1992) ("If the transaction lacks economic substance, then the deduction must be disallowed without regard to the 'niceties' of the taxpayer's intent"), affg. T.C. Memo 1991-449">T.C. Memo. 1991-449. Our conclusion that petitioners' investment in the Energy Brain System was devoid of practical economic effects other than the creation of tax benefits eliminates the need for us to consider, in deciding petitioners' liability for the disputed deficiencies, whether petitioners had a subjective profit objective for making the investment. However, as discussed below with regard to the additions to tax for negligence, we conclude that petitioners did not have a subjective profit objective when they invested in the Energy Brain System. In356 view of the foregoing, we sustain respondent's deficiency determination for the taxable years in issue. NegligenceRespondent determined that petitioners are liable for additions to tax for negligence for the taxable years in issue. Section 6653(a) for 1980 and section 6653(a)(1) for 1983 impose an addition to tax if any portion of an underpayment is due to negligence or intentional disregard of rules or regulations. For 1983, section 6653(a)(2) imposes an addition to tax in an amount equal to 50 percent of the interest due on the portion of the underpayment attributable to negligence. Negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). In order to prevail on the issue of negligence, petitioners are obliged to prove that their actions in connection with the Saxon transaction were reasonable in light of their experience and the nature of the investment. See Henry Schwartz Corp. v. Commissioner, 60 T.C. 728">60 T.C. 728, 740 (1973). Within this framework, petitioners may prevail if they357 reasonably relied on competent professional advice. Freytag v. Commissioner, 849">89 T.C. 849 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868">501 U.S. 868 (1991). However, "Reliance on professional advice, standing alone, is not an absolute defense to negligence, but rather a factor to be considered." Id. at 888. When considering the negligence addition, we evaluate the particular facts of each case, judging the relative sophistication of the taxpayers, as well as the manner in which the taxpayers approached their investment. In this case, petitioners contend that their actions, particularly their reliance on Graham & Associates, were reasonable. Petitioners had no experience or knowledge with respect to the acquisition, lease, production, installation, marketing, or use of energy management systems during the taxable years in issue. Petitioners' lack of knowledge regarding their proposed investment in the Energy Brain System should have prompted them to conduct some independent investigation before investing through Graham & Associates. Nonetheless, petitioners conducted358 virtually no independent investigation regarding either the expertise of Graham & Associates or the economic viability of the proposed investment in the Energy Brain System. We note that petitioners introduced no documents relating to the Energy Brain System into evidence, suggesting that petitioners chose never to request any written documentation concerning their investment in the Energy Brain System. See Recklitis v. Commissioner, 91 T.C. 874">91 T.C. 874, 890 (1988); Pollack v. Commissioner, 47 T.C. 92">47 T.C. 92, 108 (1966), affd. 392 F.2d 409">392 F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947) (the failure of a party to introduce evidence which is within his possession may give rise to a presumption that, if produced, such evidence would be unfavorable). In an effort to persuade the Court that their actions in connection with the Saxon transaction were reasonable, petitioners attempted to distinguish themselves from the taxpayers whom this Court found to be negligent in Schillinger v. Commissioner, T.C. Memo. 1990-640.359 Petitioners' primary goal in attempting to distinguish the factual circumstances of their case from the factual circumstances in Schillinger v. Commissioner, supra, was to persuade the Court that their objective in investing in the Energy Brain System was to earn an economic profit, rather than to obtain tax benefits, and that their actions were reasonably calculated to achieve that objective. The factual distinctions identified by petitioners are not persuasive. For example, petitioners argue that, unlike the taxpayers in Schillinger v. Commissioner, supra, they did not maintain records relating to their investment in the Energy Brain System because they did not need to create a "paper trail" to prove the legitimacy of their investment. By contrast, we view the failure to maintain records as contrary to the mandate of section 6001 and the regulations promulgated thereunder, which require taxpayers to maintain records sufficient to permit verification of income and expenses. "When a taxpayer fails to maintain or make available such records, the negligence addition may be asserted." Frick v. Commissioner, T.C. Memo. 1983-733,360 affd. without opinion 774 F.2d 1168">774 F.2d 1168 (7th Cir. 1985). Petitioners point out that the taxpayers in Schillinger v. Commissioner, supra, were cautioned by an independent accountant that the so-called tax advantages of the investment in the Energy Brain System were illusory. By contrast, petitioner testified that the advisers upon whom petitioners claim to have relied issued them no such warning. By not seeking independent advice, and by not conducting even a minimal independent investigation into the Energy Brain System as an investment, but rather by relying only on the assurances of Graham and his associates, petitioners attempted to wrap themselves in a veil of ignorance behind which they now seek to hide. Like the so-called tax advantages associated with petitioners' investment in the Energy Brain System, the veil of ignorance is illusory. Petitioners also contend that, unlike the taxpayers in Schillinger v. Commissioner, supra, they were not subject to "pressure tactics" by Graham & Associates whereby they felt compelled to invest in the Energy Brain System by the close of 1983. Instead, 361 they invested in the Energy Brain System "based on the relevant facts and material facts that were disclosed to them". Petitioners argue that this is an indication that they were not investing to obtain tax benefits but to obtain economic profits. By contrast, given the minimal information apparently provided to petitioners regarding their investment, we view this statement as tending to indicate either that petitioners relied on their own judgment, or, to the extent that they did rely on Graham, such reliance was far from reasonable. Finally, supporting our conclusion that petitioners' investment in the Energy Brain System was motivated by an interest in achieving tax benefits rather than economic profit is the fact that, prior to the time petitioners chose to invest in the Energy Brain System, Graham provided petitioners with a document entitled "Business Advisor's Questionnaire". In describing his present occupation and field of professional specialization, Graham wrote: President -- Graham & Associates -- four (4) years. Tax Planning and Tax Advantaged InvestmentsIn describing his experience in the questionnaire, Graham wrote that he had "12 years experience in investing362 in Tax Advantaged Real Estate, Equipment Leasing and Oil & Gas projects". The fact that one of the few documents petitioners received from Graham emphasized his involvement in "tax-advantaged investments" suggests that petitioners' interest in investing through Graham & Associates was to shelter their existing income from taxation, rather than to generate additional income. Petitioners' postinvestment communications regarding the Energy Brain System did not constitute an effort to monitor their investment. Rather, on the basis of the facts developed at trial, we conclude that such communications related to petitioners' concerns regarding the viability of the Energy Brain System investment as a tax shelter. Petitioners have failed to persuade us that their actions in connection with their investment in the Energy Brain System were reasonable in light of their experience and the nature of their investment. Moreover, we are convinced that petitioners did not have a subjective profit motive in investing in the Energy Brain System in 1983. Accordingly, we sustain respondent's determination with respect to the additions to tax for negligence for the taxable years in issue. Valuation363 OverstatementWe turn now to the addition to tax for a valuation overstatement. Such an addition to tax may be imposed if an underpayment of tax attributable to a valuation overstatement equals or exceeds $ 1,000. Sec. 6659(a), (d). A valuation overstatement exists if the value of any property or the adjusted basis of any property claimed on a return is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis. Sec. 6659(c)(1). In the event that the reported value exceeds 250 percent of the correct value, an addition to tax of 30 percent of the underpayment of tax attributable to such overstatement is imposed. Section 6659 does not apply, however, to underpayments of tax which are not attributable to valuation overstatements. Todd v. Commissioner, 862 F.2d 540">862 F.2d 540 (5th Cir. 1988), affg. 89 T.C. 912">89 T.C. 912 (1987) (where taxpayers were not entitled to claimed investment tax credits because property was not placed in service during the years in issue, the underpayment was not attributable to a valuation overstatement). On their 1983 income tax return, petitioners claimed a value of $ 102,500364 for their one-half interest in the Energy Brain System. On the basis of that valuation, petitioners claimed an investment credit of $ 10,250 and utilized $ 7,298 of that amount to reduce their reported tax liability (exclusive of alternative minimum tax) to zero. They also claimed as deductions a number of expenses relating to the Saxon investment, including lease expenses of $ 6,750. On a Form 1045, Application for Tentative Refund, filed with respondent, petitioners claimed investment credit carrybacks pertaining to their Saxon investment to the taxable year 1980 in the amount of $ 3,637. On the basis of the Experts' Study, we have concluded that the fair market value of the Energy Brain System did not exceed $ 795. Therefore, petitioners' valuation of the Energy Brain System constitutes a valuation overstatement. Sec. 6659(c)(1). We must now decide whether the deficiency in income tax for each of the taxable years in issue is attributable to the valuation overstatement. Sec. 6659(a); see, e.g., Gilman v. Commissioner, 933 F.2d 143">933 F.2d 143, 151 (2d Cir. 1991), affg. T.C. Memo. 1990-205; Massengill v. Commissioner, 876 F.2d 616">876 F.2d 616, 619-620 (8th Cir. 1989),365 affg. T.C. Memo. 1988-427; Todd v. Commissioner, supra; Urbanski v. Commissioner, T.C. Memo. 1994-384. 7The deficiency for 1980 resulted from the disallowance of the investment credit carryback claimed by petitioners with respect to their 1983 Saxon investment. The deficiency for 1983 resulted, in part, from the disallowance of such credit and, in part, from the disallowance of deductions claimed by petitioners with respect to such investment. Nonetheless, as discussed below, we hold that no part of the deficiency for either year is attributable to a valuation overstatement because a valid election to transfer the366 investment credit from lessor to lessee was never executed. Sec. 48(d)(1); Todd v. Commissioner, supra; Kerry v. Commissioner, 89 T.C. 327">89 T.C. 327 (1987); sec. 1.48-4(f), Income Tax Regs.In connection with their investment in the Energy Brain System, petitioners signed a document entitled "Election to Pass Investment Tax Credits from Lessor to Lessee". Section 48(d)(1) provides, in relevant part: A person * * who is a lessor of property may (at such time, in such manner, and subject to such conditions as are provided by regulations prescribed by the Secretary) elect * * * to treat the lessee as having acquired such property * * .The regulations promulgated under section 48(d)(1) (the Regulations) provide, also in relevant part: The election of a lessor with respect to a particular property (or properties) shall be made by filing a statement with the lessee, signed by the lessor and including the written consent of the lessee, containing the following information * * [Sec. 1.48-4(f), Income Tax Regs.; emphasis added.] Although petitioners attempted to execute an election in accord with section 48(d), no Saxon representative signed367 the form entitled "Election to Pass Investment Tax Credits from Lessor to Lessee". In Kerry v. Commissioner, supra, the Court held that, in the absence of strict compliance with the Regulations, a valid election to transfer the investment tax credit from lessor to lessee could not occur. Because the Regulations require that the lessor actually sign a statement electing to transfer the investment tax credit to the lessee, no valid election was made in this instance. Accordingly, the underpayments of tax resulting from the disallowance of the investment credit are not attributable to the valuation overstatement that exists for each of the years in issue. Sec. 6659(a); Todd v. Commissioner, supra.In view of the foregoing, we do not sustain respondent's determination that petitioners are liable for the additions to tax under section 6659(a) for a valuation overstatement. We note, however, that "Congress is, of course * * free to change the result in cases such as this by imposing additions to tax or additional interest on underpayments attributable to transactions 'accompanied by a valuation overstatement'". Todd v. Commissioner, 849">89 T.C. at 921-922.368 Understatement of Tax Liability for 1983We turn next to the addition to tax for substantial understatement of income tax under section 6661(a) for 1983. Section 6661(a) imposes an addition to tax equal to 25 percent of the amount attributable to a substantial understatement of income tax. An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6661(b)(1)(A). 8We have already sustained respondent's determination that petitioners understated their income tax liability for 1983 by an amount in excess of $ 5,000, which is greater than 10 percent of the tax required to be shown on the return. We sustained respondent's deficiency369 determination on the ground that the Saxon leasing program lacked economic substance. Respondent has carried her burden of proof with respect to the application of the increased addition to tax under section 6661(a). Accordingly, we sustain respondent's determination that petitioners are liable for the addition to tax under section 6661(a) and hold that it properly applies to the entire deficiency for 1983. See sec. 6661(c). Increased Rate of InterestFinally, section 6621(c) provides for an increased rate of interest with respect to any underpayment in excess of $ 1,000 which is "attributable to one or more tax motivated transactions". Sec. 6621(c)(1) and (2). The increased rate of interest applies to interest accruing after December 31, 1984. See DeMartino v. Commissioner, 88 T.C. 583">88 T.C. 583, 589 (1987), affd. 862 F.2d 400">862 F.2d 400 (2d Cir. 1988) (the increased rate of interest applies to interest accruing after December 31, 1984, even though the transaction in question was entered into before the date of enactment of section 6621(c)). Respondent determined that petitioner was liable for increased interest because the underpayments370 for the taxable years in issue were attributable to tax-motivated transactions. Section 6621(c)(3)(A)(v) provides that the term "tax- motivated transaction" includes "any sham or fraudulent transaction". Economic shams, or transactions which lack economic substance, fall within the ambit of section 6621(c)(3)(A)(v). Patin v. Commissioner, 88 T.C. 1086">88 T.C. 1086, 1128-1129 (1987), affd. without published opinion 865 F.2d 1264">865 F.2d 1264 (5th Cir. 1989), affd. sub nom. Gomberg v. Commissioner, 868 F.2d 865 (6th Cir. 1989), affd. sub nom. Skeen v. Commissioner, 864 F.2d 93">864 F.2d 93 (9th Cir. 1989), affd. without published opinion sub nom. Hatheway v. Commissioner, 856 F.2d 186 (4th Cir. 1988). Here we have concluded that the Saxon transaction was an economic sham. Accordingly, we sustain respondent's determination that petitioners are liable for the increased rate of interest under section 6621(c) with respect to the deficiencies for 1980 and 1983. 9371 ConclusionIn order to reflect our resolution of the disputed issues, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩1. 50 percent of the statutory interest due on the amount of the deficiency attributable to negligence; i.e. $ 9,045.↩2. Respondent amended her answer to plead, in the alternative, that in the event that the Court concludes that the addition to tax under sec. 6659(a) does not apply, the addition to tax under sec. 6661(a)↩ should be increased to 25 percent of the entire deficiency, rather than 25 percent of the portion of the deficiency not attributable to an overvaluation of property.2. The term "invest" and all of its derivatives are used solely for the sake of convenience throughout this opinion.↩3. The parties stipulated a copy of the front of a check dated Dec. 29, 1983, from petitioners to Saxon in the amount of $ 6,750. The copy of the check stipulated does not show that the check was ever processed.↩4. The parties stipulated to a copy of the front of a check dated Dec. 29, 1983, from petitioners to ALH in the amount of $ 337.50. The copy of the check stipulated does not show that the check was ever processed.↩5. Of this amount, petitioners utilized $ 7,298 on their 1983 return in order to reduce their reported income tax liability (exclusive of the alternative minimum tax) for that year to zero. Petitioners reported alternative minimum tax in the amount of $ 685, which represented their total reported tax liability for 1983. Petitioners then claimed a refund in the amount of $ 14,763.↩6. The sum of the investment credit claimed for 1983, $ 7,298, and the investment credit carried back to 1980, $ 3,637, equals $ 10,935, an amount in excess of the $ 10,250 claimed on Form 3468. Petitioners computed the unused investment credit available for carryback to 1980 as follows: ↩1983 investment credit$ 10,250Less: amount claimed in 1983-7,298Balance2,952Plus: 1983 AMT685Unused ITC for carryback$ 3,6377. Sec. 6659 applies to returns filed after Dec. 31, 1981. When an item carried back from a later year (such as 1983) to an earlier year (such as 1980) is "attributable to" the adjustments in the later years, sec. 6659 may be applied to returns filed before Jan. 1, 1982. Nielsen v. Commissioner, 87 T.C. 779">87 T.C. 779↩ (1986).8. An understatement will be reduced to the extent that it is: (1) Based on substantial authority, or (2) adequately disclosed in the return or in a statement attached to the return. Sec. 6661(b)(2)(B)↩. In this case, the understatement for 1983 was neither based upon substantial authority nor adequately disclosed.9. McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827, 857-860↩ (1989), does not compel a conclusion to the contrary because the deficiencies at issue herein were fully contested by petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621183/	ETHEL H. BURKLE, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Burkle v. CommissionerDocket Nos. 10774-81, 11637-82, 12271-82, 16953-82.United States Tax CourtT.C. Memo 1986-394; 1986 Tax Ct. Memo LEXIS 212; 52 T.C.M. (CCH) 249; T.C.M. (RIA) 86394; August 25, 1986. John E. Drew and John S. Mason, Jr., for the petitioner in docket Nos. 10774-81 and 16953-82. Judith Burkle Reynolds, pro se in docket No. 11637-82. David R. Schaefer and Stephen L. Saltzman for the petitioners in docket No. 12271-82. Robert E. Marum and Powell W. Holly, Jr., for the respondent. CLAPPMEMORANDUM FINDINGS OF FACT AND OPINION CLAPP, Judge: Respondent determined deficiencies in petitioner Ethel Burkle's Federal income tax in the amounts of $34,782.08 and $50,381.05 for the years 1977 and 1978 (docket Nos. 10774-81 and 16953-82, respectively). Respondent also determined a deficiency in the Federal income tax of the Estate of Robert N. Burkle, and Margaret M. Burkle, Surviving Spouse in the amount of $35,881.42 for the year 1977 (docket Nos. 11637-82 and 12271-82). The issues for decision are (1) whether certain payments received by petitioner Ethel Burkle from her former husband's estate in 1977 and 1978 constitute alimony payments under section 71; 2 and (2) whether214 such payments are deductible by the estate under section 215 for the year 1977. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner Ethel Burkle (hereinafter referred to as Ethel) resided in North Haven, Connecticut at the time her petitions were filed. Robert N. Burkle, deceased (hereinafter referred to as Robert), was a resident of Connecticut on August 24, 1977, the date of his death and his estate was probated there. The co-administratrices, Margaret M. Burkle, who is also the surviving wife, and Judith Burkle Reynolds, daughter of the deceased, resided in Connecticut when the petitions in Docket Nos. 11637-82 and Docket No. 12271-82 were filed. Ethel timely filed individual income tax returns for the taxable years 1977 and 1978, using the cash basis method of accounting. A timely joint income tax return was filed for Robert, deceased, and Margaret M. Burkle, surviving spouse, for the taxable year215 1977, using the cash basis method of accounting. Robert and Ethel were married on April 29, 1935. Ethel initiated an action to dissolve the marriage on June 19, 1973. On January 14, 1975, a judgment dissolving the marriage was entered by the State of Connecticut Superior Court. Incorporated within the judgment was an agreement, dated January 2, 1975 executed by Robert and Ethel and negotiated by their separate counsel. The pertinent provisions of the agreement provide as follows: Whereas, on the 19th day of June, 1973, the Wife commenced an action for divorce or dissolution of said marriage seeking alimony, returnable to the Superior Court for New Haven County, and * * * Whereas, the parties desire to settle amicably and to determine as between themselves, and out of Court, the question of the right of the Wife to alimony, and the amount thereof, it is therefore AGREED: * * * 2. The following agreements have been reached with respect to transfers by Husband to Wife as lump sum alimony absolutely and without condition. (a) The Husband shall transfer to Wife his interest in premises located at 82 Hartley Street in North Haven, Connecticut. * * * (b) The Husband shall216 forthwith pay Ten thousand ($10,000.) dollars in cash to the Wife. (c) The Husband shall forthwith pay the sum of Three thousand, five hundred ($3,500.) dollars on account of attorney fees incurred by Wife. 3. The following agreements have been reached with respect to periodic payments by Husband to Wife from income of Husband which shall continue so long as Husband shall live and subject to termination in the event of death or remarriage of Wife: (a) Effective October 1, 1974, Husband shall pay to Wife fifty (50%) percent of gross salary thereafter earned by him from Autac, Inc. and/or Wire, Inc. up to a salary of Thirty thousand ($30,000.) dollars. * * (b) Effective October 1, 1974, Husband shall pay to Wife thirty (30%) percent of net income in excess of Thirty thousand ($30,000.) dollars thereafter earned by him from Autac, Inc. and/or Wire, Inc. Net income, for the purpose of this subparagraph, shall mean salary earned by or dividends paid to Husband by Wire, Inc. or Autac, Inc. in excess of Thirty thousand ($30,000.00) dollars less that amount payable to the United States as taxes on all such excess payments, taking into consideration, however, the deduction Husband217 will have for alimony payments and all other proper deductions. * * 4. The following agreement has been reached with respect to control of corporations owned by Husband, Wire, Inc. and Autac, Inc. and with respect to undistributed earnings of either corporation. (a) Husband shall have full control of both corporations and his decisions as to the necessity for accumulation of corporate funds or what he determines to be good business practice shall be final. * * * In the event of a bona fide sale of either corporation or in the event of the death of the Husband, the Wife shall receive further payment, as follows: (i) In the event of a sale and after payment of all corporate liabilities, Husband will receive first a payment equivalent to the net worth of the corporation sold as shown on the year-end statement for the Spring of 1974. From the remaining funds resulting from such sale Wife will receive thirty (30%) percent of the net increase in book value occurring during and after the fiscal year which began in the Spring of 1974. * * * It is the purpose of this paragraph to provide for payment of alimony from earnings retained hereafter on hand at time of sale. (ii) In218 the event of the death of the Husband the Administrator or Executor of his estate may elect to sell said corporation and in the event of a bona fide sale the provisions of paragraph 4(a)(i) shall apply and Wife shall be deemed to be an interested party in any probate hearing concerning the bona fides of sale. (iii) In the event that Husband should die and his Administrator or Executor should elect not to sell his interest in Autac, Inc. or Wire, Inc., then and in that event, Wife shall be paid based on paragraph 4(a)(1) as if there had been a sale permitting full payment of the thirty (30%) percent net increase in book value, said payment to be made within twelve (12) months of the appointment of the Executor or Administrator. * * (c) It is specifically understood and agreed that in the event of the death of the Wife or the remarriage of the Wife prior to the sale of the business or prior to the death of Husband, then the provisions of this Agreement with respect to payment of thirty (30%) percent of net equity in the event of sale of corporation or its stock or death of Husband shall expire and terminate. Paragraph five of the agreement contains provisions for determining219 alternate alimony payments in the event that Robert was no longer employed or in control of the two corporations, Autac, Inc. and Wire, Inc. Paragraph six provides that Robert would pay to Ethel as alimony 15 percent of that portion of rent, received by Robert from the two corporations, which he used for his personal benefit. This obligation ceased in the event of either party's death or Ethel's remarriage. Paragraph seven provides as follows: Husband shall deliver a note in the amount of Fifty Thousand ($50,000.00) Dollars and said note shall be secured by a mortgage on the business real estate located in North BranfordConnecticut. No interest shall be paid on said note and said note shall expire and terminate in the event of the remarriage of Wife or death of Wife before Husband. Said note shall be payable in the event of sale of such real estate or in the event of the death of Husband. The said note shall bear the description of the terminable interest. The promissory note itself stated that it would expire in the event of Ethel's remarriage but, contrary to the agreement, did not contain the proviso with respect to the wife's death before the husband. Paragraph 12220 of the agreement states that in consideration of the undertaking of the husband under the agreement, the wife would relinquish all claims against the husband for "other forms of alimony, support and maintenance." Prior to the entry of judgment of the divorce, Robert owned all the outstanding stock of Autac, Inc. and Wire, Inc., two Subchapter S Corporations. In the financial affidavit, dated September 13, 1974, filed by Ethel in the divorce action, she did not list as an asset any interest in Autac, Inc. or Wire, Inc.Ethel received monthly payments from Robert from January 1, 1977, through August 1, 1977, totalling $14,940. Robert died on August 24, 1977. By letter dated October 5, 1977, Ethel's attorney presented a claim to the estate on behalf of Ethel in the tentative amount of $175,000 consisting in (a) the $50,000 promissory note by Robert to Ethel referred to in paragraph 7 of the above agreement and (b) $125,000 based on paragraphs three and four of the agreement. The estate issued two checks to Ethel, dated December 21, 1977 and December 27, 1977, in the amounts of $40,000 and $25,000. The letters from the estate transferring the checks and the checks themselves note221 that they are payment on account of the claim made by Ethel on October 5, 1977 regarding section (b) relative to alimony due. A check, dated October 31, 1978, in the amount of $96,000 was paid by the estate to Ethel, representing payment in full of Ethel's claim. The amount of $96,000 was arrived at as a compromise between the amount presented by Ethel and the amount computed by the estate. Ethel's attorney had computed the amount due as follows: Ethel's 30% share of salary over$30,000and increase in net worth ofcorporations$121,766.94Rent5,250.00Note50,000.00$177,016.94Less Payments made1975 $3,0001976 13,0001977 64,94080,940.00$ 96,076.94The estate computed the amount due as follows: 50% of salary up to $30,000$ 15,000.0030% of excess salary over $30,00020,844.97Rent5,250.00Increase in book value82,628.37Alimony due$123,723.34Second mortgage Note50,000.00Total$173,723.34Lees Payments to date$14,940$65,00079,940.00Balance$ 93,783.34Ethel reported on her 1977 tax return the monthly payments of $14,940 as alimony received and these payments are not in dispute. 222 She did not include in income the amounts received in 1977 totalling $65,000 or the $96,000 received in 1978 but noted on her returns for the years 1977 and 1978, that the payments were received as a nontaxable property settlement and a nontaxable distribution, respectively. The 1977 joint income tax return of Margaret Burkle and Robert claimed a deduction for alimony for the $65,000 payment made in 1977. In the notices of deficiency issued to Ethel for the years 1977 and 1978, respondent determined that the payments in question received by Ethel constituted alimony income. Respondent issued a notice of deficiency of income tax for the year 1977 to the Estate of Robert Burkle, Judith Burkle Reynolds and Margaret Burkle, Co-Administratrix (sic) and Margaret Burkle, Surviving Wife, stating that the $65,000 payments were not includable in Ethel's income and denying the alimony deduction under section 215. Separate petitions were filed by Judith Reynolds and Margaret Burkle. OPINION Ethel contends that the amounts she received from the estate do not constitute taxable income under section 71 but rather represent lump-sum payments in recognition of her contributions to her husband's223 business. Ethel also contends that the amounts paid by the estate in 1977 and 1978 are not deductible under section 215. Therefore, the inclusion in her income as taxable alimony, she argues, would constitute a distortion of income. Petitioners Estate of Robert Burkle and Margaret Burkle, Surviving Wife (hereinafter sometimes referred to as petitioners in the plural) contend that the payments made in 1977 are periodic payments which constitute taxable income to Ethel under section 71 and are deductible by petitioners under section 215. The deductibility of the payment of $96,000 in 1978 is not at issue in these cases. Respondent on initial brief stated that the notices of deficiency took inconsistent positions with respect to the year 1977 and, without abandoning this stakeholder position, argued that the amounts received by Ethel in 1977 and 1978 were includable in income under section 71 and were deductible on the joint return of petitioners with respect to the payments made in 1977 under section 215. However, on reply brief, respondent, while still arguing that the payments are income to Ethel, agrees with Ethel that they are not deductible by petitioners under section 215. 224 The initial issue for decision is whether the payments received by Ethel constitute taxable income under section 71. Section 71(a)(1) as in effect during the years at issue provides: If a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of (or attributable to property transferred, in trust or otherwise, in discharge of) a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree or under a written instrument incident to such divorce or separation. Section 71(c)(1) provides: (1) General Rule. -- For purposes of subsection (a), installment payments discharging a part of an obligation the principal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement shall not be treated as periodic payments. The primary issue here is whether the payments made by the estate constitute periodic payments or payments of a principal sum. A principal sum specified in the decree or agreement225 is one that is readily ascertainable in amount and is not contingent on the happening of certain events. Baker v. Commissioner,205 F.2d 369">205 F.2d 369 (2d Cir. 1953), affg. in part and revg. in part 17 T.C. 1610">17 T.C. 1610 (1952); Prewett v. Commissioner,221 F.2d 250">221 F.2d 250 (8th Cir. 1955), revg. 22 T.C. 270">22 T.C. 270 (1954). Section 1.71-1(d) of the Income Tax Regulations provides that payments are not installment payments of a principal sum even though the sum is specified in money or property (and therefore are considered periodic payments) if the payments are subject to any one or more of the contingencies of death of either spouse, remarriage of the wife, or change in the economic status of either spouse and such payments are in the nature of alimony or an allowance for support. The validity of the regulations was upheld by this Court in Kent v. Commissioner,61 T.C. 133">61 T.C. 133 (1973). Initially, we note that, while under Connecticut law the obligation of the husband to support his wife normally ceases upon his death, when a separation agreement provides that the husband's estate will continue to make support payments, the estate is obligated226 to make the payments. McDonnell v. McDonnell,166 Conn. 146">166 Conn. 146, 348 A.2d 575">348 A.2d 575 (1974). In the instant case, we have different provisions in the agreement imposing different payment obligations, therefore, we will examine each provision separately. Bernstein v. Commissioner,622 F.2d 442">622 F.2d 442 (9th Cir. 1980), affg. a Memorandum Opinion of this Court; Bartsch v. Commissioner,18 T.C. 65">18 T.C. 65 (1952) affd. 203 F.2d 715">203 F.2d 715 (2d Cir. 1953). Paragraphs 3(a) and (b) clearly call for periodic payments based on a percentage of Robert's salary and dividends. Paragraph six regarding rent that Robert would receive from the two corporations does not set forth an ascertainable sum but is based on a percentage of that portion of rent which Robert uses for his personal benefit. Ethel argues that upon Robert's death, the periodic payments called for in paragraphs three and six ceased and Ethel then became entitled to a lump sum payment in accordance with paragraphs four and seven of the agreement. While it is true under the terms of the agreement that the payments under paragraph three and paragraph six terminated on Robert's death, both Ethel in227 presenting her claim and the estate in its computations included amounts due under these provisions. However, the record is not clear what portion of the payments was allocable to these provisions. In any event, it is clear and we do not understand Ethel to argue otherwise that periodice payments are called for under paragraphs three and six. Because of our determinations below, it is not necessary to decide what amount is allocable to these payments. Paragraph four also does not set forth a definite sum but is based upon a percentage of net increase in value of the two corporations to be determined upon their sale or Robert's death. Clearly no ascertainable principal sum is specified in the agreement. 3 Paragraph four intended to provide for alimony from earnings retained after the date of agreement. This provision was intended to protect Ethel from Robert's decisions to retain earnings in the company rather than pay them out to himself. In the latter case, they would be subject to the percentage alimony provisions in paragraph three. In the former case, without paragraph four, Ethel would never receive her share of the corporate earnings. This adds further weight to the228 argument that the payments at issue herein were periodic payments. In addition, no amount needed to be paid if Ethel had remarried or predeceased her former husband. The obligation to pay under paragraph seven does specify a sum of money but it is also clearly contingent upon Ethel's surviving her husband and not remarrying. As such, it lacks the "fairly definite character" needed to constitute a principal sum. Baker v. Commissioner,supra.While it is true, as Ethel argues, that at the time the payments were made, the amounts were ascertainable and subject to no contingencies, the statute is clear that the principal sum must be specified in the agreement. The contingent nature of the payments is indicative of a support obligation rather than a property settlement. McCombs v. Commissioner,397 F.2d 4">397 F.2d 4, 7 (10th Cir. 1968), affg. a Memorandum Opinion of this Court; Beard v. Commissioner,77 T.C. 1275">77 T.C. 1275, 1285 (1981). The agreement itself designates the amounts as alimony rather than a property division. While the labels contained in an agreement are229 not controlling, they are entitled to some probative value where the agreement was subject to negotiations with each party represented by counsel. Schottenstein v. Commissioner,75 T.C. 451">75 T.C. 451, 457 (1980). Ethel claims that the amounts she received were not for support but were made in recognition of the contributions she made to her husband's business citing section 1.71-1(a)(4) of the Income Tax Regulations which states: section 71(a) does not apply to that part of any periodic payment which is attributable to the repayment by the husband of, for example, a bona fide loan previously made to him by the wife, the satisfaction of which is specified in the decree, instrument, or agreement as a part of the general settlement between the husband and wife. * * Ethel testified that in the early 1960's she transferred some stock worth between $30,000 and $50,000 and in 1966 she transferred money she received from her father's estate, approximately $30,000, to Robert. The transfers were made a considerable number of years before the separation agreement was drawn up. There is no evidence as to how this money was used or if it was used solely for the benefit of her husband's230 business. The financial affidavit submitted by Ethel during the divorce proceedings shows no ownership interest of Ethel in the business.The amounts to be paid under paragraphs three, four and six were based on Robert's future income rather than based on any past contributions made by Ethel. Finally, the contingent nature of the payments provided for in the agreement, including paragraph seven, belies Ethel's argument. Had she remarried she would receive nothing under any of the relevant provisions of the agreement. Based on the foregoing, we conclude that the payments received by Ethel are taxable under section 71. The next issue for decision is whether petitioners, the estate and Margaret, are entitled to a deduction under section 215 on the joint Form 1040 return. Section 215(a) provides: In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. * * [Emphasis added.] Section 1.215-1(b) of the Income Tax Regulations provides as follows: The deduction under section 215 is allowed only to the obligor spouse.231 It is not allowed to an estate, trust, corporation, or any other person who may pay the alimony obligation of such obligor spouse. * * Under section 215 and the applicable regulations, only the obligor-spouse is entitled to an alimony deduction. Estate of Jarboe v. Commissioner,39 T.C. 690">39 T.C. 690, 696 (1963). 4The fact that a joint return by the estate and Margaret was filed for 1977 does not change the result. Section 6013(a)(2) provides as follows: no joint return shall be made if the husband and wife have different taxable years; except that if such taxable years begin on the same day and end on different days because of the death of either or both, then the joint return may be made with respect to the taxable year of each. * * * While Margaret's taxable year was for the full calendar year of 1977, the taxable year for Robert ended on August 24, 1977, the date of his death. The amounts at issue were not paid during his taxable year, therefore, they are not deductible under section 215. Petitioners cite section 1.6013-3 of the Income Tax Regulations which states that where the husband232 and wife have different taxable years because of the death of either spouse, the joint return shall be treated as if the taxable years of both ended on the date of the closing of the surviving spouse's taxable year.However, petitioners omitted the rest of the regulation which makes it clear that this statement is for purposes of particular Code provisions, none of which is applicable here. The disallowance of the deduction under section 215 5 does not mean, however, that Ethel does not include the payments in her income. Periodic payments by the estate are includable in the wife's gross income regardless of the source of payments. Girard Trust Co. v. Commissioner,16 T.C. 1398">16 T.C. 1398, 1401 (1951), affd. 194 F.2d 708">194 F.2d 708 (3d Cir. 1952); section 1.71-1(c)(2) of the Income Tax Regulations.233 Based on the foregoing, Decisions will be entered for the respondent.Footnotes1. The following cases are consolidated herewith: Estate of Robert N. Burkle, Judith Burkle Reynolds, Co-Administratrix, docket No. 11637-82 and Estate of Robert N. Burkle, Deceased, Judith Burkle Reynolds and Margaret M. Burkle, Co-Administratrix and Margaret M. Burkle Surviving Wife, docket No. 12271-82.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue.↩3. See Swendseen v. Commissioner,T.C. Memo. 1978-501↩.4. Arnall v. Commissioner,T.C. Memo. 1983-232↩.5. The estate may be entitled to a distribution deduction for the payments under the income tax rules applicable to estates in Subchapter J and it may also be entitled to a deduction on the estate tax return. Estate of Laughlin v. Commissioner,167 F.2d 828">167 F.2d 828 (9th Cir. 1948) revg. 8 T.C. 33">8 T.C. 33 (1947); Izrastzoff v. Commissioner,15 T.C. 573">15 T.C. 573 (1950), affd. 193 F.2d 625">193 F.2d 625↩ (2d Cir. 1952). However, neither the fiduciary income tax return nor estate tax return are at issue in this case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621184/	MICHAEL W. BURT and JENNIFER S. BURT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBurt v. CommissionerDocket No. 6621-78.United States Tax CourtT.C. Memo 1980-363; 1980 Tax Ct. Memo LEXIS 221; 40 T.C.M. (CCH) 1164; T.C.M. (RIA) 80363; September 9, 1980, Filed Michael W. Burt, pro se. Gerald W. Hartley, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the calendar year 1975 in the amount of $432.25. The only issue for decision is whether educational and related travel expenses incurred by Michael W. Burt are deductible as ordinary and necessary business expenses. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners, Michael W. and Jennifer S. Burt, husband and wife, who resided in Laurel, Mississippi, at the time of filing222 their petitioner in this case, filed a joint Federal income tax return for the calendar year 1975 with the Internal Revenue Service Center in Chamblee, Georgia. Mr. Michael W. Burt (petitioner) studied the trumpet while in high school. Upon graduation from high school he entered the United States Marine Corps. During his service in the Marine Corps he was a trumpet player in the Marine Band. Upon his discharge from the Marines in 1972, petitioner enrolled in Copiah-Lincoln Junior College in Wesson, Mississippi. Petitioner took the basic curriculum of the freshman year during his first year at Copiah-Lincoln Junior College and in addition took some music courses. His courses at Copiah-Lincoln Junior College were not courses leading to an Associates of Arts degree but were the courses required for the first two years for a student working toward a Bachelor's degree. Petitioner attended Copiah-Lincoln Junior College for one and one-half years and during this time he lived in Brookhaven, Mississippi. Soon after moving to Brookhaven, petitioner took a position as the Minister of Music at the Easthaven Baptist Church. At that time petitioner was also the assistant band director223 at Wesson Elementary School in Wesson, Mississippi. The band director was petitioner's band director at Copiah-Lincoln Junior College, and petitioner was not required to and did not obtain a certificate from the State of Mississippi to hold the position of assistant band director. While attending Copiah-Lincoln Junior College and acting as the Minister of Music at the Easthaven Baptist Church, petitioner became the band director and band teacher in a private school, the Brookhaven Academy in Brookhaven, Mississippi. Brookhaven Academy was a new private school, and petitioner was not required to have a college degree or to obtain a teaching certificate from the State of Mississippi. He held his position at the Brookhaven Academy for two years until he left his position at Easthaven Baptist Church in the summer of 1974. After one and one-half years at Copiah-Lincoln Junior College, petitioner took one course in psychology at the extension department of the University of Mississippi in Jackson, Mississippi. In June 1974 petitioners moved to Ellisville, Mississippi, where petitioner became employed as the Minister of Music by the First Baptist Church of ellisville. The church224 did not require petitioner to have a degree in Music as a condition of his employment.Petitioner's employer did not require petitioner to continue his studies to retain his employment but did consent to his continuing his studies. In the fall of 1974, petitioner, with the consent of his employer, enrolled as a candidate for a Bachelor of Music degree at the University of Southern Mississippi in Hattiesburg, Mississippi. Petitioner's position as a Minister of Music was a full-time position, but because part of his duties, such as choir classes, were performed in the evening and part during the day and on Sunday, he was able to and did take some of his courses in classes which met during the day and some which met in the evening. The classes in which he enrolled were those necessary to obtain a Bachelor of Music (B.M.) degree. Petitioner received his B.M. degree in Applied Music with a major in trumpet in May 1976. During the spring quarter of 1976 before receiving his B.M. degree, petitioner was admitted to the University of Southern Mississippi Masters program. At the time of trial of this case, petitioner lacked only one paper for completing the requirements for that Masters225 degree in music. Petitioner completed 63 semester hours of work at Copiah-Lincoln Junior College. In the fall of his first year at the University of Southern Mississippi (September 1974 to June 1975) he took courses in physical science and biological science as well as courses in music including four courses in the summer and fall of 1975, one course in the winter quarter of 1975-76, and one course in the spring of 1976 in music education. 2226 After receiving his B.M. degree in 1976, petitioner could have obtained a one-year teaching permit from the Mississippi State Department of Education, qualifying him to teach music in grades 1 through 12, subject to the one additional requirement that he take the National Teachers Examination and score a minimum of 850 (of a top possible score of 1900). Petitioner's one-year teaching permit could have been renewed on a year-to-year basis, subject to the requirement that he take six semester hours or eight quarter hourse of education courses per year. After petitioner had completed the required education courses, he would have received a regular five-year teaching certificate. Petitioner, however, did not attempt to qualify for a Bachelor of Music Education degree and has never attempted to be certified as a teacher in Mississippi. To earn a Bachelor of Music Education degree at the University of Southern Mississippi, petitioner would have been required to take many more courses in Music Education than he did take. Petitioner was of the opinion that with his B.M. degree he could teach and direct the band at a junior227 college with the understanding that he complete his Masters degree in Music within two years and that with the Masters degree he could teach at a four-year institution. Eventually petitioner hopes to obtain his doctorate degree in Music. However, it is not and never has been petitioner's personal goal to teach music at the college level. Although larger churches generally prefer that their Minister of Music have a degree in Music, it is not a requirement of most such positions. A minister of Music has religious responsibilities, as well as musical ones. He teaches music to the members of the various church choirs as part of his duties but also assists in the conduct of Bible study classes and participates in youth retreats. 3 The responsibilities of the Minister of Music and the time required to perform the duties of the position is greater in a church with a large congregation than in a church with a small congregation. In 1976 petitioner became the Minister of Music at the First Baptist Church of Purvis, Mississippi, and later of the First Baptist Church of Laurel, 228 Mississippi.The First Baptist Church of Laurel has a larger congregation than any of the other churches served by petitioner, and petitioner's duties at that church are more extensive than were his duties in his previous employment. On their Federal income tax return for the calendar year 1975, petitioners deducted $600 as education expenses at the University of Southern Mississippi and $2,183 as travel expense, of which the amount of $1,903.80 was in connection with petitioner's education at the University of Southern Mississippi. In his notice of deficiency to petitioners, respondent disallowed the claimed $600 educational expense deduction and $1,903.80 of the claimed travel expense deduction with the following explanation: (a) The deduction of $2,183.00 claimed for travel expense is not allowed to the extent of $1,903.80 because it has not been established that any amount in excess of $279.20 constitutes an ordinary and necessary business expense or was expended for the purpose designated. Taxable income is increased by the amount of $1,903.80. (b) The amount of $600.00 claimed as a miscellaneous itemized deduction for education expense is not allowed because it has229 not been established that such amount constitutes an ordinary and necessary business expense or was expended for the purpose designated. Taxable income is increased by the amount of $600.00. At the trial counsel for respondent stated that respondent no longer questioned the fact that petitioner spent $600 for taking the courses he took at the Univesity of Southern Mississippi in 1975 or that he incurred $1,903.80 as necessary travel expense to attend his classes at the University of Southern Mississippi. The only issue is whether these expenditures are properly deductible. OPINION Section 162, I.R.C. 1954, 4 provides for a deduction by a taxpayer of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 262 provides that except as otherwise expressly provided in the law, no deduction shall be allowed for personal, living, or family expenses. Usually, a general college education leading to a Bachelor's degree undertaken by an individual is a personal expense which is nondeductible under section230 262 in computing Federal income taxes. See Carroll v. Commissioner,51 T.C. 213">51 T.C. 213, 216 (1968), affd. 418 F.2d 91">418 F.2d 91 (7th Cir. 1969). However, the expense of certain education is deductible as an ordinary and necessary business expense. Section 1.162-5, Income Tax Regs., states that except as otherwise provided therein amounts expended by an individual for education which maintains or improves the skills required by such individual in his employment or other trade or business or meets the express requirements of an individual's employer imposed as a condition to the retention of his employment are deductible as business expenses. The exceptions are for expenditures for education which is required for an individual to meet the minimum educational requirements of his employment or other trade or business or education which qualifies the individual for a new trade or business. 5231 Respondent in his brief relies on our holding in Toner v. Commissioner,71 T.C. 772">71 T.C. 772 (1979), reversed F.2d (3d Cir., June 16, 1980). In the Toner case the taxpayer taught in a Catholic school which did not require a college degree for elementary school teachers. To continue to teach in the Catholic school, the taxpayer was required by the school to take six college credits a year. While teaching in the parochial school, the taxpayer pursued a course leading to her Bachelor's degree which enabled her to obtain a teacher's certificate for teaching in the public schools of Pennsylvania. In that case we concluded that even though the taxpayer did not intend to become a public school teacher and in fact did not become a public school teacher, the expenses of the education undertaken by her in the year there in issue were not deductible since such education qualified her for a position as a public school teacher. The Circuit Court reversed, stating that as properly interpreted respondent's regulations considered all teaching positions as one trade or business. The Circuit Court concluded that the taxpayer's educational expenses were properly deductible232 under the provisions of the regulations. In reaching its conclusion the Circuit Court stressed the fact that the taxpayer in the Toner case fully met the standards of her employer as a teacher and that she was a fully recognized member of the faculty with a vote in faculty affairs. Because the facts in Toner are clearly distinguishable from the facts in this case, neither our holding in Toner nor that of the Circuit Court is helpful in disposing of this case. Petitioner in the instant case has not shown that his work as a teacher was sufficiently extensive to place him in the trade or business of being a teacher. The facts are reasonably clear that as assistant band director at Wesson Elementary School (a public school) petitioner was merely a teacher's aide and did not have the status of a teacher. In any event he certainly did not meet the minimum requirements for a teacher of any type in the public elementary schools of Mississippi. Petitioner has not shown the minimum educational requirements of Brookhven Academy for a teacher or band director which were in effect when he was first employed by the academy. Since petitioner has not shown the minimum educational233 requirements of Brookhaven Academy for a teacher or band director, it follows that he has failed to show that he met those minimum requirements when he first became employed at Brookhaven Academy. Section 1.162-5(b)(2)(i), Income Tax Regs., provides that "The fact that an individual is already performing service in an employment status does not establish that he has met the minimum educational requirements for qualification in that employment." Therefore the mere showing that peitioner was a band director at bookhaven Academy does not establish that he had met the minimum educational requirements for that position at Brookhaven Academy. Petitioner has also failed to show that he was a member of the faculty at Brookhaven Academy within the meaning of section 1.162-5(b)(2)(ii), Income Tax Regs.6234 Petitioner has not shown that he continued to be in the trade or business of teaching in the year here in issue if he was ever established in that occupation. On this record petitioner has totally failed to show that he is entitled to the claimed deduction for education expenses for any improvement such education might have made in his skills as a school band director or teacher. The primary occupation of petitioner in the years 1973 and 1974 was as a church Minister of Music. This was the only work in which petitioner was engaged in the year here in issue. Petitioner in 1975 was not required by his employer, the First Baptist Church of Ellisville, Mississippi, to obtain any further education in order to retain his position. Petitioner, however, contends that the courses he took in 1975 maintained and improved the skills required in his employment as a Minister of Music. The record is far from adequate in demonstrating how many of the courses pursued by petitioner in 1975, particularly the five advanced courses in trumpet, maintained or improved his skills as a Minister of Music. It is difficult to understand how these courses could have improved petitioner's skill as a church235 Minister of Music since petitioner had studied trumpet for years prior to 1975 and had been sufficiently proficient in trumpet to play the trumpet in the Marine Band prior to entering college. On the basis of this record petitioner has failed to show a proximate relationship between many of the courses he took in 1975 and his work as a Minister of Music. However, it does appear from the names of some of the music courses which petitioner took in 1975, such as voice, conducting, and recital, and petitioner's description of his duties as a Minister of Music, that the educational received from taking some of the courses he took in 1975 might well have improved the skills required of petitioner in his employment as a Minister of Music. Although the record is minimal as to the relationship of the courses petitioner took to his work as a Minister of Music, we conclude that some but not all of the courses he took in 1975 did improve his skills required in that position. However, in our view petitioner is not entitled to the portion of the claimed deduction for educational expenses allocable to the courses which improved his skills as a Minister of Music because the amounts expended by him236 in 1975 were for education which was required to meet the minimum standards necessary for a trade or business of a teacher of music in public schools or for a band director in a junior college in Mississippi. The record shows that when petitioner received his B.M. degree he was entitled to obtain a one-year teaching permit from the Mississippi State Department of Education and probably would have been qualified to be a band director in a junior college. At least petitioner has failed to show that the course of study he was pursuing would not have qualified him for such a new trade or business. It is petitioner's position that it was his intent to remain in church music and that it was his purpose in taking the courses he took not only in the year 1975, which is here in issue, but in other years "to become a well-educated church music director." Petitioner pointed to the fact that had his purpose in taking the courses he took been to become a teacher in the Mississippi public school system, he would have taken a bachelor of music education degree and not a bachelor of music degree in applied music. However, whether petitioner in 1975 had any intention of becoming a music teacher237 or band director in a public school or college is immaterial in determining whether the amounts he spent in pursuing his education at the University of Southern Mississippi are deductible. The regulations in effect prior to 1967 did place the determination of deductibility of amounts spent for education on the subjective intent of the person pursuing the education. However, the regulations in effect in the year here in issue which have been in effect since 1968 make such subjective intent immaterial. See Bodley v. Commissioner,56 T.C. 1357">56 T.C. 1357, 1360 (1971), and Burnstein v. Commissioner,66 T.C. 492">66 T.C. 492, 495 (1976). Therefore, the question which we must determine in this case is whether the education undertaken by petitioner leading to a Bachelor of Music degree in applied music was part of a program of study being pursued by him which would lead to qualifying him in a new trade or business. The occupation of teaching is a different occupation from that of a Minister of Music in a church. On the basis of this record we conclude that the courses petitioner pursued in 1975 were a part of a program of study that would lead to qualifying petitioner in238 the new trade or business of being a public school teacher or band director or band teacher in a junior college. Therefore, petitioner's educational expenses are nondeductible under section 1.162-5(b)(3), Income Tax Regs.On the basis of the facts present in this record, we conclude that the amounts expended by petitioner in 1975 for courses he took at the University of Southern Mississippi and related travel are not deductible as educational expenses under the provisions of section 1.162-5, Income Tax Regs.Decision will be entered for the respondent.Footnotes2. The following is a complete list of the courses taken by petitioner at the University of Southern Mississippi in the calendar year 1975: WINTER QUARTER 74-75DEPT.COURSE NO.DESCRIPTIVE TITLECARRIEDAPM333TRUMPET1.0MUS232HIS OF MUSIC2.0MUS301TWENTIETH CENT HARM3.0MUS401INSTRUMENTATION3.0SPRING QUARTER 74-75APM234TRUMPET2.0APM281ORCHESTRA1.0APM373ENSEMBLE1.0MUS233HIS OF MUSIC2.0"MED" is the description for Music Education courses.↩ MED301VOICE CLASS2.0MED333CONDUCTING1.0SUMMER QUARTER 74-75APM281ORCHESTRA1.0APM332TRUMPET2.0APM370RECITAL1.0MUS446QINSTRUMENTAL LIT2.0MUS447INSTRUMENTAL LIT2.0MED221QSTRING CLASS1.0MED421QWOODWIND CLASS1.0MED425QBRASS CLASS1.0FALL QUARTER 75-76APM432TRUMPET2.0APM433TRUMPET1.0APM471ENSEMBLE1.0APM481ORCHESTRA1.0MUS202ADV MUS THEORY3.0MUS231HIS OF MUSIC2.0MUS321COUNTERPOINT2.0MED458WIND PEDAGOGY2.03. Petitioner at one time gave private music lessons, but has not since receiving his B.M. degree.↩4. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect in the years involved. ↩5. Sec. 1.162-5, Income Tax Regs., provides in part: Sec. 1.162-5 Expenses for education. (a) General rule. Expenditures made by an individual for education (including research undertaken as part of his educational program) which are not expenditures of a type described in paragraph (b)(2) or (3) of this section are deductible as ordinary and necessary business expenses (even though the education may lead to a degree) if the education-- (1) Maintains o improves skills required by the individual in his employment or other trade or business, or (2) Meets the express requirements of the individual's employer, or the requirements of applicable law or regulation, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.(b) Nondeductible educational expenditures--(1) In general. Educational expenditures described in subparagraphs (2) and (3) of this paragraph are personal expenditures or constitute an inseparable aggregate of personal and capital expenditures and, therefore, are not deductible as ordinary and necessary business expenses even though the education may maintain or improve skills required by the individual in his employment or other trade or business or may meet the express requirements of the individual's employer or of applicable law or regulations. (2) Minimum educational requirements. (i) The first category of nondeductible educational expenses within the scope of subparagraph (1) of this paragraph are expenditures made by an individual for education which is required of him in order to meet the minimum educational requirements for qualification in his employment or other trade or business. The minimum education necessary to qualify for a position or other trade or business must be determined from a consideration of such factors as the requirements of the employer, the applicable law and regulations, and the standards of the profession, trade, or business involved. The fact that an individual is already performing service in an employment status does not establish that he has met the minimum educational requirements for qualification in that employment. Once an individual has met the minimum educational requirements for qualification in his employment or other trade or business (as in effect when he enters the employment or trade or business), he shall be treated as continuing to meet those requirements even though they are changed. (3) Qualification for new trade or business.↩ (i) The second category of nondeductible educational expenses within the scope of subparagraph (1) of this paragraph are expenditures made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business. In the case of an employee, a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as is involved in the individual's present employment. For this purpose, all teaching and related duties shall be considered to involve the same general type of work.* * *6. Sec. 1.162-5(b)(2)(ii), Income Tax Regs., states in part as follows: (ii) The minimum educational requirements for qualification of a particular individual in a position in an educational institution is the minimum level of education (in terms of aggregate college hours or degree) which under the applicable laws or regulations, in effect at the time this individual is first employed in such position, is normally required of an individual initially being employed in such a position. If there are no normal requirements as to the minimum level of education required for a position in an educational institution, then an individual in such a position shall be considered to have met the minimum educational requirements for qualification in that position when he becomes a member of the faculty of the educational institution. The determination of whether an individual is a member of the faculty of an educational institution must be made on the basis of the particular practices of the institution. However, an individual will ordinarily be considered to be a member of the faculty of an institution if (a) he has tenure or his years of service are being counted toward obtaining tenure; (b) the institution is making contributions to a retirement plan (other than Social Security or a similar program) in respect of his employment; or (c↩) he has a vote in faculty affairs.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621185/	Glenn H. Morton and Myrtle R. Morton v. Commissioner.Morton v. CommissionerDocket No. 5165-68.United States Tax CourtT.C. Memo 1971-156; 1971 Tax Ct. Memo LEXIS 175; 30 T.C.M. (CCH) 671; T.C.M. (RIA) 71156; June 30, 1971, Filed 175 1. Held, Petitioner-husband, a physician practicing as an anesthesiologist may not deduct as business expenses the costs of traveling between his residence and a hospital in response to emergency calls. The amounts claimed constituted personal commuting expenses which are nondeductible, and the fact that his occupation required more than one trip a day between his home and place of work does not alter this conclusion. 2. Held further, petitioners were not engaging in horse breeding, raising, and training with a bona fide profit expectation, and consequently the expenses connected therewith are not deductible. 672 Robert O. Rogers, 400176 Bldg., 400 Royal Palm Way, Palm Beach, Fla., for the petitioners. Glenn Gilson, for the respondent. STERRETTSTERRETT, Judge: Respondent determined deficiencies of $830.21 and $709.90 in petitioners' income taxes for the taxable years 1964 and 1965 respectively. Due to concessions by petitioners, only one of the adjustments made in the statutory notice remains for our decision. That adjustment raises the question of whether certain automobile expenses are deductible by petitioners as ordinary and necessary business expenses under section 162. 1 Because petitioners claim overpayments for both years in issue, an additional question is raised with respect to whether certain expenses incurred by petitioners in the breeding, raising and training of horses are deductible. Findings of Fact Dr. Glenn H. Morton (hereinafter referred to as Dr. Morton) and Myrtle R. Morton (hereinafter collectively referred to as petitioners) are husband and wife. They resided in Riviera Beach, Florida, at the time of filing their petition herein, and filed their joint Federal income tax returns for the taxable177 years 1964 and 1965 with the district director of internal revenue, Jacksonville, Florida. During the years in issue Dr. Morton was engaged in the practice of medicine, specializing in anesthesiology. He was a member of a partnership comprised of five individuals and known as Anesthesiology Associates. The partnership maintained a business office in West Palm Beach, Florida. The office was used for secretarial work and billings and collections. No medicine was practiced in the office. The partnership, during the years in issue, had a verbal arrangement with the Good Samaritan Hospital, West Palm Beach, Florida (hereinafter referred to as the hospital), to have an anesthesiologist available to the hospital on a 24-hour basis. During a normal working week, Dr. Morton would go to the hospital at 7:30 or 8:00 a.m. to assist with operations that had been scheduled for the day. The schedule would usually be completed by 3:00 p.m. Dr. Morton was on duty for emergencies approximately 2 days per week, and every other weekend. When on emergency duty, Dr. Morton would normally go home after the completion of the scheduled operations and have supper. He would then return to the hospital to178 make rounds at 5:00 p.m., and if nothing was pending would return to his home until called for an emergency. During the years in issue, Dr. Morton averaged two to four emergency calls per night when on duty. Dr. Morton returned home between emergency calls. While at home in between emergencies Dr. Morton would eat, sleep, and attend to other personal functions. No sleeping facilities were available at the hospital for Dr. Morton's use when he was on emergency call. Dr. Morton did not have any significant medical practice at his residence. In 1964 Dr. Morton incurred automobile expenses, including depreciation and operating costs, in the total amount of $2,423.43. Dr. Morton's total automobile expenses for 1965 were $2,217.36. During 1964 and 1965 Dr. Morton drove his automobile 12,297.2 and 14,385.9 miles respectively. The parties have stipulated that Dr. Morton's automobile expenses were incurred ratably with each mile driven. Out of the total mileage driven by Dr. Morton in each year, respondent, in the statutory notice of deficiency, allowed a deduction for the costs of 2,943.2 miles of travel in 1964 and 2,967.9 miles in 1965 as incurred for business purposes. Petitioners have179 conceded that Dr. Morton drove his car for personal reasons a total of 4,170 miles in 1964 and 4,290 miles in 1965. Included in this personal travel is 2,970 miles per year for daily round trips between Dr. Morton's residence and first place of business each working day. The balance of the mileage driven by Dr. Morton amounts to 5,184 miles in 1964 and 7,128 miles in 1965. This travel is attributable to second and subsequent round trips each working day between Dr. Morton's residence and a hospital. A great majority of these trips were between Dr. Morton's residence and Good Samaritan Hospital. Ninety percent of the trips were in response to emergency calls and 10 percent were for making rounds or visiting patients. In their 1964 and 1965 income tax returns petitioners deducted substantially all Dr. Morton's automobile expenses for those 673 years. Other than the conceded amounts of mileage set out above, respondent, in a statutory notice of deficiency dated August 8, 1968, disallowed Dr. Morton's claimed transportation expenses for the asserted reason that "[it] has not been established * * [the claimed amounts] represented an ordinary and necessary expense of your business. 180 " Prior to 1964 Dr. Morton was looking for a business he might enter upon his retirement from the practice of medicine. Dr. Morton is a graduate of Syracuse Forestry College, where he majored in zoology and big game management. He also spent a year at Cornell University in the Veterinarian College and 4 years with the State of New York managing its big game program which primarily concerned the grazing and breeding of white-tailed deer. Dr. Morton felt this background gave him some knowledge of horse raising. However he had no knowledge of how much capital would be required to profitably operate a horse breeding and training business. From 1962 through the years in issue, petitioners owned at one time or another a total of six horses. In 1960, petitioners visited a working ranch in Sheridan, Wyoming, where they spent 2 weeks inquiring about the ranch's breeding and training program, method of sale, and other matters incidental to raising horses for profit. Returning to West Palm Beach, Florida, petitioners spoke to trainers and breeders in the area. They also bought many books and studied the various breeds of horses to determine which would be the most profitable. Upon the basis181 of their investigation they decided that the American Saddle horse offered the best prospects for deriving a profit. After reaching this conclusion petitioners traveled to Kentucky and further investigated possibilities with 12 major breeders in that state. On August 6, 1963, petitioners bought a registered, untrained, 3-year old, American Saddle breed mare named Firefly for $3,000. Dr. Morton was told at the time of this purchase that trained mares of the American Saddle breed type were selling in Kentucky for prices between $4,000 and $20,000, with an average of $8,000 or $10,000. However, Dr. Morton has never attended any horse auctions. With an increase in the number of horse show entries in the American Saddle horse class, petitioners concluded that the demand for that type of horse in south Florida was expanding. After purchasing Firefly, petitioners brought her to Florida and turned her over to a trainer who entered her in shows. The value of a horse increases as it enters shows and wins ribbons and trophies. Some of petitioners' horses did win prizes, none of which were monetary. Dr. Morton did not personally train Firefly. The American Saddle breed is a five-gaited horse,182 and Dr. Morton is untrained to ride such a horse. Petitioners eventually developed the opinion that the demand for American Saddle horses in south Florida had begun to wane. About that time petitioners decided to sell Firefly for $5,000. One offer for $4,000 was received, but negotiations were terminated because the prospective purchaser could not complete the deal. The availability of Firefly was not formally advertised, rather this fact was mentioned to persons petitioners met at horse shows. Firefly is still owned by petitioners. A registered American Saddle breed stud colt named Tamilor's Rex was purchased by petitioners on October 15, 1963 for $100. The horse was sold for this low price because he had been injured a few days after birth and could not be used for showing. However, the horse had excellent breeding and Dr. Morton believed he could be used for stud purposes. Petitioners, on January 25, 1962, acquired for pleasure use a horse named Baby Doll. In 1964 they bred her and she bore a colt named Corky on April 17, 1965. Corky was sold at a loss on March 11, 1968, for $400. Aside from the first few months of his life when he was nursing, Corky cost $30 per month to183 feed. Baby Doll was the first horse petitioners acquired. Petitioners still own Baby Doll. Prior to the years in question the petitioners had also purchased a mare named Champ for use by their daughter as a riding horse. Champ was given to an organization known as Boys Ranch about a year after the horse was acquired. Petitioners also owned another horse named Daisy which was sold in 1962. Petitioners were very fond of horses and rode for pleasure. During the years in issue Dr. Morton was a member of the Sheriff's Mounted Posse of Palm Beach County. The Posse had a search and rescue function, maintained a showground, and participated in local parades. Dr. Morton did not ride his own horse in the Posse. During the years in issue Firefly, Rex, Baby Doll and Corky were boarded at a stable owned by an unrelated party because 674 petitioners did not own a farm, ranch, or stable. Petitioners did not claim any deductions for the expenses in connection with the horses on their returns for 1964 and 1965. They did not prepare any books of account or schedules for the horses until after the Internal Revenue Service began an audit of the returns for the years in issue. Dr. Morton did184 not claim deductions for the horse raising activity because he did not want to be subject to audit on the matter before he could ascertain whether the effort could be profitable. The parties agree that petitioners incurred expenses of $3,329.41 in 1964 and $3,280.77 in 1965 for the training, care, maintenance, depreciation and equipping of the horses. In their petition, petitioners claimed they are entitled to deduct the above amounts as losses " * * sustained in their trade or business of farming." Petitioners thus claim an overpayment. Opinion The first question we are to consider is whether the costs incurred by Dr. Morton in driving from his residence to the hospital and back again when responding to emergency calls or making the rounds visiting patients are deductible as ordinary and necessary business expenses. 2 We hold that they are not so deductible. It has long been held that the costs of traveling from one's residence to one's place of185 work and back again are commuting expenses and thus not incurred in carrying on one's trade or business. , affirmed per curiam (C.A. 5, 1960), and cases cited therein. The facts concerning this issue reduce to one relevant feature. The travel expenses in question were incurred by Dr. Morton in going between his residence and a place of employment. Dr. Morton admittedly did not practice medicine at his residence to any significant degree. Consequently the expenses in question were incurred for commuting and are of a nondeductible personal nature. That Dr. Morton's particular occupation may have resulted in his making more than one trip between his home and place of work during a 24-hour period does not alter this fact of life. See ; . Now we turn to the question of whether the losses petitioners sustained on their horses in 1964 and 1965 are deductible from income. For the expenses to be deductible under any relevant provision of the Internal Revenue Code of 1954, 3 petitioners must have undertaken186 their horse breeding, raising and training activities for the purpose of earning a profit. The petitioners must be able to show that they had a bona fide expectation of realizing a profit. The profit expectation, however, need not be a reasonable one. The question is a factual one, and is determined upon the record in each case. , affirmed (C.A. 2, 1967). Whether petitioners had a bona fide profit expectation is shown by their overt actions in the situation and the results actually produced. Upon a consideration of all the evidence, we conclude that petitioners were not engaged in their horse breeding, raising and training activities in 1964 and 1965 with the bona fide expectation of making a profit. 187 Presumably an individual who was engaging in an activity for profit would order his affairs with that objective in mind. In this regard petitioners' conduct is somewhat deficient. While Dr. Morton was informed as to the technicalities of breeding horses, he admitted to having no knowledge 675 concerning the capital outlay needed to support a horse breeding operation. Most significantly, petitioners did not keep books and records of account, which would not only enable them to accurately record income and disbursements, but also control expenditures with an eye toward reducing losses and eventually turning a profit. The record is devoid of any indication that petitioners advertised or held themselves out to others as horse breeders and trainers. Dr. Morton testified that he did not deduct the expenses of petitioners' equestrian activities on their 1964 and 1965 returns because he wanted to see first if a profit could be made on the operation. This indicates that petitioners entertained more than some doubt as to whether their efforts would generate any profit. When petitioners in 1963 purchased an untrained, registered American Saddle breed mare in Kentucky, they were told that188 such a horse, when trained, could be sold for a substantial price in Kentucky. Dr. Morton testified that he brought the horse from Kentucky to Florida for the purpose of training and showing it and then selling it to make a profit. It does not appear that petitioners seriously investigated the market for this type of horse in south Florida where they resided and apparently showed the horse. Dr. Morton testified that he felt the demand for American Saddle horses was increasing in south Florida because more of them were being entered in shows. However there is no indication that petitioners were aware of what price a trained American Saddle horse would fetch in south Florida and how such price compared to the costs of training and maintaining the horse until time of sale. Petitioners' breeding program only produced one horse. This horse was sold 35 months after birth for $400, producing a loss. The cost alone of feeding this horse was $30 per month, and certainly other expenses must have been incurred. This is an additional indication that a profit was not expected from the operation. Petitioners did not own any facilities where the breeding and training of horses could be conducted. 189 Rather their horses were boarded out and trainer hired. There is no showing that petitioners devoted much time to their horse breeding and training activities. Indeed, the demands of Dr. Morton's professional duties would appear to have left him little time for such activities, especially since the horses were not located in the area of his residence. Both Dr. Morton and his wife are fond of horses and enjoy riding. Three of the horses purchased by petitioners between 1962 and 1968 were acquired, initially at least, for the purpose of pleasure riding. Dr. Morton also participated for several years in the Sheriff's Mounted Posse of Palm Beach County. Thus it is clear that petitioners for some time had a hobby interest in horses. This indicates that their breeding and training activities may have been merely an extension of their hobby interest. It is clear that petitioners did make a general investigation of the possibilities of breeding horses for profit. In our opinion, however, the record does not establish that petitioners got beyond the exploratory and investigative stage of any plan to establish such a business. Cf. . 190 Having concluded that petitioners' activities with respect to their horses in 1964 and 1965 were not pursued with a bona fide profit expectation, we hold that the expenses incurred in those activities are personal expenses, nondeductible under section 262. 4Decision will be entered for the respondent. Footnotes1. All statutory references herein are to the Internal Revenue Code of 1954.↩2. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * .↩3. SEC. 162. TRADE OR BUSINESS EXPENSES. Fn. 2, supra. 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; * * * SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year - (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; * * *.↩4. 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/4621187/	Alfred M. Cox and Helen B. Cox v. Commissioner.Cox v. CommissionerDocket No. 94583.United States Tax CourtT.C. Memo 1965-5; 1965 Tax Ct. Memo LEXIS 329; 24 T.C.M. (CCH) 23; T.C.M. (RIA) 65005; August 14, 1965Sidney B. Gambill, for the petitioners. Gary L. Stansbery, for the respondent. DAWSONMemorandum Findings of Fact and Opinion DAWSON, Judge: 1 Respondent determined the following deficiencies in petitioner's income taxes for the years 1958 and 1959. Taxable YearDeficiency1958$ 5,389.80195912,133.59330 Certain issues raised by the pleadings have been conceded by the parties and will be given effect in the Rule 50 computation. Two issues remain for decision: (1) Whether losses sustained by petitioner Alfred M. Cox in the operation of his farm property are deductible as having been incurred in a trade or business; and (2) whether petitioner incurred a casualty loss in 1959. Findings of Fact Some of the facts have been stipulated and are hereby found accordingly. Issue 1 Petitioners are husband and wife residing at 2225 William Penn Highway, Pittsburgh, Pennsylvania. They filed joint Federal income tax returns for the years 1958 and 1959 with the district director of internal revenue at Pittsburgh. They kept their books and records on the calendar year basis and used the cash receipts and disbursements method of accounting. Alfred M. Cox (hereinafter called petitioner) is an experienced, knowledgeable, and successful businessman. He is the principal shareholder and chief executive officer of four corporations located in Pittsburgh. His income is primarily derived from the salaries paid him by these corporations and from dividends. The following schedule shows his total331 salary and dividend income for the years 1955 through 1960: YearSalariesDividends1955$66,930.00$ 5,777.88195672,227.505,634.75195781,966.006,849.30195885,821.4014,302.30195990,496.7014,049.00196097,006.003,300.36On June 5, 1954, the petitioner purchased an 80-acre farm in Butler County, Pennsylvania. Twenty-five acres were in timberland and the remainder was suitable for farming. There were two farm dwellings on the land, as well as a barn, a machine shop, and a six-room frame cottage. All of these buildings with the exception of the cottage were involved in the operation of the farm. The cottage was used by petitioner during his weekend visits. Its cost was segregated from the total purchase price. No depreciation was taken on it and none of the expenses incurred in maintaining it for petitioner's private use were claimed as deductions. An elderly tenant farmer had charge of the farm for the previous owner. He continued as petitioner's tenant farmer for about 2 years. Petitioner then employed Ardel Stiver, a younger man who had been raised on a farm and possessed the necessary experience. Stiver has six children. In332 order to make more room for them, petitioner remodeled and enlarged the tenant farmhouse. Petitioner's stated purpose in buying the farm was to raise beef cattle. His alleged goal was a herd of 35 to 40 head. To start his herd he purchased two cows and two bull calves in October 1954. The following is a schedule of sales from the herd: 195419551956195719581959196019611962Sale of cattle$475.61$1,061.14raisedProfit (loss) on218.75$137.12$87.03$ (952.58)sale of cattlepurchased In 1963 petitioner sold all 16 head of cattle then on hand. He did this to change his method of operation. He now buys cattle in the spring and fattens them for sale in late fall to avoid the expense of wintering a herd. Petitioner purchased an additional 69-acre farm on August 20, 1959. All but 6 acres of this additional land were suitable for pasturage. On this farm were two frame houses, a barn, tool building, machinery shed, grain bin, and silo. The farm buildings were immediately put to use. The two frame dwellings were made available as rental properties and were occupied by tenants not connected with333 the farming activities. Petitioner acquired certain farm machinery in purchasing the two farms. He has increased his inventory of farm machinery from time to time. These purchases have reduced labor costs. From the outset petitioner followed the guidance of governmental experts in operating his farm. At their direction he made periodic soil tests, rotated crops, and applied suggested fertilizers and lime applications. The Federal Government has shared in the costs of these improvements and petitioner has received United States Treasury checks defraying portions of the costs of these recommended programs. The farm and cattle herds have been assigned Federal identification numbers. None of the farm crops were produced for sale. There are no recreational facilities available, other than those usually found on any other farm. Petitioner's cottage is plain and of modest size and is used as a weekend retreat. He has no domestic help to serve him there. The following is a schedule of farm income, expenses and losses for the years 1954 through 1962 and the ratio of income to expense: YearIncomeExpenses%Losses1954$ 3,122.98$ 3,122.981955$ 107.547,211.401.57,103.8619567,144.127,144.121957137.209,180.901.59,043.701958694.368,010.728.77,316.361959384.3211,335.903.410,951.581960657.2516,003.384.115,346.1319611,291.1313,636.179.512,345.041962491.8112,118.874.111,627.06Totals$3,763.61$87,764.444.3$84,000.83334 Based on petitioner's own statements made to respondent's revenue agent, he could not have made a profit from the type of beef cattle operation used by him from 1954 to the summer of 1963. The farm was not operated by petitioner on a commercial basis for profit during the years in issue. Issue 2 Since 1949 the petitioner has lived at his present address in Pittsburgh. His home is a red, colonial-style brick house. In the summer of 1959 its fair market value was $70,000. At that time an extreme drought occurred in the Pittsburgh area which extended into the fall. This drought caused the plants and shrubs surrounding petitioner's home to enter the winter season in an abnormally dry condition. The root systems of petitioner's plants and shrubs are located some 18 inches below the ground. They absorb moisture in the winter, but since the ground froze following the drought, no moisture could penetrate to the root system, and they died. This condition was not discovered until the following spring when they failed to leaf and bud. Petitioner's expert witness was called in to replace the dead plants and shrubs. He did so at a cost to petitioner of $3,475.50. The elements that cause335 the death of the plants and shrubbery were (1) the drought that occurred in the summer and fall of 1959 and (2) the freezing of the ground during the early winter months. The loss occurred in 1959. Opinion Issue 1 - Farm Losses Petitioner has claimed substantial losses incurred in the operation of his farm for 1958 and 1959. Respondent contends that these losses are not deductible because under section 165(c)(1), 2 Internal Revenue Code of 1954, the petitioner was not in the "trade or business" of farming. The main thrust of this contention is that petitioner lacked a profit motive. It is true that petitioner employed tenants to operate his farm; that State and Federal agricultural specialists were consulted and their recommendations followed; that petitioner spent some of his own time on the farm supervising the operations; that adequate books and records were maintained; that the farm was equipped with the necessary buildings and machinery; and that336 petitioner's cottage thereon was modest in size. It is also true that petitioner operated the place as a farm during the years in issue. But the mere operation of a farm is not enough. To qualify as a "trade or business" within the framework of the statute and the applicable Treasury regulations, 3 the farm must be operated as a business enterprise for the purpose of making a profit. It is the expectation of gain that is important. The activity must be of such a nature that the taxpayer might reasonably expect a profit. Doggett v. Burnet, 65 F.2d 191">65 F. 2d 191, 194 (C.A.D.C. 1933); and Henry P. White, 23 T.C. 90">23 T.C. 90 (1954), affirmed per curiam 227 F. 2d 779 (C.A. 6, 1955). In essence, what we must determine is whether the petitioner's farm activities were "engendered by the motive or intent of realizing profits." Lamont v. Commissioner, 339 F. 2d 377, (C.A. 2, December 17, 1964), affirming a Memorandum Opinion of this Court. Or, stated differently, did petitioner intend to operate the farm as a profitable enterprise? We think not. In ascertaining such intent, an essential consideration is the petitioner's receipts and expenditures from the venture. 337 Thacher v. Lowe, 288 F. 994">288 F. 994 (S.D.N.Y. 1922). The evidence as to receipts and disbursements in this case shows a striking comparison. The insignificant receipts as compared with the high disbursements certainly tend to establish a lack of profit motivation. When this evidence is considered along with petitioner's own statements 4 in the record, it is clear to us that he had no profit motive. He testified that his aim was to raise a herd of between 35 and 40 head of cattle on his farm. However, when questioned by respondent's agent as to what profit such a herd size might show, petitioner admitted that the maximum annual receipts which he could expect from such an operation would be $4,000 to $5,000 annually. In fact, the total income in any one year never equaled the depreciation expense in such year. Even if we use the petitioner's suggested projections, we are unable to find a profit intent. While in 1963 petitioner changed his cattle raising activities, this change does not alter his intent for prior years. Any vain hope by petitioner that on some remote day a profit will result, after sustaining losses over a 9-year period, is not sufficient in our opinion to make338 the operation of the farm a business. On this record we hold that during the years in controversy the petitioner operated his farm without any genuine intent to earn a profit and, 339 therefore, the losses were not incurred in a "trade or business." See Lamont v. Commissioner, supra; Hirsch v. Commissioner, 315 F. 2d 731 (C.A. 9, 1963); and American Properties, Inc., 28 T.C. 1100">28 T.C. 1100 (1957), affd. 262 F. 2d 150 (C.A. 9, 1958). Issue 2 - Casualty Loss Respondent apparently concedes that the death of petitioner's plants and shrubs is a casualty loss in the amount claimed. Pantzer v. United States, an unreported case ( S.D. Ind., 1964, 14 A.F.T.R. 2d 5352, 64-2U.S.T.C. par. 9641). He argues only that petitioner has failed to prove that the loss actually occurred in the year claimed. Petitioner's expert witness testified that the cause of the loss was a drought which occurred in the summer and fall of 1959 and an early freeze. Although it is true that the loss was not discovered until 1960, the expert's uncontradicted testimony was that an earlier detection would have been impossible. The occurrence of the loss, and not the time of discovery, determined the year in which the loss was incurred. Since we have found as a fact that the loss occurred in 1959, the loss was properly deducted in that year. *340 To reflect the determinations made herein and the concessions of the parties on other issues, Decision will be entered under Rule 50. Footnotes1. This case was heard by Judge Clarence V. Opper and briefs were duly filed. Judge Opper died on June 19, 1964. This case, not having been disposed of, was reassigned to Judge Howard A. Dawson, Jr.↩, on November 5, 1964, and notice was given to the parties that any request for rehearing or reargument might be presented to him within 30 days. No such requests have been received.2. SEC. 165. LOSSES. (c) Limitation on Losses of Individuals. - In the case of an individual, the deduction under subsection(a) shall be limited to - (1) losses incurred in a trade or business;↩3. Sec. 1.61-4(d), Income Tax Regs.(d) Definition of "farm". As used in this section, the term "farm" embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit, and truck farms; also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit, either as owners or tenants, are designated as farmers. Sec. 1.165-6(a)(2), Income Tax Regs.(2) If the taxpayer owns and operates a farm for profit in addition to being engaged in another trade or business, but sustains a loss from the operation of the farming business, then the amount of loss sustained in the operation of the farm may be deducted from gross income, if any, from all other sources. ↩4. Petitioner testified: The whole thing here is: Is this a farm or isn't it a farm? I don't think it makes any difference whether you lose money or make money.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621188/	T. L. JAMES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. M. JAMES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.James v. CommissionerDocket Nos. 20221, 20222.United States Board of Tax Appeals17 B.T.A. 239; 1929 BTA LEXIS 2328; September 13, 1929, Promulgated 2328 Petitioners held not entitled to deductions for depletion on account of oil produced from property leased by them but as to which lease they made an absolute assignment in consideration of certain payments to be made by the assignee from such oil as might be discovered in and produced by the property covered by the lease so assigned. C. M. Pasquier, C.P.A., for the petitioners. A. George Bouchard, Esq., for the respondent. LITTLETON240 The Commissioner has determined deficiencies against each of the petitioners for 1921 and 1922, in the amounts of $924.96 and $61.48, respectively. The petitioners aver that such determinations are in error, in that the Commissioner has refused to allow a deduction for each year for depletion based upon discovery value. On motion of counsel for the petitioners, duly granted, the cases were consolidated for hearing and decision. FINDINGS OF FACT. T. L. James and Mrs. M. James, husband ans wife, respectively, and residents of Ruston, La., filed separate returns of income for the years in question, upon the community property basis. On April 28, 1920, J. G. Pratt and his wife, Willie May Pratt, 2329 leased to T. L. James a certain tract of land situate in Union County, State of Arkansas, more particularly described as the "NE. 1/4 of SW. 1/4 * * of Section 8 Township 18 Range 15 and containing 40 acres, more or less," for a term of five years, "for the sole and only purpose of mining and operating for oil and gas, and laying pipe lines, and building tanks, powers, stations and structures thereon to produce, save and take care of said products." In consideration for the granting of this lease, T. L. James paid to the lessor the sum of $3,000 cash, and agreed "to deliver to the credit of the lessor, free of cost, in the pipe line to which he may connect his wells, the equal one-eighth part of all oil produced and saved from the leased premises," and to pay to the lessor "the sum of $200 each year, in advance, for the gas from each well where gas only is found, while the same is being used off the premises." The agreement contains the following further provision: If the estate of either party hereto is assigned, and the privilege of assigning in whole or in part is expressly allowed - the covenants hereof shall extend to their heirs, executors, administrators, successors or assigns, 2330 but no change in the ownership of the land or assignment of rentals or royalties shall be binding on the lessee until after the lessee has been furnished with a written transfer or assignment or a true copy thereof; and it is hereby agreed that in this event this lease shall be assigned as to a part or as to parts of the above described lands and the assignee or assignees of such part or parts shall fail or make default in the payment of the proportionate part of the rents due from him or them, such default shall not operate to defeat or affect this lease in so far as it covers a part or parts of said lands upon which the said lessee or assigns thereof shall make due payment of said rental. At the date of the lease no oil had been discovered or produced upon the leased premises, and the nearest property upon which there was any oil production was approximately a quarter of a mile away. On April 6, 1921, the petitioners entered into an argument with the Ark-Rado Oil Corporation, which, omitting signatures and attestations, read as follows: 241 STATE OF ARKANSAS, COUNTY OF UNION. KNOW ALL MEN BY THESE PRESENTS; that I T. L. James, a resident of Dubach, Lincoln Parish, 2331 Louisiana, being a married man and having been but once married, whose wife is Mrs. Maggie Hodges James, living and not divorced from him, and a resident of Lincoln Parish, State of Louisiana, for and in consideration of the terms and conditions given in the succeeding paragraphs, do hereby sell, assign, transfer, and convey unto Ark-Rado Oil Corporation, a corporation incorporated under the laws of the State of Arkansas with domicile in El Dorado, Ark., the following described oil, gas and mineral lease, with all the rights conditions and obligations therein contained, located and bearing upon property situated in Union County, Arkansas, to wit: A certain oil, gas and mineral contract executed by J. G. Pratt, dated April 28, 1920, in favor of the said T. L. James, in as far as said lease applies to the 20 acres described as the E1/2 of the NE1/4 of SW1/4 Section 8, Township 18 South, Range 15 West, and which contract is recorded in Book 86 page 392 of the Conveyance Records of Union County, Arkansas. To have and to hold unto the said Ark-Rado Oil Corporation his successors and assigns with full and complete right to all of the conditions contained in the said lease, subject2332 thereto; and it is further understood that there is reserved in favor of the said T. L. James, a Seven-Sixteenths (7/16ths) right and interest in all of the oil and gas located in, on or under the said premises or produced in the event of production from the said tract, in addition to the One-eighth (1/8th) royalty reserved by the original lessor herein, and leaving to the present Assignee of this contract, Seven-Sixteenths (7/16ths) of all oil and gas produced upon said premises. Now the consideration of this assignment is that the said Ark-Rado Oil Corporation agrees to drill and complete upon the said 20 acres described above two test wells, and which said test wells shall be drilled to a depth of Two Thousand Five Hundred (2,500) feet unless oil or gas be found in paying quantities at a lesser depth. And it is further understood that Assignee shall begin the first test well by the erection of a derrick on said premises within 10 days from the date of this Assignment and to continue said operations by beginning actual drilling operations 20 days from this date and to continue said operations as diligently as possible in his search for oil or gas, subject to delays from2333 accidents and fortuitous events; and that the second well shall be begun within 10 days after the completion of the first test well, whether the first well be productive or dry. It is further understood and agreed that if any well with as much as One Hundred barrels of oil shall be brought in within Two Hundred (200) feet of the line of this tract during the life of this contract, that the said Assignee does agree to begin an offset well on this tract within 20 days after the completion of the said well on the adjoining tract. Now in order to carry out the terms and obligations of this Assignment, it is agreed, and forms a part of this contract to this extent that the said Assignee in warranty and as a guarantee to the said T. L. James, that said Second well shall be drilled, that he does now execute a bond for the sum of Twenty-five Thousand ($25,000.00) Dollars, which bond is made the basis of a forfeiture for that amount in the event of the failure of the Assignee to drill said second well. It is agreed that Assignee accept as a full consideration for the drilling of two wells on this property, the above described 20 acres, the Seven-Sixteenths (7/16ths) of2334 all the oil and gas found on said premises or produced therefrom, 242 and the said T. L. James reserving his Seven-Sixteenths (7/16ths) of all said oil and gas, or having paid to him that amount, delivered in gauge tanks on the premises, free of cost to himself, as the consideration for parting with this lease and with full reservation of the additional Two-Sixteenths (2/16ths) or what is commonly called one-eighth (1/8th) royalty to the original lessor. And the said Mrs. Maggie Hodges James does now join her husband herein for the purpose of waiving all exemptions, Homestead and right of dower. It is further understood that the Assignee agrees to develop the said property in a serious and skillfull manner and in the event of production in the first or the second of said test wells to follow said test wells such development and other wells and operations as will successfully develop the said tract, and that all expenses of development shall be borne by said Assignee, with full and complete interest of Seven-sixteenths (7/16ths), in all of the said wells producing oil or gas on said property in favor of the said Assignor, and agreeing to deliver to the said T. L. James his2335 interest therein in oil in gauge tanks on the premises free of cost to himself. Thus done and signed on this the 6th day of April, 1921, A.D. in the presence of the two undersigned witnesses of lawful age. At the date of the foregoing agreement, no oil had been discovered or produced upon the premises to which the assignment related. The Ark-Rado Oil Corporation began the drilling of the first well, known as Pratt No. 1, on April 23, 1921. At a depth of 2,170 to 2,171 feet, the well was tested and showed a production of 600 barrels. The well was further driven to a depth of 2,175 feet, and a test at that point showed a production of 6,000 barrels. Drilling of the second well, known as Pratt No. 2, was begun on June 6, 1921, and completed on August 2, 1921, at a depth of 2,160 feet, and with a production of 1,000 barrels. Two additional wells were driven and completed before the close of 1921. In the deficiency notice, the Commissioner advised the petitioners that "Owing to the low price of oil and the small amount of reserves your claim for discovery on the J. G. Pratt property has been denied because the discovery value will not be disproportionate to cost to an2336 operation owner. No depletion is allowed on this property as the cost was deducted from lease sale." OPINION. LITTLETON: The petitioners complain that the Commissioner has refused to allow a deduction for depletion, for each of the years 1921 and 1922, based upon discovery value, in connection with the properties leased to T. L. James by J. G. Pratt and his wife under the lease agreement of April 28, 1920. The statutory provisions which are controlling in the disposition of petitioners' complaint are found in paragraph (10) of subdivision (a) of section 214, Revenue Act of 1921, and are as follows: In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according 243 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: Provided further, That in the case of mines, oil and gas wells, discovered2337 by the taxpayer, on or after March 1, 1913, and not acquired as the result of the purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of discovery, or within thirty days thereafter: And provided further, That such depletion allowance based on discovery value shall not exceed the net income, computed without allowance for depletion, from the property upon which the discovery is made, except where such net income so computed is less than the depletion allowance based on cost or fair market value as of March 1, 1913; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee. It is entirely clear from these provisions of the statute, that the allowance for depletion, whatever the basis, is extended to only such persons as have an equitable interest in the properties of the character described, 2338 by reason of ownership, in fee simple, or of lesser estates. Unless the petitioners are within this category of taxpayers, there is no basis for their claim to an allowance for depletion based upon discovery value, or to an allowance for depletion upon any other basis. Our examination of the agreement entered into by the petitioners with the Ark-Rado Oil Corporation, under date of April 6, 1921, made in the light of the provisions of the grant of April 28, 1920, of J. G. Pratt and wife to T. L. James, has convinced us that as to the 20-acre tract which is the subject of the assignment the petitioners retained no interests such as would entitle them to a depletion allowance. These proceedings were submitted entirely upon depositions, in which we find no reference whatever as to the circumstances surrounding the parties to the two agreements described or quoted in full in the findings of fact, or any expression as to the constructions which the parties themselves have given to the agreements. We have been left to make our own constructions of the agreements and to draw our own conclusions as to the intentions of the parties thereto. The grant of Pratt and his wife to T. L. James, 2339 of April 28, 1920, made specific provision as to the rights of the parties upon the assignment of the estate of either party, in whole or in part. It was clearly contemplated that the grant could be made divisible into two or more parts. Upon assignment all of the covenants of the grant are made binding upon the assignee, and in the event of failure of compliance therewith by the assignee, the right of distress or forfeiture extends only to the estate assigned, and such failure can not 244 operate to defeat or affect the estate retained in the lessee. We believe that a fair construction of these provisions of the grant is, that upon assignment of a part of the estate by the lessee, privity of contract, between the lessor and lessee, is entirely terminated so far as it related to the subject of the assignment; that in the event of failure of compliance with the covenants of the grant, upon the part of the assignee, the lessor must look to it for redress and no remedy lies against the lessee or assignor; and that the assignee occupies the same position in relation to the lessor as that formerly occupied by the lessee, or assignor - figuratively speaking, it stands in his shoes. 2340 Looking to the agreement of April 6, 1921, between the petitioners and the Ark-Rado Oil Corporation, we find there an absolute assignment of the lease, so far as it applies to a distinct portion - by metes and bounds - of leased premises. The grant is for the entire term of the lease. The right of reentry, upon the default of the assignee, is not reserved; the posting of a bond by the assignee to insure full compliance with the covenants appears to have been deliberately adopted in lieu of any reservation of reentry in case of such default. There is neither a probability nor a possibility of reversion. Throughout the entire agreement, the language and expressions employed indicate an intent of alienation by the petitioners of all right, title and interest in the lease so far as it applied to a distinct portion of the leased premises - an intent of absolute assignment. The consideration for the assignment of a part of the lease was the agreement by the Ark-Rado Oil Corporation to drill and complete two test wells, and to pay over to the lessor and the assignees, the petitioners, one-eighth and seven-sixteenths, respectively, of all of the oil and gas produced from the premises. 2341 The fact that the consideration was to be paid to the petitioners in oil, or its cash equivalent, as and when produced, left the petitioners with no vested interest such as would entitle them to a depletion allowance in respect of oil and gas wells discovered and developed upon the premises as to which the lease was assigned. In that respect the transaction does not differ from a sale on the installment plan or on a deferred payment basis. Our conclusion is that the contract between the petitioners and the Ark-Rado Oil Corporation, of April 6, 1921, is an assignment, and that being the case, the petitioners are not entitled to any depletion allowance in respect of oil and gas wells located upon the 20-acre tract as to which the lease was assigned. Cf. . There is no evidence in the record of discovery of oil or gar wells upon the other 20-acre tract as to which the petitioners appear to have retained a leasehold interest. 245 In view of the foregoing, we find no error in the Commissioner's action in refusing to allow deductions for depletion, based upon discovery value, in respect of the properties which are the subject2342 of the lease agreement between Pratt and wife and these petitioners. Reviewed by the Board. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621189/	Penn-Warrington Hosiery Mills, Inc. v. Commissioner.Penn-Warrington Hoisery Mills, Inc. v. CommissionerDocket No. 80608.United States Tax CourtT.C. Memo 1961-211; 1961 Tax Ct. Memo LEXIS 139; 20 T.C.M. (CCH) 1050; T.C.M. (RIA) 61211; July 17, 1961139 All of the stock of petitioner and of K & S Corporation was owned 50 percent by the Kruse family and 50 percent by the Slattery family. Due to dissension between the families it was decided the Kruse family would take over petitioner and the Slattery family would take over K & S. The exchange was accomplished by the Slattery family's assigning its 50 percent of petitioner's stock to K & S and the Kruse family assigning its 50 percent of K & S stock to petitioner, and having the corporations execute an agreement whereby petitioner transferred its stock in K & S to the latter and K & S transferred its stock in petitioner to petitioner. The agreement also provided K & S transfer to petitioner the title to 20 knitting machines and petitioner pay K & S a machine rental obligation of $90,000. Held, the capital gain petitioner realized is taxable as the transaction does not qualify as a "reorganization" under section 368, Internal Revenue Code of 1954, and it does not meet the requirements of section 355, I.R.C. of 1954, for a distribution without recognized gain. Held, further, petitioner failed to establish the fair market value of the stock petitioner received in the transaction was less 140 than respondent determined. Howard G. Kulp, Jr., Esq., 628 Cooper St., Camden, N. Y., for the petitioner. David E. Crabtree, Esq., for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: The respondent determined a deficiency in the petitioner's income tax for 1953 in the amount of $10,511.58. The issues are: (1) Whether the gain realized by petitioner in a transaction between petitioner and another corporation in 1955 should be recognized within the meaning of section 355 or section 361 of the Internal Revenue Code of 1954; and (2) Whether the fair market value of stock received by the petitioner in the 1955 transaction was $55,998.66 or some lesser amount. The availability of a net operating loss carry-back to 1953 depends upon the disposition of the above issues. Findings of Fact Some of the facts have been stipulated and they are hereby incorporated by this reference. Penn-Warrington Hosiery Mills, Inc., hereinafter called petitioner, is a corporation organized under the laws of Pennsylvania on June 22, 1948, with its principal place of business in Warminster, Pennsylvania. Petitioner filed its income tax returns for the years 1953 through 1957 with 141 the district director of internal revenue at Philadelphia, Pennsylvania. Kruse & Slattery, Inc. was incorporated in 1929. It was originally engaged in tool and die making and also general machine work. Later, a considerable portion of its business was the repair and reconditioning of hosiery machinery. In 1948 Kruse & Slattery, Inc. leased hosiery knitting machines to petitioner. Petitioner commenced its hosiery manufacture business in 1948 with paid-in capital of $2,000, of which one-half was contributed by the Kruse family and one-half by the Slattery family. In the years 1950 through 1954, Kruse & Slattery, Inc. had a total net profit of $185,106.71 from its tool and die business, while its total net profit from the rental of hosiery machinery was $219,411.76. In 1954, Kruse & Slattery, Inc. had a net loss of $8,100 from its machinery rentals, while its net profit from the tool and die business was $7,530.53. It is stipulated that the balance sheet of Kruse & Slattery, Inc., as of December 31, 1954, showed the following items: Stock$ 94,300.00Surplus312,547.59Capital$406,847.59Knitting machines$386,000.00Less reserve163,500.00Book value Dec. 31, 1954$222,500.00Petitioner had net 142 earnings from its operations in the years 1950 through 1953 of $75,353.84, $49,610.30, $66,150.57 and $31,010.63, respectively. For the years 1954 through 1957 the petitioner had net losses from its operations of $30,644.31, $57,570.09 (excluding capital gain which is here in dispute), $30,190.68 and $40,774.82. Petitioner owed $95,000 to Kruse & Slattery, Inc. as of December 31, 1954. The balance sheet of petitioner, as of December 31, 1954, showed the following: Total assets$216,294.92Total liabilities$104,297.60Capital stock110,000.00Earned surplus1,997.32$216,294.92Late in 1954 or early in 1955, dissension between the Kruse and Slattery families in the operation of both petitioner and Kruse & Slattery, Inc. reached an intolerable point, and methods were discussed for dividing the two business entities between the families. On January 1, 1955, the Kruse family and the Slattery family each owned 50 percent of the stock of Kruse & Slattery, Inc. and each family owned 50 percent of the stock of petitioner. Some time between January 28, 1955 and February 8, 1955, the Slattery family assigned to Kruse & Slattery, Inc. 50 shares of the stock in petitioner, which was 50 percent of the 143 total of petitioner's outstanding stock. Within the same period, the Kruse family assigned to petitioner 371 1/2 shares of common stock and 100 shares of preferred stock of Kruse & Slattery, Inc., which shares represented one-half of the total outstanding common and preferred shares of Kruse & Slattery, Inc. On February 8, 1955, the petitioner and Kruse & Slattery, Inc. executed an agreement under which the petitioner agreed to assign to Kruse & Slattery, Inc. the 371 1/2 shares of common stock and 100 shares of preferred stock of Kruse & Slattery, Inc., which was held by petitioner, and Kruse & Slattery, Inc. agreed to assign to petitioner the 50 shares of stock of petitioner and title to the 20 knitting machines which were owned by Kruse & Slattery, Inc. and had been leased to the petitioner. It was also agreed that petitioner would pay its outstanding machine rental obligation (adjusted to $90,000) to Kruse & Slattery, Inc. in a designated series of payments. It is stipulated that the "value of the machinery transferred to petitioner, in accordance with the terms of the agreement * , was $120,000.00. This amount was what the machinery was worth to petitioner for use in its hosiery 144 business." Petitioner reported a net loss of $57,570.09 on its income tax return for 1955, which it carried back to 1953 as a net operating loss deduction. Respondent included a capital gain of $128,848.66 in petitioner's income for 1955 with the following explanation: There is included in taxable income for the year 1955 a capital gain, in the amount of $128,848.66, realized on the exchange of assets with Kruse & Slattery, Inc. In the determination of the amount realized, the fair market value of machinery received has been determined to be $120,000.00 and the fair market value of the shares of Penn Warrington Hosiery Mills, Inc. received have been determined to be $55,998.66. This adjustment by respondent in 1955 eliminated the net operating loss carry-back to 1953, which gave rise to the deficiency determined by respondent in petitioner's income tax for 1953. Due to other adjustments in petitioner's income for 1955, as indicated in the respondent's statutory notice of deficiency, the petitioner's "Taxable income corrected" for 1955 is shown there as "None." Opinion Respondent contends that the agreement of February 8, 1955 does not qualify as a "reorganization" under section 368 of the Internal Revenue Code of 1954, 145 1 and that, consequently, the provision for the nonrecognition to a corporation of gain or loss under section 361, which applies only if there is an exchange of property between corporations pursuant to a plan of "reorganization" within the meaning of section 368, has no application here. Therefore, respondent argues, the capital gain of $128,848.66 realized by petitioner when it "transferred the Kruse & Slattery stock, worth $47,150.00, to Kruse & Slattery in exchange for $120,000.00 worth of knitting machines and its own stock, then worth $55,998.66," is includible in petitioner's income for 1955. Petitioner, on the other hand, makes no serious argument on brief that sections 361 and 368 apply. Instead, petitioner relies upon section 355, which provides for the nonrecognition to a shareholder of gain or loss where a corporation distributes to its stockholder stock of a controlled corporation. It is clear that the exchange by petitioner of the Kruse & Slattery, Inc. stock (which had been assigned to petitioner early in 1955 by the Kruse family) for the hosiery knitting machines and 146 the petitioner's stock (which had been assigned to Kruse & Slattery, Inc. by the Slattery family early in 1955) does not fit within any of the several definitions of "reorganization" listed in section 368. Only the "D" type reorganization under section 368 could possibly have any bearing upon the facts of this case. Section 368(a)(1)(D) describes this type of reorganization, as follows: SEC. 368. DEFINITIONS RELATING TO CORPORATE REORGANIZATIONS. (a) Reorganization. - (1) In general. - For the purposes of parts I and II and this part, the term "reorganization" means - * * (D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356; Obviously this subsection does not apply here. Neither of the two corporations (nor 147 its stockholders) was in control of the other after the transfer of assets, since each corporation acquired its own stock in the exchange. Nor did either of the corporations distribute to is stockholders any stock or securities of the corporation to which the assets were transferred. No further discussion is needed to show that the transaction between the two corporations failed to meet both of the requirements of a type "D" reorganization. Section 3552148 149 permits the distribution by a corporation to its shareholders of the stock or securities of a controlled corporation, under carefully prescribed conditions, without the recognition of any gain or loss by the stockholder who received such stock or securities. This section applies whether or not the distribution is in pursuance of a plan of reorganization (within the meaning of section 368(a)(1)(D)). It permits the separation of two or more businesses formerly operated, directly or indirectly, by a single corporation. Again, it is manifest that the transaction here involved does not fall even remotely within the requirements of section 355. No purpose would be served in relating to any extent the reasons for this failure to qualify, since petitioner acknowledges on brief that it "failed to carry out to the letter the precise requirements of the statute." It will suffice to point out (1) that neither corporation at any time exercised the necessary "control" over the other corporation, 3 and (2) there was never any distribution by a corporation of the stock of a "controlled corporation" to its shareholders. Petitioner seeks to excuse its failure to meet the statutory requirements by indicating that section 355 was a new provision 150 in the Internal Revenue Code of 1954; that it was "not until ten months after the reorganization in February 1955, that the regulations were issued" under this section; and that if petitioner "had the benefit of the regulations [it] would have made use of the spin-off to have accomplished the same end result." "The fact that the regulation was not promulgated until after the transactions in question had been consummated is immaterial." Helvering v. Reynolds, 313 U.S. 428">313 U.S. 428. This is especially true when the section itself, even without the benefit of any regulations, lays out quite clearly certain basic requirements which petitioner could have followed in working out a corporate separation. Moreover, section 355 was derived from section 112(b)(3) and (11) of the Internal Revenue Code of 1939, so it is by no means an innovation with the Internal Revenue Code of 1954. Finally, petitioner urges that we "should consider the substance and not the form in this case, particularly because of the fact that a spin-off could have been used under the facts of this case wherein the final result would have been the same as was accomplished by the method used in this case." Although the transaction 151 might have been cast in a form which would qualify for nonrecognition of gain, it was not and the "decision must be made upon the basis of what was actually done rather than upon what might have been done." Television Industries, Inc., 32 T.C. 1297">32 T.C. 1297, affd. 284 F. 2d 322. The next issue is whether the respondent correctly computed the capital gain realized by petitioner on the exchange of assets in 1955. As we have indicated earlier in the opinion, the respondent valued the 20 knitting machines and the 50 shares of petitioner's stock, which was received by petitioner from Kruse & Slattery, Inc., in the amounts of $120,000 and $55,998.66, respectively. Petitioner, in exchange for the machines and its own stock, transferred its Kruse & Slattery, Inc. stock (371 1/2 shares of common and 100 shares of preferred stock) to Kruse & Slattery, Inc. This stock is valued in the respondent's computation at $47,150, so that the capital gain computed by the respondent is $128,848.66 ($120,000 plus $55,998.66, minus $47,150). It has been stipulated that the "value of the machinery transferred to petitioner" was $120,000, and it is not open to petitioner now to establish some different value for 152 the machines. There seems to be no dispute over the value used for the Kruse & Slattery, Inc. stock transferred by the petitioner. This amount, $47,150, appears to be one-half of the amount (stipulated as "Stock - $94,300.00") which appears on the Kruse & Slattery balance sheet of December 31, 1954. The value attributed by respondent to the 50 shares of petitioner's stock ($55,998.66) was obtained from the petitioner's balance sheet of December 31, 1954, as follows: Capital stock (100 sh.)$110,000.00Surplus1,997.32$111,997.32One-half of above amount$ 55,998.66 Petitioner argues that this amount, based upon its own books, is erroneous because respondent failed to consider (1) the chaotic conditions that existed in the hosiery manufacturing business in 1954; (2) the high cost of labor in northern factories; (3) the gloomy outlook for the hosiery manufacturing business in the future; and (4) the losses suffered by petitioner in its operations in 1954 and in years subsequent to 1955. Petitioner does not suggest what the value of the 50 shares of its stock should be, but merely states on brief that the "actual value of the stock involved in this transaction could not under any circumstances 153 be equal to the book value" and that "No willing buyer would have offered anything but a nominal figure for those shares." Petitioner has the burden of proving that the valuation used by the respondent was erroneous. Fair market value is a question of fact to be determined from all the evidence. Apart from some broad generalities, for the most part unsupported, as to the plight of the hosiery manufacturing industry at this time, petitioner introduced no evidence to show that the fair market value of 50 shares of its stock was less than $55,998.66. Many factors enter into determining the fair market value of stock, Fitts' Estate v. Commissioner, 237 F.2d 729">237 F. 2d 729, affirming a Memorandum Opinion of this Court, but petitioner did not resort to them. Certainly the fact that petitioner incurred losses in 1954 through 1957, coming after a period of substantial earnings, does not by itself support a conclusion that the value of the stock in 1955 was merely a "nominal figure." For all we know, such losses may have been due to a temporary decline in the industry, or they might easily have been caused by management policies. At any rate, the Kruse family certainly did not think that the 50 shares 154 in petitioner's stock had a fair market value of only a "nominal figure" in 1955, since it was quite willing (in order to obtain control of petitioner) to give up a half-interest in an established corporation with an impressive earnings record, and with an earned surplus of $312,547.59 as of December 31, 1954. We hold that petitioner has failed to show that the fair market value of its stock, received by it in the 1955 exchange, had a fair market value of less than $55,998.66. Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩2. SEC. 355. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED CORPORATION. (a) Effect on Distributees. - (1) General rule. - If - (A) a corporation (referred to in this section as the "distributing corporation") - (i) distributes to a shareholder, with respect to its stock, or (ii) distributes to a security holder, in exchange for its securities, solely stock or securities of a corporation (referred to in this section as "controlled corporation") which it controls immediately before the distribution, * *(C) the requirements of subsection (b) (relating to active businesses) are satisfied, and (D) as part of the distribution, the distributing corporation distributes - (i) all of the stock and securities in the controlled corporation held by it immediately before the distribution, or (ii) an amount of stock in the controlled corporation constituting control within the meaning of section 368(c), and it is established to the satisfaction of the Secretary or his delegate that the retention by the distributing corporation of stock (or stock and securities) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax, then no gain or loss shall be recognized to (and no amount shall be includible in the income of) such shareholder or security holder on the receipt of such stock or securities. (2) Non pro rata distributions, etc. - Paragraph (1) shall be applied without regard to the following: (A) whether or not the distribution is pro rata with respect to all of the shareholders of the distributing corporation, (B) whether or not the shareholder surrenders stock in the distributing corporation, and (C) whether or not the distribution is in pursuance of a plan of reorganization (within the meaning of section 368(a)(1)(D)↩).3. Section 368(c) defines "control" as 80 percent for purposes of section 355↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621190/	G. KENT STEARNS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentStearns v. CommissionerDocket No. 13216-81United States Tax CourtT.C. Memo 1984-97; 1984 Tax Ct. Memo LEXIS 574; 47 T.C.M. (CCH) 1182; T.C.M. (RIA) 84097; February 29, 1984. G. Kent Stearns, pro se. Janice Chenier Taylor, for the respondent FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined a deficiency in the amount of $1,015.99 in petitioner's 1979 Federal income tax. After concessions, the issues for decision are as follows: (1) Whether petitioner is entitled to a deduction for automobile expenses as business expenses under section 162 1 in any amount greater than that allowed by respondent; and (2) Whether petitioner used certain camera equipment, a telephone answering machine, and a calculator in his trade or business and, if so, whether he is entitled to a deduction for depreciation under section 167 and an investment tax credit under section 38 for those items. 576 For the sake of simplicity, we shall first state the general facts and then combine our Findings of Fact and Opinion with respect to each of the issues. 1. GeneralAt the time he filed his petition in this case, petitioner resided in New Orleans, Louisiana. During 1979, the year at issue, petitioner was employed as an associate professor with joint academic appointments in the Departments of Management and Marketing, and Hotel, Restaurant and Tourism Administration at the University of New Orleans (UNO). He conducted his classes on Tuesdays and Thursdays and spent the remainder of his time doing research, arranging and handling continuing legal education seminars, attending professional meetings, and the like. 2. Automobile ExpensesOn his 1979 income tax return, petitioner claimed an automobile expense deduction of $1,575.25 consisting of $1,480 in mileage expense, using the standard mileage rate, and $95.25 in parking fees and tolls. When he prepared his return, petitioner calculated the amount of his local business mileage as follows: He estimated that during 1979 he drove his car approximately 20,000 miles and that 40 percent of the total mileage, or 8,000577 miles, was allocable to business mileage. He then multiplied that mileage by the prevailing standard 18.5 cents per mile, arriving at the $1,480 automobile expense. In conjunction with the audit of his 1979 return sometime in 1981, petitioner prepared a reconstruction of his 1979 business mileage which appears in the record as a document entitled "1979 Est. of Business Mileage." This document, prepared by petitioner after examining his appointment calendar for 1979, reflects petitioner's estimate of his business mileage for 1979 as 13,412 miles. In the notice of deficiency, respondent disallowed $977.25 of petitioner's automobile expense deduction, thus, allowing a deduction of $598 for approximately 3,232 business miles. 2 The first issue we must decide, therefore, is whether petitioner is entitled to an automobile expense deduction in an amount any greater than that allowed by respondent. The burden is on petitioner to prove that respondent's determination is erroneous, Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a). We hold that petitioner has carried that578 burden and is entitled to a larger deduction. Respondent grounds his argument in support of his disallowance of the deduction on the premise that, because petitioner kept no log or other documentation of his local business mileage for 1979, he is unable to substantiate his claim; thus, he should not be allowed to deduct any more than respondent has allowed. Respondent cites section 1.162-17(d), Income Tax Regs., which deals with substantiation of items of employee business expense. Specifically, section 1.162-17(d)(2), Income Tax Regs., provides that: "The Code contemplates that taxpayers keep such records as will be sufficient to enable the Commissioner to correctly determine income tax liability * ." Section 1.162-17(d)(3), Income Tax Regs.579 , provides, however, that: "Where records are incomplete or documentary proof is unavailable, it may be possible to establish the amount of the expenditures by approximations based upon reliable secondary sources of information and collateral evidence * * ." Further, all of the business mileage claimed by petitioner constitutes local transportation, not travel away from home; thus, his mileage expenses are not subject to the strict substantiation requirements of section 274(d). 3Petitioner's straightforward testimony at trial and his detailed mileage reconstruction based in part on his appointment calendar are sufficient, in our opinion, to provide a basis from which to make a reasonably reliable estimate and finding of his local business mileage. Respondent did not introduce any evidence at trial tending to discredit petitioner's testimony or mileage reconstruction. We conclude that petitioner is allowed to deduct business mileage of 10,482 miles falling into four categories: A. Trips to Baton Rouge, Louisiana (200 mile round trip from petitioner's580 home) -- a total of 7,400 miles. 31 trips in order to do research on the topic of employee performance appraisal at the Louisiana State University (LSU) library, the primary library of the LSU system of which UNO, petitioner's employer, is a part. Petitioner chose to go to the LSU library because neither UNO nor the New Orleans Public Library had as extensive a collection with respect to petitioner's research topic as LSU. 4 trips to the LSU campus for meetings with people from LSU's Continuing Education Division to discuss setting up continuing education seminars of a type with which petitioner had previous experience. 2 trips to attend meetings of the Board of Regents, the governing board of education of the State of Louisiana. Respondent urges that, in addition to the lack of substantiation, petitioner should be denied a deduction for the trips for the Board of Regents meetings because petitioner did not participate in these meetings; thus, they are not "ordinary and necessary" in that they are not sufficiently related to petitioner's trade or business of a college professor. Petitioner testified, however, that although he did not participate at the meetings, issues581 pertinent to UNO were discussed at the meetings and he stood ready to participate if need be. From his testimony, we infer that he had been authorized to speak on behalf of UNO. Based on this testimony, we find that petitioner's attendance at the meetings was sufficiently related to his trade or business to allow him a deduction for this business mileage. Petitioner claimed an additional 800 miles for four trips to committee meetings of the Louisiana State Legislature for "hearings in areas that I had some interest in." We find that petitioner is not entitled to a deduction for these trips because he has failed to show a business purpose for his attendance at these meetings, i.e., he has not shown that attendance at the hearings had any substantial relationship to his work as a professor. B. Continuing Education Seminars -- a total of 2,072 miles. During 1979, petitioner was co-director of certain continuing education seminars held at the Fountain Bay Hotel. Petitioner was responsible for setting up the seminars, arranging for speakers to come from various parts of the country and then conducting the seminars. These responsibilities were not part of his regular UNO duties; 582 he received additional compensation for this work. Clearly, petitioner's seminar work is closely related to his professional trade or business, and he is entitled to deductions for ordinary and necessary expenses incurred in doing that work. Indeed, respondent does not argue that he is not. Thus, we find that petitioner may deduct the following mileage in conjunction with the seminars: 44 4 trips for 40 seminar days plus 4 planning days involving 40 miles per round trip from petitioner's home to the hotel for a total of 1,760 miles. 13 trips to airport to pick up speakers involving 24 miles per round trip from hotel to the airport, a total of 312 miles. C. Grocery Price Survey Research -- a total of 570 miles. During 1979 petitioner participated in a grocery price survey in which grocery prices were compared for some 200 grocery stores in the New Orleans area. Petitioner conducted training sessions for some of the people involved in the survey; he did some583 of the surveying himself; and he did the evaluations of the survey, incurring mileage in picking up the survey material. This activity was connected with petitioner's position at UNO's Department of Management and Marketing, and the mileage he incurred in conjunction with this activity is deductible as follows: 5 training sessions involving 50 miles per round trip, a total of 250 miles. 200 miles driven by petitioner while doing the survey. 3 evaluation sessions involving 40 miles per round trip, a total of 120 miles. D. Attendance at Business Meetings -- a total of 440 miles. Petitioner attended several professional meetings in conjunction with his position at UNO's Department of Hotel, Restaurant and Tourism Administration. He gave talks to the Front Desk Association and to a group of hotel accountants. He also made business calls to Loyola University, Wendy's, the Hyatt Hotel, and Ogden Foods. On his mileage reconstruction sheet, petitioner estimated 440 miles driven in conjunction with these activities. We hold that petitioner is entitled to a deduction for this travel. 3. Depreciation and Investment Tax CreditOn his 1979 income tax return, petitioner584 deducted $495.01 for depreciation and claimed an investment tax credit of $209.72 with respect to camera equipment, a telephone answering machine, and a calculator. Respondent disallowed both the depreciation deduction and the investment credit. For the reasons stated below, we conclude that petitioner is entitled to a depreciation deduction and an investment credit for the camera equipment; however, he is not entitled to the deduction and credit for either the telephone answering machine or the calculator. A. Camera equipment. In 1979, petitioner purchased the following camera equipment: ItemPriceCannon A-1 camera and lens$621.40Tripod and copy stand260.84Auto bellows and lenses849.16TOTAL$1,731.40Petitioner purchased this equipment because camera equipment is not furnished by UNO due to a lack of funds. He uses this equipment only in connection with his UNO teaching duties. Petitioner takes pictures and makes slides which he uses as visual aids during his lectures. At trial, petitioner showed the Court examples of the types of slides he uses for teaching, e.g., slides showing a computer keyboard, a computer program, and a dot matrix print585 for use in petitioner's course in computer programming; slides of Cancun, Mexico, for use in petitioner's course on tourism development; and slides of Austrian coins, a passport, an international driving permit, and Austrian mountain ranges for use in UNO's foreign study program in Innsbruck, Austria, in connection with the tourism courses. Petitioner does not use any of this camera equipment for personal purposes. In fact, petitioner has a different camera for personal use, a Mamyia Sekor purchased in 1969. Petitioner has never taken any personal or family photographs with the camera equipment here at issue. Pursuant to section 167(a)(1), 5 a taxpayer is "allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear * * of property used in the trade or business * * ." As our Findings of Fact demonstrate, the camera equipment at issue was used by petitioner only in connection with his teaching duties at UNO. He never made any personal use of the equipment. Thus, we conclude that the equipment was "used [by petitioner] in the trade or business" and586 petitioner is entitled to a deduction for depreciation of the camera equipment. Respondent contends that the camera equipment is not an "ordinary and necessary" business expense and, therefore, petitioner should not be allowed the deduction for depreciation. Whether the property in issue is a kind of property that is usually or customarily used in the business in which a taxpayer is engaged may be relevant to the issue to be decided. But that is not the controlling test for depreciation deductions. Section 167 requires only that the property be "used in the trade or business" or be "held for the production of income." In the light of the undisputed testimony, we have concluded that petitioner's camera equipment was used exclusively in his trade or business; thus, respondent's argument is without merit or proper legal foundation. 587 6In view of our holding that petitioner is allowed a depreciation deduction for the camera equipment, it follows that he is also entitled to an investment588 tax credit for the equipment. Section 38(a) as amplified by section 48(a)(1) allows a credit against income tax for investment in certain tangible personal property as to which depreciation is allowable and which has a useful life of 3 years or more. According to Forms 3468, Computation of Investment Credit, and 4562, Depreciation, attached to petitioner's 1979 income tax return, petitioner stated that the useful life of the camera equipment is 7 years. Respondent does not challenge this claim. Thus, the camera equipment meets the requirements of sections 38 and 48 and petitioner is, therefore, entitled to an investment credit for the equipment. B. Telephone Answering Machine and Calculator. In 1979, petitioner purchased a telephone answering machine and a calculator for a total of $365.85. There is nothing in the record to indicate what the answering machine and calculator cost individually. Petitioner testified that he purchased the answering machine for the "prime purpose" of receiving telephone messages from his students when he was not at home. Petitioner had a telephone589 available for messages at UNO from 8:00 a.m. to 4:30 p.m. After 4:30 p.m., however, students could only reach petitioner at home. Because students are in class all day, petitioner testified that he believed that the "prime time" that they would need to get in touch with him, their professor, would be at night when they were working on problems. Petitioner's testimony on this issue is not convincing. Although he stated that he used the answering machine exclusively in his business activities, he also admitted on cross examination that his friends called him at home. Given the availability of his UNO office telephone to his students until 4:30 p.m. each school day, we are not satisfied that the main use of the machine was not to record personal messages. While it is true that property which is used substantially for both trade or business and personal purposes may be depreciated according to the percentage of trade or business useage, see e.g., Motel Co. v. Commissioner,340 F.2d 445">340 F.2d 445, 448-449 (2d Cir. 1965), affirming a Memorandum Opinion of this Court; Holmes Enterprises, Inc. v. Commissioner,69 T.C. 114">69 T.C. 114, 119 (1977),590 petitioner has not met his burden of providing us with enough information to make an apportionment between business and personal use. Thus, we conclude that petitioner is not entitled to a depreciation deduction for the answering machine. With respect to the calculator, petitioner has not met his burden of proving that he is entitled to a depreciation deduction. As stated above, we are unable, from the record before us, to determine how much the calculator cost separately. Further, and most significant, petitioner offered no evidence, with the exception of one isolated statement, that he used the calculator for business purposes exclusively. He offered no details as to how he used the calculator in his business. On brief, petitioner argues that he used the calculator for paper and exam grading; however, petitioner's statements in his brief do not constitute evidence from which we can decide the case. Thus, petitioner is not entitled to a depreciation deduction for the calculator. It follows in view of our conclusion that petitioner is not entitled to a depreciation deduction, neither591 is he entitled to an investment credit in respect of either the answering machine or the calculator because the items are not depreciable. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. All Rules references are to the Tax Court Rules of Practice and Procedure unless otherwise noted.↩2. This mileage figure does not appear in the notice of deficiency. We have calculated it by dividing $598, the amount of the deduction allowed, by 18.5 cents per mile, the standard mileage rate applicable in 1979. Respondent does not contend that any part of the mileage here in dispute involves commuting.↩3. See Ward v. Commissioner,T.C. Memo 1979-165">T.C. Memo. 1979-165; Barry v. Commissioner,T.C. Memo. 1978-250↩.4. In his mileage reconstruction, petitioner claimed 80 trips for 40 seminar days. We are allowing only 40 trips because petitioner has failed to explain why 80 trips were required to attend 40 seminar days.↩5. SEC. 167. DEPRECIATION. (a) General Rule.--There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) -- (1) of property used in the trade or business * *↩6. Indeed, given the definition of "necessary" in Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933) as "appropriate and helpful" to a taxpayer's business, the camera equipment was appropriate and helpful to petitioner in carrying out his professional duties as a college professor. With respect to "ordinary", the Supreme Court has explained that the principal function of the term "ordinary" is to clarify the distinction between those expenses that are currently deductible and those that are in the nature of capital expenditures, which if deductible at all, must be amortized over the useful life of the asset. Commissioner v. Tellier,383 U.S. 687">383 U.S. 687, 689-690 (1966). In this sense, petitioner's expenditure for the camera equipment is not ordinary but is concededly capital in nature. By arguing that to be depreciable an expenditure must be ordinary, respondent misconceives the difference between currently deductible business expenses under sec. 162 and depreciable capital expenses under sec. 167↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621191/	ELMS SECURITIES CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RespondentElms Sec. Corp. v. CommissionerDocket No. 14167-86.United States Tax CourtT.C. Memo 1987-162; 1987 Tax Ct. Memo LEXIS 158; 53 T.C.M. (CCH) 440; T.C.M. (RIA) 87162; March 25, 1987. Eric A. Seiff, for the petitioner. Mitchell B. Hausman, for the respondent. PANUTHOSMEMORANDUM FINDINGS OF FACT AND OPINION PANUTHOS, Special159 Trial Judge: This case is before the Court on respondent's Motion to Dismiss for Lack of Jurisdiction and petitioner's Motion for Leave to Amend Petition. 1 The sole issue for consideration is whether Laurence M. Brown (hereinafter Brown) has authority to bring this action on behalf of petitioner under Rules 23(a)(3) and 60(c). FINDINGS OF FACT At the time of filing the petition herein, the principal place of business of petitioner was New York, New York. The notice of deficiency, dated February 14, 1986, determined a deficiency in petitioner's Federal income tax for the taxable year ended June 30, 1982 in the amount of $268,920. The primary adjustments are disallowed management fees and a disallowed net operating loss deduction. A petition was filed with the Court on May 15, 1986. The petition is executed by Brown. Below the signature line160 the following information appears: Laurence M. Brown, Member of the Board of Directors, Elms Securities Corporation, 660 Madison Avenue, New York, New York 10021, Telephone: (212) 731-0330 Respondent's Motion to Dismiss for Lack of Jurisdiction is premised on the theory that Brown is not a proper person to sign the petition. In response to the Motion to Dismiss, petitioner's Motion for Leave to Amend was filed on August 21, 1986. The Amendment to Petition was lodged on the same date. Petitioner (through Brown) seeks to substitute the signature of counsel for that of Brown. The Court finds the following facts based upon the submissions of the parties including oral stipulations and the Affidavit of Brown, filed January 29, 1987. Petitioner is a closely-held New York corporation which conducted trading activities in various securities. Petitioner ceased all trading activities on January 6, 1983. Brown, as a director of petitioner, advised the National Association of Securities Dealers, Inc. of the cessation of trading activity at that time. Prior to 1983, the individuals who held offices and/or were directors of petitioner and the respective dates of their resignations161 are as follows: Howard SamuelsChairman/DirectorJune 30, 1982Andrew ReeganPresidentAugust 17, 1982Alan KralPresidentDecember 17, 1982Nicholas CapanoTreasurer/SecretaryDecember 31, 1982Saul DworkinVice PresidentJanuary 31, 1983Bruce H. LipnickDirectorNovember 1, 1982Terrence T. HerzogDirectorMay 13, 1983Laurence M. BrownDirectorAs of August 20, 1982 there were three stockholder/directors: Terrence Tobius Herzog, Bruce Howard Lipnick, and Brown. On or about September 28, 1982, Mr. Lipnick sold his shares back to petitioner. Mr. Herzog resigned as director effective May 13, 1983. It is not entirely clear if he remained a shareholder. 2 Brown indicates in his Affidavit that he cannot determine if Mr. Herzog is or is not a shareholder. Brown further indicates that since Mr. Herzog's resignation, the latter has not participated in any activities regarding petitioner. 162 Petitioner and Brown (in his individual capacity) were named defendants in a lawsuit in the United States District Court for the Northern District of Texas sometime in 1984. Counsel representing both defendants (the same counsel that has filed an appearance in this litigation) filed pleadings and motions on behalf of both defendants. Petitioner was also named as a defendant in a lawsuit in the Superior Court of the State of California for the County of Los Angeles in 1983. Brown, in January of 1984, authorized California counsel to defend petitioner's interest. In support of his authority to represent petitioner, Brown, in his Affidavit dated January 22, 1987, states as follows: 9. Because the petitioner has not actively conducted business for approximately four (4) years, there have been no formal meetings of the shareholders or directors. But more significantly, prior to these four years of inactivity, my authority to engage counsel for litigation and file the necessary documentation was both implied and orally expressed; invariably my actions were accepted, and not criticized by the shareholders, directors and officers. No formal approval was required then; nor is it163 required now. 10. It seems that at this stage when the corporation is not active, no business is conducted, and no meetings are held to discuss its management, it is within my authority and indeed my responsibility to do what I always have been repeatedly authorized to do -- institute a legal proceeding for the protection and preservation of the corporate interest when the corporation's action has been challenged, as it has here with respect to its tax return for the tax year ending June 30, 1982. * * Respondent's position is that Brown has not established that he was authorized to act on behalf of petitioner. In contrast, petitioner argues that Brown, under the particular facts and circumstances of this case, as a director, satisfies the provisions of Rule 23(a) and Rule 60. Petitioner also argues that Brown had implied authority based upon his prior activities with respect to this corporation. OPINION Rule 60(c) provides in part as follows: (c) Capacity: The capacity of an individual, other than one acting in a fiduciary or other representative capacity to engage in litigation164 in the Court shall be determined by the law of his domicile. The capacity of a corporation to engage in such litigation shall be determined by the law under which it was organized. * * The burden of proof in establishing jurisdiction is upon the party claiming its existence. 3 The parties agree that we must look to New York law to determine whether Brown had authority to file this action on behalf of petitioner. Brown's activity as a member of the Board of Directors would be governed by N.Y. Bus. Corp. Law sections 701-727 (McKinney 1963).Pursuant to New York law, the business of a corporation is to be managed by the board of directors. N.Y. Bus. Corp. Law section 701 (McKinney 1963). The question of whether to commence a lawsuit on behalf of a corporation is a decision to be made by the directors. Rosengarten v. Intern. Tel. & Tel. Corp.,466 F. Supp. 817">466 F.Supp. 817, 822 (S.D.N.Y. 1979).165 A majority of the directors present at the time of a vote at a meeting is required for action. N.Y. Bus. Corp. Law section 708(d) (McKinney 1963). The number of directors constituting the entire board cannot be less than three, unless there are less than three shareholders. In such case the number of directors cannot be less than the number of shareholders. N.Y. Bus. Corp. Law, section 702(a) (McKinney 1963). Having carefully examined the record in this case, we believe petitioner has satisfied its burden of proof that Brown has sufficient authority to act on its behalf. Clearly, Brown is the only remaining officer or director and the only person who could possibly act on behalf of this corporation. While not entirely free from doubt, it further appears likely that he is the sole remaining shareholder. We do not believe, however, that we need to decide whether Brown has satisfied all the technical provisions of New York law such that he had actual authority to act; we are satisfied under these facts, that in acting on behalf of petitioner, he was impliedly authorized to act. Under New166 York law, where there has been no direct prohibition by the board of directors, the president of a corporation has presumptive authority to defend and prosecute suits in the name of the corporation. Rothman & Schneider v. Beckerman,2 N.Y. 2d 493, 497, 161 N.Y.S.2d 118">161 N.Y.S. 2d 118, 121, 141 N.E.2d 610">141 N.E. 2d 610, 613 (1957). See also NYF Proper Properties Corp. v. SB Investors, Ltd.,96 A.D.2d 481">96 A.D. 2d 481, 464 N.Y.S. 2d 37 (1983); Roos v. Aloi,127 Misc. 2d 864">127 Misc. 2d 864, 487 N.Y.S. 2d 637 (Sup. Ct. 1985). Generally, the implied authority of the president will not rest in another officer; however, where such officer has alone been running the corporation, generally without intervention or direction from the board of directors or president, there is no reason, in law or practice, why he should not be able to defend or prosecute suits in the name of the corporation. Rothman & Schneider v. Beckerman,supra.In this case, it appears that Brown has been acting as the president of the corporation. He has attended to the day to day affairs of the corporation; and has defended lawsuits in the name of the corporation since it became inactive in 1983. *167 Thus, it appears that Brown has implied authority to litigate this matter in the name of the corporation. Additionally, regardless of whether Brown's official title is "president" or "director", or some other executive label, from the record, it appears that he is the only person who can, or will, act on behalf of the corporation. Unless Brown impliedly possesses the power to act on behalf of the corporation, the corporate interests may be prejudiced, if not entirely destroyed. West View Hills, Inc. v. Lizau Realty Corp.,6 N.Y. 2d 344, 189 N.Y.S. 2d 863, 160 N.E. 2d 622 (1959). In situations requiring the exercise of power to preserve and protect the interests of the corporation, such power will be implied. West View Hills, Inc. v. Lizau Realty Corp.,supra.We believe that this is such a situation. Accordingly, we conclude that Brown has the implied power to maintain this action on behalf of the corporation. For the reasons stated herein, respondent's Motion to Dismiss for Lack of Jurisdiction will be denied; and, petitioner's Motion for Leave to Amend Petition will be granted. An appropriate order will be issued.Footnotes1. This case was assigned pursuant to section 7456 (redesignated as section 7443A by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) and Rule 180. All section references are to the Internal Revenue Code of 1954, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. In a letter written to Brown on May 13, 1983, Mr. Herzog submitted his resignation and also asked that his financial interests in petitioner be liquidated. No information has been provided as to whether Mr. Herzog's shares of stock were, in fact, liquidated.↩3. See American Police and Fire Foundation Inc. v. Commissioner,T.C. Memo. 1981-704↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621192/	David F. Bolger and Barbara A. Bolger, Petitioners v. Commissioner of Internal Revenue, RespondentBolger v. CommissionerDocket Nos. 5033-68, 5755-68United States Tax Court59 T.C. 760; 1973 U.S. Tax Ct. LEXIS 162; 59 T.C. No. 75; March 8, 1973, Filed 162 Decisions will be entered under Rule 50. Corporations were organized to acquire title to properties, issue promissory notes secured by mortgages, and execute leases in order to provide maximum financing by avoiding State law restrictions on loans to individuals, to provide a mechanism for limiting the personal liability of such individuals, and to facilitate multiple-lender financing. Upon the consummation of the foregoing transactions, the corporations immediately transferred the properties to the individuals, subject to the mortgages and leases but without such individuals assuming any personal liability. Each corporation was required to be continued in existence so long as any obligation of the mortgage note remained unpaid. Held, the corporations were at all times viable entities for tax purposes and were not agents or nominees of the individuals in respect of the underlying transactions. Moline Properties v. Commissioner, 319 U.S. 436">319 U.S. 436 (1943); National Carbide Corp. v. Commissioner, 336 U.S. 422">336 U.S. 422 (1949). Held, further, by virtue of the transfers by the corporations to the individuals, the latter163 (of which petitioner was one) acquired a depreciable interest in the properties, and, in each instance, the unpaid balance of the mortgage at the time of such transfer is includable in the basis of the property for purposes of depreciation. Crane v. Commissioner, 331 U.S. 1 (1947). C. J. Queenan, Jr., D. L. Ketter, Alan H. Finegold, and Allan McClain, for the petitioners.John J. O'Toole, for the respondent. Tannenwald, Judge. Scott, J., dissenting. Goffe, J., agrees with this dissent. Quealy, J., dissenting. Goffe, J., agrees with this dissent. Goffe, J., dissenting. Wiles, J., agrees with this dissent. TANNENWALD761 Respondent determined the following deficiencies in petitioners' income tax:YearDeficiency1963$ 13,153.44196422,596.75196530,512.00196690,186.00Certain concessions having been made, the only issue remaining for our consideration is whether petitioners are entitled to deductions for depreciation on account of certain real and personal property under the circumstances set forth herein. A decision with respect to this issue governs the allowability of rental and interest expenses and the investment credits claimed 165 by petitioners.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference.David F. Bolger (hereinafter referred to as the petitioner) and Barbara A. Bolger are husband and wife whose legal residence was Ridgewood, N.J., at the time the petitions herein were filed. Joint returns for the years in question were filed with the district director of internal revenue for the Manhattan District, New York. Petitioner Barbara A. Bolger is a party herein solely because she filed joint returns with her husband for the years in question.During the years in question, petitioner was actively engaged in real estate investment and finance. As a result of his experience, he became familiar with the intricacies of various real estate transactions, one form of which is the subject herein.Petitioner's modus operandi was generally the same for all 10 transactions challenged by respondent. Typically, petitioner would form a financing corporation with an initial capitalization of $ 1,000. The shareholders consisted of those individuals who would ultimately receive title to the property, as explained infra.166 Petitioner would then arrange to have the corporation purchase a building which some other manufacturing or commercial concern (hereinafter referred to as the user) desired to lease; on occasion, the seller was the user itself. Then, within several days, and, more often, on the same day, all of the following transactions would take place: (1) The seller would convey the property to the financing corporation; (2) the financing corporation would enter into a lease with the user; and (3) the financing corporation would then sell its own negotiable interest-bearing corporate notes in an amount equal to the purchase price to an institutional lender (or lenders, as the case might be) pursuant to a note purchase agreement (as the document was usually called), which would provide that the notes be secured by 762 a first mortgage (which sometimes took the form of a deed of trust), and by an assignment of the lease.The mortgage notes provided for payment to be made over a period equal to or less than the primary term of the lease and the financing corporation was also obligated to pay for all of the lender's out-of-pocket expenses, including legal fees.The mortgage was a lengthy, detailed167 document covering almost every conceivable contingency. It spelled out in great detail the terms of payment and right of prepayment, the rights of the parties in case of default, and the responsibilities and limitations of the financing corporation under the agreement. More specifically, the corporation promised to maintain its existence and to refrain from any business activity whatsoever except that which arose out of the ownership and leasing of the property. Payments by the lessee were to be made directly to the mortgagee (or trustee) in satisfaction of payments on the secured notes. Moneys received under the lease were to be first applied to payment on the mortgage notes with the remainder to be paid over to the financing corporation. Provision was made as to the circumstances under which the corporation could sell or transfer the property, the transferee being required to assume all obligations under the mortgage and lease except that the transferee assumed no personal financial obligation for the payment of principal and interest or any other monetary judgment, liability on such assumption being limited to the property transferred. The transferee was also required to 168 compel the financing corporation to maintain its existence, prevent it from engaging in any business other than that arising out of the property and lease thereon, cause such corporation to maintain books available for inspection by the mortgagee, and prevent any merger or consolidation by such corporation with any other corporation.The lease was for a primary term at least equal to, and, on occasion, in excess of, the period of the mortgage note. Provision was also made for payment by the lessee of all taxes, insurance, repairs, etc., and all costs of acquisition save the purchase price incurred by the lessor -- i.e., it was a net lease. The lessee's right and interest in the property, easements, or appurtenances were subordinated to the mortgage. Payments under the lease were to continue even if the building was destroyed; the lessee had the right to purchase the property in such event for a price set in accordance with a schedule attached to the lease which approximated the amount required from the lessor to prepay the note. Refusal to accept the offer of purchase would result in the termination of the lease. The lessee further agreed to indemnify the lessor from any liability169 resulting from any occurrence on the premises or because of the work being done on the premises by the lessee. The lessee was permitted to sublease the premises or any portion thereof, and he was permitted to assign his interest in the lease, providing 763 the sublessee or assignee promised to comply with the terms of the mortgage and the lease and further providing the lessee remain personally liable for the performance of all its obligations under the lease.Upon the completion of the foregoing, the financing corporation would convey the property to its shareholders for "One dollar and other valuable consideration," subject to the lease and the mortgage and without any cash payment or promise thereof by the transferee. Concurrently, the transferee would execute an assumption agreement in favor of the financing corporation, promising to assume all of the financing corporation's obligations under the lease and the mortgage but limited as aforesaid.The particulars of the various transactions, insofar as they are material to the within case, are summarized in the following chart and the qualifications thereafter set forth:Property andNature ofPurchaseFinancing(financingimprovementpricecorporationColton, Cal.Bank bldg$ 250,835$ 250,000 -- secured(Stonbernardino by Properties, 5% mortgage Inc.) notes Silver Spring,Warehouse215,000$ 215,000 -- securedMd. (Instrument by Properties, 5.25% secured Inc. notes Kinney ShoeStores1,355,500$ 1,355,500 --(Janess secured by Properties, 5% mortgage Inc) notes Muskegon,Bank1,650,000$ 1,650,000 --Mich. bldg. secured by (Georgiana 5.25% mortgage Properties, notes Inc.) San Antonio,Warehouse370,000$ 370,000 -- securedTexas by (Andrean 5.20% secured Properties, notes Inc.) Rockford, Ill.Factory935,000$ 935,000 -- secured(North Park bldg. by Properties, 5.35% secured Inc.) notes Long IslandFactory2,000,000$ 2,050,000 --City, New bldg. secured by York (East 6.125% secured River Properties, notes Inc.) Etiwanda, Cal.Factory1,550,000$ 1,546,800 -- secured(Fontana bldg. by Properties, 5.80% secured Inc.) notes Detroit, Mich.Milk2,300,000$ 2,300,000 -- secured(Milk Properties, processing by Inc.) plant 6.50% mortgage notes IBM ComputerComputer187,935$ 189,500 plus(Bettina (9/1)$ 58,800 -- Properties, 58,299secured by Inc.) (9/30)a promissory note at 5% int. per year. 170 LeaseProperty andLesseebaseLease renewalAnnual(financingtermtermrentalcorporation(years)Colton, Cal.American263 successive$ 17,048.45(Stonbernardino National 10-year Properties, terms at Inc.) $ 5,000 annually Silver Spring,Beckman284 successive14,835.00Md. (Instrument Properties, 5-year Properties, Inc. terms at Inc.) $ 5,375 annually Kinney ShoeKinney253 successive93,528.00(Janess Shoe 5-year terms Properties, Affiliates at $ 37,413 Inc.) annually Muskegon,National305 successive107,055.00Mich. Lumberman's 5-year terms (Georgiana Bank at reduced Properties, rent at % Inc.) of cost San Antonio,Shop-Rite204 successive36,340.00Texas Foods, 5-year (Andrean Inc. terms at Properties, reduced Inc.) rent at % of cost Rockford, Ill.National254 successive65,544.00(North Park Can 5-year Properties, Corp. terms at Inc.) reduced rent at % of cost Long IslandNational281 ten-year, 3188,024.00City, New Can five-year York (East Corp. terms at reduced River Properties, rent Inc.) at % of cost Etiwanda, Cal.National285 successive106,950.00(Fontana Can 5-year Properties, Corp. terms at reduced Inc.) rent at % of cost Detroit, Mich.Borman261 ten-year, 3176,120.00(Milk Properties, Food Stores, five-year Inc.) Inc. terms at reduced rent at % reduction IBM ComputerRaytheon85 one-year40,749.00(Bettina Company 6terms Properterties, Inc.) 171 764 Fixedmortgagepayments --Method ofAmount ofInterestProperty andprincipaldepreciationdepreciationexpense(financingandusedclaimedcorporation)interest,annualColton, Cal.$ 16,784150% declining1963-$ 2,764$ 679(Stonbernardino balance 1964-16,1288,057Properties, 1965-13,5057,917Inc.) 1966-11,4987,760Silver Spring, 14,304Straight1964- 2,6561,620Md. (Instrument line 1965- 3,0642,737Properties, 1966- 2,9152,693Inc.) Kinney Shoe92,508Straight1964- 6,7937,924(Janessline 1965-23,74716,621Properties, 1966-22,87616,288Inc.) Muskegon,105,824Straight1965-18,91212,634Mich. line 1966-27,45121,138(Georgiana Properties, Inc.) San Antonio, 35,732Straight1965- 9,6073,946Texas (Andrean line 1966- 6,2165,910Properties, Inc.) Rockford, Ill. 65,344Straight1966-12,0567,425(North Park line Properties, Inc.) Long Island188,024150% declining1966-19,316City, New balance York (East River Properties, Inc.) Etiwanda, Cal.106,571150% declining1966-61,37854,272(Fontana balance Properties, Inc.) Detroit, Mich.175,160Double declining1966-31,469(Milk Properties, balance Inc.) IBM ComputerNot 150% declining1963-23,239(Bettina availablebalance or 1964-56,33411,813Properties, double 1965-42,25110,615Inc.) declining 1966-31,6889,105balance 172 NetDatePetitioner'sRentlossfinancinginterest inProperty andexpensefromand lease(1) corporation;(financingpropertyarrangements(2) deed;corporation)completed(3) date oftransferColton, Cal.$ 455$ 2,477May 31, 1963(1) 100%(Stonbernardino 5,45612,590(2) 100%Properties, 5,4559,828(3) 11/1/63Inc.) 5,4557,664Silver Spring,1,185Feb. 28, 1964(1) 25%Md. (Instrument 2192,311(2) 25%Properties, 131,912(3) 2/28/64Inc.) Kinney Shoe3,542June 12, 1964(1) 25%(Janess22017,206(2) 25%Properties, 6215,844(3) 6/12/64Inc.) Muskegon,3,10121,265Sept. 24, 1963(1) 25%Mich. 6721,892(2) 25%(Georgiana (3) 9/24/63Properties, Inc.) San Antonio,2906,252Dec. 28, 1964(1) 25%Texas (Andrean 33,044(2) 25%Properties, (3) 12/28/64Inc.) Rockford, Ill.2655,956Mar. 31, 1966(1) 25%(North Park (2) 25%Properties, (3) 3/31/66Inc.) Long Island19,316June 22, 1966(1) 100%City, New (2) 100%York (East (3) 6/22/66River Properties, Inc.) Etiwanda, Cal.49,242May 17, 1966(1) 100%(Fontana (2) 100%Properties, (3) 5/17/66Inc.) Detroit, Mich.31,469Aug. 19, 1966(1) 100%(Milk Properties, (2) 25%Inc.) (3) 9/19/66IBM Computer23,239Sept. 1, 1963(1) 100%(Bettina 27,398and (2) 100%Properties, 12,117Oct. 1, 1963(3) 9/1/63Inc.) 44and 10/1/63 173 In the Colton, Calif., transaction, the transfer of the property from Stonbernardino Properties, Inc., to petitioner was delayed for 5 months. Also, upon receipt of the deed, petitioner conveyed the underlying land to a third party for $ 83,923.91 and simultaneously leased the property back for a term equal to that of the primary lease on the building. Petitioner paid a rental equal to 32 percent of the rent received from the lessee of the building less 32 percent of any expenses incurred by Stonbernardino or petitioner in conformity with the mortgage and lease.In the Kinney Shoe transaction, one of seven parcels acquired by Janess Properties, Inc., was not actually conveyed to it until July 29, 1964, a month and a half after the original transaction was executed. All transfers of the parcel to petitioner and his associates then proceeded as in the model transaction.765 In the San Antonio transaction, the initial amount of financing proved inadequate to cover the cost of the facilities built on the property. Therefore, on June 15, 1965, about 6 months after the initial transactions, an additional $ 100,000 was financed in a manner similar to the initial cost. The mortgage174 and lease agreements were amended to absorb this cost and Andrean Properties, Inc., was a party to the modification documents.In the Etiwanda, Calif., and Rockford, Ill., transactions, a separate document was executed purporting to designante the financing corporation as the nominee of petitioner and his associates.In each instance, the fair market value of the underlying property was at least equal to the face amount of the mortgage, or the unpaid balance thereof, at the date the financing transactions were completed and at the date of the transfers to petitioner and, in some instances, to his associates.Petitioner reported in the tax returns for the years in question his proportionate share of the income and deductions attributable to the properties after his acquisitions.OPINIONThe dispute in this case -- whether petitioner is entitled to depreciation deductions under section 167 1 with respect to certain properties -- arises from a single factual pattern repeated several times, planned and executed by the petitioner, on each occasion using a different property and different persons in the supporting roles of lessee and mortgagee. In each instance, the petitioner acquired175 legal title to the property, subject to a long-term lease of the property and a mortgage encumbering the property in respect of which he assumed no personal liability. At the time of petitioner's acquisition, the value of each property at least equaled the unpaid principal amount of the mortgage, and petitioner neither made nor obligated himself to make any cash investment in the property out of his own pocket.The essential facts of the several transactions are set forth in our findings and include a recital of certain variations in respect of the several properties involved. Neither party argues that these variations should produce different results for a particular piece of property. 2 The two issues upon which resolution of the basic question depends are: (1) Should the corporations from which the petitioner acquired his ownership interest in the properties be recognized as separate viable entities; and (2) if they should be so176 recognized, are they or 766 the petitioner entitled to an allowance for depreciation and for other related items.We consider first the viability of the corporations. There is no question that they were organized and utilized in the initial stages for business purposes, namely, to enable the contemplated transactions to produce maximum financing by avoiding State law restrictions on loans to individuals rather than corporate borrowers, to provide a mechanism for limiting personal liability, and to facilitate multiple-lender financing. In furtherance of these purposes, the corporations purchased the properties, entered into the leases, issued their corporate obligations, and executed mortgages and assignments of the leases as security for the payment of those obligations. At that point of time the corporations were undoubtedly177 separate viable entities whose separate existence could not be ignored for tax purposes. Moline Properties v. Commissioner, 319 U.S. 436">319 U.S. 436 (1943). The activities of the corporations involved in Jackson v. Commissioner, 233 F. 2d 289 (C.A. 2, 1956), O'Neill v. Commissioner, 170 F. 2d 596 (C.A. 2, 1948), and Dallas Downtown Development Co., 114">12 T.C. 114 (1949), relied upon by petitioner, were far less by comparison; those cases are therefore distinguishable. Nor do we think the record herein can support petitioner's assertion that, in engaging in the aforementioned transactions, the corporations were merely acting as agents or nominees. 3National Carbide Corp. v. Commissioner, 336 U.S. 422 (1949); Taylor v. Commissioner, 455">445 F. 2d 455 (C.A. 1, 1971), affirming a Memorandum Opinion of this Court; Fort Hamilton Manor, Inc., 51 T.C. 707">51 T.C. 707, 719-720 (1969), affd. 445 F. 2d 879 (C.A. 2, 1971). Compare Paymer v. Commissioner, 150 F. 2d 334178 (C.A. 2, 1945), reversing in part a Memorandum Opinion of this Court on facts distinguishable from those involved herein. Indeed, the existence of an agency relationship would have been self-defeating in that it would have seriously endangered, if not prevented, the achievement of those objectives which, in large part, gave rise to the use of the corporations, namely, the avoidance of restrictions under State laws.We still must determine, however, whether the corporations should be recognized as 179 separate viable entities after the transfers of the properties in question. At that point, they were stripped of their assets and, by virtue of their undertakings, could not engage in any other business activity. On the other hand, the corporations continued to be liable on their obligations to the lenders and were required, under the 767 terms of those obligations, to remain in existence, to abide by certain other undertakings, and to preserve their full powers under the applicable State laws to own property and transact business. Moreover, the transferees of the properties agreed to cause the corporations to comply with their undertakings, albeit that any claim for breach of such agreement was limited to the property and could not constitute a basis for the assertion of personal liability. Finally, we note that, in the case of the San Antonio property, the corporation participated in refinancing arrangements subsequent to the transfer to petitioner.Under the foregoing facts and based upon the record before us, the circumstances herein do not constitute an exception to the following test enunciated in Moline Properties, Inc. v. Commissioner, 319 U.S. at 438-439,180 and we hold that the corporations continued to be separate viable entities for tax purposes: 4The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. * * [Citations omitted.]181 On the same basis, we conclude that the corporations cannot be considered as agents of the transferees during the period following the transfers.Having held that the corporations should be treated as separate viable entities at all times pertinent herein, we are required to decide the second issue raised by the parties -- whether petitioner as a transferee of the properties in question is entitled to the deduction for depreciation. Resolution of this issue depends upon who has the depreciable interest in the properties, the corporations or the petitioner, 5 and, in the event that it is the petitioner, the measure of his basis. The key to our decision ultimately lies in a determination of the extent to which the doctrine of Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947), applies.182 We turn first to a consideration of the nature of the interest which the petitioner acquired. Petitioner contends that he and his associates acquired both legal title and full beneficial ownership of the properties from the corporations. Respondent counters with the assertion 768 that, because of the long-term leases and the commitments of the rentals to the payment of the mortgages by virtue of the assignments of the leases which were consummated prior to the execution of the deeds, the conveyances by each corporation transferred only a reversionary interest in the buildings 6 and that consequently petitioner did not acquire a present interest in the properties which may be depreciated for income tax purposes. We agree with petitioner.Implicit in respondent's position is the concept that, by virtue of the leases and financing transactions, the corporations183 divested themselves of all but bare legal title to the properties. Following this concept to its logical conclusion would require a determination either that the corporations thereby deprived themselves of any presently depreciable interest or that their right to deduct the cost of the buildings should be by way of amortization over the lease terms. But both possibilities are belied by respondent's basic argument that the corporations retained such an interest in the properties as against their transferees that they, and not the latter, should be held accountable for the income from the properties and be entitled to the depreciation deduction. 7 Compare Harriet M. Bryant Trust, 11 T.C. 374">11 T.C. 374 (1948). See also sec. 1.167(a)-4, Income Tax Regs. (capital expenditures for buildings by a lessor are recoverable through depreciation allowances over the life of the buildings and not the term of the lease). The assignments of the leases, like the mortgages, were transfers solely for security and did not relieve the corporations from being charged with the rents for income tax purposes. Ethel S. Amey, 22 T.C. 756">22 T.C. 756 (1954). Each 184 lease was part and parcel of the ownership of the particular property the legal and beneficial ownership of which was vested at the outset in the appropriate corporation. Cf. LeBelle Michaelis, 54 T.C. 1175">54 T.C. 1175 (1970). It is this critical factor which distinguishes the cases, relied upon by respondent, dealing with the right of a lessor to depreciate buildings constructed on his land by the lessee. The lessee, by virtue of his expenditure, was clearly entitled either to depreciation of the building or amortization of its costs over the term of the lease. The question presented was whether the lessor, as the legal owner of the building, could also claim depreciation. Thus, unlike the instant situation, where both parties agree that only the corporations or the transferees, but not both, are entitled to depreciation, the courts were faced with the possibility of a double deduction. The beneficial ownership of the buildings was held to be vested in the lessee and the technical vesting of legal title in the lessor by virtue of the ownership of the land 769 was not deemed sufficient to permit the conclusion that the lessor had a depreciable interest. 185 See the discussion in World Publishing Co. v. Commissioner, 299 F. 2d 614 (C.A. 8, 1962), reversing 35 T.C. 7">35 T.C. 7 (1960), and in Albert L. Rowan, 22 T.C. 865 (1954). See also Buzzell v. United States, 326 F.2d 825">326 F.2d 825 (C.A. 1, 1964); Catharine B. Currier, 51 T.C. 488 (1968). Such lack of depreciable interest in the lessor has generally been the foundation for denying a depreciation allowance to the lessor's transferee -- at least where the transfer was by way of inheritance. Albert L. Rowan, supra, and cases cited therein. 8186 In short, as we see the situation, the real question to be decided is what was petitioner's basis in each of the properties. Before proceeding to a discussion of this question, we need to dispose of certain preliminary contentions on the part of respondent. First, he contends that petitioner has not proved by what means he acquired his claimed interests in the properties -- whether as a purchaser or as a shareholder in receipt of corporate distributions by way of dividends, in liquidation, or otherwise. Ancillary to this argument and also in an attempt to avoid the impact of Crane v. Commissioner, supra, respondent argues that petitioner has failed to prove that the fair market value of the properties, at the time of his acquisition, was equal to or in excess of the face amounts of the mortgages. In respect of the latter contention, whatever may be the state of the record herein as to the value of the properties without regard to the leases or at dates subsequent to those on which the corporations made the transfers, we are satisfied both independently on the facts revealed by the record and also on the basis of respondent's stipulation at the187 trial that, at the time of transfer by the corporations, the fair market value of each property, taking the existing lease into account (cf. LeBelle Michaelis, supra), at least equaled the remaining principal balance of the unassumed mortgage. Such being the case and considering the fact that neither party claims any value in excess of such unpaid balance, it seems clear to us that if that unpaid balance is deemed part of petitioner's basis, that cost and the fair market value of each property will be in the same amount and it will be immaterial whether petitioner's basis is determined under section 1012 (cost) or under section 301(d) or 334(a) (fair market value). It is, therefore, unnecessary for petitioner 770 to prove, or for us to decide, whether petitioner took title as purchaser or shareholder.This brings us to the final question to be considered, namely, should the unpaid balance of each mortgage be deemed part of petitioner's basis even though petitioner and his associates assumed no liability in respect thereto. Had petitioner accepted personal liability for the mortgage debt, instead of merely taking the leased property subject to188 the lien but without personal liability, there would be no legitimate question that the debt as assigned was part of the basis of the property. Thus, the issue is whether the absence of such personal liability should produce a different result. In Crane v. Commissioner, supra, the Supreme Court held that the amount of a mortgage encumbering inherited property should be included in the devisee's basis for such property, whether or not the devisee assumes personal liability for the mortgage. In Blackstone Theatre Co., 12 T.C. 801 (1949), we applied the doctrine of Crane to a purchase and held that the amount of an unassumed lien on acquired property should be included in the cost of the property. Cf. Parker v. Delaney, 186 F. 2d 455 (C.A. 1, 1950). We reiterated this conclusion in Manuel D. Mayerson, 47 T.C. 340 (1966), where a purchase-money mortgage without personal liability was included in the amount of basis for purposes of depreciation. In so doing, we were not deterred by the fact that the taxpayer made only a nominal cash investment. 189 We explained that the effect of the Crane doctrine is:to give the taxpayer an advance credit for the amount of the mortgage. This appears to be reasonable, since it can be assumed that a capital investment in the amount of the mortgage will eventually occur despite the absence of personal liability. * * * [See 47 T.C. at 352. Emphasis added.]Respondent argues that such an assumption is unreasonable under the facts of the present case. He asserts that petitioner has no reason to protect his interest in the property involved herein, since his cash flow is minimal and the property is mortgaged to the full extent of its value. Such assertion ignores the fact, however, that petitioner's equity in the property increases as the rents under the lease are paid in amortization of the mortgage. This increase in equity will benefit petitioner either by way of gain in the event of a sale or the creation of refinancing potential. Moreover, petitioner will seek to protect his interest in the property in order to retain the benefits of any appreciation in its fair market value.To claim, as respondent does, that petitioner will be making no investment in190 the property during the term of the lease merely begs the question. The rents are includable in his income even though they are assigned as security for the payment of the mortgage. See Ethel S. Amey, supra.As we stated in the Mayerson case, the Crane doctrine 771 permits the taxpayer to recover his investment in the property before he has actually made any cash investment. Every owner of rental property hopes to recoup his investment, plus a profit, from the receipt of rental income. In the normal case, he applies part of this income to the amortization of any mortgage encumbering the leased property, retaining any excess over the mortgage payments as his cash flow. As Mayerson makes clear, petitioner's case should not be treated differently merely because his acquisition of the property is completely financed and because his cash flow is minimal.Similar reasoning disposes of respondent's argument that, under the circumstances of this case, the likelihood that petitioner will ever be called upon to make any payments on the mortgages is so speculative as to require that the mortgage obligation be characterized as a contingent191 obligation and not included in cost under the principle enunciated in Columbus & Greenville Railway Co., 42 T.C. 834">42 T.C. 834 (1964), affd. 358 F. 2d 294 (C.A. 5, 1966); Albany Car Wheel Co., 40 T.C. 831 (1963), affd. 333 F. 2d 653 (C.A. 2, 1964); and Lloyd H. Redford, 28 T.C. 773">28 T.C. 773 (1957). We dealt with those cases in Mayerson and distinguished them on the ground that the underlying obligations, by their terms, were contingent. See 47 T.C. at 353-354. Such is not the situation herein.Finally, our finding that the unpaid principal balance of each mortgage was equivalent with the fair market value of the property at the time of transfer by each corporation obviates the need to consider whether the Crane doctrine should apply where that circumstance does not exist. See Crane v. Commissioner, 331 U.S. at 12, fn. 37; Parker v. Delaney, 186 F. 2d at 458; compare Edna Morris, 59 T.C. 21">59 T.C. 21 (1972).The combination of192 the benefits of accelerated depreciation and the Crane doctrine produces a bitter pill for respondent to swallow. We see no way of sugarcoating that pill, short of overruling Crane v. Commissioner, supra, which we are not at liberty to do. 9Because of the various concessions made by the parties and to reflect our conclusions herein,Decisions will be entered under Rule 50. SCOTT; QUEALY; GOFFEScott, J., dissenting: I respectfully disagree with the conclusion of the majority in this193 case since in my view petitioner and his associates 772 were merely owners of an equity or stock interest in the various corporations.Quealy, J., dissenting: If compelled to travel the same route taken by the majority, I would nevertheless reach a different conclusion. My disagreement with the majority, however, goes deeper than that. As Appellate Judge Rives aptly observed in Davant v. Commissioner, 366 F. 2d 874, 879 (C.A. 5, 1966), our decision should be compatible with the statute as a whole. He said:We stand now at the threshold of our travel through the detailed and complex Code provisions that must govern our determination. Before we embark upon that journey it is well to restate the general principle that rules prescribed by Congress in the Code are often wholly reasonable and appropriate when taken in isolation, but that fact alone should not and must not prevent a court from harmonizing these apparently divergent elements of specific policy so that they may continue to cohabit the same body of general law which Congress has directed shall be viewed as a single plan. As Mr. Justice Frankfurter so aptly stated [Universal Camera Corp. v. NLRB, 340 U.S. 474">340 U.S. 474, 71 S. Ct. 456">71 S.Ct. 456, 95 L. Ed. 456">95 L.Ed. 456, 489 (1951)],194 "There are no talismanic words that can avoid the process of judgment." [Fn. omitted.]We should not be diverted by "mere formalities" designed to make a transaction appear to be other than what it was in order to achieve a tax result. Commissioner v. Court Holding Co., 331">324 U.S. 331 (1945). Rather than be concerned with the separate steps in the "paper jungle," I would look to the position of the parties when the transaction has been completed. I would thus be guided by a long line of cases following Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179">315 U.S. 179 (1942), holding that a connected series of acts must be construed as a single transaction and so judged under the internal revenue laws. Applying these principles to the facts in this case, it is my opinion that when all of the so-called paper work is considered, the interests acquired by the petitioner and his associates must be deemed to constitute an equity or stock interest in a taxable association.The transactions which are involved in this proceeding followed a common pattern. The petitioner would contact a commercial or manufacturing corporation 195 which either had or was in the process of acquiring a facility. Petitioner would thereupon negotiate the terms of an agreement whereby the user of the facility would sell the property and lease it back under a long-term lease at a rental adequate to support the financing of the full amount of the purchase price. The petitioner would then cause to be organized a "financing corporation" which would take title to the property, enter into the lease with the user, and issue its notes to a lending institution, secured by a mortgage on the 773 property and assignment of the lease, in order to obtain the funds for the purchase. As security for its notes, the financing corporation would convey to a trustee all its right, title, and interest in and to the property, including all rents and income therefrom. The financing corporation further covenanted to preserve its existence as a corporation and to keep in full force and effect its right to own such property and to transact business for so long as the notes were outstanding.As an integral part of the transaction, the petitioner simultaneously had the financing corporation execute a deed purporting to transfer the property to the 196 petitioner and his associates. The petitioner and his associates then entered into an assumption agreement whereby they agreed to be bound by the terms and conditions of the deed of trust, the lease and its assignment, together with any other obligations imposed on the financing corporation except that they assumed no obligation for the payment of principal and interest on the notes or any monetary judgment resulting therefrom. 1The use of the financing corporation enabled the petitioner inter alia (1) to obtain from institutional lenders a loan for the full amount of the purchase price, (2) to avoid any personal liability on account of such financing, (3) to increase the marketability of the financing, 197 and (4) to avoid any restrictions applicable under State laws in the case of individual borrowers. In addition, the holding of title and the execution of the lease in the name of the financing corporation enabled the petitioner to create subordinated fractional interests which could be transferred without affecting the continuity of the mortgage, deed of trust, lease, and the like.In the internal revenue laws, the term "corporation" is not limited to what might be considered a corporation organized under State law. Sec. 301.7701-1, Proced. & Admin. Regs. Section 7701(a)(3) provides: "Corporation. -- The term 'corporation' includes associations, joint-stock companies, and insurance companies."In his regulations, the respondent has enumerated the major characteristics of an entity taxable as a corporation under section 7701(a)(3), as follows:Sec. 301.7701-2 Associations, including organizations labeled "corporations." -- (a) Characteristics of corporations. (1) The term "association" refers to an organization whose characteristics require it to be classified for purposes of taxation as a corporation rather than as another type of organization such as a partnership or a trust. 198 There are a number of major characteristics ordinarily found in a pure corporation which, taken together, distinguish it from other organizations. These are: (i) Associates, (ii) an objective to carry on business and divide 774 the gains therefrom, (iii) continuity of life, (iv) centralization of management, (v) liability for corporate debts limited to corporate property, and (vi) free transferability of interests. Whether a particular organization is to be classified as an association must be determined by taking into account the presence or absence of each of these corporate characteristics. The presence or absence of these characteristics will depend upon the facts in each individual case. In addition to the major characteristics set forth in this subparagraph, other factors may be found in some cases which may be significant in classifying an organization as an association, a partnership, or a trust. An organization will be treated as an association if the corporate characteristics are such that the organization more nearly resembles a corporation than a partnership or trust. See Morrissey et al. v. Commissioner (1935) 296 U.S. 344">296 U.S. 344.In Morrissey v. Commissioner, 296 U.S. 344">296 U.S. 344 (1935),199 the Supreme Court not only confirmed the authority of the respondent to issue such regulations, but approved the enumerated characteristics as appropriate criteria in determining whether a business entity or association, whether incorporated or otherwise, is to be treated as a taxable entity under section 7701(a)(3), separate and apart from its shareholders or participants. It thus becomes a question whether taking the enterprise as a whole, and looking to the characteristics enumerated, it more closely resembles a corporation than a partnership, trust, or proprietorship. If so, the interests acquired by the petitioner and his associates would be that of "stockholders" as distinguished from owners of the property. Morrissey v. Commissioner, supra;Bloomfield Ranch v. Commissioner, 167 F. 2d 586 (C.A. 9, 1948).The mechanics were such that the petitioner had provided continuity in the form of a corporation organized to take title to the property, limited liability on the part of the participants who held an undivided interest in the property, centralized management in that as the principal officer of the corporation200 petitioner conducted all negotiations and made all decisions; and, transferability of interest on the part of participants without affecting the obligations with respect to the property all of which had been undertaken in the name of the corporation. These objectives could only be achieved through an entity which would provide the continuity of ownership, centralization of control, and limitation of liability that are characteristic of the corporate form.Contrary to the opinion of the majority, fractional interests were not necessarily issued upon the basis of formal ownership of the stock in the financing corporation. Under the opinion of the majority, the corporation was immediately stripped of all its assets. The stockholders of record owned mere pieces of paper. The real equity in the financing corporation was represented by the deeds transferring fractional interests to the petitioner and his associates, not by the shares of stock. Thus, when we look to the transaction as a whole, there are 775 present all of the characteristics enumerated by the respondent in section 301.7701-2, Proced. & Admin. Regs. Such entity must be recognized under the internal revenue laws201 as a "taxpayer" distinct and apart from the petitioner and his associates. Both the income and deductions reflected by the petitioner in his individual returns were chargeable to that "taxpayer." Morrissey v. Commissioner, supra;Kurzner v. United States, 413 F. 2d 97 (C.A. 5, 1969).I must also disagree with the opinion of the majority in its application of the law to the separate components of the transactions presented here. While Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947), holds that a taxpayer is entitled to include in his basis for purposes of depreciation a bona fide indebtedness encumbering the property at the time acquired, it is axiomatic for the application of this rule that the indebtedness is discharged by the taxpayer either directly with his own funds or out of taxpayer's interest in the income from the property. Where a taxpayer neither puts up his own funds nor is chargeable with the income used to discharge the indebtedness, such taxpayer never acquires a basis in the property.The identity and continued role of the financing corporation as mortgagor and lessor of202 the property was essential. Under the terms of the loan agreements, the mortgage notes were required to be maintained as the direct obligation of the issuing corporation. Any income designated to the payment thereof would necessarily be chargeable in the first instance, at least, to such corporation.If the deeds granting the petitioner and his associates fractional interests in the properties effectively transferred ownership thereof from the financing corporations, those corporations would be stripped of all of their assets. The financing corporation would be an empty shell. While the majority thus purports to recognize that such corporations were at all times viable entities for tax purposes, the ultimate decision of the majority is incompatible with that principle. To put the matter simply, having transferred its entire interest in the leasehold to a trustee to collect the rents and pay its indebtedness, I would regard the documents purporting to transfer the property to the petitioner and his associates as carrying no present interest. The petitioner had no present interest in the property which was subject to depreciation. M. DeMatteo Construction Co. v. United States, 433 F. 2d 1263203 (C.A. 1, 1970). 2The position of the petitioner and his associates was no different than that of an owner of land who leases it to another under an agreement 776 whereby the lessee will cause a building to be erected on the land. The lessee goes out and obtains a loan secured by a mortgage on his leasehold interest, including the building. The income or rents from the property are then applied, in part, to amortize this loan. When the ground lease expires, the owner of the land will get back his land, together with the building. Some day, the landowner will get it all. The petitioner has the same expectations. 204 During the intervening period, however, the rents are not taxable to him merely because of their application to the discharge of an indebtedness which encumbers the property. Neither has sustained any depreciation. For example, see Schubert v. Commissioner, 286 F. 2d 573 (C.A. 4, 1961), affirming 33 T.C. 1048">33 T.C. 1048 (1960); Reisinger v. Commissioner, 144 F. 2d 475 (C.A. 2, 1944); Albert L. Rowan, 22 T.C. 865 (1954).Goffe, J., dissenting: As indicated, I agree with the views of Judge Quealy expressed in his dissenting opinion. I feel, however, that some additional comment is warranted as to the substance of the steps comprising the pattern utilized by petitioners.In order to make the pattern work from a business standpoint, the corporate form had to be adopted; it was indispensable. Not only did the corporation have to be organized; it had to continue in existence until the indebtedness was extinguished. After title was transferred to the individuals, the corporation continued to own the most valuable present right in the property, the right to the income205 which would extinguish the indebtedness. Because of this I feel that attention should be focused on the transfer of title from the corporation to the individuals. The transfer of title served no business purpose; it transferred the only revenue-producing asset of the corporation but was not even supported by action of the board of directors in order to give the transfer an aura of respectability. It was nothing more than an integrated step in the "paper work." Assuming that the parties intended the transfer of title to be a dividend, they did not even carry out the necessary steps to make it look like a dividend.After the transfer of title the corporation continued to be liable on the debt and the individuals were not monetarily liable.I conclude that the transfer of title was for the sole purpose of passing on to the individuals a deduction for accelerated depreciation in excess of the income from the property. Furthermore, I do not see how the reporting of income by the individuals adds any strength to petitioners' case. In my view both the income and the deductions belong to the corporation.I conclude that the transfer of title was nothing more than a device to secure for206 the petitioners the benefits of subchapter S status which they could not otherwise enjoy. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465777 (1935). I do not believe petitioners should be able to accomplish by indirect means what they could not do directly. I would, therefore, disallow the deduction for depreciation to the individuals. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended.↩2. They have simply pointed to these variations as supportive of their arguments in respect of the two indicated issues. We will accordingly treat these variations in the same fashion.↩3. In the case of the Etiwanda, Calif., and the Rockford, Ill., properties, there is nominee language in the pertinent documents, but, in our opinion, such language does not overcome the numerous other elements which have a more than counterbalancing effect. See Fort Hamilton Manor, Inc., 51 T.C. 707 (1969), affd. 445 F. 2d 879↩ (C.A. 2, 1971). In any event, as we have previously pointed out, neither party has sought separate treatment for particular transactions.4. In so concluding, we have taken into account that, in situations such as are involved herein, the taxpayer may have less freedom than the Commissioner to ignore the transactional form that he has adopted. See Commissioner v. State-Adams Corporation, 283 F.2d 395">283 F.2d 395, 398-399 (C.A. 2, 1960). Compare Higgins v. Smith, 308 U.S. 473">308 U.S. 473 (1940); Aldon Homes, Inc., 33 T.C. 582">33 T.C. 582, 596↩ (1959).5. Respondent concedes that the leases involved should be recognized as such and makes no argument that the lessees are the ones to whom the benefit of a depreciation deduction should inure. Cf. Helvering v. Lazarus & Co., 308 U.S. 252">308 U.S. 252↩ (1939).6. Respondent does not indicate his position vis-a-vis the land involved, presumably because it is in any event not subject to an allowance for depreciation.↩7. As previously pointed out, respondent does not attack the validity of the leases. See fn. 5 supra↩.8. In this connection, we note that the position of the lessor is sometimes also discussed in terms of his not having any basis. What is more, such discussion sometimes confuses the two questions, i.e., existence of a depreciable interest and the measure of basis, of which respondent's briefs herein furnished an excellent example. See also, e.g., M. DeMatteo Construction Co. v. United States, 433 F. 2d 1263 (C.A. 1, 1970). Where the transfer is by way of sale, the authorities are divided. Compare World Publishing Co. v. Commissioner, 299 F. 2d 614 (C.A. 8, 1962), reversing 35 T.C. 7">35 T.C. 7 (1960), with M. DeMatteo Construction Co. v. United States, supra↩.Since, in our view, the instant case is distinguishable, we need not now decide which line of authority to follow.9. Crane has been the subject of extensive discussion, some of it critical. See Andrews, "Personal Deductions in an Ideal Income Tax," 86 Harv. L. Rev. 309">86 Harv. L. Rev. 309, 379, fn. 122 (1972); Perry, "Limited Partnerships and Tax Shelters: The Crane Rule Goes Public," 27 Tax L. Rev. 525">27 Tax L. Rev. 525 (1972); Adams, "Exploring the Outer Boundaries of the Crane Doctrine: An Imaginary Supreme Court Opinion," 21 Tax L. Rev. 159">21 Tax L. Rev. 159↩ (1966).1. In reality the so-called assumption agreements were little more than "window dressing," since the participants were not subject to any monetary liability. It is questionable whether such agreements served any useful purpose other than to bind petitioner and his associates together in a common business enterprise.↩2. In this respect, the facts are distinguishable from World Publishing Co. v. Commissioner, 299 F.2d 614">299 F.2d 614↩ (C.A. 8, 1962). In that case, the taxpayer acquired by purchase the entire interest of the lessor. Since that interest included both the land and a building erected thereon by the lessee, it was held that the taxpayer acquired a depreciable interest in the building.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621193/	BRADLEY M. AND MONICA PIXLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPixley v. Comm'rNo. 7093-02L United States Tax Court123 T.C. 269; 2004 U.S. Tax Ct. LEXIS 41; 123 T.C. No. 15; September 15, 2004, Filed Commissioner's disallowance of tithing expenses in determining taxpayers' ability to pay liabilities sustained. 41 H is an ordained Baptist minister. In this proceeding to collect Ps' unpaid 1992 and 1993 tax liabilities by levy, Ps submitted to R's Appeals Office an offer in compromise, claiming a "tithe to church" as part of their necessary living expenses. In evaluating Ps' ability to pay their outstanding tax liabilities, the Appeals officer declined to take these alleged tithing expenses into account. Held: Under relevant provisions of the Internal Revenue Manual, tithes that a minister is required to pay as a condition of employment are allowable in determining ability to pay outstanding tax liabilities. Held, further, because Ps failed to substantiate that H was employed as a Baptist minister after R initiated the collection proceedings, the Appeals officer did not abuse his discretion by declining to take into account Ps' alleged tithing expenses. Held, further, the disallowance of Ps' alleged tithing expenses for this purpose did not violate H's First Amendment rights to free exercise of religion. Tommy E. Swate, for petitioners.Daniel42 N. Price, for respondent. Thornton, Michael B.269 OPINIONTHORNTON, Judge: Pursuant to section 6330(d), petitioners filed a petition for review of an Appeals Office determination sustaining a proposed levy. 1 The primary issue for decision is whether, in evaluating petitioners' offer in compromise, the Appeals officer should have considered petitioners' alleged tithing expenses in determining whether they had the ability to pay their outstanding tax liabilities. 2 We must also decide 270 whether respondent's disallowance of tithing expenses for this purpose violates Mr. Pixley's First Amendment right to free exercise of religion.43 BackgroundThe parties submitted this case fully stipulated pursuant to Rule 122. We incorporate herein the stipulated facts. When petitioners filed their petition, they resided in Newhall, California.Mr. Pixley is a licensed and ordained Baptist minister. From September 1995 through June 2001, he served as pastor of Grace Community Bible Church, in Tomball, Texas. 3 Thereafter, petitioners moved to California, and Mr. Pixley was employed as an echocardiographer at Children's Hospital in Los Angeles.Respondent mailed to petitioners a Letter 1058, Final Notice- Notice of Intent to Levy and Notice of Your Right to a Hearing (notice of intent to levy), dated October 5, 2000, proposing a levy with respect to petitioners' unpaid tax liabilities totaling $ 19,366.69 for 1992 and $ 39,851.27 for 1993. In response to this notice, petitioners submitted a timely Form 12153, Request for a Collection Due Process Hearing, dated44 October 18, 2000, raising an offer in compromise as an alternative to levy.Shortly after requesting their Appeals hearing, petitioners submitted to respondent a Form 656, Offer in Compromise (offer in compromise), signed October 22, 2000. Petitioners also submitted a Form 433-A, Collection Information Statement for Individuals, listing a $ 520 "tithe to church" as a monthly necessary living expense.In the Appeals hearing, the Appeals officer requested, on numerous occasions, that petitioners submit evidence that the claimed tithe was a condition of Mr. Pixley's employment. Petitioners failed to respond to these requests. The Appeals Office issued to petitioners a "Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330", dated March 14, 2002. In the notice of determination, the Appeals Office rejected petitioners' offer in compromise 271 and concluded that petitioners had the ability to fully pay their 1992 and 1993 tax liabilities. The notice of determination stated that petitioners failed to establish that tithes were a condition of Mr. Pixley's employment and that, for purposes of evaluating petitioners' offer in compromise, tithing expenses were disallowed45 in determining petitioners' ability to pay.After the notice of determination was issued, the Appeals officer reconsidered petitioners' offer in compromise and gave them additional opportunities to submit evidence that the claimed tithe was a condition of Mr. Pixley's employment. Petitioners failed to submit this information, and the Appeals officer ultimately sustained his rejection of petitioners' offer.DiscussionIn this case, we are called upon to address for the first time, in the context of an offer in compromise, the treatment of a minister's tithing expenses for purposes of determining ability to pay outstanding tax liabilities.I. Petitioners' ContentionsPetitioners claim that tithing expenses are incurred as a condition of Mr. Pixley's employment as a Baptist minister and should be taken into account in determining petitioners' ability to pay their taxes. Petitioners argue that the Appeals officer's disallowance of the tithing expenses for this purpose violates Mr. Pixley's First Amendment right to free exercise of religion.II. Standard of ReviewBecause petitioners' underlying tax liability was not properly at issue in the Appeals Office hearing, we review the46 Appeals Office determination for abuse of discretion. See Keene v. Commissioner, 121 T.C. 8">121 T.C. 8, 17-18 (2003); Lunsford v. Commissioner, 117 T.C. 183">117 T.C. 183, 185 (2001).III. Offers in CompromiseA. In GeneralSection 7122(a) authorizes the Commissioner to compromise a taxpayer's outstanding tax liabilities. Dutton v. 272 Commissioner, 122 T.C. 133">122 T.C. 133, 137, 122 T.C. 133">122 T.C. 133, 122 T.C. No. 7">122 T.C. No. 7 (2004). Section 7122(c)(1) provides that "The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer in compromise is adequate and should be accepted to resolve a dispute."The regulations state three different grounds for compromising tax liabilities: (1) Doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. Sec. 301.7122-1T(b), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999). 4 The parties' arguments focus exclusively on the ground of doubt as to collectibility. Doubt as to collectibility arises if the taxpayer's assets and income are less than the full amount of the assessed liability. Id. In determining whether there is doubt as to collectibility,47 the Commissioner must determine the taxpayer's "ability to pay" the outstanding tax liabilities that are to be compromised. Sec. 301.7122-1T(b)(3)(ii), Temporary Proced. & Admin. Regs., supra.B. Determining a Taxpayer's Ability To PayIn determining a taxpayer's ability to pay outstanding tax liabilities, the Commissioner takes into account the funds the taxpayer needs to pay basic living expenses. Id. The taxpayer's basic living expenses are determined by evaluating the taxpayer's facts and circumstances. Id.In evaluating a taxpayer's ability to pay, the Commissioner considers two types of allowable expenses: (1) necessary expenses, and (2) conditional expenses. Internal Revenue Manual (IRM), secs. 5.15.1.3 and 5.15.1.3.1(1) (Mar. 31, 2000). 5 For this purpose, a necessary expense is one that is used for a taxpayer's (and his48 family's) health and welfare or production of income. IRM sec. 5.15.1.3.2(1) (Mar. 31, 2000). The expense must be reasonable taking into account family size, geographic location, and any unique individual circumstances. IRM sec. 5.15.1.2.3(1) and (2) (Mar. 31, 2000). Expenses that do not qualify as necessary may nevertheless 273 be allowable in certain limited circumstances as so-called conditional expenses. IRM sec. 5.8.5.4.2 (Nov. 30, 2001).For purposes of determining a taxpayer's ability to pay, charitable contributions are necessary expenses if they provide for a taxpayer's (or his family's) 49 health and welfare or are a condition of the taxpayer's employment. IRM sec. 5.15.1.3.2.3(3) and exh. 5.15.1-2 (Mar. 31, 2000! ). The IRM specifically addresses tithes to religious organizations, as follows: 1. Question. If, as a condition of employment, a minister is to tithe, a business executive is required to contribute to a charity * * , will these expenses be allowed? Answer. Yes. The only thing to consider is whether the amount being contributed equals the amount actually required and does not include a voluntary portion. [IRM, Exhibit 5.15.1-3 (Mar. 31, 2000).]On brief, respondent contends that petitioners' alleged tithing expenses should be disallowed pursuant to IRM section 5.8.5.4.2(9) (Nov. 30, 2001), which states that "Charitable contributions are not allowed." This IRM subsection, however, relates expressly to conditional expenses, not necessary expenses, and does not purport to override the provisions of IRM Exhibit 5.15.1-3 (Mar. 31, 2000) as set out above.IV. Whether the Appeals Officer Abused His DiscretionIn the Appeals hearing, petitioners were given the opportunity to substantiate that Mr. 50 Pixley was employed as a Baptist minister. They failed to do so. In fact, there is no evidence that Mr. Pixley was employed as a minister when the notice of determination was issued to petitioners in March 2002 or that he has been employed as a minister at any time since. 6 Consequently, even if we were to assume arguendo, as petitioners assert, that "The Southern Baptist Convention has a doctrine that its members should tithe ten percent of 274 their income to the church", we are unpersuaded that tithing was a requirement of Mr. Pixley's employment.51 We hold that the Appeals officer did not abuse his discretion in disallowing petitioners' claimed tithing expenses.V. Petitioners' First Amendment ChallengeThe First Amendment of the United States Constitution provides that "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof".Petitioners contend that respondent's disallowance of Mr. Pixley's tithing expenses for purposes of evaluating their offer in compromise violates the Free Exercise Clause of the First Amendment. The gist of petitioners' argument, as we understand it, is that by declining to make allowance for tithing expenses in evaluating petitioners' ability to pay their taxes, respondent is effectively reducing the funds that petitioners have available to support their religion and diverting those funds to the U.S. Treasury.It may well be true that paying their taxes will leave petitioners less funds to support their religion. But this is a burden, common to all taxpayers, on their pocketbooks, rather than a recognizable burden on the free exercise of their religious beliefs. Constitutional protection of fundamental freedoms "does not confer an entitlement52 to such funds as may be necessary to realize all the advantages of that freedom." Harris v. McRae, 448 U.S. 297">448 U.S. 297, 318, 65 L. Ed. 2d 784">65 L. Ed. 2d 784, 100 S. Ct. 2671">100 S. Ct. 2671 (1980); see Regan v. Taxation With Representation of Wash., 461 U.S. 540">461 U.S. 540, 550, 76 L. Ed. 2d 129">76 L. Ed. 2d 129, 103 S. Ct. 1997">103 S. Ct. 1997 (1983).In any event, even if petitioners could demonstrate a recognizable burden on the free exercise of their religious beliefs, the burden would be justified by the Government's compelling interest in collecting taxes and administering a uniform, mandatory, and sound tax system. See, e.g., Hernandez v. Commissioner, 490 U.S. 680">490 U.S. 680, 699-700, 104 L. Ed. 2d 766">104 L. Ed. 2d 766, 109 S. Ct. 2136">109 S. Ct. 2136 (1989) (quoting United States v. Lee, 455 U.S. 252">455 U.S. 252, 260, 71 L. Ed. 2d 127">71 L. Ed. 2d 127, 102 S. Ct. 1051">102 S. Ct. 1051 (1982), stating that the Government has a "'broad public interest in maintaining a sound tax system,' free of 'myriad exceptions flowing from a wide variety of religious beliefs'"); United States v. Lee, supra at 260 ("Because the broad public interest in maintaining a sound tax system is of such a high order, religious belief in conflict with the payment of taxes affords no basis for resisting the tax."); Miller v. Commissioner, 275 114 T.C. 511">114 T.C. 511, 517 (2000); Adams v. Commissioner, 110 T.C. 137">110 T.C. 137, 139 (1998), affd. 53 170 F.3d 173">170 F.3d 173 (3d Cir. 1999). This compelling Government interest underpins the Commissioner's authority to compromise tax liabilities under section 7122 and to prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer in compromise is adequate and should be accepted to resolve a tax dispute, see sec. 7122(c)(1). 754 We hold that the Appeals officer's disallowance of tithing expenses in evaluating petitioners' ability to pay their taxes did not violate Mr. Pixley's First Amendment rights to free exercise of religion.VI. ConclusionWe sustain respondent's determination in the notice of determination that, for purposes of petitioners' offer in compromise, Mr. Pixley's tithing expenses are not allowable in determining petitioners' ability to pay their outstanding tax liabilities. Petitioners raise no additional arguments against respondent's proposed collection action. Consequently, we sustain respondent's determination to proceed with collection of petitioners' tax liabilities by levy.Decision will be entered for respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.↩2. A "tithe" is "a tenth part of something paid as a voluntary contribution or as a tax especially for the support of a religious establishment". Merriam Webster's Collegiate Dictionary 1238 (10th ed. 1997).↩3. Until early 2001, Mr. Pixley was also employed by Cardiology Associates of Houston, Texas.↩4. Final regulations under sec. 7122 were promulgated effective for offers in compromise pending on or submitted on or after July 18, 2002. Sec. 301.7122-1(k)↩, Proced. & Admin. Regs.5. On May 5, 2004, we ordered the parties to file additional supplemental stipulations of fact, including stipulations as to the portions of the Internal Revenue Manual (IRM), as in effect for the relevant time periods, that the parties discussed on brief. The parties made appropriate stipulations and included as exhibits copies of the relevant portions of the IRM. All references to the IRM are to these stipulated exhibits.↩6. On brief, petitioners allege that after Mr. Pixley left Grace Community Church in June 2001, petitioners moved to California so that Mr. Pixley could prepare to attend a seminary, that he continued his ministry in an unpaid position as a Baptist minister, and that he continued to tithe to keep this position. There is no evidence in the record, however, to substantiate these allegations, and there is no indication that petitioners presented any such evidence to the Appeals officer. Even if we were to assume arguendo that these allegations are true, they do not establish that tithes were paid as a condition of employment.↩7. The Commissioner states that the objectives of the offer in compromise program are to: (1) Effect collection of what can reasonably be collected at the earliest possible time and at the least cost to the Government; (2) achieve a resolution that is in the best interest of both the individual taxpayer and the Government; (3) provide the taxpayer a fresh start toward future voluntary compliance with all filing and payment requirements; and (4) secure collection of revenue that may not be collected through any other means. IRM sec. 5.8.1.1.4(1) (Feb. 4, 2000). These objectives are in furtherance of the Government's greater interest in collecting taxes and maintaining a uniform, mandatory, and sound tax system.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621194/	HAROLD A. and ANITA B. TURNEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTurney v. CommissionerDocket No. 38952-85.United States Tax CourtT.C. Memo 1987-74; 1987 Tax Ct. Memo LEXIS 70; 53 T.C.M. (CCH) 80; T.C.M. (RIA) 87074; February 9, 1987. Harold A. Turney, pro so. Debra K. Moe, for the respondent. PARRMEMORANDUM FINDINGS OF FACT AND OPINION PARR, Judge: Respondent determined deficiencies in petitioners' 1980 and 1981 Federal income tax in the amounts of $4,175.00 and $3,444.00, respectively. The issues for decision are as follows: (1) Was petitioner 1 required to include in income disability retirement payments received during 1980 and 1981? (2) If so, do respondent's prior assurances to petitioner that this income was not taxable, and petitioner's reliance thereon, estop respondent from now determining the deficiencies in tax? (3) 72 If respondent is not so estopped, is petitioner entitled to elect the section 72(d)2 annuity cost recovery method with respect to these amounts? FINDINGS OF FACT Most of the facts have been stipulated and are so found. The stipulation of facts and related exhibits are incorporated herein by this reference. Petitioners, husband and wife, resided in San Jose, Calif., at the time of filing the petition in this case. They timely filed Federal income tax returns for 1980 and 1981 with the Internal Revenue Service Center in Fresno, Calif.Petitioner was a civilian employee of the United States Department of the Army until September 24, 1976, when he retired on disability. Petitioner was 57 years old at the date of his retirement. During the years in issue petitioner had not yet reached age 65. Mandatory retirement age for petitioner was age 70. During his employment with the Army, petitioner contributed $20,084 to the Civil Service Retirement System, all attributable to retirement benefits. 73 Following his retirement he received annuity payments as follows: YearAmount1976$1,751197710,989197811,664197912,735198014,400198115,945When petitioner retired, he was advised to go to his local Internal Revenue Service office to discuss any questions he might have regarding his disability retirement annuity. He complied with the advice and met with a representative of respondent who reviewed petitioner's discharge papers and medical documents. The Internal Revenue Service representative informed petitioner that he would not be taxed on the disability annuity until he reached age 65, the normal retirement age. At 65, the representative advised, he would begin drawing his regular pension and would at that time have taxable income. In early 1981, petitioner received a letter from respondent stating that there appeared to be a discrepancy in his 1978 taxes and asking him to contact respondent's San Jose office. Petitioner did so, and met with a different individual. This second representative concurred in the opinion given by the first representative in 1976. Petitioner was again informed that his retirement income was not taxable until74 age 65. Respondent's representative also advised petitioner that he might be selected for examination every year due to respondent's computer program, but that petitioner should give the same explanation and would have no problem. Following this examination, in a letter dated March 17, 1981, respondent informed petitioners that the examination of their 1978 tax return showed "no change" and that the return was accepted as filed. Pursuant to the advice received from respondent in 1976, and again in 1981, petitioners did not report the disability retirement income on their income tax returns. Other income received by petitioners was reported. 3 Petitioners further relied on respondent's advice in structuring their financial affairs. Petitioners pay all bills currently and do not enter into debt; they therefore budget their income carefully. In light of respondent's opinion as to the non-taxability of the disability payments, petitioners considered that income to be available for current expenditures. Petitioners did not set aside money for the possible payment of back taxes and interest. 75 Petitioner was again contacted by the Internal Revenue Service in 1983, and this time met with a different representative of the San Jose office. This time he was told that he had been wrongly advised by the two previous representatives, and that the disability annuity was taxable income. Petitioner was told that he owed taxes and interest on the disability payments from 1976 through 1983, 4 but, because he had followed the advice of respondent's representatives, there would be no additions to tax. After he was informed that he had to pay tax on his disability income, approximately in May 1984, petitioner requested that he be able to use the three-year annuity cost recovery method for retirees (which he referred to as the "Golden Rule"). Petitioner made this request first to the auditor and later to the Appeals Officer and District76 Counsel attorney. He was told this method was not available to him for the years 1980 and 1981, because the annuity had not been reported in 1976 through 1979. Respondent's position was that petitioner's contributions were already recovered in 1976 through 1979, and that he was therefore "deemed" to have elected the three-year cost recovery method for those years. On August 12, 1985, respondent issued a notice of deficiency to petitioners with respect to the years 1980 and 1981. The notice of deficiency stated that the disability income received by petitioner in 1980 and 1981, in the amounts of $14,400 and $15,945, respectively, had not been reported. Further, petitioners were not eligible for the disability income exclusion due to income limitations. OPINION The first issue to decide is whether petitioner was required to include in gross income his disability retirement pay received during 1980 and 1981. On two occasions, in 1976 and in 1981, respondent considered this question and concluded that this income was not taxable to petitioner until he reached age 65. Petitioner did not turn 65 unil 1984. However, respondent reconsidered his earlier opinion and now takes the77 position that the disability payments are taxable income. Petitioner received Civil Service disability retirement payments in 1980 and 1981, at a time when he had not yet attained age 65 or the mandatory retirement age. His disability payments accordingly qualify as wage continuation payments (sick pay) under section 105(d). Brownholtz v. Commissioner,71 T.C. 332">71 T.C. 332, 335 (1978); DePaolis v. Commissioner,69 T.C. 283">69 T.C. 283, 286-287 (1977). While section 72(d)5 normally applies to retirement annuities, the general rule 6 is that it does not apply to an amount received as an accident or health benefit while the taxpayer has not yet attained age 65. 7 The tax treatment of such amount is determined under sections 104 and 105. Sec. 105(d)(6); sec. 1.72-15(b), Income Tax Regs. The amounts received by petitioner are excludible only to the extent they are attributable to his own contributions, under section 104(d)(3). Those benefits received which78 are attributable to employer contributions are includible in gross income under section 105(a), except to the extent they can be excluded under section 105(d). 79 In this case petitioner's contributions to the Civil Service Retirement System were towards retirement and not disability benefits. The disability payments he received during the years at issue were attributable to his employer's contributions. He therefore must include his disability income in gross income, pursuant to section 105(a). Section 105(d), however, provides for a limited exclusion from gross income in the case of amounts received as wages or in lieu of wages for a period during which an employee, under age 65, could not work because of permanent and total disability. This exception is limited to $100 per week; further, the excludible amount is reduced dollar-for-dollar by the amount by which the taxpayer's adjusted gross income exceeds $15,000. Petitioners' adjusted gross income in 1980, as reported on their Form 1040A, was $21,531.00. Their correct adjusted gross income, including the $14,400 of disability income, should have been $35,931. Since the maximum allowable exclusion is $5,200 ($100 per week), but petitioners' adjusted gross income exceeds $15,000 by $20,931, 80 petitioners are not entitled to any disability income exclusion in 1980. Likewise, in 1981 petitioners' adjusted gross income was too high to afford them the benefits of the section 105(d) exclusion. Their 1981 return reported adjusted gross income of $8,806.72. Their correct adjusted gross income, including the $15,945 of unreported disability income, was $24,751.72. This figure exceeds $15,000 by $9,751.72, which is again more than $5,200 and thus their disability income exclusion for 1981 is zero. Petitioner was clearly misinformed by the Internal Revenue Service representatives with whom he met in 1976 and 1981; as the above indicates, all of the disability income received by petitioner prior to attaining age 65 was taxable income except to the extent it could be excluded under section 105(d). 8 As noted above, petitioners' earnings during the years at issue made the section 105(d) exclusion unavailable for their use. The advice given petitioner by respondent regarding the nontaxability of his disability81 income was incorrect when given. Petitioner followed this advice and did not include the income in his gross income year after year. We must now decide if respondent should be estopped from determining deficiencies in income tax based on petitioners' failure to report the disability income in 1980 and 1981. While the doctrine of estoppel is applied to the Government and its officials with great caution, in proper circumstances it does apply. Simmons v. United States,308 F.2d 938">308 F.2d 938 (5th Cir. 1962); Vestal v. Commissioner,152 F.2d 132">152 F.2d 132 (D.C. Cir. 1945), revg. 4 T.C. 558">4 T.C. 558 (1945). The traditional elements of equitable estoppel are not present in this case. These elements are: (1) Conduct constituting a representation of material fact; (2) Actual or imputed knowledge of such fact by the representor; (3) Ignorance of the fact by the representee; (4) Actual or imputed expectation by the representor that the representee will act in reliance upon82 the representation; (5) Actual reliance thereon; and (6) Detriment on the part of the representee. Consolidated Freightways, Inc. v. Commissioner,74 T.C. 768">74 T.C. 768, 791 n. 8 (1980), affd. and revd. on other issues 708 F.2d 1385">708 F.2d 1385 (9th Cir. 1983); Graff v. Commissioner,74 T.C. 743">74 T.C. 743, 761 (1980), affd. per curiam 673 F.2d 784">673 F.2d 784 (5th Cir. 1982). 9In this case, respondent's error was a mistake of law by respondent's agents, not a misrepresentation of fact. It is well settled that the Commissioner may retroactively correct a mistake of law, Automobile Club of Michigan v. Commissioner,353 U.S. 180">353 U.S. 180 (1957), even where the taxpayer has relied to his detriment on the Commissioner's mistake. Dixon v. United States,381 U.S. 68">381 U.S. 68 (1965). Similarly, the Commissioner may challenge in a succeeding year the treatment of83 an item that he allowed in an earlier year. Hawkins v. Commissioner,713 F.2d 347">713 F.2d 347 (8th Cir. 1983), affg. a Memorandum Opinion of this Court; Coors v. Commissioner,60 T.C. 368">60 T.C. 368 (1973), affd. 519 F.2d 1280">519 F.2d 1280 (10th Cir. 1975); Rose v. Commissioner,55 T.C. 28">55 T.C. 28 (1970). Moreover, this case involves erroneous legal advice given a taxpayer by employees of the Commissioner. Under those circumstances, the Commissioner is generally not bound by the actions of his employees. See Fortugno v. Commissioner,41 T.C. 316">41 T.C. 316 (1963), affd. 353 F.2d 429">353 F.2d 429 (3d Cir. 1965); Schuster v. Commissioner,312 F.2d 311">312 F.2d 311 (9th Cir. 1962), affg. in part and revg. in part 32 T.C. 998">32 T.C. 998 and 32 T.C. 1017">32 T.C. 1017 (1959); Vestal v. Commissioner,supra.However, there are exceptions to the general rule that the Commissioner may correct a mistake of law. Under a quasi-estoppel or abuse84 of discretion theory, the Commissioner has been estopped from changing a position with respect to a taxpayer where a great injustice or unconscionable result would follow. Such cases have generally involved the following elements: (1) A misrepresentation by a representative of the United States, acting within the scope of his duties; (2) The absence of contrary knowledge by the taxpayer, in circumstances where the taxpayer may reasonably act in reliance upon the representation; (3) actual reliance; (4) detriment; and (5) a factual context in which the denial of equitable relief would be unconscionable. New York Athletic Supply Co., Inc. v. United States,450 F. Supp 469, 471 (S.D.N.Y. 1978). 10We note that the Ninth Circuit, to which this case is appealable, has considered the notions of justice and fair play in determining whether the Government should be estopped from correcting a mistake of law. United States v. Wharton,514 F.2d 406">514 F.2d 406 (9th Cir. 1975); Fox v. Morton,505 F.2d 254">505 F.2d 254 (9th Cir. 1974); United States v. Lazy FC Ranch,481 F.2d 985">481 F.2d 985 (9th Cir. 1973);85 Schuster v. Commissioner,supra.In order for respondent to be estopped from correcting a mistake of law, the equitable interest of the party asserting estoppel must be "compelling", and the loss which he would sustain must be "unwarrantable" and "unconscionable." Schuster v. Commissioner,supra at 317-318; Estate of Emerson v. Commissioner,67 T.C. 612">67 T.C. 612, 618 (1977). In this case, we sympathize with petitioner, but we do not believe this case is one in which it is proper to estop respondent from correcting his mistake. Petitioner has received the benefits of respondent's mistake of law. From 1976 through 1983 he treated his disability retirement income as nontaxable. The statute of limitations has run on the years 1976 through 1979, and petitioner is now being held accountable for taxes due on this income in 1980 and 1981. 11 As the income should properly have been included in gross income when received, this does not strike us as an unconscionable, unjust result which cries out for relief. 86 In addition, while we accept Mr. Turney's testimony that he always prefers to avoid debt, and did not structure his affairs so as to allow for the payment of taxes on this income, we do not find that this amounts to such "detrimental reliance" which would compel us to grant relief. Petitioner has not proved that he has suffered any real and substantial loss as a result of respondent's erroneous advice. Cf. Graff v. Commissioner,supra.The opinion regarding the taxability of the income was sought after petitioner retired, and respondent's advice can therefore not be considered to be petitioner's motivation for retiring early. 12 Indeed, petitioner benefited financially from respondent's legal error, as he did not pay tax on this income from 1976 through 1979. 1387 Accordingly, we hold that respondent is not estopped from determining a deficiency in petitioner's income tax based on the unreported disability retirement income. We next turn to the question whether petitioner may elect the three year cost recovery method for the disability retirement annuity he received during 1980 and 1981. See sec. 72(d). As noted previously, where disability payments are received in lieu of wages, sections 104 and 105 apply rather than section 72. However, a taxpayer may waive his right to the section 105(d) disability income exclusion, and instead elect the section 72(d) annuity cost recovery method. Sec. 105(d)(6). This election, if made, is an irrevocable waiver of the right to claim the disability income exclusion in the taxable year for which the election is made and in each taxable year thereafter. The election is made by means of a statement attached to the taxpayer's income tax return, or amended return, for the taxable year in which the taxpayer wishes to begin annuity cost recovery. Sec. 7.105-1, Q & A-19, Temporary Income Tax Regs., 41 Fed. Reg. 5663188 (Dec. 29, 1976). In this case, Mr. Turney made no election to report his disability annuity using the cost recovery method on either his 1980 or 1981 return, or on any earlier returns, nor has he filed any amended returns for those years containing any such election. Indeed, this fact was considered by this Court in making our determination that the disability payments should have been included in income, and that respondent's initial advice to the contrary was incorrect. The record indicates, however, that once petitioner was informed by respondent that this income was taxable, he requested that he be permitted to use the three year cost recovery method, and was repeatedly told he could not. Rather than allow petitioner to amend his 1980 return (or advise him of the proper method to do so), respondent persisted in the claim that because petitioner did not properly report this income since 1976, he should be "deemed" to have made the election in 1977, 14 and thus should be deemed to have recovered his cost in 1977 through 1979. Respondent maintained this position at trial as well. 89 We do not agree with respondent's argument. The election to waive the section 105(d) disability income exclusion, and instead report the annuity pursuant to section 72(d), is clearly an affirmative election by a taxpayer. Mr. Turney never made any election with respect to 1977, 1978 or 1979, and we will not impute any such election to him. These years are closed. With respect to the years 1980 and 1981, respondent argues that since no formal election of section 72(d) treatment was made on petitioner's return, the three-year annuity cost recovery method is unavailable to him. Again, we disagree with respondent's conclusion. Section 105(d)(6) does not provide that the election must be on a return but provides that the taxpayer must make an "irrevocable election." 15 The procedure for making the election is set forth in respondent's regulations, which require a statement attached to a tax return or amended return. In this case, petitioner has not filed such a statement with his return. However, this Court has repeatedly held that literal compliance with the procedural directions90 in Treasury regulations on making elections is not required; substantial compliance may suffice where the essential statutory purposes have been fulfilled. See American Air Filter Co. v. Commissioner,81 T.C. 709">81 T.C. 709 (1983); Tipps v. Commissioner,74 T.C. 458">74 T.C. 458 (1980); Hewlett-Packard Co. v. Commissioner,67 T.C. 736">67 T.C. 736 (1977). What is required is evidence of an affirmative intent on the taxpayer's part to make the required election and be bound thereby. Atlantic Veneer Corporation v. Commissioner,85 T.C. 1075">85 T.C. 1075 (1985). The facts of this case lead us to conclude that petitioner has indicated an affirmative intent to make the election under section 105(d)(6) for years beginning in 1980, and to be bound by such election. Such intent was repeatedly communicated to respondent's auditor, Appeals Officer, and District Counsel attorney, beginning in May, 1984 16 and continuing up until the time of trial; the evidence91 shows that despite respondent's insistence that petitioner had already "elected" the three-year cost recovery rule for earlier years, petitioner continued to assert his position that he could elect it as of 1980. Petitioner adhered to this position in his petition to this Court, his trial memorandum, and his trial testimony. We find that petitioner clearly intended to make this election, and committed himself to be bound by its consequences. Compare Valdes v. Commissioner,60 T.C. 910">60 T.C. 910 (1973). He has therefore complied with the essential purpose of the statute, that of an irrevocable election of the benefits of section 72(d), and a waiver of the benefits of section 105(d). The three-year annuity cost recovery rule is therefore applicable to the disability annuity income received by petitioner during the years at issue. Petitioner's contributions to his retirement plan totalled $20,084. He received $14,400 during 1980 and $15,945 during 1981. After recovery of employee contributions, $10,261 of*92 the amount received in 1981 is a taxable annuity. Accordingly, Decision will be entered under Rule 155.Footnotes1. References to "petitioner" will be to Harold A. Turney. ↩2. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue.↩3. Petitioners' returns for 1976 through 1979 are not part of the record. Petitioners' 1980 and 1981 returns show adjusted gross income of $21,531.00 and $8,806.72, respectively.↩4. The Internal Revenue Service representative with whom petitioner spoke conceded from the outset that the years 1976 through 1979 were barred by the statute of limitations. Petitioner had not yet received a notice of deficiency for 1982 and 1983 at the time of trial, although adjustments to income had been proposed based on the same issue.↩5. In pertinent part, sec. 72(d) reads as follows: (1) Employee's contributions recoverable in 3 years - Where - (A) part of the consideration for an annuity, endowment, or life insurance contract is contributed by the employer, and (B) during the 3-year period beginning on the the date on which an amount is first received under the contract as an annuity, the aggregate amount receivable by the employee under the terms of the contract is equal to or greater than the consideration for the contract contributed by the employee, then all amounts received as an annuity under the contract shall be excluded from gross income until there has been so excluded an amount equal to the consideration for the contract contributed by the employee. Thereafter all amounts so received under the contract shall be included in gross income. ↩6. The general rule applies unless the taxpayer makes an election under sec. 105(d)(6). We are assuming for now that no sec. 105(d)(6)↩ election has been made. 7. In this situation, the "annuity starting date" under sec. 72(d) begins in the taxable year in which the taxpayer attains age 65 or his mandatory retirement age, if earlier. Sec. 105(d)(6); sec. 1.105-4(a)(3), Income Tax Regs.; sec. 7.105-1, Q & A-4, Temporary Income Tax Regs., 41 Fed. Reg. 56630↩ (December 29, 1976).8. We note that in 1976, when petitioner first sought advice from respondent, the sick pay exclusion then in effect under sec. 105(d)↩ provided different limitations.9. See also T. Lynn & M. Gerson, "Quasi-Estoppel & Abuse of Discretion as Applied Against the United States in Federal Tax Controversies," 19 Tax L. Rev. 487">19 Tax L. Rev. 487, 488↩ (1964).10. See also T. Lynn and M. Gerson, supra↩ at 488-489.11. As noted above, the 1982 and 1983 tax years are still under review by the Internal Revenue Service.↩12. Compare United States v. Lazy FC Ranch,481 F.2d 985">481 F.2d 985↩ (9th Cir. 1973). 13. We do not mean to imply that petitioner is better off for having received and followed respondent's erroneous advice. On the contrary, we feel strongly that this taxpayer's case has been mishandled by respondent, and we understand that he feels injured and victimized. Despite lifelong efforts to avoid debt, and despite his best intentions, petitioner now faces a potential debt of several thousand dollars at a time in life when his earning capacity is at its lowest. In a legal sense, however, we cannot find the sort of "detrimental reliance" or "unjust result" which would be necessary to estop respondent from collecting the taxes due.↩14. Sec. 105(d)(7) (redesignated sec. 105(d)(6)↩) was added by the Tax Reform Act of 1976 to provide for the election of the three-year annuity cost recovery provisions by early disability retirees. The new provision was generally effective for years beginning after Dec. 31, 1976, except for certain exceptions not relevant to petitioner herein. Sec. 505, Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1566, as amended by sec. 301, Tax Reduction and Simplification Act of 1977, Pub. L. 95-30, 91 Stat. 126. We assume that respondent refers to 1977 as the first year in which he would "deem" Mr. Turney to have made an election for this reason.15. Compare sec. 168(f)(4), in which the procedure for making an election is set forth in the statute. See DeMarco v. Commissioner,87 T.C. 518">87 T.C. 518↩ (1986), on appeal (1st Cir., Jan. 15, 1987).16. We note that this was the first opportunity petitioner had to make this election, as this was the first time he was informed that the income was reportable.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621195/	DAVID HASKELL and SUZANNE HASKELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHaskell v. CommissionerDocket No. 6446-84.United States Tax CourtT.C. Memo 1986-341; 1986 Tax Ct. Memo LEXIS 265; 52 T.C.M. (CCH) 15; T.C.M. (RIA) 86341; August 4, 1986. 265 H purchased a 15-minute segment of a 30-minute episode from a 130-episode television series. The offering material stressed tax benefits, contained no income projections, and had a grossly inflated estimate of the value of the segment.At the time of purchase, there had been no market testing of the series, and there was no assurance that such segment would be shown as part of the episode or the series. H paid for such segment with $13,000 in cash and a $52,000 note, recourse in form. Distribution of the segment has produced no revenue. Held: (1) H and W executed valid extensions for the time to assess tax, making the notice of deficiency for 1977 timely; (2) H not entitled to deductions resulting from the purchase and distribution of the segment because such activities were not entered into for profit; (3) for the same reason, H not entitled to investment tax credit for purchase of segment; (4) H and W liable for the addition to tax under sec. 6651(a), I.R.C. 1954, for failure to timely file their return for 1979; and (5) the United States is not entitled to an award of damages under sec. 6673, I.R.C. 1954. William Randolph Klein, for the petitioners. James W. Clark and Lynn C. 266 Washington, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined the following deficiencies in, and addition to, the petitioners' Federal income taxes: Addition to TaxSec. 6651(a)YearDeficiency1 I.R.C. 1954 1977$23,450.3119791,397.00$350.00The issues for decision are: (1) Whether, under the provisions of section 6501, the assessment and collection of taxes is barred by the statute of limitations; (2) whether the petitioners are entitled to deductions for losses resulting from the purchase and distribution of a 15-minute segment of a television series; (3) whether the petitioners are entitled to an investment tax credit for purchasing such segment; (4) whether the petitioners are liable for the addition to tax under section 6651(a) for failure to timely file their Federal income tax return for 1979; and (5) whether the United States is entitled to an award of damages under section 6673. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioners, David and Suzanne Haskell, husband 267 and wife, maintained their legal residence in Elm Grove, Wis., on the date the petition in this case was filed. They filed their joint Federal income tax returns for 1977 and 1979 with the Internal Revenue Service. The time to assess the tax due on the return for 1977 was extended to December 31, 1983, by means of three consents to extend the time to assess tax which were executed by the parties. David Haskell will sometimes be referred to as the petitioner. The petitioner has been a medical doctor specializing in orthopedic surgery since 1972. His specific area of expertise is sports medicine. At the time of trial, he held, among other positions, the post of medical director of the Milwaukee Bucks of the National Basketball Association. He had no special training, education, or experience in the field of television program distribution. However, he was involved in a wife variety of business interests including real estate rental properties, pharmaceutical manufacturing, and oil drilling. The petitioner received and reviewed offering material from Field Planning Corp. (FPC) concerning the television series "Peter Lupus' Body Shop." Such material is approximately 100 pages long, 268 containing a description of the 130-episode series and the tax consequences of owning a 15-minute videotape segment 2269 of one such 30-minute episode. The credits of the announcer are said to include numerous small roles in television and motion pictures, the most notable being the fight announcer in the movie "Rocky." The producer is listed as being a three time Emmy Award winner. The material contains no information concerning the past accomplishments of the host, Peter Lupus; nor does the record in this case contain any such evidence. During each eposode, the host performs some exercises and then interviews two guests. Typically, the material states, one guest is an entertainer, such as Jim Backus, and the other is a health or beauty professional. Additionally, viewer mail concerning health and beauty concerns is answered, and an audience member is completely made over by a beauty specialist. One half of the offering material deals with the tax consequences of segment ownership. Included are sections entitled "tax shelter summary" and "tax shelter recap." In the accounting and legal opinion sections, there are extensive discussions of the profit objective requirement for tax benefits and the at-risk rules. On one page is a photocopy of a New York Times article which reports on an IRS crackdown on tax shelter partnerships in, among other areas, motion pictures and master recordings. Hand printed in the margin of such page is the message "our program is for individual investors, not partnerships." The offering material submitted by FPC and reviewed by the petitioner also included a photocopy of the newsletter Brennan Reports and an article copied from Barron's, entitled "Outwitting Uncle Sam." In the tax shelters described in the articles, the participant purchases an entire interest in one episode of a television series; but on the Brennan Reports copy, a handwritten notation identified as an "editors (sic) correction" states that a 15-minute segment is purchased. Such segment is purchased with a 20-percent 270 downpayment and a note, described as fully recourse, equal to 80 percent of the purchase price. However, such note, which has a 10-year term and carries interest at 8 percent per annum, is repayable out of 25 percent of the segment's gross receipts. Brennan Reports says: It is expected that two individual investors involved in the program will each purchase notes of each other from the film seller. Presumably at the maturity of the notes there will be identical balances outstanding and, therefore, neither investor will desire to foreclose upon the other. Instead, they would both be willing to increase the term of the notes for a sufficient number of years to permit payoff through revenues generated by the films. What has happened, in effect, is that fully recourse debt instruments have been converted to non-recourse debt without having violated the at risk provisions of the Tax Reform Act. * * * Additionally, the materials stated that a first-year write-off equal to 400 percent of the downpayment was expected. The Barron's article observes: Even if the deal is questionable, the odds are with the participant. His chance of escaping an audit is excellent. And if the IRS does audit 271 his return, unless the program is an outright sham, the agency at most will disallow a part of his deduction. The matter can then be taken to court for long drawn out litigation. Meanwhile, the investor has received what amounts to an interest-free loan from Uncle Sam. When he pays the deferred taxes, owing to inflation, it will be with cheaper dollars. * * On September 15, 1977, Four Star Entertainment Corp. (Four Star) and Film Syndicators, Inc. (FSI), entered into an agreement wherein FSI appointed Four Star as its exclusive distributor of the Peter Lupus' Body Shop series throughout the world for 7 years from that date. FSI was to receive 50 percent of the worldwide gross receipts. Conrad Frank was the president of FPC and controlled Four Star and FSI. The summary personal history included in the offering materials states that he was in the life insurance business for 19 years, was a Certified Life Underwriter, and had previously "prepared" 15 films for "potential economic profits as well as tax shelter benefits." The offering material contained a letter to Mr. Frank from Gerald Feifer of Media Marketing Corp. The letter stated that after screening four 30-minute episodes, 272 Mr. Feifer estimated the value of each segment at $65,000. Prior to purchasing the segment, the petitioner read a reprinted article from Taxes-The Tax Magazine entitled "Motion Picture Tax Shelters-A New Approach." Such article contained a detailed explanation of the tax aspects of a scheme substantially the same as the one at issue in this case. Topics discussed in such article included: basis for depreciation, method of depreciation, depreciation recapture, at-risk rules, and investment tax credit. On November 13, 1977, the petitioner and Silver Dollar Video Films, Inc. (Silver Dollar), executed a purchase agreement. Silver Dollar was controlled by Mr. Frank, and he executed the agreement on behalf of Silver Dollar. Under such agreement, Silver Dollar sold all right, title, and interest in a segment of an episode of the series in return for $13,000 in cash and a note from the petitioner for $52,000 at 8-percent interest per annum, due November 13, 1987.He further agreed to enter into a distribution agreement within 30 days. Such distribution agreement was to contain a provision whereby 25 percent of the gross receipts from the segment would be paid each year to Silver Dollar. 273 Such payments were to reduce the unpaid balance of the purchase price. On the same day, the petitioner entered into a 10-year distribution agreement with FSI. FSI was given the exclusive right to distribute, exhibit, rent, market, and otherwise exploit the segment in return for which the petitioner was to receive 50 percent of the gross receipts realized from such activities. However, one-half of the petitioner's share was to be remitted directly by FSI to Silver Dollar until the $52,000 note was satisfied. The rights of FSI could only be assigned with the prior written consent of the petitioner. The segment purchased by the petitioner was from episode 30 and was entitled "Mary Conroy's Defense Against Rape." The petitioner did not view the segment prior to purchase. At the time of his purchase, none of the episodes had been shown on television, and slightly more than half had finished videotaping. The offering materials submitted to and reviewed by the petitioner before he purchased his segment contained very little information concerning the amount of income that could be earned by the segment or how it was to be used.However, testimony at the trial established that the best 274 chance for producing income was by syndicating the segment, as part of the series, on a strip basis. Usually, syndication takes the form of sales on a station-by-station basis. Sales are limited to one station per city because exclusivity of the series within the city must be guaranteed. For this series, stripping would entail showing one episode each day, Monday thru Friday. Mr. Feifer's estimate of value of each segment was questioned by Gary K. Sherman, the regional director of a financial consulting and marketing organization, who wrote to Mr. Frank on behalf of two potential investors. Mr. Sherman was concerned that Mr. Feifer did not answer his telephone, that no one at Media Marketing Corp. had ever heard of him, and that certain advertising professionals felt that such a series would only cost between $5,000 to $12,000 per segment to make. He requested assurance that the price of a segment was reasonable in relation to its fair market value. There is no evidence that such assurance was given. In the fall of 1977, station KECC of El Centro, Cal., agreed to air all 130 episodes at no charge to KECC, except shipping costs. Such showings were to take place during November 275 and December of 1977. The series had gross receipts from distribution of $2,600 in 1978 from station KGUN of Tucson, Ariz. In 1979, Community Home Television, Inc. (Community), of Quezon City, Philippines, contracted to lease 52 episodes for $15,600. Episode number 30 was not included in such episodes. The station KECC agreement was entered into by FSI, and the other two agreements were entered into by Four Star. Mr. Frank, in his capacity as the president of National Film Products, Inc., kept segment owners aware of the income from these agreements. 3The petitioner paid Silver Dollar $2,000 for an assignment of the balance due at the due date in 1987 of the $52,000 liability incurred by Gary Sorenson from the purchase of a segment of the series. Such liability arose from Mr. Sorenson's execution of a purchase agreement similar to the one executed by the petitioner. FSI terminated its distribution agreement with Four Star on April 16, 1979. FSI agreed to accept $6,000 from the Community contract in complete satisfaction of all amounts owed to it under the distribution 276 agreement. As a result, segment owners forfeited any right to any additional revenue from the station KGUN agreement. The petitioners reported gross income of $290,856 for 1977 and $430,465 for 1979 and partnership losses of $65,682 for 1977 and $122,319 for 1979. They also reported a $145,884 loss from rental property and a $34,179 farm loss for 1979. They claimed Schedule C losses associated with the segment of the series of $39,000 for 1977 and $3,250 for 1979. In 1977, they reported no income from the segment and claimed depreciation of $39,000, representing 60 percent of its purported value, under the "sliding scale" method of depreciation. Additionally, the petitioners took a $6,500 investment tax credit for the purchase of the segment. For 1979, they reported no income from the segment and $3,250 as a depreciation deduction. In his notice of deficiency dated December 14, 1983, the Commissioner disallowed all credits and deductions arising from the purchase and ownership of the segment of the series and determined that the petitioners were liable for an addition to tax for failure to timely file their return for 1979. Under Rule 72 of the Tax Court Rules of Practice and Procedure, 277 4 the Commissioner served the petitioners with a timely request for the production of documents relating to the deductions and credits claimed and disallowed on their returns. Later, the Commissioner moved for an order compelling the petitioners to comply with such request and for sanctions in the event that they failed to comply. The Court ordered them to furnish the requested documents. After a hearing on the motion for sanctions, the Court found that the petitioners had not complied with the Court's order to furnish the documents and that there was no just cause for their failure to do so. Accordingly, under Rule 104, the Court ordered that any requested document that had not been made available to the Commissioner could not be offered by the petitioners at trial. At the close of the trial, the Commissioner filed a motion for damages under section 6673 for instituting proceedings before the Tax Court primarily for the purpose of delay or taking a frivolous position. OPINION The first issue for decision is whether, under the provisions of section 6501, the assessment and collection of tax of 1977 is 278 barred by the statute of limitations. In their petition, the petitioners challenged the timeliness of notice for both 1977 and 1979. In their reply to affirmative answers, they conceded timely notice for 1979 and stated that the extensions executed by them for 1977 were induced by the Commissioner's fraud. Section 6501(a) provides the general rule that the Commissioner has 3 years after a taxpayer's return is filed within which to commence statutory proceedings for assessment and collection of tax by the mailing of a notice of deficiency. Section 6501(c)(4) allows the normal 3-year statute of limitations to be extended by agreement between the parties.When the Commissioner relies upon such consent to extend the time to assess tax, he bears the burden of proving the existence of such consent. Bonwit Teller & Co. v. Commissioner,10 B.T.A. 1300">10 B.T.A. 1300 (1928); Farmers Feed Co. v. Commissioner,10 B.T.A. 1069">10 B.T.A. 1069 (1928). However, extensions valid on their face and introduced into evidence satisfy such burden. The petitioner must then show the extensions were invalid. Concrete Engineering Co. v. Commissioner,19 B.T.A. 212">19 B.T.A. 212, 221 (1930), affd. 58 F.2d 566">58 F.2d 566 (8th Cir. 1932); Rule 142(a). Here the 279 parties stipulated that consents were executed by the parties extending the time for assessment until December 31, 1983, but the petitioners did not address the validity of their extensions at trial or in their briefs. Therefore, we find that the Commissioner's notice of deficiency was timely issued. The second issue for decision is whether the petitioners are entitled to deductions for 1977 and 1979 for losses resulting from their purchase and distribution of a 15-minute segment of episode 30 of the Peter Lupus' Body Works television series. Section 165(a) allows a deduction for any loss sustained during the taxable year that is not compensated for by insurance or otherwise, but section 165(c) limits the deduction allowable to individuals. Section 165(c)(1) allows an individual a deduction for a loss incurred in a trade or business. It is well settled that to constitute a trade or business, the activity must be engaged in with an "actual and honest objective of making a profit." Hirsch v. Commissioner,315 F.2d 731">315 F.2d 731, 736 (9th Cir. 1963), affg. a Memorandum Opinion of this Court; Green v. Commissioner,83 T.C. 667">83 T.C. 667, 686-687 (1984); Flowers v. Commissioner,80 T.C. 914">80 T.C. 914, 931 (1983); 280 Siegel v. Commissioner,78 T.C. 659">78 T.C. 659, 699 (1982); Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 646 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983); Golanty v. Commissioner,72 T.C. 411">72 T.C. 411, 425 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981); Allen v. Commissioner,72 T.C. 28">72 T.C. 28, 33 (1979); Dunn v. Commissioner,70 T.C. 715">70 T.C. 715, 720 (1978), affd. 615 F.2d 578">615 F.2d 578 (2d Cir. 1980); Churchman v. Commissioner,68 T.C. 696">68 T.C. 696, 701 (1977); Jasionowski v. commissioner,66 T.C. 312">66 T.C. 312, 319 (1976); Benz v. Commissioner,63 T.C. 375">63 T.C. 375, 383 (1974); Bessenyey v. Commissioner,45 T.C. 261">45 T.C. 261, 274 (1965), affd. 379 F.2d 252">379 F.2d 252 (2d Cir. 1967). Although a reasonable expectation of profit is not required, the taxpayer must have the intent and objective of realizing a profit. Hirsch v. Commissioner,315 F.2d at 736; Brannen v. Commissioner,78 T.C. 471">78 T.C. 471, 506 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984); Dreicer v. Commissioner,78 T.C. at 644-645; sec. 1.183-2(a), Income Tax Regs. "Profit," in this context, means economic profit, independent of tax savings. Beck v. Commissioner,85 T.C. 557">85 T.C. 557 (1985); Herrick v. Commissioner,85 T.C. 237">85 T.C. 237, 254-255 (1985); Surloff v. Commissioner,81 T.C. 210">81 T.C. 210, 233 (1983). 281 The issue of whether a taxpayer engaged in an activity with the requisite intention of making a profit is one of fact to be resolved on the basis of all the facts and circumstances of the case. Hirsch v. Commissioner,315 F.2d at 737; Dreicer v. Commissioner,78 T.C. at 645; Golanty v. Commissioner,72 T.C. at 426; Allen v. Commissioner,72 T.C. at 34; Dunn v. Commissioner,70 T.C. at 720. In making this determination, more weight must be given to the objective facts than to the taxpayer's mere after-the-fact statements of intent. Sec. 1.183-2(a), Income Tax Regs.; Thomas v. Commissioner,84 T.C. 1244">84 T.C. 1244, 1269 (1985), affd. 792 F.2d 1256">792 F.2d 1256 (4th Cir. 1986); Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659, 666 (1979); Churchman v. Commissioner,68 T.C. at 701. The petitioners bear the burden of proving that they possessed the required profits objective. Rule 142(a); see also Boyer v. Commissioner,69 T.C. 521">69 T.C. 521, 537 (1977); Johnson v. Commissioner,59 T.C. 791">59 T.C. 791, 813 (1973), affd. 495 F.2d 1079">495 F.2d 1079 (6th Cir. 1974); Sabelis v. Commissioner,37 T.C. 1058">37 T.C. 1058, 1062 (1962). Section 1.183-2(b), Income Tax Regs., sets forth some of the relevant factors, derived principally from prior case law, which are to be 282 considered in determining whether an activity is engaged in for profit. Boyer v. Commissioner,69 T.C. at 537; Benz v. Commissioner,63 T.C. at 382-383. Such factors include: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or loss with respect to the activity; (7) the amount of occasional profit, if any, which is earned; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved. Allen v. Commissioner,72 T.C. at 33-34. Dr. Haskell was the petitioners' only witness. His testimony consisted of claims that the purchase and distribution of the segment were motivated by a profit objective. The Court was not persuaded by his testimony which was self-serving and uncorroborated. The Commissioner's only witness was A. Frank Reel, an attorney and an expert in the area of television production 283 and distribution. From 1946 until 1977, he held prominent positions with the American Federation of Television and Radio Artists, Ziv Television Programs, Inc., United Artists Television, Inc., and Metromedia Producers Corporation. At the time of trial, he was associated with a New York City law firm and specialized in entertainment law. He was associated with the syndication and distribution of numerous television series including "Highway Patrol," "Sea Hunt," "Jeopardy," and the "Merv Griffin Show." He is the author of the book, "The Networks-How They Stole the Show," published in 1980 by Charles Scribner's Sons. Such book describes the development of the television industry in the United States from its inception and contains a thorough analysis of the economics of production and distribution in such industry. His testimony was unambiguous and reflected a thorough knowledge of the television industry. The petitioners argue that their purchase and distribution of the segment were activities entered into with the requisite profit objective because there was a remote possibility that a substantial profit would be made. In support of this argument, they contend that the videotapes 284 of the episodes were of good quality and that the host and production crew were reputable television professionals. Additionally, they argue that substantial effort went into the distribution of the series. the Commissioner contends that the petitioners' activities were entirely tax motivated. He cites the substantial tax shelter information provided in the offering material and the unbusinesslike manner in which the activities were conducted. The circumstances surrounding the purchase of the segment clearly indicate that the activity was not engaged in for profit. Approximately one-half of the offering material dealt exclusively with the anticipated tax benefits flowing from such purchase. Excerpts from Barron's, Brennan Reports, and the New York Times clearly stated that the purpose of the scheme was to avoid taxes by circumventing the at-risk provisions of the Code. Barron's noted that the chance of an audit of a participant's income tax return was remote and that, by litigating an adverse determination, the investor received "an interest-free loan from Uncle Sam." The thrust of such materials was that, by executing a purported recourse note (which would never be paid by him) 285 with a face value of $52,000, the petitioner could invest $13,000 in cash and receive the same tax benefits as if he had invested $65,000 in cash. The offering material contains very little information relating to the income potential of the series. There is no information concerning how the series was to be distributed. The only information dealing with the economic value of the segment is the letter from Mr. Feifer. Such letter states that based on screening four episodes it is his opinion that the fair market value of each segment is $65,000. No support is provided for such estimate, and Mr. Feifer's credentials are not listed in the materials. The petitioners did not conduct their affairs in a businesslike manner. Despite investing a large sum of money, purportedly $65,000, the petitioner did not consult with anyone who had knowledge of the television industry. Mr. Sherman suspected that each segment was worth a fraction of its $65,000 price, while Mr. Reel determined a maximum value of $1,125 when shown as part of a 100-or-more episode series. The discrepancy between price and value is so great that, had anyone who had experience in the field and who was not involved in 286 the promotion been consulted, he would have immediately questioned the price of the segment. A person of the petitioner's wide business interests would not overlook such an inquiry if he were engaged in a bona-fide, for-profit activity. In view of the facts that Mr. Feifer could not be located by Mr. Sherman and that he did not work at Media Marketing Corp., the petitioner's contention that he consulted with several people concerning Mr. Feifer's qualifications to make such estimate is not believable. In contrast to such failure to make any inquiry into the value of the segment, the petitioner read an article about tax shelters in addition to the tax information included in the offering material. Clearly, the petitioner was more curious about tax benefits than economic profit. The series was produced and marketed in a very unorthodox manner. According to Mr. Reel, the usual way to produce and market a series such as the one at issue, is to make only a pilot episode and test it in several major markets, such as Chicago, Los Angeles, and New York. If such pilot is successful, additional episodes in the series are then made. This approach minimizes the amount of money invested and 287 tests the market for the series. In this case, all 130 episodes were made without a pilot. Such arrangement was needlessly risky and totally contrary to industry practice. The petitioners provided no explanation for such arrangement. The petitioner received no guarantee that the other segment of episode 30 would be shown with his segment. Similarly, no agreement existed requiring that episode 30 be shown as part of the series. In fact, episode 30 was not part of the Philippine distribution agreement. The petitioners provided no explanation for such oversight, despite Mr. Reel's determination that the segment had no value if it were not distributed with a series of 100 or more episodes. No one connected with the distribution of the petitioner's segment had any expertise in television distribution. Mr. Frank had "prepared" 15 full length movies but was primarily an insurance underwriter. The petitioners presented no evidence establishing his expertise or that of anyone else connected with such distribution. The petitioner was not attentive to the distribution of his segment. In September 1977, FSI named Four Star as its exclusive distributor of the series. Yet, on November 13, 288 1977, Silver Dollar sold the segment to the petitioner, and on the same day, he entered into a distribution agreement with FSI, whose rights were assignable only with his written consent. The revenue-producing agreements for the series were entered into with Four Star, and not FSI, as distributor. It is true that both entities were controlled by Mr. Frank; however, the petitioners' failure to explain this situation leads us to find that the petitioner was not concerned with who distributed the segment. From 1977 through 1979, there was no realistic possibility that the petitioner' segment would appreciate in value. The segment cost the petitioner many times its fair market value. There was no objective evidence that it would ever be worth $65,000. In view of the lack of any agreement that the segment would be shown as part of the series and the absence of a market study, any subjective desires of the petitioner concerning appreciation or income potential were pure fantasy. The purchase and distribution of the petitioner's segment has consistently incurred losses, and there is no indication that this pattern will change. The series, made up of 260 segments, grossed $18,200 as of 289 March 1980, and the petitioners had received nothing. They provided no explanation for such failure, but argue that a change of distributors will improve the economic picture. However, no basis for such optimism was provided. The petitioner's acquisition of Mr. Sorenson's $52,000 liability to Silver Dollar for $2,000 was in keeping with the advertised plan to convert notes, which were fully recourse on their face, to nonrecourse debt. As the scheme is described in the literature, the notes of two investors are sold to each other by Silver Dollar for $2,000 each. Neither investor has an incentive to collect on a note because each holds the note of the other, so that the debts are offsetting.While no evidence was presented that Mr. Sorenson holds the petitioner's debt, the fact that such a scheme is part of the promotion leads us to wonder whether it is held by Mr. Sorenson and causes us to doubt the bona fide nature of the petitioner's debt. The scheme suggests that such debt was intended solely to inflate the tax benefits from the segment ownership by allowing depreciation of the $52,000 represented by the note, even though such amount was never intended to be paid. While it 290 is unnecessary for us to determine whether the sliding scale method of depreciation is the appropriate method of depreciation for the series, we observe that the $39,000 depreciation deduction for 1977 is suspicious. Such amount is three times the petitioner's downpayment; the segment was shown at most once during the 48 days he owned it in 1977; and the segment produced no revenue in 1977. When viewed in the context of this case, the large deduction suggests a pure tax motivation for the segment purchase. The petitioners had gross incomes in 1977 and 1979 which could have resulted in a 70 percent marginal tax rate for each year. Such rate is a strong incentive to engage in tax shelter activities for purely tax motives. Their reporting of large losses in both years from a variety of activities is consistent with the use of tax shelters. This indication of pure tax motive was not addressed by the petitioners. Finally, the petitioners' refusal to make certain documents available to the Commissioner, when combined with the other facts of this case, gives rise to the presumption that if produced the documents would be unfavorable to the petitioners. See Wichita Terminal Elevator Co. v. Commissioner,6 T.C. 1158">6 T.C. 1158, 1165 (1946), 291 affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947), and cases cited therein. Based upon the record, it is quite clear that the petitioners have failed to carry their burden of proving that they had the requisite profit objective concerning their purchase and distribution of the segment. Accordingly, the Commissioner's disallowance of the petitioners' claimed losses with respect to the segment is sustained. The next issue for decision is whether the petitioners are entitled to an investment tax credit for purchasing the segment. Section 48(a), as in effect during 1977, limits the availability of the investment tax credit under section 38 to "property with respect to which depreciation (or amortization in lieu of depreciation) is allowable and having a useful life * * * of 3 years or more." Depreciation deductions are allowable only with respect to property which is used in a trade or business or held for the production of income. Sec. 167(a). As we have already discussed, the presence of a profit objective is essential to the existence of a trade or business. Hirsch v. Commissioner,315 F.2d at 736; Brannen v. Commissioner,78 T.C. at 501 and n.7; Hager v. Commissioner, 76 T.C. at 784. Such an 292 objective is obviously required for property to be held for the production of income. See Fox v. Commissioner,80 T.C. at 1006; Mitchell v. Commissioner,47 T.C. 120">47 T.C. 120, 128-129 (1966). We have already determined that the petitioners did not engage in segment-related activities with the intention of making a profit. Consequently, we conclude that the petitioners are not entitled to claim an investment tax credit with respect to the segment. Flowers v. Commissioner,80 T.C. at 931 n. 24; Wildman v. Commissioner,78 T.C. 943">78 T.C. 943, 953-954 (1982); Pike v. Commissioner,78 T.C. 822">78 T.C. 822, 841-842 (1982), affd. without published opinion 732 F.2d 164">732 F.2d 164 (9th Cir. 1984). 5 The fourth issue for decision is whether the petitioners are liable for an addition to tax under section 6651(a) for failure to timely file their return for 1979. The petitioners have the burden of disproving the Commissioner's determination. Rule 142(a); BJR Corp. v. Commissioner,67 T.C. 111">67 T.C. 111, 130 (1976). Since the petitioners made no effort to introduce evidence concerning this issue, we sustain the 293 Commissioner's determination as to such addition to tax. The final issue for decision is whether the United States is entitled to an award of damages under section 6673 for taxpayer delay or maintenance of a frivolous or groundless position. Such section, as applicable to this case, provides: 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. * * * The petitioners failed to produce any objective evidence of a profit objective, and the offering material lists delay of tax payment as a benefit of litigating the validity of this shelter. Such points support a determination that damages are appropriate. However, because of the late notice that such damages would be sought and the previously unlitigated facts of this shelter, 6 we hold that the United States is not entitled to an award of damages under section 6673. Future cases arising from the same or factually similar shelters can expect such damages to *294 be assessed unless they present the Court with objective evidence of an economnic profit objective. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue.↩2. We observe that the parties have stipulated that the segment was only 10 to 12 minutes long. Such length is somewhat shorter than stated in the offering material. Because a precise determination of the length of the segment is not necessary for our decision, we do not make such determination. The segment will sometimes be referred to as a 15-minute segment.3. The record does not reveal the relationship of such corporation to the other entities involved in this case.↩4. Any reference to a Rule is to the Tax Court Rules of Practice and Procedure.↩5. Cronin v. Commissioner,T.C. Memo. 1985-83; Jaros v. Commissioner,T.C. Memo. 1985-31; Ziegler v. Commissioner,T.C. Memo. 1984-620↩.6. We observe that in Magin v. Commissioner,T.C. Memo. 1985-304↩, this Court found that an investor's purported purchase of a 15-minute segment of the series was a factual sham because the investor did not gain any rights to the segment. Such case dealt with investor-specific facts, such as the failure to properly execute the purchase and distribution agreements. In the case at hand, the Commissioner did not argue factual sham.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621197/	JOHN IRA MARTIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMartin v. CommissionerDocket No. 606-90United States Tax CourtT.C. Memo 1990-560; 1990 Tax Ct. Memo LEXIS 632; 60 T.C.M. (CCH) 1131; T.C.M. (RIA) 90560; October 25, 1990, Filed 632 An appropriate order and decision will be entered. John Ira Martin, pro se. Carolyn A. Arnold, for the respondent. NAMEROFF, Special Trial Judge. NAMEROFFMEMORANDUM OPINION This case is before the Court on respondent's Motion for Judgment on the Pleadings filed pursuant to Rule 1201 and respondent's Motion for Assessment of Damages under section 6673. In four notices of deficiency, respondent determined deficiencies in income taxes and additions633 to tax due from petitioner as follows: ADDITIONS TO TAX SECTIONSYEARDEFICIENCY6653(a)(1)6653(a)(2)6651(a)6654(a)1983$ 6,097.00$ 304.85$ 649.00$ 105.2819846,226.00311.30569.75--19856,887.00344.35644.25--6653(a)(1)(A)6653(a)(1)(B)19867,178.00358.90654.25--The adjustments giving rise to the above deficiencies and additions to tax in the notices of deficiency are based upon the failure of petitioner to report various items of income. Petitioner alleged in the petition only that this Court is without subject matter jurisdiction due to an invalid notice of deficiency because the determination is not based on a valid return and other procedural defects. After respondent filed his answer, petitioner filed a motion to dismiss for lack of jurisdiction on the grounds that no notice of deficiency may be issued where a taxpayer634 does not file a return. That motion was denied. Then petitioner filed a Reply in two parts. Part one consisted of 23 pages, plus several hundred pages of exhibits, and reiterated petitioner's argument that no notice of deficiency can be valid where no Federal tax return was filed. Part two consisted of 30 pages and attempted to establish that petitioner, a citizen of the State of California, was a non-resident alien individual with regard to the Internal Revenue Code. In response to respondent's motions, petitioner filed a Motion to Dismiss Respondent's Motion for Judgment on the Pleadings, an amended petition, and a Motion for Order Compelling Production. These voluminous documents further registered petitioner's contention that there were "procedural defects" in the issuance of the notices of deficiency. Petitioner also filed a Motion to Dismiss Respondent's Motion for Assessment of Damages. Petitioner's Motion for an Order Compelling Production requests respondent to produce a catalog of Federal tax form letters and notices, the date and number of the Federal register in which the Form 1040 was published; and the date and number of the Federal register in which various635 Treasury department orders were published. We initially note that petitioner has not served a formal notice of production of documents and things upon respondent pursuant to Rule 72. However, even if petitioner had done so, we would decline to grant petitioner's motion. It is well established that this Court will generally not explore the underpinnings of the notice of deficiency to examine respondent's administrative policy, motives, procedures, or evidence used in arriving at the determination of a deficiency. Dellacroce v. Commissioner, 83 T.C. 269">83 T.C. 269, 280 (1984); Riland v. Commissioner, 79 T.C. 185">79 T.C. 185, 201 (1982); Greenberg's Express Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324, 327 (1974). Accordingly, petitioner's discovery motion will be denied. Turning to respondent's Motion for Judgment on the Pleadings, we find that petitioner's arguments are spurious. Petitioner asserts that: 1) as a citizen resident of the State of California, it would be constitutionally impermissible to exact a tax from him on income earned within the United States; 636 2) he is not a member of the class of individuals upon whom Congress has levied a tax upon any activity he was engaged in; 3) the Internal Revenue Service only has authority to enforce the tax laws relating to foreigners and United States citizens earning foreign-source income; 4) Congress has never imposed a tax upon income; and 5) he was erroneously classified as a "taxpayer" subject to income tax. These frivolous tax protester arguments have been rejected repeatedly, and as such, we cannot envision any reason to refute these arguments with somber reasoning and copious citation of precedent. Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984). Petitioner's argument that the notice of deficiency is invalid because it is not based upon a filed return has been rejected. See Hartman v. Commissioner, 65 T.C. 542">65 T.C. 542 (1975). That principle has been repeatedly upheld and indeed has been endorsed by the Ninth Circuit in Roat v. Commissioner, 847 F.2d 1379 (9th Cir. 1988). The short answer to all of petitioner's arguments is that he is not exempt from Federal income tax. See Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403, 406-407 (1984).637 A petition must contain: 1) "Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency or liability;" and 2) "Clear and concise lettered statements of facts on which petitioner bases the assignments of error." Rules 34(b)(4) and (5). Petitioner has failed to allege any error or any facts in support of any error. Therefore, petitioner has failed to raise any justiciable issue in his petition. Any issues not raised in the assignment of error shall be deemed conceded. Rule 34(b)(4). A judgment on the pleadings is appropriate where petitioner raises no justiciable issues. Abrams v. Commissioner, supra, at 408; Brayton v. Commissioner, T.C. Memo. 1989-664. Accordingly, respondent's Motion for Judgment on the Pleadings will be granted. Whenever it appears to the Tax Court that a taxpayer's position in a proceeding is frivolous or groundless or that the638 proceeding was instituted or maintained primarily for delay, a penalty in an amount not in excess of $ 25,000 may be awarded to the United States by this Court in its decision. Section 6673(a). We find that petitioner's conduct compels the awarding of a penalty to the United States under section 6673. Petitioner adamantly continues to raise the same unfounded tax protester arguments which we have continually rejected. Despite petitioner's claim that he is not an attorney, he has inundated this Court with papers of a legal nature, accurately citing voluminous cases and statutes for propositions which are utterly frivolous and groundless. (We note, however, that the papers filed by petitioner bear a remarkable resemblance to papers filed in other tax protestor cases.) Therefore, respondent's request for a penalty under section 6673 will be granted, and accordingly we require petitioner to pay a penalty of $ 8,000 to the United States. An appropriate order and decision will be entered. 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.↩. 50% of the interest due on the underpayment.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621198/	JANET BLISS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBliss v. CommissionerDocket No. 3759-89United States Tax CourtT.C. Memo 1993-390; 1993 Tax Ct. Memo LEXIS 392; 66 T.C.M. (CCH) 522; August 25, 1993, Filed 392 Decision will be entered for respondent. For petitioner: Stephen A. Zorn. For respondent: Doreen M. Susi. WHALENWHALENMEMORANDUM FINDINGS OF FACT AND OPINION WHALEN, Judge: Respondent determined the following deficiency in, and additions to, petitioner's 1982 Federal income tax: Additions to TaxDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)Sec. 6661$ 15,590$ 779.5050% of the$ 3,897.50interest dueon $ 15,590All section references are to the Internal Revenue Code of 1954, as amended. The sole issue for decision in this case is whether petitioner qualifies under section 6013(e) to be relieved of liability for the tax attributable to her joint 1982 Federal income tax return. FINDINGS OF FACT The parties have stipulated some of the facts. The Stipulation of Facts filed by the parties and the exhibits attached thereto are incorporated herein by this reference. Petitioner resided in Glendale, New York, at the time she filed the petition in this case. Petitioner married Mr. Harold J. Bliss in January 1963. She was 21 years old. The couple lived in Philadelphia, Pennsylvania, where Mr. Bliss attended LaSalle College, and where petitioner, who had393 only a high school education, worked as a billing clerk for City Service Oil Co. Petitioner held her job for approximately 1 year, until complications from her first pregnancy forced her to quit working. She gave birth to the couple's first child on March 28, 1964. Petitioner did not work outside the home again until 1982. In 1964, Mr. Bliss graduated from LaSalle College and received a scholarship to attend Notre Dame University Law School. The family moved to South Bend, Indiana, where they lived until Mr. Bliss's graduation from Notre Dame in May 1967. Mr. Bliss then accepted a job with the Phoenix, Arizona, law firm of Evans, Kitchell & Jenckes, and the family moved to Scottsdale, Arizona, where petitioner and her husband purchased a house. Petitioner gave birth to the couple's second child on November 4, 1965, and to their third child on July 20, 1968. The third child suffered from hyaline membrane syndrome and the expense of his medical treatment drained the family's finances. Thus, the family continued to struggle financially despite Mr. Bliss's position as an attorney. When Mr. Bliss began working for Evans, Kitchell & Jenckes, he discussed his salary with petitioner. 394 By 1970, however, petitioner did not know Mr. Bliss's salary, and, when she asked him about his income, Mr. Bliss became hostile and angry. Mr. Bliss controlled the couple's joint checking account. He made all deposits into the account, and, until 1973, he wrote most of the checks. Mr. Bliss gave petitioner a weekly allowance, which she used to buy food and clothing for the family. Petitioner's marriage to Mr. Bliss began to falter in the early 1970s. In November 1973, Mr. Bliss moved out of the family's house. After a short time he returned, but he moved out again the following January. Mr. Bliss remained separated from petitioner until sometime in 1978. In that year, he filed for divorce but withdrew the petition after he reconciled with petitioner. The couple's reconciliation was short-lived, and Mr. Bliss moved out again a few months later. Despite Mr. Bliss's separation from petitioner and their children, he continued to provide them with financial support. He made biweekly deposits into a joint checking account that he maintained with petitioner. Petitioner used these funds to pay family expenses. Initially, Mr. Bliss deposited $ 600 into the account every 2 weeks. 395 By the time of the couple's divorce in 1983, Mr. Bliss's biweekly deposits totaled $ 1,200. Mr. Bliss also paid other family expenses as they arose. After paying for an item, Mr. Bliss sometimes, but not always, deducted its cost from his next deposit into the couple's checking account. During 1982, Mr. Bliss's payments on behalf of the family in excess of his biweekly deposits totaled approximately $ 12,500. These payments included high school tuition, the cost of a trip to France for one of his daughters, the cost of a trip to Texas for petitioner and one of his daughters to visit colleges, the cost of auto and life insurance, and miscellaneous household and clothing bills. In addition, in December 1982, petitioner's car was damaged beyond repair in an accident that took place while one of the daughters was driving it. Mr. Bliss gave petitioner $ 5,000 to use as a downpayment on another car. He did not seek reimbursement for any of these additional payments. Petitioner's involvement with the family's finances increased during the couple's separation. After Mr. Bliss moved out, petitioner paid the family's household bills and mortgage payments. As noted above, petitioner396 made these payments with the funds that Mr. Bliss deposited to the couple's joint account. At the end of each year, petitioner informed Mr. Bliss of the deductible expenses paid during the year. He used the information to complete the couple's joint Federal income tax return. Petitioner did not otherwise participate in the preparation of their joint tax returns. On January 1, 1981, Mr. Bliss left Evans, Kitchell & Jenckes. He and another lawyer, David West, formed West & Bliss, a professional corporation (hereinafter referred to as West & Bliss). Mr. Bliss did not discuss his decision to leave Evans, Kitchell with petitioner. She learned of it when he asked her to help with a reception to celebrate the opening of the new firm. The first year of West & Bliss was a financial success. The couple's 1981 joint Federal income tax return reported $ 117,112 of earnings from the firm, and $ 107,716 of adjusted gross income, attributable solely to Mr. Bliss's earnings. In January 1982, Mr. Bliss filed a petition for divorce in the Superior Court for the County of Maricopa, Arizona. Petitioner was represented in the divorce action by Mr. Jeremy E. Butler, and his associate Ms. Carole397 P. Clark. Mr. Bliss was represented in the divorce action by Mr. Robert A. Jensen and his associate, Mr. Wm. David Anderson. During the divorce proceedings, petitioner, through her attorneys, obtained discovery of certain books and records from West & Bliss. Specifically, petitioner obtained: (1) A copy of the Articles of Incorporation of West & Bliss, P.A.; (2) a list of clients of the firm that Mr. Bliss had originated; (3) a list of payments made to Mr. Bliss during 1981, entitled "Officer loans and salaries 12/31/81" (referred to herein as the 1981 ledger); (4) copies of the firm's ledger sheets for 1982 for two accounts, one entitled "Officers' salaries -- Bliss" and the other entitled, "Loans to officers -- Bliss" (together referred to herein as the 1982 ledger); (5) two lists of expenses reimbursed to Mr. Bliss, one for the "year ended 12/31/81", and the other for the "ten months ended 10/31/82"; and, (6) two lists of the time billed by Mr. Bliss, one for the "year ended 12/31/81", and the other for the "ten months ended 11/1/82". The 1981 ledger is an accounting work paper that shows the date and check number of each disbursement made to Mr. Bliss. The amount of each 398 disbursement is listed under one of two columns, the first designated "loans" and the second designated "salary". The 1987 ledger indicates that $ 75,426.41 was originally classified as "salary". The remainder, $ 43,660.18, was originally classified as "loans". However, at the end of the year, the aggregate disbursements in the "loans" column were reclassified as "salary". Thus, the 1981 ledger shows that West & Bliss paid a total of $ 119,086.59 in "salary" to Mr. Bliss during 1981. The total disbursements to Mr. Bliss during 1981, $ 119,086.59, included FICA tax withholding of $ 1,975.05. The firm treated the difference between those amounts, $ 117,111.54, as Mr. Bliss's compensation for 1981, and it issued to Mr. Bliss a Form W-2, Wage and Tax Statement, that reported wages of that amount. He reported $ 117,112 as compensation from the firm on the couple's joint income tax return for 1981. The 1982 ledger covers the 10 months ending October 31, 1982. The account for "Officers' salaries -- Bliss" lists ten payments of $ 6,000 to Mr. Bliss, a total of $ 60,000. The account for "Loans to officers -- Bliss" lists eight payments to Mr. Bliss totaling $ 29,363.26. Thus, according399 to the 1982 ledger, West & Bliss paid a total of $ 89,363.26 to Mr. Bliss through October 31, 1982. After receiving the above information, petitioner, through her divorce attorneys, deposed Mr. Bliss. Several days later, as required by the rules of the superior court, petitioner and Mr. Bliss each filed with the court a sworn affidavit of individual income, expenses, liquid assets, and debts. Mr. Bliss's affidavit lists "gross monthly pay" of $ 6,000 per month but states in a footnote that such amount "Excludes periodic draws; see pretrial statement." At the time that he filed his affidavit in the divorce action, Mr. Bliss anticipated that, at the end of the year, West & Bliss would recharacterize as "salary" the disbursements that it had originally treated on its books as "loans". Accordingly, Mr. Bliss's affidavit lists a debt to the Internal Revenue Service in the amount of $ 9,900, which is the anticipated Federal tax liability that would be triggered if the loans were recharacterized. The Joint Pretrial Statement referred to in Mr. Bliss's affidavit is another pleading that was filed in the divorce proceeding. Attached to the Joint Pretrial Statement are two exhibits, 400 one prepared by or on behalf of petitioner, and the other prepared by or on behalf of Mr. Bliss, each of which sets forth a proposed distribution of the couple's community property. Mr. Bliss's proposal states as follows: 10. For purposes of computation of spousal maintenance and of child support, the Court is asked to note that Husband's 1981 income net after payment of state and federal income taxes and F.I.C.A. withholding was $ 87,000.00. Gross revenue attributable to Husband's efforts and interest in the law firm of WEST & BLISS, P.A. in calendar year 1981 was $ 177,241.00. Therefore, his realized income was approximately 49% of gross receipts. To date, 1982 income has not been as high, attributable to the settlement of two major lawsuits and conclusion of other litigation which was ongoing during 1981. Through September 30, 1982, gross revenue attributable to Husband's efforts and his interest in the firm was $ 119,398.00. Forty-nine percent (49%) of this figure is $ 58,505.00. Accordingly, Husband's current average monthly income is $ 6,500.56 per month. Although this average is deceptive due to the recent settlement of a fairly large matter in litigation, Husband's401 proposal is based upon a net monthly pay of $ 6,500.00 per month.Petitioner, her former husband, and their attorneys appeared on December 8, 1982, for trial of the divorce action. However, before the start of trial, the attorneys for the parties, Messrs. Butler and Jensen, negotiated a settlement of the case in the presence of their clients. During the negotiations, the attorneys discussed numbers represented on a flip chart or blackboard. Among the principal issues addressed were Mr. Bliss's anticipated income from West & Bliss for 1982 and the couple's predicted tax liability for 1982. The attorneys predicted that the couple would owe an additional $ 11,000 in Federal taxes for the 1982 tax year, beyond the withholding made from Mr. Bliss's salary. Petitioner and Mr. Bliss agreed to limit petitioner's liability for the additional 1982 taxes to a maximum of $ 5,500. This agreement was later memorialized in the Separation Agreement that petitioner and Mr. Bliss executed on December 13, 1982. That agreement provides as follows: 24. INCOME TAXESThe parties shall file either jointly or separately for tax year 1982, as shall be to their maximum joint tax advantage. 402 Husband shall pay all 1982 income taxes, whether federal or state, subject to reimbursement by Wife to the extent of one-half, but not to exceed $ 5,500.00. All federal and state taxes paid by Husband in excess of $ 11,000.00 shall not be reimbursable by Wife. Wife's obligation to Husband under this paragraph 24 shall be secured by a note and deed of trust upon the former family residence, as awarded hereinafter. Said note and deed of trust are specifically not incorporated into this Agreement, and are not joined, merged, or otherwise a part or portion of this Agreement except as this Agreement requires the execution of documents for compliance with its terms. Any tax liability not now known for tax years 1979 or 1980 due to an error in the reporting of Husband's income, failure to report his income, or due to any erroneous claim of deduction shall be the responsibility of Husband. Any tax liability arising from any other source for any year other than as specified in this paragraph is not subject to this Agreement.The Separation Agreement also states as follows: 1. ADVICE OF COUNSELEach of the parties is, and has had the opportunity to become fully and completely403 informed of the financial and personal status of the other, and each of them has had the advice of counsel, to-wit: Wife having had the advice of LEWIS & ROCA and Jeremy E. Butler and Carole P. Clark thereof; and Husband the advice of MITCHELL, JENSEN & TIMBANARD, P.C. and Robert A. Jensen and Wm. David Anderson thereof, and each of the parties has given mature thought to the making of this Agreement and all of the obligations contained herein, and each of the parties understands that the agreements and obligations assumed by the other are assumed with the express understanding and agreement that they are in full satisfaction of all obligations which each of said parties now has or might hereafter or otherwise have toward the other.At the end of 1982, West & Bliss began to experience cash flow problems. In late December, the firm's accountant, Mr. Jess Finerman, advised the officers of West & Bliss "that the 1982 loans would not be taxable as income to the recipients if they [i.e. the loans] were treated as loans by the corporation and by the recipients and the proper documentation for the loans was prepared." Thereafter, Mr. Bliss executed a promissory note to the firm dated404 December 31, 1982, in the amount of $ 32,940.12, the year-end balance of his loan account with the firm. On its 1982 Federal income tax return, West & Bliss reported that it had paid compensation to Mr. Bliss of $ 71,171. This amount does not include the balance of Mr. Bliss's loan account, $ 32,940.12. Mr. Finerman prepared the Bliss's joint 1982 return. The return reports $ 71,171 as Mr. Bliss's compensation from West & Bliss. Contrary to the expectations of petitioner, Mr. Bliss, and their attorneys on December 8, 1982, the return claims an overpayment of income tax of $ 6,875. This overpayment was caused by the failure of West & Bliss to recharacterize "Loans to officers -- Bliss" as additional compensation. In June of 1983, Mr. Bliss presented the couple's joint 1982 return, as prepared by Mr. Finerman, to petitioner for signing. Mr. Bliss called petitioner's attention to the fact that they would receive a tax refund of $ 6,875. Petitioner signed the return, and she received the refund a few months later. She deposited it into her bank account and gave one-half to Mr. Bliss. Sometime after 1982, respondent audited the 1982 return filed on behalf of West & Bliss. Respondent405 determined that West & Bliss had improperly treated as loans certain distributions to its owners, David West and Harold Bliss, in the amounts of $ 59,792 and $ 32,940, respectively, for a total amount of $ 92,732. Respondent determined that the distributions were actually additional salaries to Messrs. West and Bliss. The officers of West & Bliss entered into an agreement with the IRS in which they conceded that the amount treated on the return as loans to officers, $ 92,732.00, was additional salaries to the officers of West & Bliss. Based on the adjustment to the 1982 return of West & Bliss, respondent determined that petitioner's 1982 joint return understated Mr. Bliss's income from the firm. Accordingly, respondent determined the subject deficiency in, and additions to, the tax reported on petitioner's 1982 joint return. Respondent's notice of deficiency states as follows: In accordance with the corporate examination, the distribution of corporate funds to you is not a loan and has been included in income. Accordingly, your taxable income has been increased $ 32,940.00.At the time of her divorce, petitioner had begun taking classes at Scottsdale Community College. 406 These classes included college level English, algebra, and sociology. In September 1983, she began a 1-year, full-time paralegal program at Arizona State University. Petitioner then went on to the University of Phoenix, where she completed her bachelor's degree in business administration in July 1986. In September 1986, she matriculated to law school at the City University of New York and completed a juris doctor degree in May 1989. OPINION Respondent determined that the joint 1982 Federal income tax return filed by petitioner and her former husband understated the couple's gross income by $ 32,940.12. Petitioner does not question the correctness of respondent's adjustment to her joint 1982 return. The sole issue raised by petitioner is whether she qualifies as an innocent spouse under section 6013(e) and is relieved of joint and several liability for the tax and additions to tax determined by respondent with respect to that return. Section 6013(a) provides that "A husband and wife may make a single return jointly of the income taxes under subtitle A" of the Internal Revenue Code. Section 6013(d)(3) provides that, if they elect to do so, the tax is computed on the aggregate407 income of both spouses and the liability with respect to the tax on the return is joint and several. An exception to the rule imposing joint and several liability in the case of a joint return is found in section 6013(e)(1), which states as follows: (e) SPOUSE RELIEVED OF LIABILITY IN CERTAIN CASES. -- (1) IN GENERAL. -- Under regulations prescribed by the Secretary, if -- (A) a joint return has been made under this section for a taxable year, (B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, (C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement,then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement.To qualify as an "innocent 408 spouse" under section 6013(e)(1) a taxpayer must establish that each of the above requirements is satisfied. Rule 142(a) of the Tax Court Rules of Practice and Procedure. Failure to prove any one of the above requirements prevents the taxpayer from qualifying as a so-called innocent spouse. E.g., Hayman v. Commissioner, 992 F.2d 1256">992 F.2d 1256, 1260 (2d Cir. 1993), affg. T.C. Memo 1992-228">T.C. Memo. 1992-228; Bokum v. Commissioner, 94 T.C. 126">94 T.C. 126, 138 (1990), affd. 992 F.2d 1132">992 F.2d 1132 (11th Cir. 1993). The parties have stipulated that petitioner made a joint return for 1982 and that there is a substantial understatement of tax on the return attributable to grossly erroneous items of Mr. Bliss. Accordingly, subparagraphs (A) and (B) of section 6013(e)(1) are satisfied. The issue is whether petitioner has met her burden of proving that subparagraphs (C) and (D) of section 6013(e)(1) are satisfied. Under section 6013(e)(1)(C), petitioner must prove that in signing the return, she did not know, and had no reason to know, of the substantial understatement caused by Mr. Bliss's omission of $ 32,940 from409 his gross income. See, e.g., Purcell v. Commissioner, 86 T.C. 228">86 T.C. 228, 236 (1986), affd. 826 F.2d 470">826 F.2d 470 (6th Cir. 1987). This is a question of fact to be determined after taking into consideration all available facts and circumstances. See, e.g., Flynn v. Commissioner, 93 T.C. 355">93 T.C. 355, 365 (1989). This issue turns primarily on whether the financial information that petitioner and her divorce attorneys obtained at the end of 1982 was sufficient to put petitioner on notice that Mr. Bliss's income was understated when she signed to couple's return. We believe that it was. Accordingly, we find that petitioner either knew or had reason to know of the substantial understatement caused by Mr. Bliss's omission of $ 32,940 from the gross income reported on the couple's joint return for 1982. For this reason, we hold that petitioner has not shown that section 6013(e)(1)(C) is satisfied. Accordingly, petitioner is not eligible for innocent spouse status under section 6013(e). We do not reach the question whether section 6013(e)(1)(D) is satisfied. One of the main issues in petitioner's divorce case involved410 the level of Mr. Bliss's income from his professional corporation. As petitioner's divorce attorney testified during the trial of this case: I was worried as to whether we were having what we like to call divorce planning in the sense that Mr. Bliss was some how putting over until after the divorce the collection of his fees.During discovery in the divorce case, petitioner's divorce attorneys subpoenaed the books and records of West & Bliss and deposed Mr. Bliss. Among the information that petitioner and her divorce attorneys obtained were ledgers of the distributions that had been made by the firm to Mr. Bliss during 1981 and 1982. The 1981 ledger shows that West & Bliss had classified some of the distributions to Mr. Bliss during the year as "loans" but had recharacterized them as "salary" when the firm closed its books at the end of the year. The "loans" were part of the $ 117,112 in compensation that the firm paid to Mr. Bliss during 1981. The 1982 ledger that petitioner and her divorce attorneys received accounts for the first 10 months of that year. It shows that West & Bliss paid $ 6,000 per month to petitioner as "salary" and that the firm made additional distributions411 to him in the aggregate amount of $ 29,363.26, which were characterized as "loans". Accordingly, the 1982 ledger shows that the firm made total distributions to Mr. Bliss of $ 89,363.26 during the first 10 months of the year. The pleadings filed by Mr. Bliss in the divorce action confirm that he expected his 1982 income from West & Bliss to exceed $ 6,000 per month. The affidavit of income and expenses that he filed lists "gross monthly pay" of $ 6,000 but states, in a footnote, that such amount "Excludes periodic draws; see pretrial statement." Further, Exhibit A of the Joint Pretrial Statement filed in the divorce action reports that as of September 30, 1982, Mr. Bliss's income from the firm after payment of Federal and State income taxes had averaged $ 6,500.56 per month. Additionally, none of the pleadings filed in the divorce suit or the Separation Agreement that petitioner and her former husband executed makes provision for any debt of Mr. Bliss to West & Bliss. In his testimony in this case, Mr. Bliss's lead divorce attorney, Mr. Jensen, rejected the contention that petitioner's divorce lawyer, Mr. Butler, had considered Mr. Bliss's compensation to consist only of the 412 "salary" distributions of $ 6,000 per month and did not take into account the distributions that were booked as "loans". Mr. Jensen testified as follows: I can assure you Mr. Butler took quite the contrary position. In other words, that the stated salary had to be increased by the amount of the draws. * * For purposes of determining spousal maintenance and child support, we would have regarded the loans as well as the stated salary as income for the year or years in question.Mr. Jensen also testified as follows: Well, when you represent -- Jerry Butler is a reasonably well-known divorce lawyer who represents his clients with vigor. There is no way that he would have permitted us under this set of circumstances, nor would we have attempted to argue, nor did I attempt to argue, that those loans which had been reversed in the year 1981 would not be reversed in the year '82 and become income and any such argument quite frankly would have been met with a good deal of derision by Mr. Butler and quite frankly I don't present cases to the Court that I think are going to result in derision so I accept that statement -- that condition and assumed that that would be the413 fact.Thus, it is clear that the parties to the divorce case considered the distributions made by West & Bliss to Mr. Bliss that were booked as "loans" to constitute compensation to Mr. Bliss. Petitioner argues, based upon her testimony at trial before this Court, that she never saw the documents discovered from West & Bliss or the pleadings filed in the divorce action, or, if she saw them, that they are so complex that she did not understand them. She also asserts that she left the divorce proceedings entirely to her attorneys and was not given any information by her divorce attorneys that reasonably put her on notice that Mr. Bliss's gross income was understated on the couple's 1982 joint return. She further argues that any knowledge possessed by her attorneys should not be imputed to her. We do not credit petitioner's testimony that, before signing the couple's joint return, she did not see the documents discovered by her divorce attorneys from West & Bliss and that she did not see the pleadings filed in the divorce case, including Mr. Bliss's affidavit and the Joint Pretrial Statement. Petitioner's testimony is contradicted by the testimony of her divorce attorney, Mr. 414 Butler. He noted that at the bottom left-hand corner of each of those documents there is a hand written "cc" followed by a date. He testified that the "cc" probably meant "copy to client" and the date "would be my then secretary's method of showing that." Accordingly, it appears that the discovery obtained from West & Bliss was sent to petitioner on November 24, 1982, and that the affidavit submitted by petitioner's former husband in the divorce action and the Joint Pretrial Statement were sent to petitioner on January 12, 1983. We so find. We also reject petitioner's contention that the documents discovered during the divorce case and the pleadings in that case were too "complex" for petitioner to understand, and we reject her contention that she did not have sufficient educational background or sophistication to understand them. To the contrary, from our observation of petitioner, she seemed highly intelligent. Moreover, the issue in the divorce case was basic: How much money would Mr. Bliss receive from his law firm in 1982. The 1982 ledger clearly shows that in the first 10 months of the year he received salary of $ 60,000 and loans of $ 29,363.26, for a total of $ 89,363.26. 415 Mr. Bliss's affidavit and the joint pretrial statement confirm that he expected to receive more than $ 6,000 per month. Further, petitioner's testimony in this case demonstrates a full understanding of the issues in the divorce case, and a particular concern that, during the long separation, she had not received a fair amount of support. Finally, we do not credit petitioner's testimony that after she retained Mr. Butler "I left it there and I just didn't bother with it." In this regard, we note that Mr. Butler's associate, Ms. Clark, who dealt with petitioner much of the time, did not testify in this case. Even if we were to accept petitioner's testimony that she did not review or understand the discovery and pleadings in the divorce case, it is clear that she was present on December 8, 1982, when her lawyers negotiated an agreement to limit her liability for 1982 income taxes to $ 5,500. That agreement was made necessary by the fact that Mr. Bliss anticipated owing an additional $ 11,000 in Federal income taxes when the "loans" from West & Bliss were recharacterized as salary. Under paragraph 24 of the Separation Agreement that was negotiated between the parties on December416 8, 1982, petitioner agreed to reimburse Mr. Bliss for $ 5,500 of the additional income taxes that they anticipated would be due when the 1982 return was filed. Petitioner also agreed to give a promissory note secured by a deed of trust on her house to satisfy that promise. We infer, based upon the negotiations that took place on December 8, 1982, that petitioner understood the amount of income taxes that the couple anticipated owing for 1982 and her share of that liability. Petitioner admitted during her testimony in this case that "when it was over I just talked to [Ms. Clark] a little bit about what, you know the tax thing." We believe that, in June 1983, when Mr. Bliss presented the couple's joint 1982 return to petitioner for review and execution, she either knew or should have known that his income was understated. The return claims a tax refund of $ 6,875. This was a significant change from the additional tax liability of $ 11,000 that the divorce lawyers and their clients had discussed on December 8, 1982. Page one of the return lists "wages, salaries, tips, etc." in the amount of $ 71,171. Thus, without further review of the return, petitioner was put on notice that417 the return reported earnings from West & Bliss of less than $ 6,000 per month. All of the information obtained in the divorce proceedings and in the settlement discussions on December 8, 1982, indicated to petitioner that Mr. Bliss anticipated earning more than $ 6,000 per month from West & Bliss. A final point should be noted. Petitioner argues, based upon paragraph 24 of the Separation Agreement, that she expected the couple's entire 1982 tax liability to be $ 11,000, and that she thought that the return that Mr. Bliss presented to her was correct because the aggregate tax liability was $ 13,332, only "slightly more than the $ 11,000 tax liability threshold referred to in the Separation Agreement." To the contrary, as Mr. Bliss's testimony in this case and petitioner's own actions make clear, petitioner and her former husband intended the $ 11,000 amount to refer to the additional tax that would be due when they filed their 1982 return. They did not intend it to refer to the couple's entire tax liability. If they had so intended, petitioner would have been required to pay $ 5,500 to Mr. Bliss even though the return claimed a refund. As it was, petitioner and Mr. Bliss split418 the refund, one-half each. Negligence Addition Under Section 6653(a)Respondent determined that petitioner is liable for additions to tax pursuant to section 6653(a)(1) and (2). Respondent determined that the entire underpayment was due to negligence. Section 6653(a)(1) imposes an addition to tax equal to 5 percent of the underpayment if any part of the underpayment for the year is due to a taxpayer's negligent or intentional disregard of respondent's rules or regulations. Section 6653(a)(2) imposes an addition to tax equal to 50 percent of the interest payable under section 6601 with respect to any portion of the underpayment that is attributable to negligence or intentional disregard of the rules or regulations. Petitioner bears the burden of disproving respondent's determination that the entire underpayment was due to negligence or intentional disregard of respondent's rules or regulations. Rule 142(a). Petitioner introduced no evidence concerning this issue. Accordingly, we sustain respondent's determination of the additions to tax under section 6653(a)(1) and (2). Addition For Substantial Understatement Of Income Tax under Section 6661Respondent determined*419 that petitioner is liable for the addition to tax under section 6661(a). Section 6661(a) imposes an addition to tax equal to 25 percent of the amount of any underpayment attributable to a "substantial understatement" of income tax for the taxable year. In the case of a noncorporate taxpayer, any understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6661(b)(1). Petitioner bears the burden of disproving respondent's determination. Rule 142(a). Petitioner introduced no evidence concerning this issue. Accordingly, we sustain respondent's determination of the addition to tax under section 6661. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621199/	E. Vance Walters and Kae L. Walters v. Commissioner.Walters v. CommissionerDocket No. 5693-64.United States Tax CourtT.C. Memo 1966-38; 1966 Tax Ct. Memo LEXIS 247; 25 T.C.M. (CCH) 215; T.C.M. (RIA) 66038; February 23, 1966Charles J. Chastang, 33 North High St., Columbus, Ohio, for the petitioners. W. Dean Short, for the respondent. MULRONEY Memorandum Opinion MULRONEY, Judge: Respondent determined deficiencies in petitioners' income tax for the years 1961 and 1962 in the amounts of $350.12 and $456.52, respectively. Other deficiencies were determined, including a deficiency for the year 1960, but these have all been conceded by petitioners. E. Vance Walters, who will be called petitioner, is an osteopathic physician who lives in Cincinnati, Ohio. He and his wife Kae L. Walters filed their joint income tax returns for the two years that are here involved with the district director of internal revenue at Cincinnati, Ohio. The deficiencies in controversy248 involve payments in the years 1961 and 1962 of $400 and $1,000, respectively, to the Epp Memorial Hospital. Petitioner is in the same position as the taxpayer in Glenn L. Heigerick, 45 T.C. 475">45 T.C. 475, (Feb. 23, 1966), in that he was an osteopath who agreed to pay $5,000 for staff privileges as a minor specialist. He made the above payments on this obligation for medical staff privileges and took deductions for same on his 1961 and 1962 income tax returns, which respondent disallowed. Petitioner contends that the payments were deductible business expenses under section 162(a), Internal Revenue Code of 1954. The payments secured staff privileges for an indefinite time and it was in effect petitioner's testimony that he anticipated his reappointment each year and he has been reappointed and is still a member of the staff. Since the payments were made under the same circumstances as the payment that was disallowed in Glenn L. Heigerick, supra, our opinion there will control here. Accordingly, consistent with our opinion in the above cited case, we hold that the $400 and $1,000 payments in the years 1961 and 1962 for staff privilege fees were249 not allowable business expense deductions under section 162(a), Internal Revenue Code of 1954. Here, as in Glenn L. Heigerick, supra, respondent allowed amortized deductions for said payments based on treating the payments as capital expenditures. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621200/	Dee Bredin Thibault v. Commissioner. Conrad Thibault and Dee Bredin Thibault v. Commissioner.Thibault v. CommissionerDocket Nos. 84402, 84403.United States Tax CourtT.C. Memo 1963-64; 1963 Tax Ct. Memo LEXIS 278; 22 T.C.M. (CCH) 251; T.C.M. (RIA) 63064; March 5, 1963278 John A. Sullivan, Esq., 14 Wall St., New York, N. Y., for the petitioners. Lee A. Kamp, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Respondent determined deficiencies in additions to petitioners' income tax as follows: Addition to TaxSec. 294(d)(1)(B)YearPetitionersI.R.C. 19391951Dee Bredin Thibault$3,575.001952Dee Bredin Thibault3,600.001953Conrad and Dee Bredin Thi-bault3,112.501954Conrad and Dee Bredin Thi-bault3,650.00The issue presented is whether petitioners' failure to make timely installment payments of estimated tax for 1951 through 1954 was due to reasonable cause and not willful neglect. Findings of Fact Some of the facts have been stipulated. They and the facts shown by the exhibits attached thereto are found accordingly. Petitioners, Conrad Thibault and Dee Bredin Thibault, husband and wife, were married in December 1953 and reside at 1035 Fifth Avenue, New York, New York. Dee Bredin Thibault filed individual income tax returns for calendar years 1951 and 1952 and petitioners filed joint income tax returns for calendar years 1953 and279 1954 with the district director of internal revenue, Upper Manhattan district, New York, New York. Dee Bredin Thibault will hereinafter be referred to as petitioner. For 1951, petitioner duly filed a declaration of estimated tax of $50,000 and an amended declaration of $40,000. The following installments were paid: March 15, 1951$2,500June 15, 19512,500September 15, 19515,000January 10, 19522,000For 1952, petitioner filed a declaration of estimated tax of $40,000. No estimated tax payments were made. For 1953, petitioner filed a declaration of estimated tax of $35,000 on which no payments were made. Petitioner Conrad Thibault filed a separate declaration indicating estimated income tax of $1,000 and paid that amount. For 1954, petitioner and her husband filed a declaration of estimated tax of $30,000 and an amended declaration of $42,500. No installment payments were made. The predominant source of the income to which the additions to tax here relate is petitioner's life interest in a spendthrift trust composed of General Motors stock. Dividends in the following amounts were paid to petitioner: 1951$80,000.00195280,000.00195380,000.00195499,958.60280 Petitioner had insignificant amounts of other income. From 1939 to 1950, including years during World War II when she was stationed in Great Britain and the Pacific in the service of the United States Government, petitioner retained Joseph B. Deutsch (hereinafter referred to as Deutsch) to handle her income tax. Deutsch is a Certified Public Accountant and former agent of the internal revenue service who is a qualified tax consultant. Deutsch's practice was to prepare returns and estimates from information supplied by petitioner and submit them to petitioner for signing and mailing. Deutsch prepared declarations of estimated tax for petitioner through 1947 which were duly filed. Declarations for 1948, 1949, and 1950 were not timely filed nor were timely payments made thereon. The following actions by Deutsch occurred in regard to petitioner's estimated tax for 1948, 1949, and 1950: (a) A letter to petitioner dated February 20, 1948, enclosing an income tax return for 1947 which he had prepared, in which he stated that, "I will defer filing your 1948 Declaration of Estimated Tax in order to conserve your cash, as you have until [January 15, 1949] to file the same without a281 penalty." (b) A telephone conversation with petitioner's secretary on June 15, 1948, in which he advised payment of the estimated tax. (c) A letter to petitioner dated August 19, 1948, advising her to file her declaration for 1948. (d) A telephone conversation with petitioner's secretary on September 17, 1948, advising her that the declaration must be filed no later than January 15, 1949. (e) A visit on December 9, 1948, either with petitioner or her secretary in regard to filing the declaration. (f) A telephone conversation on January 4, 1949, advising petitioner to file her 1948 estimate. Petitioner told Deutsch that she had no money and he advised her to file a final return and ask for an extension of time to pay. (g) A telephone message from petitioner on January 31, 1949 that she was unable to pay the 1948 tax. (h) A telephone conversation on August 16, 1949, with petitioner's secretary explaining interest charges on extensions of time to pay. (i) A letter to petitioner on January 3, 1950, noting that no declaration for 1949 had been filed, "[the] reason, of course, being that you were short of funds." Deutsch advised her that the last opportunity for filing282 expired on January 15, 1950 and that, "[in] order to avoid penalties, the tax payment on the declaration should be at least 80% correct * ." He asked for information regarding the amount of her net taxable income for 1949. (j) A telephone conversation on January 6, 1950, with petitioner, during which she stated that she had no cash and did not wish to file a declaration. (k) A letter to petitioner dated March 4, 1950, enclosing an income tax return for 1949 which he had prepared and stating that, "[technically] you are also liable for interest on this assessment inasmuch as you filed no Declaration of Estimated Tax for the year 1949." Deutsch also stated that he was not preparing a declaration of estimated tax for 1950, "as I know you will have no funds available with which to make any payment at this time. However, under the law you have until January 15, 1951 in which to file an estimated tax based on your taxable income for the year 1950." He suggested a conference with her toward the end of the year, "as I believe it will be to your advantage and eventually save you much interest if it were possible for you to arrange to meet your income tax obligations on a 'pay as283 you go' basis." (1) A letter to petitioner dated July 25, 1950, noting that declarations had not been filed for 1948 or 1949, nor so far for 1950. Deutsch noted that "[the] Collector of Internal Revenue has begun to enforce [penalty] provisions very strongly and is making assessments retroactively to 1947." He urged her to set aside funds in order to file and pay either by September 15, 1950 or January 15, 1951. "[Otherwise] a 6% penalty will be assessed. This penalty would be in addition to any interest that may be found due for any tax for the year 1950 remaining unpaid by March 15, 1951." Petitioner fell into arrears on her tax ability in the amount of approximately $75,000. In August 1950, petitioner retained the services of the law firm of Cadwalader, Wickersham & Taft to advise her in regard to her tax problems. Thereafter petitioner filed declarations of estimated tax for 1949 and 1950 showing taxes of $38,986.60 and $45,000.00, respectively. Petitioner paid $10,000 on her 1950 estimated tax and $10,000 on her 1951 estimated tax during 1951 and an additional $2,000 on her 1951 estimated tax in early 1952. She also paid $25,000 on her arrears during 1951. In each284 of the letters accompanying a payment, petitioner or her counsel requested an extension of time to pay the estimated taxes and the arrears. Each of the letters stated that petitioner's difficulties were due to imprudent advice given to her by her prior tax consultant and that she was endeavoring to become current in her payments. There was no response to these letters from respondent. In October and November 1951, petitioner sought to work out a compromise or agreed payment plan with respondent. On October 18, 1951, petitioner's counsel wrote to Rocco J. Ceroni (hereinafter referred to as Ceroni) of the collector's office, setting forth petitioner's financial situation and again stating that her difficulty was due to erroneous advice "that it was not necessary for her to file declarations of estimated income tax and to put herself on a pay-as-you-go basis." The letter averred that petitioner had been burdened with supporting her daughter, her daughter's child, and her mother; that she had now insisted that another person share her mother's quarters to reduce expenditures; that she had sold her car; that she had unsuccessfully attempted to sublease her apartment; that she had not285 met with success in efforts to obtain a loan with which to pay her tax indebtedness; and that she had been unable to persuade the settlor of the trust of which she was beneficiary to permit an invasion of the corpus of the trust. On November 14, 1951, petitioner's counsel submitted a financial statement, Form 433, to Ceroni for the period October 15, 1950 to October 15, 1951, showing the following: ReceiptsTrust fund$110,000.00Miscellaneous840.00DisbursementsDebt reduction5,042.00Servant's wages2,080.00Living expenses, including expensesof mother, daughter, grand-daugh-ter, and taxpayer (approximate)31,000.00Rent paid10,637.50Charitable donations (approximate)3,000.00United States and New York incometaxes paid62,751.07Doctor and hospital bills, includingoutlay for mother and daughter aswell as taxpayer3,316.05 No action was ever taken on this by the respondent. A partial schedule of petitioner's expenditures during this period, from September 12, 1951 to November 16, 1951, is as follows: DateAmountPayeeRemarksTaxesSept. 12$5,000.00Collector of Internal RevenueEstimatedSept. 127,500.00Collector of Internal RevenueArrearsSept. 14264.58State Tax CommissionIncome taxOct. 111,625.26State Tax CommissionIncome taxPersonalSept. 26$300.00Bergdorf GoodmanOn accountSept. 2696.00Regency ClubDuesSept. 26100.00Henri Bendel, Inc.On accountSept. 26100.00Elizabeth ArdenOn accountSept. 2623.64Peck & PeckIn fullSept. 2658.16Werman & Lester Photo ServicesIn fullSept. 26142.66French BooteryIn fullSept. 2630.75Cartier, Inc.In fullSept. 2880.00Traveler's Aid SocietyDonationOct. 832.40Boating Corporation of SouthhamptonOct. 1173.96H. L. Hubbell Mfg.2 filing cabinetsOct. 15150.00Hospitalized Veterans Music ServiceDonationOct. 1553.55Renee FarcaStockingsOct. 1687.55Jacque WilsonSuitOct. 16100.00CashAt "21" ClubOct. 2330.00Hospitalized Veterans Music ServiceDonationOct. 2654.19Mormeth & VickeryAuto insuranceNov. 198.15Henri Bendel, Inc.Oct 1st billNov. 134.10Bloomingdale Bros.In fullNov. 129.05Jack & Charlie's "21" ClubSept. chargesNov. 182.56Madison Avenue & 76th Street GarageSept. billNov. 1320.00Music Reseach FoundationDonationNov. 1610.00Metropolitan Museum of ArtDonationNov. 16132.53The River Club of New YorkNov. 1st invoice paid in fullNov. 16150.22The Regency ClubOct. 31 invoice paid in fullNov. 1610.00Cerebral Palsy Society of New YorkDonationNov. 165.00Father Flanagan's Boys' TownDonation286 Anthony Wolff (hereinafter referred to as Wolff) of the collector's office took over handling petitioner's delinquent account. In the usual procedure of the special warrant squad to which he was assigned, he would see only the taxpayer's delinquent account card and would not see any income tax returns or declarations of estimated tax. Wolff, however, was aware of the Form 433 which petitioner had submitted. In January 1952, petitioner's counsel had a telephone conversation with Wolff in regard to petitioner's delinquent account. He advised Wolff that petitioner had been making payments on both the delinquent account and the current tax but did not have enough funds to pay both accounts in full. On March 5, 1952, petitioner's counsel had another telephone conversation with Wolff, in which Wolff advised that all money that could be made available for taxes should be paid on the arrears. A letter from petitioner's counsel to the collector, dated March 13, 1952, transmitting petitioner's 1951 return and 1952 declaration, contained the following: Your attention is drawn to the fact that no remittance is enclosed herewith. The absence of any remittance is occasioned by the express287 request made by Mr. Wolff of your Fifth Avenue office, that any checks on account of tax arrears be sent directly to him, and we are sending our client's check in the sum of $10,000 to him for application on the arrears for the 1950 year. With the making of this payment, our client is unable to make any payment at this time in connection with either the 1951 year or the estimated tax for 1952, and we respectfully request an extension of time in which to enable her to make such payment. In that connection, we should like to point out that a complete Form 433 was filed by our client with Mr. Wolff some months back, giving full particulars of her financial situation. A letter from petitioner's counsel, dated March 17, 1952, to Wolff, contained the following: For your information, we might add that we have followed the further suggestion that all moneys available be forwarded to you for application on this oldest tax indebtedness, and our client has as a result not been able to forward any money for further application on the 1951 year's tax or on the declaration for the current year. Thereafter, until 1955, petitioner made payments only on her tax arrears. In correspondence with288 the collector's or director's office during the years in question, petitioner's counsel noted the procedure being followed and combined therewith requests for extensions of time to pay current as well as delinquent taxes. No formal extension of time to pay either the current or delinquent taxes was ever granted by the collector's or director's office during the years 1951 through 1954, nor was any response made to the request for an extension of time in which to pay. No objection was raised to the procedure being followed by the petitioner. During the period involved here, petitioner supported her mother, who required medical attention, and also contributed to the support of her daughter and her daughter's child who lived with her during part of the period. Petitioner claimed only her mother as an exemption. After her marriage petitioner's income was the chief means of her family's support. Petitioner and Conrad Thibault claimed the latter's son as an exemption. Petitioner engaged in activities pursuant to her career as a writer. She wrote a number of poems and articles. One was sold to Holiday Magazine for $200. She traveled to Europe in 1951 to gather material for a story on289 Queen Wilhelmina of The Netherlands, whom she had known during World War II, which she hoped to sell to Ladies' Home Journal. It was never accepted for publication. While in Europe she gathered material for articles on the Princess of Liechtenstein, for which she received no substantial return. She began writing a "Celebrity Cook Book" which has not been published. In 1952 and 1953, petitioner and Mrs. Robert Considine attempted to promote a television show called "What's New." There were ten performances of the program, which was a variety show with well-known "intellectuals" from various fields appearing without charge. It attracted some sponsors but was regarded as too intellectual to be successful. Six of the performances were given as charity benefits. The program was abandoned because of the heavy expense involved. Petitioner occasionally worked as an accompanist for her husband who is a professional concert singer. Petitioner, who has also been a professional photographer, attempted to promote several advertising series in association with other persons but was unsuccessful. Petitioner paid the following amounts of Federal income tax: YearTaxPayment1951Estimated tax for1950$10,000.00Estimated tax for195110,000.00On balance owing25,000.00Total$45,000.001952Estimated tax for19512,000.00On balance owing44,124.19Total46,124.191953On balance owing38,500.001954On balance owing36,000.00290 Petitioner's corrected income tax liability for 1951 and 1952 and petitioner's and Conrad Thibault's corrected joint liability for 1953 and 1954 are as follows: 1951$39,215.05195236,383.99195337,233.20195442,418.07A partial schedule of petitioner's other expenditures is as follows: (A) State taxes. Petitioner paid state income taxes of approximately $4,000 annually. (B) Rent. Petitioner paid approximately $500 a month rent during the period involved here on an apartment at 956 Fifth Avenue, New York. This apartment included a two-room suite for petitioner's mother. (C) Servant. Petitioner employed a maid for the apartment during the period at an annual expense of $2,000 to $3,000. (D) Personal secretary. Petitioner employed a personal secretary during at least part of 1951, paying her $50 a week. (E) Business rent. Petitioner rented a two-room business office at 745 Fifth Avenue beginning in 1951 at an annual rate of approximately $3,000. This office was subleased during 1953 and 1954. (F) Entertainment. Petitioner expended amounts for entertainment as follows: ClaimedTotalbusinessYearamountexpenseDisallowed1951$3,154.8519522,299.73$ 594.99$394.9919532,019.62723.58250.0019541,926.901,314.10500.00291 The disallowances were agreed to by petitioner. (G) Charitable contributions. Amounts claimed by petitioner and disallowed are as follows: YearAmountDisallowed1951$2,000.00$180.0019521,901.00486.0019532,491.60140.0019542,832.85182.00(H) Stock purchases. Petitioner purchased Rainbow Oil stock for $4,600 in June 1951, but the purchase was rescinded 30 days later. Petitioner purchased 2,000 shares of Joe Indian Mountain Metal Mines for $1,210 during 1952 which was subsequently sold at a loss. Petitioner also purchased undisclosed stock through W. E. Hutton Company for $833 during 1952. Petitioner did not consult her tax counsel at Cadwalader, Wickersham & Taft prior to making these investments. (I) Investment in stage plays. Petitioner invested $1,200 in "Four Times Twelve" in the latter part of 1950. The play was unsuccessful and the loss was claimed on her return for 1951. During 1951, petitioner invested $1,200 in "Second Threshold," which was unsuccessful and resulted in a loss of $800. In 1953, petitioner invested $1,470.10 in "Escapade," which was also unsuccessful, and the loss was claimed on her 1953 return. Petitioner did292 not consult her tax counsel in advance in making these investments. (J) Loans. Petitioner made advances during this period to a non-profit group called "The Dancers," which held dances in her apartment every month. (K) Selected purchases. (1) January 1951: Brooch and earrings for $3,000 from Van Cleef & Arpels, which was subsequently sold. (2) January 1951: Portrait of herself from Uberto Pallastrelli for $1,600. (3) March 1951: A Vickrey painting from Creative Gallery, which was subsequently sold. (4) May 1952: A New De Soto automobile for $2,489.61, which was sold for approximately $1,000 when she married Conrad Thibault. (5) 1953 and 1954: A Steinway piano for $2,700, which was subsequently sold for $2,000. (L) Vacations. (1) February 1951: Two-week trip to Nassau and the Bahamas. (2) June and July 1951: Six-week trip to Europe during which she obtained material to prepare articles on Queen Wilhelmina of The Netherlands and the Princess of Liechtenstein. $1,455 of the $2,200 expense was allowed as a business deduction. (3) January 1952: Two-week trip to Nassau. (4) August 1952: Nine-day stay at Elizabeth Arden's Maine Chance Health Farm in Maine. (5) February293 1953: Two-week trip to Jamaica, part of which was paid for by a raffle won by petitioner. (6) Summer 1963: $1,500 rent for summer home at Roslyn, Long Island. (7) January 1955: Ten-day vacation in Nassan with her husband and her daughter and daughter's husband. (M) Bills and loans. Petitioner paid bills and loans of undetermined amounts and dates of origination. On her statement of financial condition, Form 443, filed November 14, 1951, petitioner listed her only liability as notes payable in the amount of $4,000. Opinion Petitioner contends that a statement to her counsel by the employee of the internal revenue service who was handling her delinquent tax account constituted "reasonable cause" for her failure to pay current installments of her estimated tax so as to avoid the statutory addition to tax for their nonpayment.1 The statement was not denied by Wolff, the individual involved, and there was affirmative evidence that it was made. Whether or not it was correct and whether or not Wolff had authority to make it seem to us to be irrelevant to the issue. We regard it as incontrovertible that reliance on his advice was at least as justifiable as in the case of a qualified294 private tax adviser, which has frequently been held to be "reasonable cause." 2, affirmed per curiam (C.A. 3, 1945); . This is, if anything, a stronger case for petitioner in the light of the fact that a "presumption of legality attaches to the act of a public officer." (C.A. 9, 1949); . 295 Cases holding that estoppel does not lie against the Government, where substantive questions of law, (C.A. 4, 1961), or of fact, , arise, which are the sole objections advanced to petitioner's contention in this respect, are beside the mark. In spite of respondent's mistaken attention to the contrary, these cases did not involve reasonable cause, but only the question of whether the tax in question was legally and actually due. The issue was not, as here, whether there was reasonable cause for failure to make a payment admittedly due, but rather the existence of any liability in the first place. There is no more reason to regard these decisions as authority on reasonable cause than there would be for a taxpayer to argue that he did not owe taxes because a qualified tax consultant advised him that he did not. Cf. ; , another case cited by respondent, is similarly no authority for his position here. There, reliance upon296 statements of an internal revenue agent as reasonable cause was not rejected but the issue was disposed of by the holding that "before a taxpayer can get relief from the imposition of * * penalties by showing that his failure to file the original return within the time required by law was due to reasonable cause and not willful neglect, he must file a belated return," (Italics added) which, in that case, had not been done. And in , affirmed per curiam , certiorari denied , decision was for the taxpayer although the situation there was more favorable to respondent. This appears most succinctly in an excerpt from the lone dissent of Judge Disney (p. 679): I think that reasonable cause may not be predicated in the attitude of a revenue agent, at least not where, as here, he merely failed to do anything or say anything * * * To a similar effect is . The statement on which petitioner and her counsel testified that they relied was to the effect that preference was to be given to payment of the taxes, longest in arrears. 297 While petitioner had a large income and spent sizable portions of it for non-tax purposes, we entertain no doubt that in none of the years before us could she have completely discharged both her past due taxes and the payments on her current estimated tax. What she had was virtually an election and a presumably competent authority advised her how to exercise it. This brings us to an issue not originally raised by the parties but on which argument was requested by the Court. Examination of petitioner's use of her funds during the period in controversy indicates the possibility that, notwithstanding the advice upon which she relied, petitioner might have succeeded in applying some amounts to the partial liquidation of her estimated current tax liability; and that hence, while there might have been reasonable cause to some extent, failure to pay anything at all could be attributed to "willful neglect." 3 See . Respondent, however, has taken the position on brief that the addition to tax is indivisible, and that the statute does not contemplate application of the "penalty" to only a part of the underpayment; that, in effect, the entire298 addition to tax is due or none of it is. Since we find that failure to pay at least a part of the estimated tax was due to reasonable cause and not to willful neglect, and that hence it is not justifiable to impose the entire addition, we conclude that, as the issue is presented here, respondent erred in his determination.Other grounds relied upon by petitioner as reasonable cause consequently need no further consideration. Decisions will be entered for the petitioners. Footnotes1. SEC. 294. @ADDITIONS TO, THE TAX IN CASE OF NONPAYMENT. (d) Estimated Tax. - (1) Failure to File Declaration or Pay Installment of Estimated Tax. - * * (B) Failure to Pay Installments of Estimated Tax Declared. - * * [In] the case of a failure to pay an installment of the estimated tax within the time prescribed, unless such failure is shown to the satisfaction of the Commissioner to be due to reasonable cause and not to willful neglect, there shall be added to the tax 5 per centum of the unpaid amount of such installment, and in addition 1 per centum of such unpaid amount for each month (except the first) or fraction thereof during which such amount remains unpaid. In no event shall the aggregate addition to the tax under this subparagraph with respect to any installment due but unpaid, exceed 10 per centum of the unpaid portion of such installment. ↩2. This seems to be respondent's view also. He says in his reply brief: "It is recognized that reasonable reliance upon the advice of qualified tax counsel, to whom full information has been given, is reasonable cause where there are no other factors present."↩3. See footnote 1, supra. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621202/	Corey Don Eiges, Theresa Deal Eiges, and Jordan Deal Eiges, a Minor, by Corey Don Eiges and Theresa Deal Eiges, as Next Friends, Petitioners v. Commissioner of Internal Revenue, RespondentEiges v. CommissionerDocket No. 17236-92United States Tax Court101 T.C. 61; 1993 U.S. Tax Ct. LEXIS 45; 101 T.C. No. 4; July 21, 1993, Filed An appropriate order will be issued. R issued, on the same day, a statutory notice determining deficiencies in and additions to P-parents' 1983 and 1988 Federal income taxes, and a statutory notice of transferee liability determining P-parents' 4-year-old son's transferee liability for his parents' income tax deficiencies to the extent of the value of assets allegedly transferred to him. Jeopardy assessments were made for both determinations. P-parents timely filed a petition challenging respondent's determinations. R moved to dismiss for lack of jurisdiction with respect to the minor son. Held: R's motion will be denied. As natural guardians of their minor son, P-parents may act as his "next friends" under Rule 60(d), Tax Court Rules of Practice and Procedure, and did in fact intend to petition for redetermination of both their deficiencies and their minor son's transferee liability. Corey Don Eiges and Theresa Deal Eiges, pro sese.William R. McCants, for respondent. Dawson, Judge. DAWSON62 OPINIONDawson, Judge: This case was assigned to Special Trial Judge Francis J. Cantrel pursuant to section 7443A(b)(4) and Rules 180, 46 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge set forth below.OPINION OF THE SPECIAL TRIAL JUDGECantrel, Special Trial Judge: This matter is before the Court on respondent's motion to dismiss for lack of jurisdiction as to Jordan Deal Eiges as transferee of the assets of Corey Don Eiges and Theresa Deal Eiges (petitioner parents), and to amend the caption to read "Corey Don Eiges and Theresa Deal Eiges, Petitioners".By joint statutory notice of deficiency dated May 12, 1992, respondent determined deficiencies in and additions to petitioner parents' 1983 and 1988 Federal income taxes as follows:Additions to taxYearDeficiencySec. 6653(b)(1)Sec. 6653(b)(2)1983$ 151,385$ 75,6931198825,54119,15647 Jeopardy assessments were made in the full amount of the deficiencies and additions for both years on March 13, 1992. According to the explanation attached to the notice of deficiency, respondent increased petitioner parents' 1983 taxable income by $ 312,000 for gold they "fraudulently received" 63 from the Chase Manhattan Bank of New York. Respondent increased petitioner parents' 1988 taxable income by $ 157,654 "for cash or cashier checks used to purchase two real estate lots in the name of Theresa Deal but who subsequently testified that the funds came to her from Corey Don Eiges."Petitioner parents are the natural parents of a minor child, Jordan Deal Eiges (Jordan), born in 1988. On May 12, 1992, respondent also issued a statutory notice of liability to "Jord[a]n Deal Eiges as Transferee of the Assets of Corey Don Eiges and Theresa Deal Eiges as Tenants in the Entirety as Transferee of Theresa Deal." The notice states that Jordan was determined to be liable for petitioner parents' 1983 and 1988 income tax deficiencies and additions to tax to the extent of $ 190,000, the value of assets allegedly received by Jordan. In a statement attached to the liability notice, 48 respondent sets out petitioner parents' 1983 and 1988 deficiencies and additions to tax as they appear in the deficiency notice, and states that assets of petitioner parents were transferred to Jordan by quit-claim deed on August 2, 1991. Respondent lists the value of two adjoining lots of land in Harbour Pointe, Bay County, Florida, as $ 95,000 each; and therefore determines Jordan's transferee liability to be $ 190,000. A jeopardy assessment of Jordan's transferee liability was made on March 13, 1992.Respondent's certified mailing list (Form 5273) reflects that the three copies of the statutory notice of deficiency issued to petitioner parents on May 12, 1992, were sent by certified mail to Federal prison camps in Bryan, Texas, and Tyndall Air Force Base, Florida, as well as to a post office box in Lynn Haven, Florida. The form also shows that on the same day four copies of the statutory notice of transferee liability issued to "JORD[A]N DEAL EIGES AS TRANSFEREE OF THE ASSETS OF COREY DON EIGES AND THERESA DEAL EIGES" were sent by certified mail to each of the three locations listed above, as well as to "4316 North Shore Road, Lynn Haven, Florida 32444."The following document49 captioned in the names of "Corey Don Eiges, Theresa Deal Eiges, and Jord[a]n Deal Eiges, Petitioners," was timely received by this Court and filed as a petition on July 29, 1992:64 COMES NOW the Petitioners, Corey Don Eiges and Theresa Deal Eiges, together with a minor child, Jordan Deal Eiges to disagree with the Notice of Deficiency issued by the Commissioner of Internal Revenue, Shirley Peterson, through her District Director, James Ryan.Said Deficiency Notice alleges 1040 Individual Taxes due for the year of 1983 in the amount of $ 151,385.00 together with attached penalties and inte[r]ests.Said Deficiency Notice further alleges 1040 Individual Taxes due for the year 1988 in the amount of $ 25,541.00 together with attending penalties and interests.Both of the above year allegations of deficiencies are now placed into total contest, as all of the above allegations of taxes owed for each of the two year[s], with their attached penalties and interests, are totally false.The alleged taxpayers indicated on the Notice of deficiency, and most especially the minor child, have no 1040 Individual Tax liability for the two years in question. The minor child was not 50 yet born until 1988.1. The Petitioners have not enclosed a copy of the Notice of Deficiency; as it is not the duty of the Petitioners to provide this court with evidence contrary to the truth.2. The Petitioners dispute the alleged taxes due and owing, according to the Notice of Deficiency, for the year 1983 in the amount of $ 151,385.00 together with any attending penalties and interests.3. The Petitioners dispute the alleged taxes due and owing, according to the Notice of Deficiency, for the year 1988 in the amount of $ 25,541.00 together with any attending penalties and interests.4. The Notice of Deficiency lists a tax derived from a false assumption of taxable income based o[n] a false gross income addition for each of the two years in contest.WHEREFORE these Petitioners respectfully request this administrative court order the Commissioner of Internal Revenue to withdraw her totally erroneous document known as a NOTICE OF DEFICIENCY.[Emphasis added.]Petitioner Corey Don Eiges resided in the Federal Prison Camp at Tyndall Air Force Base, Florida, on the date the petition was filed. Petitioner Theresa Deal Eiges was incarcerated in the Federal Prison Camp at Bryan, Texas. 51 On "information and belief", respondent provides the following information: at the time the statutory notice of liability was issued, Jordan resided in the physical custody of Judith D. Harris, the sister of petitioner Theresa Deal Eiges, at 4316 North Shore Road, Lynn Haven, Florida 32444. No legal guardian has been appointed for Jordan. 2In her motion filed September 15, 1992, respondent moves to dismiss for lack of jurisdiction as to Jordan and to amend 65 the caption accordingly. Respondent asserts this Court lacks jurisdiction because the petition filed by petitioner parents was neither signed by Jordan nor by them on his behalf, and because no notice of liability was attached, a petition was not timely filed by Jordan or by a legal guardian expressly acting on his behalf. Respondent cites and relies upon Rules 13(c) and52 60(a), (c) and (d), and sections 6213(a) and 7502.Respondent's motion presents an issue of first impression in that it involves our jurisdiction over the transferee liability of a minor child of taxpayers who have themselves petitioned the Court to redetermine the deficiency out of which the transferee liability arises.Two things are required to invoke this Court's jurisdiction: A validly issued notice of deficiency or transferee liability, and a timely filed petition for redetermination of the deficiency or liability determined by the Commissioner. Secs. 6212, 6213(a), 7502; Rule 13. In objecting to respondent's motion that we lack jurisdiction over Jordan for failure of the latter requirement, petitioner parents argue that this Court lacks jurisdiction over Jordan because he "never received any Notice of Deficiency, nor has anyone in charge of his affairs received said Notice." 3 Furthermore, the objection notes that Jordan "is not now, nor has he ever been, a taxpayer." Lastly, petitioner parents challenge that Jordan is a transferee of any property.53 The jurisdiction of this Court is governed by statute. Sec. 7442. This Court has jurisdiction to determine whether we have jurisdiction over Jordan. See Midland Mortgage Co. v. Commissioner, 73 T.C. 902">73 T.C. 902, 905 (1980). Once this Court determines that it has jurisdiction, it retains that jurisdiction regardless of subsequent concessions, stipulations, or events. See Gladstone Found. v. Commissioner, 77 T.C. 221">77 T.C. 221, 224 (1981), and cases cited therein.Section 7453 provides that proceedings in this Court "shall be conducted in accordance with such rules of practice and procedure * * * as the Tax Court may prescribe". In general a case is commenced in this Court by the filing of a petition to redetermine a deficiency set forth in a notice of deficiency or to redetermine the liability of a transferee set forth in a 66 notice of liability issued by the Commissioner to the transferee. Rule 20(a). Rule 34 sets forth the basic requirements for filing a petition with this Court. Among other things, each petition is required to be signed by each petitioner or petitioner's counsel. Rule 34(b)(7). Failure of the petition54 to satisfy applicable requirements may be grounds for dismissal of the case. Rule 34(a)(1). "The dismissal of a petition for failure to satisfy applicable requirements depends on the nature of the defect, and therefore is put in the contingent 'may' rather than the mandatory 'shall'". Explanatory Note to Rule 34(a), 60 T.C. 1084">60 T.C. 1084; Brooks v. Commissioner, 63 T.C. 709">63 T.C. 709, 711 (1975).Rule 60(a)(1) provides that a case shall be brought by and in the name of the person against whom the Commissioner determined the deficiency (in the case of a notice of deficiency) or liability (in the case of a notice of liability), or by and with the full descriptive name of the fiduciary entitled to institute a case on behalf of such person. In the notices of deficiency and transferee liability, respondent made two separate determinations: Petitioner parents' deficiencies and additions, and Jordan's transferee liability for the same. Jordan did not sign and could not have signed the petition in this case; rather, it was signed by his parents.Our Rule 60 provides, in pertinent part:(c) Capacity: * * * The capacity of a fiduciary or other representative55 to litigate in the Court shall be determined in accordance with the law of the jurisdiction from which such person's authority is derived.(d) Infants or Incompetent Persons: Whenever an infant or incompetent has a representative, such as a general guardian, committee, conservator, or other like fiduciary, the representative may bring a case or defend in the Court on behalf of the infant or incompetent person. An infant or incompetent person who does not have a duly appointed representative may act by a next friend or by a guardian ad litem. * Our Rule 60(c) and (d) is patterned after and substantially identical to rule 17(b) and (c) of the Federal Rules of Civil Procedure.4 Of rule 17(c) of the Federal Rules of Civil Procedure, it has been said: "There is little distinction between a next friend and a guardian ad litem. A guardian ad litem is a special guardian, appointed by the court to defend in behalf 67 of an infant party. A next friend is one who, without being regularly-appointed guardian, represents an infant plaintiff." Till v. Hartford Accident & Indem. Co., 124 F.2d 405">124 F.2d 405, 408 (10th Cir. 1941); see 43 C.J.S., Infants, sec. 22256 (1978).The purpose of Rule 60(d) is to protect and preserve the rights and interests of those taxpayers under the legal disability of infancy or incompetency. Lacking a "duly appointed representative," Jordan may act in this Court by a "next friend" under Rule 60(d). In Florida and at common law, parents are recognized as the natural guardians of their minor children. 39 C.J.S., Guardian & Ward, sec. 6 (1976). 5 Also in Florida and at common law, a representative need not be appointed where the interests of an infant litigant are adequately protected by a parent or natural guardian. Bronstein v. Roth, 64 So. 2d 272">64 So. 2d 272 (Fla. 1953);57 43 C.J.S., Infants, sec. 223 (1978); see also Maugeri v. Plourde, 396 So. 2d 1215 (Fla. Dist. Ct. App. 1981). 658 In this case, it is appropriate to recognize Jordan's natural guardians, petitioner parents, as his "next friends" for purposes of filing a petition to redetermine his transferee liability.759 Having established petitioner parents' capacity to represent their minor son as his next friends, we must consider whether the petition filed in this case in fact confers jurisdiction over Jordan. We generally prefer to hold that this Court 68 has jurisdiction whenever possible so as to provide taxpayers with an opportunity to obtain judicial redetermination of their tax liability prior to the payment thereof. Hess v. Commissioner, T.C. Memo. 1989-412 (citing Fishman v. Commissioner, 51 T.C. 869">51 T.C. 869, 874 (1969), affd. per curiam 420 F.2d 491">420 F.2d 491 (2d Cir. 1970)). For example, this Court has treated as petitions all documents filed by taxpayers within the statutory 90-day period if they were intended to be petitions. O'Neil v. Commissioner, 66 T.C. 105">66 T.C. 105, 107 (1976); Castaldo v. Commissioner, 63 T.C. 285">63 T.C. 285, 287 (1974). Respondent asserts that petitioner parents did not intend to petition on behalf of their son because no copy of the transferee liability notice is attached, the petition refers only to a single notice of deficiency, and60 petitioner parents' signatures lack explicit denotation of their representative capacity. We observe that petitioner parents did not attach a copy of the deficiency notice to the petition, yet respondent does not argue that this same defect is fatal to our jurisdiction over them. Our Rules are promulgated to provide procedural guidance and are not intended to limit judicial review authorized by sections 7442 and 6213. See Barbados #6 Ltd. v. Commissioner, 85 T.C. 900">85 T.C. 900, 906 (1985).Nor do we think it significant that the language used in the petition refers primarily to the deficiency notice. The record shows that multiple notices of deficiency, transferee liability, and jeopardy assessment were issued to petitioner parents and to Jordan. Petitioner parents presumably received notices addressed to their minor son. Because Jordan's determined transferee liability arises out of petitioner parents' deficiency, there is some confusion as to which of respondent's liability determinations and assessments these pro se taxpayers are responding to. The intent of the petition, however, is clear. Jordan's name appears in the petition's caption as well as61 in its first paragraph as that of a petitioner. Furthermore, the fifth paragraph of the petition reads: "The alleged taxpayers indicated on the Notice of deficiency, and most especially the minor child, have no 1040 Individual Tax liability for the two years in question. The minor child was not yet born until 1988." (Emphasis added.) Although petitioner parents' representative capacity fails to appear explicitly on the signatory line, their "lack of knowledge should not be equated with a lack of intent". Holt v. Commissioner,69 67 T.C. 829">67 T.C. 829, 832 (1977). Reviewing the petition as a whole, we hold that it was filed for the purpose of bringing all issues of petitioner parents' deficiencies as well as Jordan's liabilities as a transferee before this Court."While the timely filing of a petition that does not conform to the rules of this Court may give this Court jurisdiction of the case, it remains entirely discretionary with the Court whether it will accept and file a nonconforming document as a petition, and whether it will dismiss the case for failure to comply with those rules." Carstenson v. Commissioner, 57 T.C. 542">57 T.C. 542, 546 (1972).62 Where the interests of justice are best served, this Court has exercised its discretion in retaining jurisdiction in cases where the petition lacked the signature of the proper party. See Holt v. Commissioner, supra;Brooks v. Commissioner, 63 T.C. 709">63 T.C. 709 (1975); Carstenson v. Commissioner, supra;Powers v. Commissioner, 20 B.T.A. 753">20 B.T.A. 753 (1930). The petition in this case does not lack the proper party's signature because petitioner parents are the proper signatories. Rather, they failed to include a formal description of themselves as Jordan's representatives. As discussed above, our Rule 60(d) was specifically promulgated to protect the interests of infants. To hold form over substance in applying the Rule would serve the interests of neither justice nor Jordan. As our Rules permit us such latitude, and the petition filed in this case is otherwise timely and correct, we hold that petitioner parents' signatures appearing on the petition were made to contest their income deficiencies, and on behalf of Jordan as his next friends under Rule 60(d), to contest his transferee63 liability.Not only are the interests of justice best served by our consideration of the deficiency and transferee liability actions together, but those of judicial economy are served as well. See Centre for Intl. Understanding v. Commissioner, 84 T.C. 279">84 T.C. 279, 282 (1985); Odend'hal v. Commissioner, 75 T.C. 400">75 T.C. 400, 402 (1980). With regard to Jordan's transferee liability, respondent bears the burden of proving that respondent has satisfied the procedural requirements of section 6901(a) providing a procedure through which respondent may collect from a transferee of assets unpaid taxes owed by the transferor if a basis exists under applicable State law for holding the transferee liable. Sec. 6902(a); Rule 142(d); Commissioner v. Stern, 357 U.S. 39">357 U.S. 39, 45 (1958); Gumm v. Commissioner, 93 T.C. 475">93 T.C. 475, 47970 (1989), affd. without published opinion 933 F.2d 1014">933 F.2d 1014 (9th Cir. 1991). Petitioner parents are now before us as the taxpayers whose deficiencies are the basis of both of respondent's determinations. This Court therefore has jurisdiction64 to redetermine respondent's determination that there are in fact unpaid taxes owed by petitioner parents. By retaining jurisdiction, they are before us as Jordan's representatives as well as the alleged transferors in the transferee liability case.We find additional support for retaining jurisdiction over Jordan in the jeopardy assessment provisions. If subsequent to a jeopardy assessment a petition is filed in the Tax Court, this Court has jurisdiction "to redetermine the entire amount of the deficiency and of all amounts assessed at the same time in connection therewith." Sec. 6861(c); sec. 301.6861-1(c), Proced. & Admin. Regs. Respondent made the jeopardy assessments of deficiencies, additions, and transferee liability on the same day, March 13, 1992; and the notices of deficiency and liability were issued on the same day, May 12, 1992. See sec. 6861(b). The amount of Jordan's liability was thus assessed at the same time in connection with petitioner parents' deficiency assessment.On this record, respondent's motion to dismiss the petition as to Jordan will be denied. However, the Court, in its order to be issued, will amend the caption of this case to accord with this *65 opinion to show Jordan's status as a minor and petitioner parents as next friends.An appropriate order will be issued. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩1. 50 percent of the interest payable under sec. 6601 with respect to the portion of the underpayment attributable to fraud.↩2. Petitioners did not respond to this Court's order of May 4, 1993, requesting information as to the whereabouts of Jordan and whether a legal guardian had been appointed for him.↩3. The Court's May 4, 1993, order addressed petitioner parents' argument and determined that a notice of transferee liability was validly issued to Jordan Deal Eiges. See Hoffenberg v. Commissioner, 905 F.2d 665">905 F.2d 665, 667 (2d Cir. 1990), affg. per curiam T.C. Memo. 1989-676↩.4. Cases applying the Federal Rules of Civil Procedure are illustrative for purposes of analyzing and interpreting our Rules. Rule 1(a); Take v. Commissioner, 82 T.C. 630">82 T.C. 630, 633 n.8 (1984), affd. 804 F.2d 553">804 F.2d 553 (9th Cir. 1986); Shiosaki v. Commissioner, 61 T.C. 861">61 T.C. 861, 862↩ (1974).5. Petitioner parents both resided in Federal prison camps at the time the petition was filed. The petition bears Corey Don Eiges' prison address in Florida. Under Florida law, a mother and father are natural guardians of their own children during their minority. Fla. Stat. Ann. sec. 744.301(1)↩ (West 1986 & Cum. Supp. 1992).6. The fact that Jordan is in the physical custody of a relative does not dissolve petitioner parents' status under State law as natural guardians. We note, however, that incarceration is recognized as a reason for removing a parent as guardian. See Fla. Stat. Ann. sec. 744.474↩ (West 1986). Nevertheless, there is no indication in the record that any guardianship proceedings were ever conducted for removal or appointment of a guardian for Jordan, nor does it appear that any proceedings are pending.7. We note that commentators and cases have discussed the possible conflict between Fed. R. Civ. P. 17(b) and (c), as to whether Federal law or State law is controlling for purposes of determining the capacity of a next friend or guardian ad litem. See 3A Moore, Moore's Federal Practice, par. 17.26, at 17-210 (2d ed. 1993); 6A Wright, et al., Federal Practice and Procedure, sec. 1571, at 510 (2d ed. 1990); 68 A.L.R.2d 752">68 A.L.R.2d 752. The Court of Appeals for the Fifth Circuit, to which this case is appealable as to petitioner wife, has held that State law is not controlling for purposes of Fed. R. Civ. P. 17(c). Travelers Indem. Co. v. Bengston, 231 F.2d 263">231 F.2d 263 (5th Cir. 1956) (appointment of guardian under Fed. R. Civ. P. 17(c) is procedural and therefore governed by Federal Rules and not State law); see also Chrissy F. v. Mississippi Dept. of Pub. Welfare, 883 F.2d 25">883 F.2d 25, 27 (5th Cir. 1989); Fallat v. Gouran, 220 F.2d 325">220 F.2d 325, 328-329 (3d Cir. 1955). The Court of Appeals for the Eleventh Circuit, to which this case is appealable as to petitioner husband and Jordan, follows decisions of the Court of Appeals for the Fifth Circuit which predate the creation of the Eleventh Circuit. Bonner v. City of Prichard, 661 F.2d 1206">661 F.2d 1206, 1207↩ (11th Cir. 1981).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621203/	E. G. Kilroe and Frances H. Kilroe, Petitioners, v. Commissioner of Internal Revenue, RespondentKilroe v. CommissionerDocket No. 73257United States Tax Court32 T.C. 1304; 1959 U.S. Tax Ct. LEXIS 75; September 29, 1959, Filed 75 Decision will be entered under Rule 50. In May 1953, petitioners purchased a house in Winter Park, Florida, after having it examined for termites. At that time, while some old termite damage was detected in the northwest corner of the residence, the exterminator company reported the house to be in sound condition. In January of 1954 and 1955, annual inspections of said house were made by a termite control company. There was no exterior evidence of termite damage prior to the latter part of April 1955. In the latter part of April 1955, infestation and substantial damage to the northeast wall of the kitchen, floor, and cabinets were discovered. Held, that the damage was shown to have occurred with the degree of suddenness required to support a casualty loss deduction within the purview of section 165(c)(3) of the Code of 1954. Held, further, that the entire loss in question occurred during the taxable year 1955. Amount of loss deduction determined. Irving M. Felder, Esq., for the petitioners.Louis J. DeReuil, Esq., for the respondent. Fisher, Judge. Tietjens, J., concurring. Turner, J., dissenting. Murdock, Harron, and Raum, JJ., agree with this dissent. Atkins, J., dissenting. Turner and Harron, JJ., agree with this dissent. FISHER1305 Respondent determined a deficiency in income tax against petitioners for the taxable year 1955 in the amount of $ 465.13.The issues presented for our consideration herein are: Whether petitioners are entitled to deduct a loss resulting from termite damage to their personal residence as a casualty loss within the meaning of section 165(c)(3) of the Code of 1954; 77 whether the loss, if allowed, is deductible for the year 1955; and the amount of the loss allowable.FINDINGS OF FACT.Some of the facts are stipulated, and, as stipulated, are incorporated herein by reference.E. G. and Frances H. Kilroe, sometimes hereinafter referred to as petitioners, were, in the year 1955, and are at the present time, husband and wife, residing at 1101 Palmer Avenue, Winter Park, Florida.Petitioners each filed a separate individual income tax return for the taxable year 1955 with the district director of internal revenue at Jacksonville, Florida. On January 19, 1957, petitioners filed an amended joint return for 1955 with said district director.Petitioners purchased their residence, located at 1101 Palmer Avenue, Winter Park, Florida, in May 1953. At that time, it was about 20 years old. The residence is constructed of stucco on wood. Before said residence was purchased, petitioners sought a bank loan, and the bank obtained the Rudler Exterminating Company, Inc., to inspect the house for termites. In May 1953, petitioners' residence was inspected by said company. At that time, the company found some old termite damage in the northwest corner of the residence78 but reported the house in sound condition.Thereafter, on December 11, 1953, petitioners executed a 5-year contract guaranty bond with Orkin Exterminating Company of Florida, Inc. (hereinafter called Orkin), which called for an initial termite treatment together with five annual termite inspections. On January 9, 1954, petitioners' residence was termite inspected by Orkin and treated. Again, on January 19, 1955, petitioners' residence was inspected for termites by said company.In February or March of 1955, E. G. Kilroe, hereinafter called petitioner, noticed that some plaster had fallen from the wall in the kitchen. He removed some of the loose plaster under the kitchen window and noticed that some plastering would have to be done. Petitioner did not see any termite activity from the exposure that was made.1306 About 10 days or 2 weeks later, a contractor came to petitioner's home, pulled some more plaster from the wall, and advised petitioner that the plaster had fallen as a result of termite damage. Petitioner did not see any termite activity at that time.Subsequently, in April 1955, several workers cut away the outside wall near the kitchen window. Approximately 79 20 feet of the north wall, about 12 feet of the east wall up to the height of the kitchen ceiling, the kitchen floor, and the cabinets in the kitchen were torn out. Fresh termite channels were found at that time.Prior to the latter part of April 1955, there was no exterior evidence of termite damage. Petitioner never saw a moving termite either inside or outside of the house.Petitioner was familiar with termite activity at the homes of several acquaintances in the local area, and also had personal experience with termite infestation while living in India.Petitioners, on their separate income tax returns for 1955, and as reflected in their amended joint return for 1955, deducted the amount of $ 2,042.88, which had been expended by them for repairs resulting from damage done by termites. Respondent, in his statutory notice, disallowed the full amount of said deduction.Petitioners, in 1955, sustained a casualty loss from termites in the amount of $ 2,042.88.OPINION.Respondent contends that there was no "casualty" within the intendment of section 165(c)(3) of the Code of 1954, 1 on the grounds that the element of suddenness with respect to the alleged termite invasion and resulting80 damage is absent; that the loss, if any, did not occur in the taxable year 1955; and that the amount of the claimed loss has not been established. In essence, it is respondent's position that the termite infestation and resultant damage involved herein occurred over a long period of time and hence lacks the requisite element of suddenness. Petitioners, on the other hand, urge that the initial invasion and subsequent damage occurred in a relatively short period of time during the early part of the taxable year 1955.The term "suddenness" is comparative, and gives rise to an issue of fact under circumstances which may exist in a variety of backgrounds in respect of which the rapidity and detection of 81 the damage may vary considerably, depending on the nature of the hostile operating force and the surrounding circumstances of the particular case. In some of the cases involving termite losses, the claimed deductions 1307 were disallowed, Charles J. Fay, 42 B.T.A. 206">42 B.T.A. 206 (1940), affd. 120 F. 2d 253 (C.A. 2, 1941); United States v. Rogers, 120 F. 2d 244 (C.A. 9, 1941). In others they were allowed, Rosenberg v. Commissioner, 198 F. 2d 46 (C.A. 8, 1952), reversing 16 T.C. 1360">16 T.C. 1360 (1951); Shopmaker v. United States, 119 F. Supp. 705">119 F. Supp. 705 (E.D. Mo. 1953). For a comprehensive discussion of those cases, inter alia, see Leslie C. Dodge, 25 T.C. 1022">25 T.C. 1022 (1956).In Rosenberg, supra, which held that the loss was allowable, the court stated that it agreed with the views of the Ninth and Second Circuits in the Rogers and Fay cases that in order to come within the definition of "other casualty," as that term is used in the statute, "the occurrence82 must be sudden," but distinguished those cases on the ground that therein there was a lack of demonstrated suddenness of the losses. Emphasizing that suddenness is a comparative term, the court stated (p. 51):Comparatively speaking, an invasion of a colony of termites which destroys the timbers of a building in a month, three months, or a year, is a sudden destruction, when from natural depreciation it would have required from 25 to 50 years or longer for them to have been substantially injured. * * Likewise, in Shopmaker v. United States, supra, an inspection of residential premises at the time of purchase in December 1949 did not disclose the presence of termites. No termites were found in the premises during 1950. In February 1951, termites appeared in the house. Holding that the facts brought the case within the scope of the Rosenberg decision, and that a loss deduction was allowable, the court went further and said (p. 706):We are impressed with the argument of plaintiffs that the casualty is the invasion of the premises by termites. This is a comparatively quick or sudden operation. The resultant damage which may extend over83 a period of months or years flows from the casualty. The damage and the time it takes for the termites to effect it should not be confused with their initial invasion and determining what is the casualty. * * More recently, in Buist v. United States, 164 F. Supp. 218">164 F. Supp. 218 (E.D.S.C. 1958), the taxpayer bought a summer beach cottage in 1939. In the spring or early summer of 1953, an inspection of the premises did not disclose the presence of termites or termite damage. In June of 1954, an inspection showed that the house was under heavy attack by termites. The court found that there were no termites in the house during the summer of 1953, and between that time and June of 1954, when the house was suddenly attacked by swarms of termites. Holding that the facts of the case brought it within the ambit of the Rosenberg and Shopmaker cases, both supra, the court concluded (p. 220):When termite damage occurs in a short period of time, as it did in this case, the element of suddenness is present, so that the loss resulting therefrom constitutes a casualty within the meaning of the law.1308 In Technical Information Release, No. 142, 84 dated March 13, 1959, the Internal Revenue Service has announced its present policy of allowing deduction on account of such losses when "the termite infestation and subsequent damage * * occurred in relatively short periods of time," and of disallowing such deductions when "the termite infestation and subsequent damage occurred over periods of several years." The release further announces that the Service will follow Buist v. United States, supra. See, to the same effect, Rev. Rul. 59-277, I.R.B. 1959-35, p. 8.Respondent, however, takes the position that the instant case is distinguishable from the Rosenberg, Shopmaker, and Buist line of decisions and is controlled by the Rogers, Fay, and Dodge cases, claiming that petitioner has failed to prove that the termite infestation and damage incident thereto occurred in a relatively short period of time and during the year 1955. It is our view, however, that unlike the instant proceeding, in each of the cases relied upon by respondent, the facts showed the requisite element of suddenness was lacking.Here, the record shows that in 1953, when petitioners sought85 a bank loan in order to purchase the house in question, the bank obtained a qualified termite exterminating company to inspect the property to verify that the premises were free from active termites. In May 1953, said house was examined and the exterminating company discovered some "old termite damage" in the northwest corner of the house, but reported the house in sound condition. Mindful that termites were indigenous to the locale of said property, petitioners took special precautions to guard against possible infestation by hiring a termite control company to make annual inspections under a 5-year contract, which extended from January 1954. On January 9, 1954, petitioners' residence was inspected by Orkin, the exterminator company, and treated. Again, on January 19, 1955, petitioners' residence was termite inspected by said company. During this entire period there was no exterior evidence of termite infestation or damage. A month later, in February 1955, petitioners noticed that plaster had fallen from the wall below the kitchen window located in the northwest corner of the house. In the latter part of April, upon opening the wall, termite activity and damage were discovered. 86 Respondent suggests, on brief, that since the damaged area of the kitchen lies partially on the same wall, i.e., the north wall, which adjoined the old termite damage discovered in 1953, petitioners, upon opening the kitchen wall in April 1955 merely discovered old termite damage which may have existed at the time the portion of the northwest corner of the house was damaged prior to May 1953, when the first inspection was made at the behest of the bank. We 1309 think the evidence, including the stipulation, effectively negatives this view since fresh termite channels were found in April 1955. Respondent has offered no evidence in support of his suggestion.We are aware, of course, that the fact that there were annual inspections of the premises by the exterminating company does not establish with certainty the absence of either termite activity or damage at the time of the inspections. Such inspections are hardly foolproof, but they tend to corroborate the view that the infestation of termites in question occurred after January 1955, especially when considered in the light of the stipulated fact that there was no exterior evidence of damage prior to the latter part of April87 1955. Moreover, while Kilroe admittedly never saw a moving termite inside or outside of his house prior to or during April 1955, he testified unequivocally that when the kitchen wall was opened by the contractors in the latter part of April 1955, he found moist runways or "fresh channels" where live termites had been moving recently. 2 We find his testimony in this respect convincing.88 We recognize that it was impractical for petitioner to have ascertained the precise moment of the initial invasion of the termites into the premises since the termite damage was concealed. Under the circumstances, we would hardly expect the taxpayer to pinpoint the date of invasion with exactitude. Nevertheless, we are not barred thereby from examining into the attendant circumstances. Bearing in mind the fact that an inspection had been made in 1953 when the house was purchased and that annual inspections were made of the premises each year thereafter, the last having been made in January 1955 -- about 3 months before the discovery of the termite damage in question -- plus the fact that there had been no exterior evidence of termite activity and that there were "fresh channels" in the kitchen wall and floor, we are persuaded that the time within which the damage or loss occurred was within a relatively short time prior to discovery in 1955. From the record as a whole, we conclude that there was no termite activity in petitioners' house between May 1953 and January 1955, and that the petitioners are entitled to a casualty loss deduction for the damage in question. Rosenberg v. Commissioner, supra;89 Buist v. United States, supra.1310 Respondent relies on our decision in Leslie C. Dodge, supra, wherein we held that the element of suddenness was lacking and that the time of invasion by the termites had not been established. We believe that Dodge is distinguishable on the facts and is not controlling here. In Dodge, the taxpayers purchased their residence about the year 1930 and in the year 1944 noticed that termites had eaten through the floor of the den in their home when they appeared in large numbers on the carpet. Repairs were made and the woodwork under the floors treated. Annual inspections were made by an exterminating company under a contract which extended from the year 1944 through the year 1948. As no termite damage was found during said period, the taxpayers concluded that the termites had been exterminated and did not renew the contract for annual inspections. Four years later, in about February 1952, the taxpayers again noticed that termites had appeared in large numbers on the floor of the den in their residence and extensive damage was done to the woodwork under the den, kitchen, 90 and a part of the dining room. Unlike Dodge, in the instant case annual inspections were made by a termite control company, the last one having been made only a few months before the discovery of the damage, which was limited to the kitchen area of the house.Turning to the year of the casualty loss in question, respondent contends that the "extensiveness" of the damage involved precludes a finding that the damage could have occurred in any portion of the taxable year 1955. Section 165(a) of the 1954 Code provides that in computing income there shall be permitted deduction of individual losses "sustained during the taxable year and not compensated for by insurance or otherwise." Respondent's proposed interpretative regulations, section 1.165-1, promulgated pursuant to this section, require such loss to be evidenced "by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed." Whether the loss which the taxpayer seeks to deduct is deductible during a taxable year is primarily a question of fact controlled by the circumstances in the particular case. Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287, 292 (1945),91 rehearing denied 326 U.S. 811">326 U.S. 811 (1946).Considering the unusual circumstances of the loss involved herein, we believe that the general requirement that losses be deductible in the year in which they are sustained calls for a practical test. Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445 (1930). Admittedly, the damage was substantial. At the same time, the fresh channels found at the time the damage was discovered and the failure to find evidence of termite activity prior thereto support the view of recency. Respondent offered no opinion or other evidence supporting a contrary view. In fixing the year in which the loss was sustained, we may rely upon circumstantial evidence, which we think supports petitioner's position.1311 While the matter is not entirely free from doubt, because of the concealed character of the termite activity involved, the preventive measures taken by petitioner to guard against termite infestation, the fact that there was no exterior evidence of damage, and the failure to find termite activity until after January of 1955, persuade us to resolve the issue in favor of petitioners. We hold, therefore, 92 that the loss in controversy was sustained entirely in the taxable year 1955.With respect to the amount of loss suffered by petitioners, under section 165(c)(3), the proper measure of the damages to the residence is the difference between the fair market value of the property immediately preceding the casualty and the fair market value immediately thereafter, but not in excess of the adjusted basis of the property, diminished by any insurance recovery. Helvering v. Owens, 305 U.S. 468 (1939); W. F. Harmon, 13 T.C. 373">13 T.C. 373 (1949).At the outset, we note that there is no evidence as to whether, or to what extent, petitioners were compensated by insurance or otherwise for the damage to their property. However, as the parties have tried the case as though petitioners received no compensation, we will proceed herein on the assumption that none was received. Clarence A. Peterson, 30 T.C. 660">30 T.C. 660, 663 (1958), on appeal (C.A. 9, Sept. 23, 1958).Respondent contends that petitioners have failed to establish a loss in the amount of $ 2,042.88. Respondent's determination is, of course, prima facie correct, 93 and the burden of proof is upon petitioners to establish both the fact and the amount of a deductible loss. Burnet v. Houston, 283 U.S. 223">283 U.S. 223 (1931).Petitioner testified that he spent a little over $ 2,000 for repairs to his residence resulting from the damage done by termites. The stipulation shows the amount expended to have been $ 2,042.88. Although petitioner has not directly proved the fair market value of the house immediately preceding the casualty and the fair market value thereafter, we think it reasonable to infer that the fair market value of a termite-infested house would be reduced, as a result of such infestation, to an extent at least equal to the actual expense of repair and replacement. See Buist v. United States, supra.It is clear, also, that this amount did not exceed the adjusted basis of the property. Respondent has offered no testimony in refutation of that of petitioner, and we find no reason to disregard petitioner's testimony. Accordingly, petitioner is sustained. Blackmer v. Commissioner, 70 F. 2d 255 (C.A. 2, 1934).Decision will be entered under94 Rule 50. TIETJENS1312 Tietjens, J., concurring: Unless we are willing to hold that termite damage can never be a "casualty," the result reached here is correct on the facts. TIETJENS; ATKINSTurner, J., dissenting: In my opinion, it is of common knowledge and notorious that there is no such thing as sudden loss or damage from termites, and under the rule of ejusdem generis, a loss represented by termite damage is not a casualty loss within the meaning of section 165(c)(3) of the Internal Revenue Code of 1954 or section 23(e)(3) of the Internal Revenue Code of 1939, the language of the two sections being identical. We so held as far back as 1940, in Charles J. Fay, 42 B.T.A. 206">42 B.T.A. 206, affirmed by the United States Court of Appeals for the Second Circuit at 120 F. 2d 253. In affirming the Fay case, the Circuit Court cited with approval the opinion of the Court of Appeals for the Ninth Circuit in United Statesv. Rogers, at 120 F. 2d 244, wherein that court applied the doctrine of ejusdem generis to the effect that the statute must be construed as though it read "loss95 by fires, storms, shipwrecks, or other casualty of the same kind."In Martin A. Rosenberg, 16 T.C. 1360">16 T.C. 1360, we followed our prior holding in Charles J. Fay, supra, with the support of the affirmance by the Court of Appeals for the Second Circuit, and the opinion of the Court of Appeals for the Ninth Circuit in United States v. Rogers, supra. In reversing the Rosenberg case, 198 F. 2d 46, the Court of Appeals for the Eighth Circuit attempted to distinguish the Fay and Rogers cases, by concluding that the facts in that case, unlike the facts in the Fay and Rogers cases, disclosed a suddenness of the termite damage which would bring the Rosenberg case within the reasoning of the Fay and Rogers cases. In my opinion, the Circuit Court completely and wholly misconstrued the facts, in that in order to find substance to its conclusion of suddenness, it departed from the facts relating to the occurrence of damage and attempted to apply the statute to the discovery of the damage. Very plainly, the right to the deduction does not turn upon96 the discovery of damage, but upon the occurrence thereof.Similarly, in the instant case the findings as I view them contradict rather than support a conclusion of the suddenness of the termite damage. The only event reasonably shown as sudden by the facts was the discovery that the damage had already occurred and not the occurrence of the damage itself, the expressed conclusion being that the damage had occurred sometime between January 1 and actual discovery thereof in April. Furthermore, the disclosure, upon examination, of old channels as well as current channels was indicative that 1313 the damage had been steady and gradual over a long period of time. The existence of the fresh channels merely disclosed where the current activity was going on. Furthermore, since the termites operate within planks, timbers, or beams, and there being no showing that their periodic swarmings are necessarily in the vicinity of their woodeating operations, the fact that the petitioner never saw a moving termite inside or outside his house prior to April is of no importance.In view of the fact, therefore, that the Eighth Circuit Court of Appeals in the Rosenberg case accepted the interpretation97 of the statute as declared in the Fay and Rogers cases, and this Court in its opinion in the instant case does not pointedly depart from that construction, it is my opinion that the facts require a result contrary from that reached.In conclusion, however, it might be said that the respondent, in the Department of Agriculture, undoubtedly has at hand and could call as witnesses the leading authorities on termites and their activities, and if it is to be his policy to continue to press cases such as this to decision, it would seem desirable that he call those experts as witnesses, and put to rest any and all questions of fact as to whether or not there could be any substantial damage occasioned by termites with a suddenness comparable to that caused by fire, storm, shipwreck, or other casualty of the same kind. And in the absence of such rebuttal of testimony, as was the situation here, he should either reconsider his administrative position with respect to the applicability of the sections involved to such losses, or should ask Congress to expand the statute.Atkins, J., dissenting: It is my opinion that this Court, in Charles J. Fay, 42 B.T.A. 206">42 B.T.A. 206,98 and Martin A. Rosenberg, 16 T.C. 1360">16 T.C. 1360, and the Courts of Appeals of the Ninth Circuit and the Second Circuit in United States v. Rogers, 120 F. 2d 244, and Fay v. Helvering, 120 F.2d 253">120 F. 2d 253, respectively, properly held that termite damage does not constitute a casualty loss, inasmuch as it represents the progressive deterioration of property through a steadily operating cause and does not result from some sudden cause or accident which is unforeseeable and not preventable. There is no logical basis for holding that in some cases termite damage constitutes a casualty loss and that in some it does not. If termite damage is properly deductible as a casualty loss, it should be allowed in every case, provided, of course, that it is reasonably shown that the loss was sustained in the taxable year involved. Periodic inspections for termite damage would be important 1314 for this purpose, but not for showing that the loss was or was not a casualty loss. See Burns v. United States, (D.C. N.D. Ohio) 174 F. Supp. 203">174 F. Supp. 203. The technical information release99 and the revenue ruling referred to in the majority opinion, are not the equivalent of regulations, and cannot limit the scope of our consideration of the fundamental question involved. In my opinion the claimed deduction should be disallowed. Footnotes1. SEC. 165. LOSSES.(c) Limitation on Losses of Individuals. -- In the case of an individual, the deduction under subsection (a) shall be limited to -- * * (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. * *↩2. As to what petitioner observed with respect to termite infestation in April 1955, on pages 17 and 18 of the transcript he testified as follows:"The channels of which I am speaking which were hard, that is, not broken into dust, were channels of live termites because if they do not carry up the moisture into those channels the channels break into dust. Now, when you say channels of inactive termites, their channels break away unless they are active termites continuously moving through those channels." Later, on page 21, he testified further: "I cannot remember ever seeing a moving termite outside the house or inside the house. What I could see was their fresh channels because nobody would go to look for termites after axes and electric saws had been used on the building. The termites are by then all underground."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621205/	ESTATE OF CHARLES J. KELLY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kelly v. CommissionerDocket No. 7976.United States Board of Tax Appeals8 B.T.A. 296; 1927 BTA LEXIS 2917; September 24, 1927, Promulgated 2917 William Huck, Jr., Esq., for the petitioner. A. W. Gregg, Esq., for the respondent. STERNHAGEN 296 Deficiencies in income tax of decedent before death for the period January 1 to June 24, 1921, $520.74, and the period June 24 to December 31, 1921, $586.32, and overassessment for 1920 of $7.74. The proceeding was submitted by the parties upon a stipulation that the evidence and record in Bruno O. A. de Paoli, Executor, Estate of Louis de Paoli, Docket No. 7978, should be taken as the basis for decision. FINDINGS OF FACT. 1. Louis de Paoli and Charles J. Kelly were engaged, as partners, in the terrazzo and tile flooring business in New York City in 1920 and for a great many years prior thereto, under the firm name of de Paoli & Kelly. 297 2. Each partner had an equal interest in the firm. 3. Kelly's only income, during the years 1920 and 1921, was what he received out of the firm of de Paoli & Kelly. 4. During the year 1919, Louis de Paoli entered into agreements with his son, Bruno de Paoli, and his son-in-law, Frank Bacchetti, both of whom were employees of de Paoli & Kelly, to pay them for the year 1920 and subsequent2918 years, in addition to fixed salaries of $40 per week, a sum equal to 25 per cent each of the net profits of the firm after deducting 10 per cent on the invested capital of the firm. 5. During 1920 and 1921, the firm paid each of the aforesaid employees the sum of $500 on account of these profits. 6. During much of 1920 and 1921 Kelly was ill and took no part in the business or affairs of the firm, and he died on June 24, 1921. 7. During 1920 and 1921 de Paoli declined to pay the balance of the profits to the two employees until he was protected by judgments obtained by his son and his son-in-law. 8. Suits were brought by these two men against de Paoli, as sole surviving partner of the firm, in the Supreme Court of New York, New York County, in March, 1922. 9. De Paoli, in his answers to these suits, admitted the making of the agreements as above stated, and testified as a witness on the trial and in his testimony likewise admitted the making of the agreements as stated. 10. On June 20, 1922, each of the plaintiffs in said suits obtained a judgment against Louis de Paoli, as sole surviving partner of the firm of de Paoli & Kelly, for $12,266.61, which, with interest2919 and costs, amounted to $13,487.66, which was the sum paid on each judgment in 1922. Of this sum of $13,487.66, the sum of $5,350.45 represented 1920 profits, the sum of $4,398.45 represented profits from January 1 to June 24, 1921, and the sum of $3,738.76 represented profits from June 24 to December 31, 1921. OPINION. STERNHAGEN: The foregoing findings of fact are as submitted by petitioner, but, as in the companion case of , the petitioner fails for the reason that on the cash basis he or the partnership may not deduct an unpaid liability. Petitioner here has not proved the basis of his or the partnership's return or the method of his or its accounts, although in his petition he alleges that he kept no books. See . This failure of proof, as in the companion case, is not a mere oversight, because the question was squarely suggested at the trial. It should be added, in view of the petitioner's brief, that counsel for the petitioners have expressly maintained throughout these proceedings that the two employees were not partners and were therefore 298 not participating*2920 in the profits as such. The question, therefore, is not whether the two partners can be charged with having received the income of the partnership, but whether the partnership is entitled to the deduction in 1920 and 1921 for compensation to employees not paid until 1922. The determination is sustained. Judgment will be entered on 15 days' notice, under Rule 50.Considered by LANSDON and ARUNDELL.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621206/	Estate of Anna D. Childs, Deceased, James H. Childs, Harvey Childs, III, Blair Childs and the Union Trust Company of Pittsburgh, Executors, v. Commissioner.Estate of Childs v. CommissionerDocket No. 111548.United States Tax Court1943 Tax Ct. Memo LEXIS 218; 2 T.C.M. (CCH) 388; T.C.M. (RIA) 45094; June 30, 1943218 1. Held, that under the provisions of her husband's will decedent acquired a life interest and not a fee in his residuary estate, and hence the value of the residuary property is not includable in her estate. 2. At the time of decedent's death 400 shares of H. Childs & Co., Inc. stock were held by her subject to an option at $10.00 per share. The fair market value of the stock at her death was $100 per share. Held, the proper value of such stock for Federal estate tax purposes is $10.00 per share. Hill Burgwin, Esq., 1515 Park Bldg., Pittsburgh, Pa., and J. Garfield Houston, Esq., for the petitioner. T. Harrison Miller, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Fact and Opinion The respondent determined a deficiency of $58,600.32 in the estate tax of the estate of Anna D. Childs, deceased. The issues are: 1. Whether the decedent held in fee or as a life tenant certain assets devised to her under the will of her husband Harvey Childs, Jr. 2. Whether 400 shares of stock of H. Childs & Co., Inc. are includable in the decedent's gross estate at their fair market value of $100 per share at the time of her death or at the option price of $10.00 per share, 219 as provided in the option agreement dated May 31, 1935. Findings of Fact The facts were stipulated and as so stipulated are adopted as findings of fact. The portions thereof pertinent to the issues are substantially as follows: The petitioners are the executors under the last will and testament of Anna D. Childs, deceased. The estate tax return for the estate of Anna D. Childs, deceased, was filed with the collector of internal revenue for the 23rd district of Pennsylvania. Harvey Childs, Jr., the husband of Anna D. Childs, died November 7, 1917, a resident of the City of Pittsburgh, Allegheny County, Pennsylvania, leaving a last will and testament which was duly probated before the Register of Wills of Allegheny County, Pennsylvania, and was recorded in the office of the Register in Will Book Volume 146, page 344. Letters testamentary were granted to Anna D. Childs and James H. Childs, the executors named therein. Paragraph V of that will is as follows: V. All the rest and residue of my Estate, of every sort, manner and description whatsoever, and wheresoever found, I give and bequeath to my beloved wife, ANNA D. CHILDS, for her own, without any reservation of any sort, to use220 the income and such of the principal as may be necessary for her own maintainance and the comfortable maintainance of all my children unmarried and residing at home, with the wish that she look upon this bequest as a sacred trust, to be used as above indicated, and at her death to divide same equally among my children or their direct heirs, making such division, per stirpes. Harvey Childs, Jr. left five children. Three of them were children of a former marriage and two were also the children of the decedent, Anna D. Childs. He also had a stepchild who was the daughter of Anna D. Childs by a former marriage. The executors of the estate of Harvey Childs, Jr., deceased, filed a First and Final Account of their administration in the Orphans' Court of Allegheny County, Pennsylvania, at No. 229 November Term, 1918. The account was duly advertised and confirmed absolutely, and after audit thereof by the court a decree of distribution was entered awarding the residuary estate of the testator to Anna D. Childs under Paragraph V of his will. No exceptions to the decree were filed. With the decree of distribution the court filed an opinion (reported in 67 Pittsburgh Legal Journal 46). 221 Anna D. Childs died March 20, 1939. Her executors filed an account in the Orphans' Court of Allegheny County, Pennsylvania, at No. 3696 of 1939, entitled "Estate of Harvey Childs, Jr., Deceased. First and Final Account of Anna D. Childs (now Deceased) Life Tenant under the will of Harvey Childs, Jr., James H. Childs, Harvey Childs, III, Blair Childs and The Union Trust Company of Pittsburgh, Executors." After having been duly advertised, this account was confirmed absolutely, and, after audit by the court, a decree of distribution was entered awarding the balance for distribution shown on such account to the five children of Harvey Childs, Jr. No exceptions to the decree were filed. The decree became final October 23, 1939. Certain assets in the possession of Anna D. Childs at the time of her death, valued by the Commissioner at $297,221.33, are neither the same assets which she acquired in kind under Paragraph V of the will of Harvey Childs, Jr., or are assets purchased with the proceeds from the sale or redemption of assets which had been so acquired. Anna D. Childs segregated on her books the accounts relating to such assets. These assets do not include any assets purchased with222 life insurance proceeds. At the time of his death Harvey Childs, Jr. was the sole propriety of the business of H. Childs and Company. A 4/5 interest in this business was a part of his residuary estate bequeathed under Paragraph V of his will. Shortly after his death the business was incorporated under the name of "H. Childs & Co., Inc.", and on January 12, 1918, 1752 shares of the capital stock were issued to Anna D. Childs for the aforesaid 4/5 interest. On January 16, 1918 Anna D. Childs purchased an additional 600 shares of the stock with part of the insurance proceeds. At the time of her death Anna D. Childs held one certificate for 1752 shares and another certificate for 600 shares of such stock, both registered in her name. The entire 2352 shares were distributed equally to the five children of Harvey Childs, Jr. On May 31, 1935 Anna D. Childs granted to her stepson, James H. Childs, an option for ten years from date to purchase 400 shares of the capital stock of H. Childs & Co., Inc., for $10.00 per share. The option recited that James H. Childs had managed and operated the company since 1917, had rendered exceptional service through the depression and that Mrs. Childs desired223 to give him the opportunity of increasing his stockholdings. The other four children requested Mrs. Childs to give the option. The option gave James H. Childs the sole and exclusive right to purchase such shares and was binding on the decedent's estate. James H. Childs has not yet elected to exercise this option. The fair market value of the capital stock of H. Childs & Co., Inc., at the date of death of Anna D. Childs was $100 per share. Opinion VAN FOSSAN, Judge: The question involved in the first issue can be simply stated: Under Paragraph V of her husband's will did Anna D. Childs acquire a life estate or the fee in his residuary estate? By coincidence counsel for both the petitioner and the respondent have traveled the same path of reasoning but arrive at diametrically opposite conclusions. Each assumes that the decisions of the courts of Pennsylvania govern the construction of the will (see Blair v. Commissioner, 300 U.S. 5">300 U.S. 5; Freuler v. Helvering, 291 U.S. 35">291 U.S. 35, and each cites numerous Pennsylvania decisions to support his view. The petitioner argues that under a proper interpretation of the language of Paragraph224 V of the will of Harvey Childs, Jr., and Anna D. Childs held the residuary estate as a life tenant, with limited power to consume the principal; that the Orphans' Court decided that she took a life estate; and that such decision is in accord with the law of Pennsylvania, as established by the Supreme Court of that State. The respondent's position is that the testator made to his wife an outright gift of the property and that the precatory words in Paragraph V following the words of absolute disposition do not serve to diminish the fee so created. Paragraph V of the will follows: V. All the rest and residue of my Estate, of every sort, manner and description whatsover, and wheresoever found, I give and bequeath to my beloved wife, ANNA D. CHILDS, for her own, without any reservation of any sort, to use the income and such of the principal as may be necessary for her own maintainance and the comfortable maintainance of all my children unmarried and residing at home, with the wish that she look upon this bequest as a sacred trust, to be used as above indicated, and at her death to divide same equally among my children or their direct heirs, making such division, per stirpes. 225 From careful study of this paragraph, we have come to the conclusion that it was the intent of the testator to bequeath to his wife the use of his residuary estate during her lifetime, with the privilege of invading the corpus if it should become necessary so to serve the purposes therein set forth, and to give to his five children or their issue the remainder of his estate unconsumed at the time of his wife's death. The words of that paragraph therefore spell out a life estate to the testator's wife, with the remainder to his children. The property was given by the testator to his wife "for her own, without any reservation of any sort" but with the purpose, definitely and conclusively expressed, "to use the income and such of the principal as may be necessary for her own maintenance and the comfortable maintenance of all my children unmarritd and residing at home." The respondent quotes the words "to my beloved wife, Anna D. Childs, for her own, without any reservation of any sort" to support his theory that the will gave her a fee, but he ignores the words immediately following. The entire paragraph must be considered as a whole in order to determine the true intent of the testator. 226 Inherent in the language ignored by the respondent is the dominant purpose of utilizing the income of the estate, in so far as it will go, in providing a comfortable living for the testator's wife and children at home; of invading the principal, if necessary, and at his wife's death of passing on the unused portion thereof to his children. The interpretation of wills varies with the language of each document. We find Pennsylvania cases tending to support the respondent's theory. See Kidd's Estate, 75 Pittsburgh 771; In re Robinson's Estate, 282 Pa. 581">282 Pa. 581, and others. However, the decision of the Supreme Court of Pennsylvania which seems peculiarly applicable to the situation before us is found in Fassitt v. Seip, 240 Pa. 406">240 Pa. 406. In that case the court held: In the will under consideration there is a devise over, and there are other provisions clearly indicating that the testator had in contemplation an "unexpended" balance of his estate at the death of his wife. He directed to whom this unexpended balance should go and how it should be enjoyed. He intended that his wife should have every use and enjoyment of his residuary227 estate that he himself had while living. If necessary for her comfort and maintenance she could have consumed and expended all of it and for these purposes could have conveyed a fee simple title to a bona fide purchaser. But this she did not do. She died in possession of the properties and undertook to dispose of them by her will. We therefore agree with the conclusion reached by the learned court below that the properties in question are a part of the unexpended remainder of the estate of her husband and passed under his will to the devisees named therein. Following the views expressed in this decision, we have no doubt that the decedent obtained a life estate under her husband's will. The respondent argues further that the Orphans' Court did not decide the question whether the provisions of the will of Harvey Childs, Jr. gave to his wife the fee or a life estate in his residuary estate. We do not agree. Judge Miller of that court held: The foregoing devise is a clear gift to the wife of the residue of testator's estate, coupled with the wish that any portion of it remaining at her death shall be divided among his children or their heirs; the bequest with power of consumption 228 carried absolute title: Tyson's Estate, 191 Pa. 218">191 Pa. 218. This does not mean, however, that the whole of the residue is hers to do with as she sees fit; it is limited to her own maintenance and that of his children, unmarried and residing at home; it cannot be diverted from these purposes. The extent of her consumption is within her control; her decision honestly reached in accordance with the purposes expressed by the testator, is not reviewable. * * It does not follow that the remaindermen have no remedy. Only, however, when there is proof of a misuse of the estate contrary to the terms of the devise, and then the remedy is set forth in Watson's Estate, 241 Pa. 271">241 Pa. 271. So long as she uses the property, income "and such of the principal as may be necessary," she has the unquestioned right to control the direction of it, and the court can only interfere when she attempts to divert the fund from the purposes for which it was bequeathed to her. He devises is to her "for her own"; while he says "without any reservation of any sort," he does limit the devise to her control of income and principal, if necessary, for the purposes 229 of maintenance. Whether the unconsumed residue is to be divided by her among his heirs or passes under this provision in the will, is a matter not before us now. It is sufficient to decide that the estate in her with a power of consumption, gives her absolute control and use, not only of income but of corpus when necessary, and until or unless misuse is shown, her judgment and discretion cannot be questioned. It is clear from this opinion that Anna D. Childs was limited in her use of the principal - a situation which would not have arisen if she had possessed the fee in the residuary property. Furthermore, in the decree entered in October, 1930, the court ordered that the funds in the estate of Harvey Childs, Jr., deceased, be distributed to the five "remaindermen," thus recognizing unquestionably the character of the estate acquired by his widow. That estate, as we have said, is a life interest in the residuary property, as provided in Paragraph V. The second issue presents the proper valuation of 400 shares of the stock of H. Childs & Co., Inc. at the time of the decedent's death. On May 31, 1935 the decedent gave her stepson an option to purchase 400 shares of the company's stock230 at $10.00 per share. The option continued for ten years and was binding on the decedent's estate. The rights under the option were not exercised at the decedent's death. The option did not specify from what source the decedent should supply the 400 shares. Mrs. Childs had possession of 2,352 shares of the company's stock at the date of her death. Of these 1,752 were a part of the residuary estate of Harvey Childs, Jr., and the remaining 600 shares had been purchased by her from insurance proceeds. The Commissioner included in the decedent's estate the entire block of 2,252 shares. In so far as the 600 shares are concerned, the petitioners concede that all are properly includable in her estate, but assert that the value of the 400 shares under option should be reduced from the fair market value of $100 per share at the decedent's death to the amount of the option price of $10 per share. The respondent does not challenge the validity or enforceability of the option contract but contends that the fact that the option was not exercised at the time of the decedent's death compels us to disregard it. However, he overlooks the facts that the option bound the decedent's estate and that 231 the distribution to the five children of Harvey Childs, Jr. became effective on October 23, 1935, over seven months after her death. It might appear that the settlement of his stepmother's estate and the decree approving the equal distribution of the company's stock held by her would justify the assumption that James H. Childs was estopped from exercising the option, but it is unnecessary to carry the argument so far. The undisputed fact remains that, at the time of the decedent's death, 400 of her shares, asserted by the Commissioner to be her own property and so conceded by the petitioners, were burdened with the option. The principle is well established that the value of such stock is limited to the option price. Helvering v. Salvage, 297 U.S. 106">297 U.S. 106; Commissioner v. Bensel, 100 Fed. (2d) 639, affirming 36 B.T.A. 246">36 B.T.A. 246; Lomb v. Sugden, 82 Fed. (2d) 166; Wilson v. Bowers, 57 Fed. (2d) 682; Estate of John T. H. Mitchell, 37 B.T.A. 1">37 B.T.A. 1. The value of the stock for purposes of Federal estate tax must be determined232 as at the time of the stockholder's death. Lomb v. Sugden, supra. That value was $10 per share as to the 400 shares, and adjustments in the tax will be made accordingly. The parties have made various stipulations relating to credits and deductions. They will be given due consideration in the computation of the tax. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621207/	WILLIAM G. EGNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEgner v. CommissionerDocket No. 10115-83.United States Tax CourtT.C. Memo 1984-473; 1984 Tax Ct. Memo LEXIS 199; 48 T.C.M. (CCH) 1041; T.C.M. (RIA) 84473; September 5, 1984. William G. Egner, pro se. Barbara E. Horan, for the respondent. SWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: By statutory notice of deficiency dated February 10, 1983, respondent determined deficiencies in petitioner's Federal income tax liabilities of $3,996 for 1979 and $11,836202 for 1980. After concessions by the parties, the issues for decision are (1) whether petitioner is entitled to miscellaneous itemized deductions and business deductions in excess of those allowed by respondent, (2) whether petitioner is entitled to an investment tax credit for the purchase of his pickup truck, and (3) whether petitioner is entitled to an award of litigation costs. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioner resided in Evans, Colorado, at the time the petition herein was filed. Petitioner timely filed his Federal income tax returns for 1979 and 1980, and timely filed his petition herein on May 3, 1983. During the years in controversy, petitioner was employed by a Denver, Colorado, trucking company as a driver of 18-wheel transport trucks. During 1980, petitioner also started a business enterprise, apparently as a sole proprietor, known as "Protect Yourself," that marketed a line of survival products and sold newspapers from vending machines (hereinafter sometimes referred to as the "sales business"). On his Federal income tax returns for 1979 and 1980, petitioner deducted certain miscellaneous itemized expenses, employee203 business expenses, and claimed an investment tax credit in connection with the purchase of a pickup truck. On his 1980 return, petitioner also deducted schedule C business expenses allegedly incurred in his sales business. Upon audit, petitioner failed to substantiate any of these alleged expenses, and respondent issued his notice of deficiency on February 10, 1983, denying all of the claimed deductions and credits. During the subsequent Appeals Office conference, 13 of the 46 deductions claimed by petitioner were allowed in full by respondent, 23 deductions were disallowed entirely or in part for lack of substantiation, and 10 deductions were disallowed entirely, regardless of substantiation, for failure to qualify as deductible expenses. The deductions disallowed for lack of substantiation and the amounts disallowed are reflected below: AmountsAmounts ConcededAmountsItemClaimedBy RespondentDisallowed1979Business Telephone$ 134.00$ 107.00$ 27.00Fares44.004.2539.75Meals5,662.004,034.121,627.88Feed Expense2,524.00749.001,785.001980Business Telephone610.00193.00417.00Fares810.00540.00270.00Travel & Entertainment1,840.009.001,831.00Investment Publications380.00240.00140.00Books Related to Tax Law1,740.001,624.00116.00Truck Supplies2,992.001,747.001,245.00Small Tools410.00200.00210.00Parking & Tolls20.0020.00Dues & Publications1,206.001,206.00Liability Insurance290.0092.00198.00Legal & Professional520.00520.00Postage310.0063.00247.00Bookkeeping/Secretarial2,100.00722.001,378.00Service Charges225.0035.00190.00Sales Materials1,370.001,123.00247.00Seminars390.00138.00252.00Advertising2,435.00321.002,114.001 Depreciation 1,663.001,348.00315.00Machine Hire1,800.001,722.0078.00TOTAL$29,475.00$15,011.37$14,473.63204 Petitioner has no additional documentary evidence to substantiate the claimed deductions now in dispute 2 and his testimony at trial with respect thereto generally was vague. For example, we set forth below a portion of the transcript: THE COURT: Okay, "small tools," $210.00 [referring to the amount disallowed] -- THE WITNESS: That is just substantiation * * those records are missing. * * * THE COURT: Okay, Do you want to -- the $140.00 disputed for "investment publication fees"? Is that just substantiation? THE WITNESS: Yes, those were basically, that is substantiation. THE COURT: Do you have any substantiation here on that item? THE WITNESS: No, anything that I had was given to them, and anything else is lost or destroyed or -- THE COURT: Okay, the $116.00 for "books and tapes related to tax law"? THE WITNESS: This is strictly205 substantiation there. THE COURT: Do you have substantiation here on that today? THE WITNESS: No more than I had then. The following deductions were substantiated by petitioner, but were disallowed by respondent as personal expenses: ItemAmount Disallowed19791980Investment Travel$ 481.00Office in the Home500.00$ 541.00Office Supplies172.00Clothing & Laundering289.00557.00Accident & Disability Insurance418.50Meals and Lodging156.00Automobile Expenses400.00Camper Shell400.00Total Amount Disallowed$1,442.00$2,472.50Petitioner206 also claimed an investment tax credit in 1979 in the amount of $343 with respect to the purchase of his pickup truck, which respondent disallowed. At trial, petitioner also made written and oral motions and/or requests that this Court grant him assistance of counsel, a claim of right to a jury trial, a shifting of the burden of proof (treated as a request to shift the burden of going forward with the evidence) to respondent, and, in the alternative, an interlocutory appeal to the Tenth Circuit Court of Appeals, which requests were all denied. OPINION Unsubstantiated ExpensesAll deductions from gross income, whether personal or business, must be substantiated pursuant to Section 6001. 3 Business expenses are subject to the further substantiation requirements of sections 1.162-17 and 1.274-5, Income Tax Regs.Section 1.162-17(d), Income Tax Regs., suggests methods for substantiating business expenses that include the preparation207 of a daily diary or record of expenditures, maintained in sufficient detail to enable the taxpayer to readily identify the amount and nature of any expenditure. The regulation also provides that "[w]here records are incomplete or documentary proof is unavailable, it may be possible to establish the amount of the expenditure by approximations based upon reliable secondary sources of information and collateral evidence." Section 1.162-17(d)(3), Income Tax Regs. This provision reflects the rule in Cohan v. Commissioner,39 F.2d 540">39 F.2d 540, 544 (2d Cir. 1930), which provides authority for this Court to make reasonable approximations of some undocumented business expenses. The Cohan rule, however, is expressly inapplicable to any expenses incurred in business travel away from home (including meals and lodging), or in entertainment for business purposes. Such expenses must be fully documented and cannot be allowed on the basis of the unsupported testimony of the taxpayer. Section 1.274-5(a), Income Tax Regs.Section 274(d)208 specifically outlines the elements necessary to substantiate alleged business travel and entertainment expenses as follows: (1) the amount; (2) the time and place; (3) the business purpose; and (4) the business relationship to the taxpayer of each person entertained.If the taxpayer's failure to substantiate business travel and entertainment expenses is due to the loss of his records through circumstances beyond his control, such as destruction by fire, flood, earthquake, or other casualty, the taxpayer may be relieved of the specific substantiation requirements of section 274(d) and may be allowed to reconstruct his expenses using any reasonable method. Section 1.274-5(c)(5), Income Tax Regs.Petitioner herein claims to fall within this exception for loss of records. Petitioner asserts that some of his financial records were stored at a friend's residence and upon his retrieval of the storage containers the records were missing. The loss of a taxpayer's records while209 in the custody of a third party, however, absent a casualty, does not entitle the taxpayer to invoke the lost records exception of section 1.274-5(c)(5), Income Tax Regs.Gizzi v. Commissioner,65 T.C. 342">65 T.C. 342 (1975). 4 Therefore, petitioner must fully document all business entertainment and travel expenses.We conclude that petitioner has not substantiated any of the 23 deductions itemized above. With respect to the first six categories of unsubstantiated deductions ("Business Telephone" through "Travel and Entertainment"), those deductions were allegedly incurred while petitioner was away from home in connection with his employment as a truck driver or in connection with his sales business and they are therefore subject to the specific substantiation requirements of section 274(d). As explained above, petitioner is ineligible for the lost records exception, and also has provided no reconstruction of the expenses as required. We therefore sustain respondent with respect to these deductions. With respect to the remaining 17 categories of unsubstantiated deductions210 ("Investment Publications" through "Machine Hire"), petitioner asserts that this Court is bound to accept his uncorroborated testimony as substantiation thereof unless such testimony is improbable, unreasonable, or questionable, citing Demkowicz v. Commissioner,551 F.2d 929">551 F.2d 929, 932 (3rd Cir. 1977). We find that petitioner's maintenance of a "home office" (as explained below) specifically for the purpose of storing his tax records belies his assertion that such records are mysteriously "missing." That petitioner failed to produce his records leads us to question whether these expenses actually were incurred, and we cannot find, based on his testimony alone, that respondent's determination was erroneous. Petitioner also urges this Court to approximate his unsubstantiated expenses pursuant to the rule in Cohan,supra. Without reliable documentation, however, or other specific evidence in addition to petitioner's uncorroborated testimony, we are not inclined to utilize the Cohan rule to authorize deductions for those unsubstantiated expenses. We are not convinced that any expenses in excess of the amounts allowed by respondent actually were incurred by petitioner211 and therefore sustain respondent on those claimed expenses. Substantiated Expenses(1) Investment Travel -- Petitioner paid $481 for the rental of a motor home allegedly used to search for investment property. At the time, petitioner was not in the business of real estate investment, nor did he hold any investment property for the production of income, and petitioner did not locate any investment property during the trip in which he used the motor home. Expenses incurred in search of possible future investments are generally held to be insufficiently connected to income producing activity to be deductible. O'Donnell v. Commissioner,62 T.C. 781">62 T.C. 781 (1974), affd. without opinion 519 F.2d 1406">519 F.2d 1406 (7th Cir. 1975). 5 At the time the motor home was rented, petitioner was not engaged in the business of investing in real property nor had he entered into any real estate investment for profit; therefore, the nexus between the transportation expense and the production of income is missing. Kinney v. Commissioner,66 T.C. 122">66 T.C. 122, 127 (1976).212 Moreover, we are not convinced that the motor home was rented for any purpose other than petitioner's personal pleasure.Accordingly, we sustain respondent on this issue. (2) Office in the Home -- In 1979 and 1980, petitioner deducted $500 and $541, respectively, as the expense incurred in maintaining a home office. This "office" consisted of a corner of petitioner's living room which was equipped with a desk and a file cabinet. Petitioner asserts that in 1979 he used this portion of his living room exclusively to maintain income tax records, and in 1980, to maintain both tax records and records for his sales business. Petitioner calculated this deduction based on his estimate of the fair rental value of this portion of his residence. Section 280A(a) generally prohibits a deduction for expenses incurred in connection with a taxpayer's personal residence. An exception in section 280A(c)(1)(A) allows a taxpayer a deduction for the costs of maintaining a portion of his personal residence if that portion is213 exclusively used on a regular basis as the principal place of a taxpayer's trade or business. If the taxpayer is an employee, a deduction is allowed only if the exclusive and regular use of the home office is for the convenience of the employer. A further limitation provides that the deduction shall not be allowed to the extent that it exceeds the gross income derived from the business for which the office is exclusively and regularly used. Section 280A(c)(5). Respondent disallowed the home office deductions claimed by petitioner because the home office was not the principal place of petitioner's employment as a truck driver, because the office was not used for the convenience of petitioner's employer, and because it was not exclusively used on a regular basis as the principal place of petitioner's sales business. 6We agree with respondent for each of the reasons stated above. See Odom v. Commissioner,707 F.2d 508">707 F.2d 508 (4th Cir. 1983),214 an unpublished opinion, affg. a Memorandum Opinion of this Court. (3) Office Supplies -- Petitioner deducted the $172 cost of miscellaneous supplies such as paper, pencils and files. These supplies were used for, among other things, writing to legislators, keeping travel records which were required by his employer, and preparing his tax returns. Petitioner may not deduct the costs incurred in corresponding with legislators, unless such correspondence is of "direct interest" to petitioner's trade or business, i.e., is reasonably expected to directly affect petitioner's trade or business. Section 1.162-20(c)(2)(i)( b), Income Tax Regs. Petitioner did not submit any evidence with respect to the content of his correspondence and he has not provided any evidence to allocate the $172 between the costs of supplies for legislative correspondence and the cost of supplies used for his travel records and tax return preparation. Exercising our best judgment, however, (see Cohan,supra) we allow petitioner a deduction in the amount of $25 for office supplies relating to the travel215 records and the preparation of his tax return. (4) Clothing and Laundering -- In 1979 and 1980, petitioner deducted $289 and $557, respectively, for expenses incurred in the purchase of clothing he wore as a truck driver, as well as the costs of laundering his work clothing. In order to deduct the cost of clothing, and the cleaning thereof, as ordinary and necessary business expenses, the clothing must be required as a condition of the taxpayer's employment and must not be suitable for general or personal wear outside the work place. Donnelly v. Commissioner,262 F.2d 411">262 F.2d 411 (2d Cir. 1959), affg. 28 T.C. 1278">28 T.C. 1278 (1957); Yeomans v. Commissioner,30 T.C. 757">30 T.C. 757 (1958). This is true even if the clothing would not have been purchased except for the taxpayer's employment, Donnelly v. Commissioner,supra;Yeomans v. Commissioner,supra, and the mere fact that the taxpayer does not wear the clothing outside of work does not mean the clothing was unsuitable for personal or private purposes. Hynes v. Commissioner,74 T.C. 1266">74 T.C. 1266, 1289-1291 (1980).216 There is no evidence in the record that petitioner's employer required him to wear any particular type of clothing while at work, and there is no evidence ot suggest that petitoner's clothing was not generally suitable to wear during non-working hours.As far as we can tell, petitioner selected his clothing at his discretion and for his convenience and the costs incurred incident thereto are thus personal and non-deductible. Donnelly v. Commissioner,supra,Roberts v. Commissioner,176 F.2d 221">176 F.2d 221 (9th Cir. 1949), affg. 10 T.C. 581">10 T.C. 581 (1948). Because the cost of petitioner's clothing is a personal expense, the costs incurred in cleaning such articles are also non-deductible personal expenditures. Section 262; Hynes v. Commissioner,supra.(5) Accident and Disability Insurance -- Petitioner deducted the $418.50 cost of accident and disability insurance which would provide income continuation in the event he became disabled. Where the proceeds of an insurance policy inure to a taxpayer's benefit alone, the cost217 of such insurance is not deductible as a business expense under the provisions of section 162. Blaess v. Commissioner,28 T.C. 710">28 T.C. 710 (1957). 7 The record herein fails to establish that the proceeds of petitioner's insurance policy were restricted in any way. Presumably, petitioner would be entitled to do with the proceeds of such insurance as he wished. On these facts, the cost of the insurance at issue is not deductible as a business expense under section 162. We therefore sustain respondent on this issue. (6) Meals and Lodging -- Petitioner deducted the $156 cost incurred for lodging in the city of Denver, Colorado, which respondent disallowed because the expense was not incurred while petitioner was away from home. Petitioner contends that his home for tax purposes is Evans, Colorado, his place of residence, and that his employment as a truck driver required him to take temporary lodging in Denver on some occasions because hazardous road conditions prevented his 50-mile commute from Denver back to his residence in Evans, and also because he was at times required to be available218 for subsequent truck driving runs on short notice. It is well established that a taxpayer's home for Federal income tax purposes is his principal place of business or post of employment. 8Mitchell v. Commissioner,74 T.C. 578">74 T.C. 578, 581 (1980). Petitioner's principal place of business is in Commerce City, Colorado, in the Denver metropolitan area. Travel expenses, including meals or lodging, incurred in the general Denver area at the beginning or end of petitioner's truck driving runs are therefore non-deductible personal expenses because such expenses did not arise while petitioner was "away from home." 9(7) Automobile Expenses -- Petitioner used his pickup truck in 1980 to commute to Denver for his employment as a truck driver and also to make sales calls in connection219 with his Protect Yourself business. Petitioner claimed $400 in expenses allegedly incurred incident thereto, including $306 for tires and other unspecified supplies, $88 for Colorado State vehicle registration, and $6 for a Greeley City business license. Upon audit, respondent conceded that petitioner had used the pickup truck in 1980 partially for business purposes and allowed him to reconstruct the mileage incurred therefrom under the optional method for vehicles placed in service after December 31, 1979. See, Rev. Proc. 82-61, 2 C.B. 849">1982-2 C.B. 849. Respondent asserts that once petitioner chose to deduct mileage incurred in business pursuits under the optional method, he is precluded from deducting the vehicle's operating and fixed costs in addition thereto. We agree with respondent. Although not binding on this Court, the revenue procedure provides clear notice to taxpayers that deductions computed under the optional method "shall be in lieu of all operating and fixed costs of the vehicle allocable to business purposes." The phrase "operating and fixed costs" expressly220 includes tires and registration fees. Sec. 3.01(1)(c), Rev. Proc. 82-61, supra,1982-2 C.B. at 850. It is conceivable that petitioner's truck supplies might fall outside the definition of operating and fixed costs, but we have no evidence with respect to what supplies were purchased and therefore have no basis from which to approximate an allowable deduction. We sustain respondent on this issue. (8) Camper Shell -- Petitioner deducted as a business expense the $400 cost of a camper shell that the purchased to protect sales merchandise, mattress, tools, and other equipment that petitioner carried in his pickup truck. Petitioner used the mattress, tools, and the equipment exclusively in his employment as a truck driver. He was assigned to drive a different transport truck on each occasion and was not permitted to store those items on the employer's premises. Petitioner asserts that the camper shell was a business expense, incurred in addition to his commuting expenses. In the alternative, petitioner argues that the camper shell was a capital asset and should be depreciated over its useful life. Respondent does not contest that the items transported221 in petitioner's pickup truck were necessary for petitioner's employment or that they could only be transported in a vehicle such as a pickup truck.Respondent asserts, however, that the camper shell was a non-deductible personal expense. It is well established that the costs incurred in commuting to and from a taxpayer's place of employment are non-deductible personal expenses, and the fact that business "tools" are transported during the commute does not serve to convert the commuting costs into deductible business expenses. See, e.g., Fausner v. Commissioner,413 U.S. 838">413 U.S. 838 (1973), affg. 472 F.2d 561">472 F.2d 561 (5th Cir.), affg. a Memorandum Opinion of this Court; Feistman v. Commissioner,63 T.C. 129">63 T.C. 129, 135 (1974), case dismissed on appeal 587 F.2d 941">587 F.2d 941 (9th Cir. 1978). Where, however, as we stated in Feistman,supra,-- a commuter incurs additional expenses because he has to transport his "tools" to work, such additional costs may be deductible as a business expense under section 162. * * It is not enough, however, that222 the taxpayer demonstrate that he carried tools to work.He must also prove that the same commuting expenses would not have been incurred had he not been required to carry the tools. [Feistman,supra at 135, 10 citation omitted.] Petitioner testified, and we find such testimony credible, that any personal use of the camper shell was minimal, and that he would not have purchased the camper shell but for the necessity to protect the sales merchandise, bedding, tools, and equipment that were transported to his place of employment.On the record before us, we find that the camper shell was purchased for a business purpose and was incurred in addition to petitioner's commuting expenses. The camper shell, however, substantially improved the value of petitioner's pickup truck, and was therefore a capital expenditure that must be depreciated 11 over the camper shell's useful life rather than deducted as a business expense. 12 We so hold. 223 Investment Tax CreditPetitioner claimed an investment tax credit of $343 in 1979 for the purchase of his pickup truck 13 which he used to commute to and from his employer's truck terminal and to transport the tools used in his employment. Respondent denied the credit on the grounds that the truck did not qualify as a business asset. To qualify for an investment tax credit, among other things, the newly-acquired property for which the credit is claimed must be subject to an allowance for depreciation. Sections 38 and 48. Section 167(a) allows depreciation on property that is used in a trade of business or held for the production of income. A taxpayer's use of his vehicle in commuting to work, even where he must carry tools that are necessary to his employment, 224 does not serve to convert the vehicle into a business asset. 14Fausner,supra;Feistman,supra.Therefore, petitioner is not entitled to the investment tax credit. 15225 Petitioner's Claim for Litigation CostsIn his brief, petitioner made a claim for litigation costs in an unspecified amount pursuant to section 7430 and Rule 231, Tax Court Rules of Practice and Procedure.Section 7430 provides that reasonable litigation costs, including attorney's fees, may be awarded to taxpayers who have filed petitions with this Court after February 28, 1983, and who have established that (1) all administrative remedies were exhausted, section 7430(b)(2); (2) the government's position in the case was unreasonable, section 7430(c)(2)(A)(1); and (3) the taxpayer has substantially prevailed with respect to either the amount in controversy or the most significant issue, section 7430(c)(2)(A)(ii). Litigation costs, however, may only be claimed, unless conceded by respondent, upon written motion to this Court filed after the issuance of an opinion determining the issues in the case, or after the parties have settled all issues in the case other than litigation costs. Rule 231(a)(2), Tax Court Rules of Practice and Procedure.Because petitioner's request is*226 premature and improper in form, he has failed to meet the procedural prerequisites for an award of litigation costs under section 7430 and Rule 231. Furthermore, any such motion would be in vain as petitioner has not substantially prevailed with respect to the substantive issues herein. In light of the above conclusions, Decision will be entered under Rule 155.Footnotes1. Petitioner deducted $1,663 as straight-line depreciation for vending machines, store fixtures, and a tape duplicator, calculated on an unsubstantiated cost basis of $4,807. Respondent redetermined the depreciation deduction to be $1,348, calculated on a substantiated cost basis of $4,715, and disallowed the $315 difference.↩2. Respondent rejected three pieces of documentary evidence submitted in an attempt to substantiate some of the petitioner's disallowed deductions: a handwritten 3" X 5" card to verify an $842 advertising expense paid in cash to one Omar Rivera for an 8-foot banner; a similar 3" X 5" card to verify an $1,785 expense for alfalfa; and a $180 receipt for "truck supplies" which itemized department store purchases in the girls, domestics, jewelry, stationery, and housewares departments. Respondent rejected this evidence because it did not reliably verify the claimed expenses.↩3. All section references are to the Internal Revenue Code of 1954, as amended, and in effect during the years in issue.↩4. See Flowers v. Commissioner,T.C. Memo. 1980-374↩.5. See also Stroope v. Commissioner,T.C. Memo. 1975-348↩.6. Indeed, it appears from the record that petitioner deducted $300 in 1980, which respondent concedes was proper, for rental of a business property presumably to house the operations of petitioner's sales business. (Ex. 8-G)↩7. See also Andrews v. Commissioner,T.C. Memo. 1970-32↩.8. Petitioner's reliance on Rosenspan v. Commissioner,438 F.2d 905">438 F.2d 905 (2d Cir.) cert. denied 404 U.S. 864">404 U.S. 864 (1971), is misplaced. Rosenspan↩ involved an itinerate taxpayer who had no home from which to be away. 9. Rev. Rul. 55-236, 1 C.B. 274">1955-1 C.B. 274↩.10. See also Myers v. Commissioner,T.C. Memo. 1981-735↩, wherein the taxpayer, a truck driver, deducted a portion of the costs of commuting to his employer's truck terminal in a van that carried a mattress, tools, etc., for use on the job. The taxpayer deducted the portion of the costs of driving the van that exceeded the cost of driving a smaller car. The Court disallowed the expense because it was not incurred in excess of the expenses that the taxpayer would have incurred had he operated the van without the mattress and other items. 11. The parties are to attempt to agree on the appropriate depreciation of the camper shell in 1980 in connection with the Rule 155 computation.↩12. Clark v. Commissioner,T.C. Memo. 1969-241; Jones v. Commissioner,↩ a Memorandum Opinion of this Court dated May 29, 1952.13. Petitioner's credit was apparently calculated on an alleged qualified investment in the amount of $3,431, which is approximately 51% of the cost basis of his pickup truck. Petitioner was not engaged in his sales business in 1979 and therefore did not claim the pickup truck was purchased for use in that regard.↩14. Petitioner relies on Pool v. Commissioner,T.C. Memo. 1977-20, in support of his assertion that his pickup truck is a business asset. In Pool, the taxpayer, a construction worker, was required by his employer to carry construction materials weighing up to one ton to various job sites, which he carried in his pickup truck. In addition to his pickup truck, the taxpayer owned a station wagon which he would have used to commute to work but for the necessity of carrying the construction materials. We allowed the taxpayer to deduct the costs of operating his truck that exceeded the costs he would have incurred had he driven the station wagon, under the rule in Feistman,supra.We did not allow a blanket deduction for all commuting costs nor did we recharacterize the taxpayer's vehicle as a business asset. Petitioner herein is distinguished from the taxpayer in Pool↩ because petitioner did not own a second vehicle and would have commuted in his pickup truck regardless of the need to carry his "tools" to work. 15. See Gladu v. Commissioner,T.C. Memo 1982-702">T.C. Memo 1982-702↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621208/	JOSEPH LAWRENCE FLAIG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFlaig v. CommissionerDocket No. 11370-81.United States Tax CourtT.C. Memo 1984-150; 1984 Tax Ct. Memo LEXIS 528; 47 T.C.M. (CCH) 1361; T.C.M. (RIA) 84150; March 26, 1984. Earl C. Crouter, for the petitioner. Brian Kawamoto, for the respondent. RAUMMEMORANDUM FINDINGS OF FACT AND OPINION RAUM, Judge: The Commissioner determined deficiencies in petitioner's income taxes for 1975 and 1976 in the amounts of $7,281 and $5,707, respectively, and a $1,141 addition to tax under section 6651(a)(1), I.R.C. 1954, for 1976. After concessions, the only issue remaining for decision is whether the Commissioner erred in disallowing $7,598 of a deduction of $10,018 claimed as "Promotion and Public Relations" expenses for 1975 and disallowing in toto an $11,739 deduction similarly claimed for 1976. 1 The principal component of the amounts in dispute relate to a "birthday" party given each year by petitioner. In an amendment to the pleadings, petitioner seeks to support the deductions530 alternatively as "advertising" expenses. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference. Petitioner resided in Los Angeles, California, when he filed his petition herein. During the taxable years he was engaged in the general practice of law as a sole practitioner. The bulk of his practice involved the representation of plaintiffs in personal injury cases, but he also handled a variety of other legal matters. Among numerous items designated as "Other Business Expenses" on petitioner's income tax returns for each of the years involved was a claimed deduction of $10,018 for 1975 described as "Promotion and Public Relations" and a claimed deduction of $11,739 for 1976 similarly identified. The principal component of each of these claimed deductions related to the cost of an annual531 "birthday" party given by petitioner. Petitioner's birthday was October 12, and each year for at least 14 years, he has given a large "birthday" party on or about that date. He invited many of his past and present clients, their families and friends, and certain "claims managers and supervisors of the insurance companies" that he dealt with. The parties started at about 6:30 p.m. and lasted until about 11:30 p.m. Some 1,000 guests attended these parties in 1975 and 1976, and petitioner hired a banquet room for that purpose. On these occasions, the guests gathered to enjoy food "and lots of it" served buffet style, champagne, punch, coffee, tea, and the music of an orchestra known as "The Esquires". Guests danced to the music thus provided. The parties were so popular that local television and radio stations and newspapers "[came] * * * in greater and greater numbers each year" to cover the event. No significant amount of business was conducted at these parties, although clients would sometimes approach petitioner and inquire about the status of pending legal matters or introduce a potential client. Petitioner would comment briefly and, if needed, suggest a later office532 appointment. Also, he would occasionally ask a client to sign a lease, an assignment, or a will. However, petitioner admitted that "the primary purpose of the party was not to sign wills and not to sign authorization forms, and so forth". The record shows that during 14 annual parties, clients executed a total of about six wills. Petitioner produced cancelled checks in connection with the 1975 party aggregating $5,188.69 and cancelled checks for the 1976 party aggregating $7,764.64. Part of the expenses incurred in connection with the 1975 party was $2,420 expended for 1,000 "books" and 780 salt and pepper shakers that were distributed as gifts to those who attended. Petitioner also produced cancelled checks in the aggregate amount of $6,732.14 allegedly for "Public Relations, Clients, Christmas, Easter, Etc." for 1975 and in the aggregate amount of $5,135.42 similarly described for 1976. None of the checks referred to in this paragraph related to the "birthday" parties. Some of these non-birthday party checks record payment to, for example, "See's Candy Company", "U.S. Postmaster", the "Biltmore Hotel", "Bank Americard", "American Express", and "Mayesh Flowers". Most533 of such checks contain the notation "in re Public Relations" or simply "Public Relations", but other such notations include "in re office expense", "Am[erican] Legion Children's Christmas Party", "in re Alterations on Suit", "Happy Happy Happy Birthday", "for Easter Letters", "in re Office Xmas Cards", and "Gifts to Clients". Petitioner's 1975 and 1976 Federal income tax returns also show separate deductions for "postage" and "office expense". These deductions are not here in issue. As previously indicated, petitioner deducted $10,018 on his 1975 return as a "Promotion and Public Relations" expense. This deduction was intended to include the cost of the 1975 birthday party and the other claimed "Public Relations * * * Etc." expenses associated with all of the foregoing cancelled checks. 2 The Commissioner allowed $2,420 of the claimed deduction for 1975 relating to the gifts distributed at the party but disallowed the remaining $7,598. As to the year 1976, the Commissioner disallowed the entire $11,739 claimed as "Promotion and Public Relations" expense. 534 OPINION 1. The party expenses.Section 162(a), I.R.C. 1954, allows "as a deduction all the ordinary and necessary expenses paid or incurred * * in carrying on any trade or business". However, we need not consider whether the party-related expenses come within the language of these provisions, because, in our judgment, they fail to satisfy the requirements of section 274, which renders nondeductible expenditures that would otherwise qualify for deduction. Section 274(a)(1), I.R.C. 1954, disallows "otherwise allowable" deductions - [w]ith respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, unless the taxpayer establishes that the item was directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that such item was associated with, the active conduct of the taxpayer's trade or business, (Emphasis supplied.) There is no question that petitioner's "birthday" parties constituted entertainment within the meaning of section 274. A gathering of some 1,000 guests to enjoy535 food, drink, music and dancing is clearly an "activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges [and] theaters". Section 1.274-2(b)(1)(i), Income Tax Regs. Petitioner contends that the "birthday" parties might also be described as good public relations or even advertising. However, such description, even though accurate, is in no way inconsistent with the classification of the parties as "entertainment". Section 1.274-2(b)(1)(ii), Income Tax Regs. Accordingly, petitioner may deduct the expenses with respect to these parties only if such expenses were "directly related to * * the active conduct of * * * [his] trade or business". 3We are unable to find that the entertainment of some 1,000 guests at a buffet dinner or supper at which champagne was served536 and where an orchestra provided music for dancing creates expenditures which are "directly related" to the "active conduct" of the taxpayer's trade or business of practicing law. Petitioner's brief "chit chat" with clients and potential clients and the signing of what has not been shown to be more than a few documents over a period of many years can at best be considered incidential to the "birthday" parties and too insignificant to require the conclusion that the expenditures with respect to the parties were "directly related" to petitioner's trade or business. The following regulations reinforce the conclusion that we reach (section 1.274-2(c)(7), Income Tax Regs): Expenditures for entertainment * * will generally be considered not directly related to the active conduct of the taxpayer's trade or business, if the entertainment occurred under circumstances where there was little or no possibility of engaging in the active conduct of trade or business. The following circumstances will generally be considered circumstances where there was little or no possibility of engaging in the active conduct of a trade or business: * * * (ii) The distractions were substantial, such as-- 537 (a) A meeting or discussion at night clubs, theaters, and sporting events, or during essentially social gatherings such as cocktail parties, or (b) A meeting or discussion, if the taxpayer meets with a group which includes persons other than business associates, at places such as cocktail lounges, country clubs, golf and athletic clubs, or at vacation resorts. (Emphasis supplied.) These provisions clearly apply here. Accordingly, the deductions with respect to the expenses of the "birthday" parties are precluded by section 274(a)(1) of the Code and the foregoing regulations. 4 In the circumstances, we need not consider the Government's alternative contention that the claimed deductions are not allowable in any event by reason of petitioner's failure to prove that he satisfied the specifically exacting record-keeping requirements of section 274(d) of the Code and section 1.274-5(b) of the regulations. 538 2. The non-party expenses. The record contains a substantial number of checks involving expenditures made by petitioner that were not related to his annual "birthday" parties. In the aggregate, they amount to $6,732.14 for 1975 and $5,135.42 for 1976. Petitioner describes them generally as "Public Relations, Clients, Christmas, Easter, Etc." As indicated in our findings, most of these checks bear the notation" in re Public Relations", or simply "Public Relations", while some of the checks have other notations written or typed thereon. Our findings set forth a sampling of such other notations, but all of the checks with their notations are part of the stipulated portion of the record and are included in the findings by reference. The Government has not argued on brief that the expenditures reflected in the non-party related checks are subject to the requirements of section 274. But it has contended that the notations on the checks are hearsay, and that petitioner has failed to prove that the checks represent deductible ordinary and necessary business expenses. We reject the Government's objection as to the alleged hearsay character of the notations. They are part of the539 checks contemporaneously signed by petitioner. To be sure, they constitute self-serving statements and must be viewed as such. To the extent that there is absent satisfying corroborating evidence (for example, specific credible testimony by petitioner under oath) clearly showing the deductible character of the amounts, there is a serious defect in petitioner's undertaking to carry his burden of proof. And, of course, the burden of proof is upon him to establish that he is entitled to the claimed deductions. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.Petitioner's evidence in respect to the non-party expenditures was at most skimpy and conclusory. His counsel did not question him about specific checks and the purposes which they served. Testimony by him that he personally made the determination to place the term "Public Relations" on the various checks is no more than a conclusory self-serving statement. It hardly establishes the true nature of any particular expenditure, or that such expenditure would indeed be accurately described by the notation thereon. Further, although the checks themselves do540 show that payments were made to, among others, various florists, stores, hotels and credit card companies, they do not establish the more important fact -- that the payments represented ordinary and necessary expenses that were proximately related to petitioner's practice of law. Thus, a check to the Biltmore Hotel could pay for an expert witness' room rental, or for petitioner's own personal use. Similarly, the cost of sending flowers might be an ordinary and necessary business expense or might relate to something purely personal. Even the notation "Am[erican] Legion Children's Christmas Party" on checks (and we note that such checks were not payable to the American Legion but rather to a number of different parties) does not necessarily establish the business character of the expenditures without further explanation. Also, deductions for "postage" and "office" expenses as "public relations" expenses are suspect when other, separate, deductions are taken and allowed for "postage" and "office" expense. Although we conclude that petitioner has failed to establish the deductibility of all the expenditures reflected in the checks, we are nevertheless left with a fairly clear impression541 that some portion of them do indeed constitute deductible ordinary and necessary business expenses proximately related to his practice of law. We have no precise or scientific method for determining what that portion may be, but we may proceed upon the basis of the oft-followed language of the Second Circuit in Cohan v. Commissioner,39 F.2d 540">39 F. 2d 540, 544 (2d Cir. 1930). Accordingly, doing what we can with the materials at hand, and "bearing heavily" upon petitioner for the unsatisfactory state of the record in this connection, it is our best judgment that 15 percent of the aggregate amount of the non-party related checks for each taxable year was proximately related to petitioner's practice of law. We so find as a fact, and hold that such portion of each such aggregate amount is deductible as an ordinary and necessary business expense. Decision will be entered under Rule 155.Footnotes1. Petitioner has abandoned his opposition to the section 6651(a)(1)↩ addition to tax for 1976. He did not argue the point in his opening brief, and his reply brief, referring to that addition as a "penalty", states: "in view of the facts, the petitioner is unable to contest the penalty issue".2. Although the total of the cancelled checks for the party and those unrelated to the party exceeds the amount claimed on the return, petitioner has not sought in his pleadings to increase the claimed deduction. The same situation obtains with respect to the 1976 return.↩3. There is no suggestion in the record that the "birthday" parties directly preceded or followed "a substantial and bona fide business discussion". Accordingly, the alternate test of section 274↩ that a deduction be "associated with * * the active conduct of the taxpayer's trade or business", is inapplicable.4. The Commissioner's allowance of deductions for gifts distributed at the 1975 party is consistent with the result reached above, because section 274(b)(1) makes clear that the limitations therein generally do not apply where gifts to the same individual during the taxable year do not exceed $25. Here, there were gifts costing $2,420 distributed to some 1,000 guests, and there is nothing to suggest that the aggregate gifts by petitioner to any particular individual exceeded $25 during 1975. Petitioner has not made any contention that the expenses relating to the 1976 party included a component for gifts that would be deductible in 1976 even if the other party-related expenses ran afoul of section 274↩ in that year.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621210/	Walker Groetzinger, Petitioner v. Commissioner of Internal Revenue, Respondent; Sara H. Groezinger, Petitioner v. Commissioner of Internal Revenue, RespondentGroetzinger v. CommissionerDocket Nos. 5446-76, 5447-76United States Tax Court69 T.C. 309; 1977 U.S. Tax Ct. LEXIS 20; November 28, 1977, Filed 20 Decisions will be entered for the respondent. Petitioners are transferees of the assets of an estate. The estate had timely filed its Federal estate tax return and, after certain adjustments, paid its estate tax together with all deficiencies. Subsequently, respondent refunded the bulk of those taxes. The refund was made without the taxpayer estate's request for it but because respondent erroneously posted the estate's payments of its taxes. Respondent determined the liabilities of petitioners as transferees in the amounts transferred to them. Held, the refund was not a rebate within the meaning of sec. 6211(b)(2), but was an underpayment of tax within the meaning of sec. 6901(b) over which this Court has jurisdiction. Also held, petitioners are liable as transferees of the estate under sec. 6324(a)(2). Vincent L. Alsfeld, for the petitioners.Daniel P. Ehrenreich, for the respondent. Tietjens, Judge. TIETJENS310 24 OPINIONRespondent determined a deficiency in the Federal estate tax of the Estate of Nancy W. Groezinger in the amount of $ 19,667.74 and determined the following liabilities of petitioners as transferees of the estate:PetitionerLiabilityWalker Groetzinger$ 8,316.92Sara H. Groezinger8,316.92The issues are whether this Court has jurisdiction over the petitions and, if so, whether petitioners are liable as transferees in the amounts received.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.Petitioner Walker Groetzinger resided in Wilton, N. H., when he filed his petition. Petitioner Sara H. Groezinger resided in Flemington, N. J., when she filed her petition.On December 24, 1970, Nancy W. Groezinger died testate. She was survived by Walker Groetzinger and Eric Groezinger, both of whom shared her estate equally under her will. The will named Eric as executor, for which he qualified. Several months later Eric Groezinger died. He was succeeded as executor by his widow, petitioner Sara H. Groezinger. Under the terms of Eric's 25 will, Sara inherited Eric's entire estate including his interest in Nancy's estate.The Estate of Nancy W. Groezinger (hereafter the estate) timely filed its Federal estate tax return on April 16, 1971, with the District Director of Internal Revenue, Newark, N. J. The return reported an estate tax due of $ 19,668.38. The estate was subsequently audited, and a deficiency in the amount of $ 1,643.53 was assessed. After the audit, the estate paid the total Federal estate tax due of $ 21,311.91. The payment was made by 311 check on November 22, 1971. A second deficiency of $ 2,456 was later determined and paid on December 6, 1971. All taxes having been paid, the estate received an estate tax closing letter from respondent dated March 31, 1972.We would guess that to someone's surprise, the estate later received an added bonus. Due to respondent's error in posting the payments made by the estate, respondent refunded $ 19,667.74 to the estate. The refund was promptly deposited in the estate's bank account on June 6, 1972. On June 7, 1972, the funds were distributed to petitioners and others. The petitioners received $ 8,316.92 each. The disbursements left no balance in the26 account and left the estate without assets.Apparently the error went undiscovered for several years.On March 23, 1976, respondent issued its notice of liability (90 day letter) to petitioner Sara H. Groezinger for the erroneous refund traceable directly to her. Similarly, on March 24, 1976, respondent issued a notice of liability to Walker Groetzinger. Both petitioners timely filed their petitions with this Court. We have consolidated their cases for joint consideration. Respondent has timely filed his answers, and aside from the petitions and joint motions to consolidate and to correct the spelling of the caption herein, no other pleadings have been filed by either party prior to the filing of their briefs. 1Respondent contends that there is a deficiency within the meaning of section 6211 2 in the estate's Federal estate tax and that petitioners are 27 liable for that deficiency as transferees of the estate in the amounts transferred to them out of the erroneous refund. Petitioners contend that this Court does not have jurisdiction to redetermine the liabilities involved. Rather, respondent's remedy lies in civil actions against petitioners in the district courts. There is no dispute over the amounts involved or the fact that petitioners each received a portion of the refund in question. Thus the only issues are whether this Court has jurisdiction over the petitions and, if so, whether petitioners are liable as transferees in the amounts received by them out of the erroneous refund.Before addressing those issues, we note that apparently at 312 least part of the liabilities involved may be barred by the statute of limitations. 3 We do not, however, reach that issue because petitioners have failed to plead it affirmatively. It does not appear in the petitions or in any 28 other pleading. Moreover, in their briefs petitioners' only argument with respect to the statute of limitations was that "the statute of limitations for [the] recovery of an erroneous refund has expired." No further explanation or reference to dates and Code sections was made.The statute of limitations is an affirmative defense which must be specifically pleaded. Rule 39, Tax Court Rules of Practice and Procedure. Affirmative defenses should not be raised for the first time in a party's brief simply because it does not give the opposing party a fair opportunity to properly address the issue. 4 It seems clear from respondent's briefs that he did not consider the statute of limitations to be in issue directly. Thus his briefs only address the issues of jurisdiction and liability. Because the statute of limitations was not properly raised by petitioners and not addressed directly in respondent's briefs, it will not be considered. See Shomaker v. Commissioner, 38 T.C. 192">38 T.C. 192, 201 (1962);29 Citizens Nat. Trust & Sav. Bank of Los Angeles v. Commissioner, 34 B.T.A. 140">34 B.T.A. 140, 145 (1936); cf. Oilbelt Motor Co. v. Commissioner, 16 B.T.A. 831">16 B.T.A. 831, 834 (1929) (except for jurisdictional questions, all issues must be raised in pleadings).Again, petitioners assert that this Court lacks jurisdiction to redetermine the liabilities involved herein; proper jurisdiction lies only with the district courts. In support of their contention, petitioners cite section 7405. Section 7405 provides for the recovery of erroneous refunds by means of civil actions in the district courts. 5 However, both the permissive language of the section and its legislative history indicate that the section was not intended to provide an exclusive remedy for the recovery of erroneous refunds. Added to the Internal Revenue Code by the Revenue Act of 1928, section 610 (now sec. 7405) provided the 313 Government30 with a remedy for recovering erroneous refunds by means of a civil action as well as assessment. It was intended to broaden, not limit, respondent's remedies for the recovery of erroneous refunds.This section relates to the recovery of erroneous refunds as defined in * * * [sec. 6514] and also to refunds which are erroneous independently of * * * [sec. 6514]. The section provides that any erroneous refund, of either class, may be recovered by suit brought in the name of the United States if such suit is begun within two years after the making of the refund. Obviously, if the limitation period on the making of assessments has not expired, the erroneous refund may be recovered by assessment in the ordinary manner. [S. Rept. 960, 70th Cong., 1st Sess. 42, 1939-1 C.B. (Part 2) 409, 438. Emphasis supplied.]Clearly, section 7405 does not preclude the attempted assessments in this case. See also Milleg v. Commissioner, 19 T.C. 395 (1952).31 Furthermore, this Court generally has jurisdiction over transferee liabilities for the amount of tax shown on the return and for any deficiency or underpayment of any tax. See sec. 6901. 6 Hence section 6901(b) requires the transferee's liabilities for the amount of tax shown on the return or for any deficiency or underpayment to be assessed, paid, and collected in the same manner as the taxes upon which the liabilities are based. And all such liabilities may be contested either in this Court or in the Federal district courts. See S. Rept. 52, 69th Cong., 1st Sess. (1926), reprinted in 1939-1 C.B. (Part 2) 332, 354-355; H. Rept. 356 (Conf. Rept.), 69th Cong., 1st Sess. (1926), reprinted in 1939-1 C.B. (Part 2) 361, 371-372. See also United States v. Russell, 461 F.2d 605 (10th Cir. 1972), cert. denied 409 U.S. 1012">409 U.S. 1012 (1972). Thus, if there is an amount shown on the estate's return, a deficiency, or an underpayment for which petitioners may be liable as 314 transferees of the taxpayer estate, this Court has jurisdiction. See sec. 301.6901-1(a), Proced. & Admin. 32 Regs.Respondent contends that there is a deficiency here within the meaning of section 6211. Section 6211 defines a deficiency as the amount by which the tax actually imposed exceeds: (1) The amount shown as33 a tax on the tax return, plus (2) the amounts previously assessed or collected without assessment as a deficiency, minus (3) the amount of rebates. Sec. 6211(a). 7 A rebate is an abatement, credit, refund, or other repayment made on the ground that the tax imposed was less than the amount shown on the return and the amounts previously assessed or collected without assessment. Sec. 6211(b)(2). 834 We do not think that a finding of deficiency is supported by the record. The amount of tax actually imposed on the estate is $ 23,767.91. This is undisputed by all parties. It is also undisputed that the amount shown on the estate's Federal estate tax return was $ 19,668.38, and that previous assessments, which were collected, totaled $ 4,099.53. The only dispute is whether the refund of $ 19,667.74 is a rebate. The refund was made because of an error by respondent in posting the payments made by the estate. Apparently respondent's accounting error led him or his computer to believe that the estate had paid $ 19,667.74 more than the tax imposed. Thus the refund was made for a reason other than that specified in section 6211(b)(2) and did not result in a rebate. See also sec. 301.6211-1(f), Proced. & Admin. Regs. In this regard, the burden of proof is on petitioners. See sec. 6902(a). They have met that burden.315 Respondent's reliance on Levy v. Commissioner, 18 B.T.A. 337">18 B.T.A. 337, 340 (1929); Oilbelt Motor Co. v. Commissioner, supra at 834-835; Austin Co. v. Commissioner, 8 B.T.A. 628">8 B.T.A. 628, 630 (1927);35 Newman v. Commissioner, 6 B.T.A. 373">6 B.T.A. 373, 376 (1927); and First National Bank of Plattsburg, Mo. v. Commissioner, 4 B.T.A. 478">4 B.T.A. 478, 481 (1926), is misplaced. All of the taxpayers in those cases had requested the refunds that were erroneously made. Here, the taxpayer estate never requested the refund; the refund was the result of respondent's bookkeeping error. Moreover, those cases dealt with deficiencies as defined in section 307 of the Revenue Act of 1926, ch. 27, 44 Stat. 9. Section 307 had provided:Sec. 307. As used in this title in respect of a tax imposed by this title the term "deficiency" means --(1) The amount by which the tax imposed by this title exceeds the amount shown as the tax by the executor upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded, or otherwise repaid in respect of such tax; * * [Emphasis supplied.]Section 6211(b)(2), however, modified that definition by treating as rebates only those refunds made on the ground that36 the tax imposed is less than the tax shown on the return plus amounts previously assessed (or collected without assessment) as a deficiency. Thus the above cited cases cannot be relied on, and we must therefore conclude that the erroneous refund did not result in a deficiency.Nevertheless, there is an underpayment of tax within the meaning of section 6901(b), upon which the asserted liabilities are based. The estate had filed its Federal estate tax return showing $ 19,668.38 due as its estate tax. Subsequently, a deficiency of $ 1,643.53 was assessed. The estate issued its check for $ 21,311.91, which was negotiated by respondent. A second deficiency of $ 2,456 was assessed; and the estate issued a second check to respondent in that amount, which was also negotiated. Finally, because of a bookkeeping error, respondent issued a check to the estate for $ 19,667.74, which the estate negotiated and transferred to petitioners among others. Arguably, the estate taxes were fully paid after respondent negotiated the second check. But when all of the financial transactions are viewed together, there is clearly an underpayment of tax. Cf. Commissioner v. Court Holding Co., 331">324 U.S. 331 (1945).37 The 316 amount of tax due was not fully paid. Only a net amount of $ 4,100.17 was actually paid. Hence there was an underpayment of tax in the amount of $ 19,667.74. And the liabilities asserted herein are in fact based on that underpayment. Respondent has traced the erroneous refund to petitioners and seeks to collect that portion directly traceable to them.Therefore, because the asserted liabilities are based on an underpayment of the transferor's estate taxes, and because petitioners have properly filed with this Court their petitions for redetermination of their liabilities, this Court has jurisdiction.The second issue is whether petitioners are in fact liable as transferees for the amount of the erroneous refund transferred to them. The burden of proof in this regard is on respondent. See sec. 6902(a). Respondent argues that petitioners are liable as transferees under New Jersey law; because the transfers occurred in New Jersey, section 6901 and Commissioner v. Stern, 357 U.S. 39 (1958), require us to look to New Jersey law for substantive liability. However, section 6324 provides for the substantive liability of the transferees 38 of estates with respect to the estate tax without regard to State law. See Schuster v. Commissioner, 311">312 F.2d 311 (9th Cir. 1962), affg. 32 T.C. 998">32 T.C. 998 (1959); cf. sec. 6901 (h). See also Commissioner v. Stern, supra.In order to establish liability under section 6324, respondent must show that the estate tax imposed by chapter 11 was not paid when due, and that the transferees have received property included in the gross estate under sections 2034 to 2042. Sec. 6324(a)(2). If those requirements are proven by respondent, petitioners will be liable for the amounts involved. There is no dispute over the amounts actually received by petitioners. Hence they are transferees of the estate. And as we previously discussed, there has been an underpayment of tax; the tax has not yet been fully paid. Consequently, if the petitioners are holding property includable in the decedent's gross estate under sections 2034 to 2042, they are liable as transferees. 939 We think that petitioners are holding property includable in decedent's gross estate. Each has received one-half of decedent's estate. The amounts traced directly to them were nothing more than a part of estate funds paid to respondent and erroneously 317 refunded by him. We see no reason why those funds or any other estate assets would have been excluded from the gross estate, and none of the parties has suggested otherwise. Thus we hold that petitioners are liable under section 6324(a)(2) as transferees of the Estate of Nancy W. Groezinger.Decisions will be entered for the respondent. Footnotes1. After the briefs were filed and arguments were heard, petitioners filed a motion to amend their pleadings. The motion was denied because it was untimely.↩2. Unless otherwise stated, all sections refer to the Internal Revenue Code of 1954.↩3. But see sec. 6324, discussed infra↩.4. Lamm v. Commissioner, T. C. Memo. 1977-336↩.5. Specifically, sec. 7405 provides:(a) Refunds After Limitation Period. -- Any portion of a tax imposed by this title, refund of which is erroneously made, within the meaning of section 6514, may be recovered by civil action brought in the name of the United States.(b) Refunds Otherwise Erroneous. -- Any portion of a tax imposed by this title which has been erroneously refunded (if such refund would not be considered as erroneous under section 6514) may↩ be recovered by civil action brought in the name of the United States. [Emphasis supplied.]6. Sec. 6901 provides in pertinent part:(a) Method of Collection. -- The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred: (1) Income, estate and gift taxes. -- (A) Transferees. -- The liability, at law or in equity, of a transferee of property --* * * (ii) of a decedent in the case of a tax imposed by chapter 11 (relating to estate taxes), * * in respect of the tax imposed by subtitle A or B. * * (b) Liability. -- Any liability referred to in subsection (a) may be either as to the amount of tax shown on a return or as to any deficiency or underpayment of any tax.↩7. Sec. 6211(a) provides:(a) In General. -- For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term "deficiency" means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44, exceeds the excess of -- (1)the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by taxpayer and an amount was shown as the tax by the taxpayer thereon, plus(B) the amounts previously assessed (or collected without assessment) as a deficiency, over --(2) the amount of rebates, as defined in subsection (b)(2), made.↩8. Sec. 6211(b)(2) provides:(b) Rules for Application of Subsection(a). -- For purposes of this section -- * * *(2) The term "rebate" means so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax imposed by subtitle A or B or chapter 41, 42, 43, or 44 was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.↩9. See also Peterson v. Commissioner, T. C. Memo. 1972-65↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621211/	Robin Haft Trust, Esther J. Foster, Edward Creiger, and Lewis H. Weinstein, Trustees, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentRobin Haft Trust v. CommissionerDocket Nos. 5879-71, 5880-71, 5881-71, 5882-71United States Tax Court61 T.C. 398; 1973 U.S. Tax Ct. LEXIS 2; 61 T.C. No. 45; December 27, 1973, Filed 2 Decisions will be entered for the respondent. Pursuant to the arrangements leading to a divorce and a property settlement, the stock held by the petitioners was redeemed. Before the redemption, each petitioner owned, actually and constructively, 31 2/3 percent of the stock of the corporation; after the redemption, each owned, actually and constructively, 33 1/3 percent. Held, the attribution rules of sec. 318, I.R.C. 1954, are applicable, notwithstanding the "family fight," and the payments the petitioners received from the redemption were essentially equivalent to dividends under sec. 302(b)(1), I.R.C. 1954; held, further, since the agreement referred to in sec. 302(c)(2)(A)(iii), I.R.C. 1954 was not filed, the attribution rules of sec. 318 are applicable, and there was no complete termination of the interest of each petitioner within the meaning of sec. 302(b)(3), I.R.C. 1954. Lewis H. Weinstein, Norman H. Wolfe, and Louis P. Georgantas, for the petitioners.Barry J. Laterman, for the respondent. Simpson, Judge. SIMPSON398 In these consolidated cases, the respondent determined the following deficiencies in the petitioners' Federal income taxes for the year 1967:Docket No.PetitionerDeficiency5879-71Robin Haft Trust$ 17,445.495880-71Wendy Laura Haft Trust17,445.495881-71Lisa Ann Haft Trust17,445.495882-71Daniel Foster Haft Trust17,445.49The issues which must be decided are whether the redemption of certain stock held by the petitioners (1) was not essentially equivalent to a dividend under section 302(b)(1) of the Internal6 Revenue Code of 1954, 2 or (2) resulted in a complete termination of their interest in the corporation under section 302(b)(3).FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.The petitioners are the Robin Haft Trust, the Wendy Laura Haft Trust, the Lisa Ann Haft Trust, and the Daniel Foster Haft Trust; they were created under the laws of the Commonwealth of Massachusetts, and had their principal office in Leominster, Mass., at the 399 time of filing the petitions herein. Their Federal income tax returns for the year 1967 were filed with the district director of internal revenue, Boston, Mass.In 1956, Joseph C. Foster's daughter, Marcia, married Burt Haft. Two children were born of this marriage -- Robin, born December 29, 1957, and Daniel, born September 16, 1961. Mrs. Haft had two older children -- Lisa, born September 15, 1953, and Wendy, born April 8, 1955 -- by her first husband, Lawrence Hausman, 7 who died before her marriage to Burt Haft. Burt Haft legally adopted these two children.During the marriage of Marcia to Burt Haft, he was an officer, stockholder, and employee of the Haft-Gaines Co. (the corporation). During the taxable year 1967, the corporation was a Delaware corporation with its principal office in Ft. Lauderdale, Fla. After the marriage of his daughter to Burt Haft, Mr. Foster loaned $ 200,000 to the corporation and purchased 100,000 shares of its common stock.On January 2, 1962, Mr. Foster created the trusts, and on or about January 13, 1962, he transferred, without consideration, to each trust 25,000 shares of the stock of the corporation. Thereafter, he owned no shares of stock of the corporation. The original trustees were Mr. Foster, Esther J. Foster, his wife, and Alan R. Trustman. All of the original trustees of the trusts remained in office continuously from the date of the formation of the trusts throughout 1967, the taxable year in issue. Because of the resignation of Mr. Trustman on December 19, 1968, the death of Mr. Foster on November 10, 1971, and the appointment of successor trustees, the present trustees of each of the trusts are Esther8 J. Foster, Edward Creiger, and Lewis H. Weinstein. The trusts are identical in all respects, except for the names of the trusts and their beneficiaries, and the financial and income tax data applicable to each trust is identical.When the trusts were created, there were 500,000 shares of the stock of the corporation outstanding. One hundred thousand shares were owned by Burt Haft; 100,000 shares by Richard Haft, his brother; 100,000 shares by Jack Gaines, his brother-in-law; and 100,000 shares by Abraham Haft, his father. Sometime after January 2, 1962, Abraham Haft transferred all his stock in the corporation to a trust for the benefit of his children, Burt Haft, Richard Haft, and Norma Gaines (the wife of Jack Gaines), in equal proportions.In November 1966, Marcia Haft commenced divorce proceedings against Burt Haft. In the course of the divorce proceedings, each made serious and bitter charges and countercharges about the other. In order to separate their financial interests and provide for their future relationship, several negotiating sessions took place. Both parties were represented by lawyers or accountants during the meetings. Mr. Foster, Burt Haft, and Mr. Gaines9 also participated at times. 400 Disputes characterized the discussions that led to the property settlement between Mr. and Mrs. Haft. When Mrs. Haft initiated the divorce, Burt Haft moved his residence from the house they had been occupying in Bay Harbor, Miami Beach, Fla., and did not have contact with the children until 6 or 7 months later, although he was still residing in Florida during this period. Sometime after her divorce and before 1970, Marcia Haft remarried. Thereafter, she and her new husband moved to New York, taking the children with them. After the divorce was granted on June 26, 1967, Burt Haft rarely saw the children; he did not see them at all from the time of the divorce until 1971. After 1971, they visited him in Florida; he saw them at Christmas of 1972. After November 1966, he did not pay support for the children until a court decree ordered him to do so; he ceased paying support entirely in the middle of 1970.At the same time the divorce proceedings were taking place, Mr. Foster and the trusts terminated their financial involvement in the corporation. There were negotiations concerning retirement of the debt owed by the corporation to Mr. Foster, 10 and it was finally paid in March 1967. There were also negotiations respecting the termination of the trusts' stock interest. The corporation originally offered $ 183,000 for all the trusts' shares, but in a subsequent meeting, the offer was raised. On June 17, 1967, it was agreed that the trusts' shares would be redeemed for $ 250,000 plus 6-percent interest, if the corporation chose to pay the purchase price in installments over a period of years, and $ 200,000 plus 6-percent interest, if the entire purchase price was paid on or before February 1, 1968. The corporation agreed that while the obligation was outstanding, it would not pay dividends, would not pay compensation in excess of $ 200,000 to its shareholder-employees, would not recapitalize, and would not dispose of most or all of its assets. The corporation elected to complete payment for the stock in 1967.Immediately before the redemption of the stock on June 17, 1967, the stock of the corporation was owned as follows:SharesBurt Haft100,000Richard Haft100,000Jack Gaines100,000Abraham Haft Trust for thebenefit of Burt Haft, RichardHaft, and Norma Gaines100,000Robin Haft Trust25,000Wendy Laura Haft Trust25,000Lisa Ann Haft Trust25,000Daniel Foster Haft Trust25,000Total500,00011 After the redemption, only 400,000 shares of the stock of the corporation were outstanding.The corporation's Federal income tax return for the fiscal year during which the petitioners' stock was redeemed indicated that it had a 401 balance of unappropriated retained earnings of $ 1,353,219.27 at the beginning of such fiscal year and $ 1,514,557.18 at the end of such fiscal year.In their Federal income tax returns for the year 1967, the petitioners reported the gains from the redemption as long-term capital gains. In his notices of deficiency, the respondent determined that the gains were ordinary income.OPINIONWe must decide whether the redemption should be treated as an exchange of stock under section 302(a) so that the gains are taxable as long-term capital gains, or whether such gains represented dividends taxable under sections 302(d) and 301 as ordinary income.Section 302(a) provides, in part, that if "a corporation redeems its stock * * and if paragraph (1) * * * [or] (3) * * * of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock." Paragraph (1) of section 302(b) states that "Subsection12 (a) shall apply if the redemption is not essentially equivalent to a dividend." Paragraph (3) of section 302(b) states that "Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder." Section 302(d) provides, in part, that if "a corporation redeems its stock * * and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 applies."Section 302(c)(1) provides that, except as provided in paragraph (2), the attribution rules of section 318 shall be applied in determining the ownership of stock for purposes of applying the rules of section 302. Section 318(a)(1)(A) provides that an individual shall be considered as owning the stock owned by his spouse, parents, and children; section 318(a)(2)(B)(i) provides that beneficiaries of a trust shall be considered as owning the stock owned by the trust; and section 318(a)(3)(B)(i) provides that a trust shall be considered to own the stock owned by its beneficiaries. However, under section 302(c)(2), the attribution rules of section 318 are not applicable when there is a complete termination13 of a shareholder's interest under section 302(b) (3), if certain conditions are satisfied, including the requirement that:(iii) the distributee, at such time and in such manner as the Secretary or his delegate by regulations prescribes, files an agreement to notify the Secretary or his delegate of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph. [Sec. 302(c)(2)(A) (iii).]The petitioners take the position that their interests in the corporation were completely terminated and that, accordingly, the distributions received by them in redemption of their stock were not 402 essentially equivalent to a dividend under section 302(b)(1). They argue that the redemption occurred because of the controversy between the Haft and Foster families and that because of that controversy, the attribution rules of section 318 are not applicable. In the alternative, they contend that even if the attribution rules are applied, there was a meaningful reduction in their interest in the corporation so that the redemption should be treated as an exchange and not a distribution of a dividend. Finally, they assert that they14 had good cause for not filing the agreement referred to in section 302(c)(2), and consequently, that requirement should be waived and the attribution rules should not be applied.The petitioners argue that attribution should not be applied when there has been a "family fight" and there is hostility between the members of the family. In support of that contention, they rely upon our decision in Estate of Arthur H. Squier, 35 T.C. 950">35 T.C. 950 (1961). In that case, the Court relied, in part, on the "sharp cleavage" between the various shareholders of the corporation when the redemption took place in holding that the payment was not essentially equivalent to a dividend. The petitioners also point out that the Court of Appeals for the First Circuit, where this case arose, has said, with respect to the applicability of the attribution rules, "their imposition is not inflexible and if it can be demonstrated that discord exists in a family relationship which would make attribution unwarranted, they will not be applied." Bradbury v. Commissioner, 298 F. 2d 111, 116-117 fn. 7 (C.A. 1, 1962), affirming a Memorandum Opinion of this Court. 15 In the present case, there is some question as to how much hostility actually existed between Mr. Haft and his children, and a question as to whether the relevant relationship is that between Mr. Haft and his children or that between him and the trustees. Yet, it is clear that the redemption took place as a part of the arrangements for the divorce and for the property settlement between Mr. and Mrs. Haft; and consequently, we will consider whether the existence of such circumstances affects the applicability of the attribution rules of section 318.Since the decisions in Squier and Bradbury, the Supreme Court decided United States v. Davis, 301">397 U.S. 301 (1970), in which it held that the attribution rules are applicable for purposes of determining whether a distribution is essentially equivalent to a dividend under section 302(b)(1). 397 U.S. at 308. That holding has been followed and applied in a series of subsequent decisions. William A. Sawelson, 61 T.C. 109">61 T.C. 109 (1973); Stanley F. Grabowski Trust, 58 T.C. 650">58 T.C. 650, 659 (1972); Fehrs Finance Co., 58 T.C. 174">58 T.C. 174 (1972),16 affd. 487 F. 2d 184 (C.A. 8, 1973). However, the petitioners seek to distinguish such cases on the ground that none of them involved a "family fight" such as occurred in the present case.403 A careful review of the opinion of the Supreme Court in Davis convinces us that the petitioners' argument is inconsistent with the statements and rationale of that opinion. Before the enactment of the 1954 Code, the attribution rules were sometimes applied, and sometimes not applied; to avoid that uncertainty, section 302 expressly made the attribution rules applicable for purposes of determining whether a distribution in redemption should be treated as a dividend. H. Rept. No. 1337, 83d Cong., 2d Sess., p. A96 (1954). The Court relied upon "the plain language of the statute" in concluding that the attribution rules were applicable. 397 U.S. at 306. The Court was obviously convinced that in enacting the rules of section 302, Congress sought to provide definite and specific rules and to avoid the uncertainties which had arisen under the earlier law. In considering the argument that the redemption in that case was motivated by17 a business purpose, the Court reviewed the legislative history and concluded that the legislative objective was to provide definite rules for determining when a redemption should be treated as an exchange, and to carry out that objective, the Court held that the business purpose for the redemption was irrelevant. The Supreme Court recently turned down a request to reconsider its holding in Davis, Albers v. Commissioner, 414 U.S. 982 (1973), denying certiorari in Miele v. Commissioner, 474 F. 2d 1338 (C.A. 3, 1973), affirming 56 T.C. 556">56 T.C. 556 (1971).If the applicability of the attribution rules depended upon the feelings or attitudes among the members of a family, it would then be necessary to inquire into whether there was hostility or animosity among them, whether such discord was serious, and whether it would actually or likely impair the ability of one member of the family to influence the conduct of other members. By the terms of the statute, the attribution rules are applicable irrespective of the personal relationships which exist among the members of a family, and an interpretation18 of the statute which made their applicability depend upon whether there was discord among the members of the family -- or the extent of any such discord -- would frustrate the legislative objective and would be clearly inconsistent with the language and the rationale of Davis. For these reasons, we believe that in view of the Supreme Court's opinion in Davis, the petitioners' reliance upon Squier and Bradbury is misplaced, and we hold that the applicability of the attribution rules is not affected by the circumstances which led to the redemption.Under Davis, the sole test for determining whether a distribution in redemption is essentially equivalent to a dividend is whether the redemption results "in a meaningful reduction of the shareholder's proportionate interest in the corporation." United States v. Davis, 397 U.S. at 313. The respondent applied the attribution rules and concluded 404 that immediately before the redemption, each of the petitioners owned, actually and constructively, 31 2/3 percent of the corporation's stock and that after the redemption, each owned 33 1/3 percent of such stock. His conclusion was 19 based on the following computation: Before the redemption, each petitioner actually owned 25,000 shares; under section 318(a)(3)(B), each petitioner should be treated as owning the stock owned by its beneficiary, and under section 318(a)(1), each beneficiary should be considered as owning the 100,000 shares owned by Burt Haft and the 33,333 1/3 shares attributed to him under section 318(a)(2)(B) by reason of his interest in the Abraham Haft trust; thus, each petitioner, actually and constructively, owned 158,333 1/3 of the 500,000 outstanding shares.After the redemption, each petitioner is treated as owning the 133,333 1/3 shares actually and constructively owned by Burt Haft; that is, it is considered to own 133,333 1/3 of the 400,000 shares then outstanding. The petitioners challenge that application of the law; they contend that since the petitioners actually owned none of the stock after the redemption, section 302(b)(1) should be applied by looking at the stock actually and constructively owned by Burt Haft before and after the redemption. Under their theory, Burt Haft, before the redemption, should be treated as owning, in addition to the 100,000 shares actually owned by him, 20 33,333 1/3 shares attributed to him by reason of the trust set up by his father and the 100,000 shares held by the petitioners and attributed to him because the beneficiaries of such trusts were all his children. Under that theory, he is considered as owning 233,333 1/3 of the 500,000 outstanding shares, or 46 2/3 percent; after the redemption, he is considered as owning only 133,333 1/3 shares of the 400,000 then outstanding, or 33 1/3 percent.It seems clear to us that the petitioners' theory is not in accordance with the law. Under section 302(b)(1) and the Davis holding, it is necessary to determine the stock owned by each of the petitioners, actually and constructively, before and after the redemption, and the respondent's computations do so and properly apply the rules of the statute. On the other hand, the petitioners' theory does not follow the rules of the statute and has the effect of attributing to each of the petitioners the stock owned by the other petitioners. Such attribution represents intrasibling attribution, which is not in accordance with section 318. Stanley F. Grabowski Trust, 58 T.C. 650 (1972); Title Insurance & Trust Co. v. United States, 326 F. Supp. 617 (C.D. Cal. 1971),21 affd. 484 F. 2d 462 (C.A. 9, 1973); sec. 1.318-4(b), Income Tax Regs.; Ringel, Surrey & Warren, "Attribution of Stock Ownership in the Internal Revenue Code," 72 Harv. L. Rev. 209">72 Harv. L. Rev. 209 (1958). The petitioners also point out that in Davis, Fehrs Finance, and Grabowski, the taxpayers held, or were considered as holding, controlling 405 interests in the corporations, but we perceive no reason as to why that factual difference should make any difference in the legal conclusion. The test still is whether the redemption resulted in a meaningful reduction in the shareholders' interests in the corporation, and we hold that the redemption of the petitioners' stock did not result in such a reduction in their interests in the corporation. See John D. Gray, 56 T.C. 1032">56 T.C. 1032 (1971).Section 302(b)(3) establishes a "safe harbor" for a shareholder whose entire interest in a corporation is redeemed by providing that such a redemption shall be treated as an exchange. However, in determining whether there has been a redemption of a shareholder's entire interest in a corporation, the attribution rules of section22 318 are applicable, unless the conditions of section 302(c)(2) are satisfied, including the filing of the agreement referred to in section 302(c)(2) (A)(iii). If the petitioners had met such requirements, the attribution rules would not have been applicable and the redemptions would have qualified under section 302(b)(3). Yet, the petitioners have not filed the agreement under section 302(c)(2)(A)(iii). They assert that before our decision in Lillian M. Crawford, 59 T.C. 830">59 T.C. 830 (1973), the respondent took the position that an estate or trust could not file such an agreement (see Rev. Rul. 68-388, 2 C.B. 122">1968-2 C.B. 122, and Rev. Rul. 59-233, 2 C.B. 106">1959-2 C.B. 106), and that, therefore, it would have been useless for them to attempt to file the agreement. They urge that under such circumstances, the filing of the agreement should be waived and they should be treated as having complied with the requirements of section 302(c)(2).Although the respondent's regulations require the agreement to be filed with the return, a number of cases have held that there has been substantial compliance23 with the requirement even though the agreement was not filed with the return but was filed subsequently. United States v. Van Keppel, 321 F. 2d 717 (C.A. 10, 1963); Pearce v. United States, 226 F. Supp. 702">226 F. Supp. 702 (W.D. N.Y. 1964); Georgie S. Cary, 41 T.C. 214 (1963). Yet, when we were urged to overlook the requirement altogether, we held that we could not do so; Congress required an agreement to be filed, and we could not nullify the statutory requirement. Fehrs Finance Co., 58 T.C. 174">58 T.C. 174 (1972). Nor could the requirement be satisfied by filing the agreement after our decision in the case. Fehrs Finance Co. v. Commissioner, 487 F. 2d 184 (C.A. 8, 1973). Furthermore, we find no reason to apply Columbia Iron & Metal Co., 61 T.C. 5">61 T.C. 5 (1973), to this case. In that case, we held that the petitioner was entitled to a charitable deduction because it had substantially complied with the pertinent statutory section and regulations. In the present case, the petitioners have never filed the agreement, 24 nor have they attempted to do so. In their briefs, they offered to file the agreement, 406 but it is clear that a mere offer falls far short of substantial compliance with the filing requirement. Even though the respondent insisted that the agreement must be filed with the return, taxpayers have not been discouraged from filing their agreements after their returns. United States v. Van Keppel, supra;Pearce v. United States, supra;Georgie S. Cary, supra; but see Archbold v. United States, 201 F. Supp. 329">201 F. Supp. 329 (D.N.J. 1962), affirmed per curiam 311 F. 2d 228 (C.A. 3, 1963). In like manner, the petitioners could have filed the agreement in this case, notwithstanding the respondent's position, and we cannot overlook their failure to do so and cannot waive the requirement of the statute. Fehrs Finance Co., supra.Accordingly, we hold that the requirements of section 302(c)(2) have not been satisfied, that the attribution rules of section 318 are applicable, and that the redemption does not qualify25 under section 302(b)(3).The respondent requested a finding of fact with respect to the earnings and profits of the corporation based on the information contained in its Federal income tax return for the fiscal year in which the redemption took place. The petitioners challenged the requested finding on the grounds that the tax return was not the best evidence and asserted that the respondent had the burden of computing the earnings and profits of the corporation from its books and records. We reject the petitioners' arguments. The tax return filed by the corporation constitutes evidence of the facts set forth therein. 28 U.S.C. sec. 1732 (1970); Palmer v. Hoffman, 318 U.S. 109">318 U.S. 109 (1943). Furthermore, since the respondent has determined that the distributions to the petitioners in redemption of their stock constituted dividends, the petitioners, and not the respondent, have the burden of proving that such distributions were not dividends, and if they wish to assert that the corporation had inadequate accumulated or current earnings and profits to cause the distributions to be taxable as dividends, the petitioners*26 have the burden of establishing such fact. Rule 32, Tax Court Rules of Practice; Welch v. Helvering, 290 U.S. 111 (1933). Consequently, based on the information contained in the corporation's tax return and the petitioners' failure to furnish any contrary evidence, we find and hold that the corporation had accumulated or current earnings and profits in excess of $ 200,000, the total amount of the distributions to the petitioners in redemption of their stock.Decisions will be entered for the respondent. Footnotes1. Cases of the following petitioners are consolidated herewith: Wendy Laura Haft Trust, Esther J. Foster, Edward Creiger, and Lewis H. Weinstein, Trustees, docket No. 5880-71; Lisa Ann Haft Trust, Esther J. Foster, Edward Creiger, and Lewis H. Weinstein, Trustees, docket No. 5881-71; Daniel Foster Haft Trust, Esther J. Foster, Edward Creiger, and Lewis H. Weinstein, Trustees, docket No. 5882-71.↩2. All statutory references are to the Internal Revenue Code of 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621212/	Michael Friedman v. Commissioner.Friedman v. CommissionerDocket No. 112563.United States Tax Court1943 Tax Ct. Memo LEXIS 216; 2 T.C.M. (CCH) 382; T.C.M. (RIA) 43321; June 30, 1943216 Benjamin Mahler, Esq., 39 Broadway, New York City, for the petitioner. B. W. Berg, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: Respondent determined a deficiency of income tax for the calendar year 1937 in the amount of $1,120.84. Petitioner claims an overpayment of $196.40, The questions in issue are (1) whether petitioner sustained an ordinary loss deductible in full or a capital loss limited to $2,000 upon the transfer of an interest in real estate; and (2) Is petitioner entitled to a deduction of $18,750 as an ordinary and necessary business expense? Findings of Fact Petitioner is a resident of Brooklyn, New York, engaged in the retail credit clothing business. He filed his tax return for the year 1937 with the collector for the first collection district of New York. Petitioner keeps his books and files his returns on the accrual installment basis. In 1919 petitioner and his brother, Nathan Friedman, became associated together as equal partners in the retail installment clothing business in Brooklyn, New York. The partnership continued until the death of Nathan Friedman on February 5, 1935. In carrying on this business, the partnership217 operated two stores, one at 1135 Broadway, Brooklyn, New York, known as the "Mutual Credit Clothing", and the other at 287 Livingston Street, Brooklyn, New York, known as the "Kelly." The building located at 1135 Broadway was acquired in 1923, and was occupied by the partnership and petitioner for business purposes from that date until July 1, 1936. At the time this property was purchased, it was encumbered with a mortgage in the amount of $28,500, which the partnership and petitioner reduced to $12,000. After the death of Nathan Friedman, petitioner continued to operate the business. On June 7, 1936, Anna Friedman, the widow of Nathan Friedman, commenced an action against petitioner, claiming that he was operating the business of the partnership solely for his personal account and benefit, and praying for the appointment of a receiver for the business. Thereafter, and on June 15, 1936, petitioner agreed to purchase from the estate of Nathan Friedman, the interest of the estate in the partnership at a valuation to be determined by three accountants on arbitration. It was provided that pending the determination of the valuation of decedent's interest in the partnership, petitioner218 would pay to Anna Friedman the sum of $30,000 on or before June 17, 1936, and thereafter one-half of the net surplus arising from the monthly collections, or the sum of $5,000 per month, whichever was greater. The assets of the partnership were transferred to Anna Friedman's attorney, as trustee, and all checks were to be countersigned by him. In the event any default occurred in the payments, the trustee would have the right to sell all the assets at public auction. Thereafter, Anna Friedman decided that she did not wish to be bound by the determination of the arbitrators, and disavowed her agreement to be bound by their decision as to the value of the deceased's interest in the partnership. Thereupon the matter was referred back to the court. On May 12, 1937, in open court, petitioner agreed to pay the estate of Nathan Friedman the sum of $118,750 as representing the decedent's interest in the partnership. As part of that stiuplation, petitioner agreed to execute and deliver to the estate of Nathan Friedman and Anna Friedman, or their nominees a quit-claim deed of all petitioner's right, title, and interest in the premises known as 1135 Broadway, Brooklyn, New York. The stipulation219 contained the following recitation: The deed to be executed of the Broadway premises shall contain a clause wherein Anna Friedman shall assume the mortgage obligation upon said premises and agree to hold Michael Friedman free and harmless from any liability upon the bond or mortgage debt, it being understood that the said mortgage indebtedness amounts to no more than the principal sum of approximately $12,000. If for any reason Anna Friedman determines not to accept said premises upon the conditions herein set forth, both parties shall be released of all obligations herein set forth with respect to said premises and this agreement shall otherwise be in full force and effect, but in that event, the Estate of Nathan Friedman shall execute a quit-claim deed of said premises to Michael Friedman on condition that Michael Friedman assumes the responsibility to pay all charges against those premises, mortgage, taxes, or anything else, to hold the estate safe and harmless from any liability on the mortgage debt which he shall in that event assume. Michael Friedman, however, shall also have the right to refuse to accept said property upon said conditions. Thereafter, on October 28, 1937, 220 petitioner conveyed this property to Anna Friedman for one dollar and other good and valuable considerations. The deed was subject to a mortgage reduced to the sum of $12,000 and contained the following clause: And the party of the second part hereby assumes payment of said mortgage above mentioned and agrees to hold the party of the first part safe and harmless from any claim, obligation or liability in connection therewith. Petitioner did not abandon the property located at 1135 Broadway, Brooklyn, New York. The conveyance to Anna Friedman of this property was a sale or exchange of a capital asset, and petitioner's loss is a capital loss limited to $2,000. Petitioner suffered no loss in 1937 from the acquisition of his deceased brother's interest in the partnership. Opinion Issue 1. The first issue presented is whether petitioner in conveying his interest in the Broadway property to Anna Friedman sustained an ordinary loss deductible in full or a capital loss limited to $2,000, under the provisions of section 117(d) of the Revenue Act of 1936. Petitioner contends that his equity in the property was without value prior to the conveyance and that he, in effect, abandoned221 the property and thus is entitled to a full loss of $12,624.20. Respondent claims that the property was not abandoned, that the conveyance was voluntary, and that petitioner received benefits from the conveyance. Under the facts, respondent's contentions must prevail. The property was conveyed to Anna Friedman as part of an opencourt settlement. She, as executrix of her husband's estate was suing for the estate's interest in the partnership. After protracted litigation, petitioner agreed to pay her the sum of $118,750 as the value of her husband's interest in the partnership. As part of the settlement, it was agreed that petitioner would convey the Broadway property to Anna Friedman, provided she assumed the mortgage and agreed to hold petitioner harmless from all obligations and liabilities in connection with the property. This she agreed to do. Petitioner claims that the property was purchased in 1923 subject to a mortgage of $20,000 and that at that time neither he nor his brother incurred any personal liability on the bond. However, he admits that the mortgagee demanded payments on the principal of the mortgage at various times. This would indicate that the mortgage had become222 due and payable. Petitioner has not proven that neither he nor his brother did not assume the payment of the mortgage after 1923. The fact that the open-court stipulation provided that as a condition to the conveyance, Anna Friedman would assume payment of the principal of the mortgage indicates that there was personal liability on the part of petitioner and his brother for the payment of the principal. This is strengthened by the recitation in the deed of "other good and valuable considerations" for the conveyance. Petitioner claims that the property was without value at the time of the conveyance. This contention, however, is weakened by the fact that Anna Friedman, who had first choice in either taking or refusing the property, decided to take it. Evidently she thought that not only did it have value but a sufficiently large enough value to warrant her assuming the payment of the mortgage. The assumption by Anna Friedman of the payment of the mortgage and her agreement to hold petitioner "safe and harmless from any claim, obligation or liability in connection therewith" were benefits derived by petitioner from the conveyance. It is held that petitioner did not abandon the property. 223 ; aff'd, . Petitioner does not deny that the conveyance was his voluntary act. The deed recited a good and valuable consideration. Both he and Anna Friedman were dealing at arm's length. These facts compel the conclusion that the conveyance was a sale of capital assets. To constitute a sale, there must be parties standing in the relation of buyer and seller, their minds must assent to the same proposition, and a consideration must pass. . A sale in its usual sense includes voluntary action by the owner and a consideration. . In this case both elements are present. The cases relied upon by petitioner are inapplicable here. They relate to a situation where the taxpayer abandoned his property as worthless. Under the facts of this case, it cannot be said that petitioner abandoned his property. Under the circumstances, it is held that petitioner sustained a capital loss limited to $2,000 pursuant to the provisions of section 117(d) of the Revenue224 Act of 1936. Issue 2. The next question is whether petitioner is entitled to a deduction of $18,750 for the year 1937 as an ordinary and necessary business expense. The basis of his claim is that he paid the estate of Nathan Friedman the sum of $118,750 when the interest of the decedent in the partnership was not worth more than $100,000. He argues that the excess, the sum of $18,150, was paid by him to avoid the harassments of litigation. There is little merit to petitioner's contentions. Under New York law, the legal representative of his deceased partner was entitled to receive the value of the decedent's interest in the partnership as of February 5, 1935, the date of the partner's death. Both petitioner and Anna Friedman, the estate's executrix were dealing at arm's length. Petitioner was under neither a legal nor a moral obligation to pay more than the value of his brother's interest. If as he claims, the value of his brother's interest in the partnership was only $100,000, then the payment of any sum in excess of that amount was a gift and certainly not deductible for income tax purposes. We held, in ,225 that an expenditure to avoid litigation under circumstances where the evidence did not show any legal liability in the taxpayer was not deductible as a business expense. Here, also, there was no liability on the part of petitioner to pay more than the value of the partner's interest in the partnership. The payment of the so-called "additional" amount of $18,750, to the estate of Nathan Friedman was neither a necessary nor an ordinary business expense. Petitioner is not entitled to this deduction as a business expense. It may also be noted that petitioner has not proved that the amount paid to the estate was more than petitioner should have paid. The assets of the partnership consisted principally of accounts receivable. As of February 5, 1935, these amounted to $304,362.34. Petitioner claims that due to the peculiar nature of the retail credit clothing business, these accounts were worth only 50 cents on the dollar. However, during the course of the litigation between himself and the estate, he executed an affidavit in which he claimed that they were collectible 100 cents on the dollar. He has not proved otherwise in this proceeding. From February 5, 1935, to December 31, 1935, petitioner226 collected $250,207.82 on these accounts. In 1936, further collections on the accounts were made in the sum of $21,694.61. In petitioner's 1937 return there is listed as item of "bad debts recovered" in the amount of $18,563.63. At the hearing, petitioner could hot determine whether this amount was part of the $304,362.24. Petitioner did not prove that the balance of these accounts receivable were not collected in subsequent years. Even with a claim of loss on the accounts receivable, petitioner had a profit in 1935 of $52,733.98. It may be true, as petitioner claims, that the cost of collection of the accounts were such that petitioners' profits were cut down. That, however, is immaterial for present purposes. If the transaction with the estate is a purchase of the decedent's interest in the partnership as petitioner contends, his loss can only be established at the time the assets are liquidated or disposed of. Certainly he cannot establish a loss at the time of the purchase by alleging that he had paid more for the assets than they are reasonably worth. That fact can only be proved by the facts developed subsequent to the purchase, after reasonable efforts have been made to collect227 the accounts. Under all the circumstances, petitioner is not entitled to a deduction of $18,750 as an ordinary and necessary business expense. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621216/	JOEL CULP and WILMA CULP, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, RespondentCulp v. CommissionerDocket No. 16777-82.United States Tax CourtT.C. Memo 1984-78; 1984 Tax Ct. Memo LEXIS 594; 47 T.C.M. (CCH) 1112; T.C.M. (RIA) 84078; February 16, 1984. Joel Culp and Wilma Culp, Pro Se. Maureen C. Kopko, for the respondent. SWIFTMEMORANDUM595 FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent determined a deficiency in petitioners' Federal self-employment tax liability for 1980 in the amount of $405. Petitioners resided at Lansdale, Pennsylvania, at the time their petition was filed. They timely filed their 1980 Federal income tax return, Form 1040A. Petitioners requested respondent to figure the tax due thereon. Pursuant to such request, respondent determined on June 15, 1981, that there was no Federal income tax liability due for 1980, since petitioners reported income of only $5,000. By notice of deficiency dated April 16, 1982, however, respondent determined that petitioners owed self-employment taxes of $405 for 1980. Petitioners timely filed their petition herein on July 8, 1982. The issue for decision is whether Joel Culp (hereinafter "petitioner") was an employee or a self-employed independent contractor in 1980. Petitioner contends he was an employee and not subject to self-employment taxes. This case was tried on November 30, 1983, and the findings of fact are based on the evidence admitted at trial, including a partial stipulation of facts. FINDINGS OF FACT Petitioner earned income596 in 1980 performing odd jobs, such as repairing household items and performing yard maintenance, including mowing grass and shoveling snow. Petitioner received no W-2 (Wage and Tax Statement) forms from the various people for whom he rendered services in 1980. Petitioner did not provide W-4 (Employee's Withholding Allowance Certificate) forms to any of these people. Petitioner worked whenever he was short of cash. He maintained no permanent or on-going relationship with any of the people for whom he rendered services. Petitioner always received the total amount of money promised for the services he was to render. No amount was withheld for social security taxes nor for Federal income taxes from the money paid to petitioner. Petitioner received no fringe benefits, such as sick pay, vacation pay or major medical insurance from the various people for whom he rendered services in 1980. Whenever petitioner worked, he had control of his own hours and was not supervised in the work he performed. The details of the job were left to petitioner.OPINION Section 1401 1 imposes social security and medicare taxes on self-employment income of individuals to pay for old-age, survivors597 and disability insurance and hospital insurance. The amount of self-employment income subject to these taxes is established by section 1402(b). Section 1402(b)(2) provides that self-employment income shall not include "the net earnings from self-employment, if such net earnings for the taxable year are less than $400." Thus, if petitioner earned in excess of $400 in 1980 as income from self-employment, he will be subject to the taxes described in section 1401. In determining whether an individual is an employee or an independent contractor, the following factors are generally considered: (1) the degree of control over the details of the work exercised by the one for whom the services are rendered; (2) the nature of the investment by the taxpayer in the tools and facilities used in the work; (3) the opportunity of the individual for profit and loss; (4) whether or not the one for whom the services are rendered has the right to discharge the individual; (5) whether the work is a regular part of the business of the598 one for whom the services are rendered; (6) the permanency of the relationship; and (7) the relationship the parties believe they are creating. United States v. Silk,331 U.S. 704">331 U.S. 704, 716 (1947); Simpson v. Commissioner,64 T.C. 974">64 T.C. 974, 984-985 (1975); Ellison v. Commissioner,55 T.C. 142">55 T.C. 142, 152-153 (1970); 1 Restatement of Agency 2d, sec. 220 (1958). See also sec. 31.3121(d)-1(c)(2), Employment Tax Regs.In assessing these factors, it is clear that petitioner was acting not as an employee but as an independent contractor in performing odd jobs during 1980. Petitioner had complete control over the details of the work; there were no tools or facilities to speak of in the performance of the odd jobs; petitioner worked on a fee basis without risk of loss; petitioner was hired to perform a specific service and was automatically terminated on completion of the job; petitioner performed odd jobs at the home of those for whom he rendered services and not at their places of business; petitioner performed services periodically and never developed a permanent or on-going employment relationship with those*599 for whom he rendered services; and the parties could not have believed the relationship to be anything but that of an independent contractor because of the failure to withhold employment taxes and the absence of the other indicia of an employment relationship. In summary, it is clear that petitioner was an independent contractor. As such, he was self-employed and subject to the self-employment taxes of section 1401. Therefore, Decision will be entered for the Respondent.Footnotes1. All section references, unless otherwise indicated, are to the Internal Revenue Code of 1954, as amended and in effect during the 1980 taxable year.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621217/	FINIS R. WELCH AND LINDA J. WAITE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Waite v. Comm'rDocket No. 20611-12 United States Tax Court2017 Tax Ct. Memo LEXIS 228; November 20, 2017, FiledDecision text below is the first available text from the court; it has not been editorially reviewed by LexisNexis. Publisher's editorial review, including Headnotes, Case Summary, Shepard's analysis or any amendments will be added in accordance with LexisNexis editorial guidelines.228 Docket No. 20611-12. Filed November 20, 2017.George W. Connelly, Jr.,and Heather M. Pesikoff, for petitioners.M. Kathryn Bellis, Courtney M. Hill, and Sharbel Sfeir (student), forrespondent.MEMORANDUM FINDINGS OF FACT AND OPINIONPARIS, Judge: Respondent determined deficiencies of $869,416,$1,533,336, and $1,220,441 in Dr. Welch (petitioner) and Dr. Waite's1 Federal1Both petitioners have earned doctoral degrees, and they will be referred to (continued...)- 2 -[2] income tax for 2007, 2008, and 2009, respectively, and determined adeficiency of $1,316,520 in petitioner's Federal income tax for 2010. The soleissue for decision is whether petitioner's ranching activity was engaged in forprofit under section 183 for the years in issue.2FINDINGS OF FACTSome of the facts have been stipulated and are so found. The firststipulation of facts, the first supplemental stipulation of facts, and facts drawnfrom the stipulated exhibits are incorporated herein by this reference. Petitionerresided in Texas and Dr. Waite resided in Illinois when they timely filed theirpetition.I. Petitioners' BackgroundsA. PetitionerSince middle school petitioner has been involved in vocational agricultureactivities. He continued229 those activities through high school. Tragically,petitioner was in a severe automobile accident during his freshman year of college1(...continued)as petitioner and Dr. Waite or petitioners.2Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) of 1986, as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.- 3 -[3] and has been in a wheelchair since. After his recovery he continued hiseducation and earned a bachelor of science degree in agricultural economics fromthe University of Houston in 1961 and earned a Ph.D. in economics from theUniversity of Chicago in 1966.Petitioner has had a multifaceted career. He was an economics professor for40 years and taught at the University of Chicago, Southern Methodist University,the City University of New York, University of California at Los Angeles, andTexas A&M University, and he retired from the last in 2003. In the early 1970s hebegan testifying as an expert witness in civil litigation cases. In 1976 he foundedWelch Consulting and, as of the time of trial, was its sole owner, president, andchief executive officer. Welch Consulting230 is a private consulting firm thatprovides economic and statistical consulting for lawsuits involving discriminationclaims. It has offices in Los Angeles, California, Washington, D.C., and Bryan,Texas.3In 1979 petitioner incorporated Unicon Research Corp. (Unicon). ThroughUnicon petitioner conducted his major research activities, which were funded byFederal grants and contracts. Because he found the bureaucratic process of3Bryan, Texas, is a small town near College Station, Texas, the location of TexasA&M University, and is approximately one hour from petitioner's ranch.- 4 -[4] obtaining Federal funding too cumbersome, he began funding his ownresearch and supporting it with assistance from Unicon and Welch Consulting. Asof the time of trial petitioner still performed managerial activities at Unicon.In 1982 petitioner formed a partnership, Computing Resource Center(CRC), of which he was a 50% partner. CRC eventually became StataCorp LP.StataCorp provides software for the research community. During the years inissue petitioner was no longer involved in StataCorp's day-to-day operations anddid not receive a salary from it.In 2007 petitioner formed PayEval to develop a statistical program231 thatwould assist businesses in assessing the equal opportunity outcomes betweendemographic groups in pay, promotion, and other areas. After two or three yearshe was unable to sell the program and ceased development. Starting in 2009petitioner considered PayEval part of Welch Consulting.Meanwhile, back at the ranch in Texas Fridays and Saturdays were workdays, with the ranch being relatively quiet on Sundays. During the years in issuepetitioner spent Thursday nights through Sundays at his ranch.Petitioner has never had a written business plan for any of his businessventures.- 5 -[5] B. Dr. WaiteDr. Waite holds a master's degree and a doctorate in sociology. She hasbeen a professor at the University of Chicago since 1991. She and petitionermarried in 2007 and divorced in 2010. During the years in issue Dr. Waite splither time between Chicago, Illinois, and petitioner's ranch in Texas, spending theweekends at the ranch with petitioner. Although she toured the ranch withpetitioner and occasionally listened to his ideas and plans for it, Dr. Waite was notinvolved in any of the ranch operations.II. Center Ranch A. LandIn 1987 petitioner purchased the first 130 acres of land that would become232 Center Ranch.4 Center Ranch now comprises nearly 8,700 acres on seven tracts ofland in Leon County, Texas, near Centerville.5 Petitioner purchased thousands ofthose acres during the years in issue. Center Ranch is split into the followingdivisions:4Petitioners offered expert reports for Center Ranch's real estate, its cattle, and its horses. Over respondent's objections, all of those reports were entered into evidence. Respondent offered no expert reports.5Petitioner owns 8,688 acres and leases another 900 acres for various ranch purposes. See infra p. 7. - 6 - [6] Acquisition Purchase Appraised DivisionAcreage1 datespricevalue2 Headquarters 2,410 1987-2010 $4,493,166 $14,630,000 Buffalo Creek 1,274 1989-1999 861,563 2,720,000 Stanmire/River- bottom 1,172 1990-2008 906,687 2,900,000 Coker Place 320 2006 639,000 1,032,000 Trinity River 2,703 2007, 2010 3,950,535 5,510,000 Keechi Creek 761 1998 477,300 2,970,000233 Bull pens/ receiving pens 48 1989 43,500 470,000 Total 8,688 n/a 11,371,751 330,232,000 1All acreage amounts are rounded to the nearest whole number.2The appraised values are as of Nov. 12, 2013, the inspection date of petitioner's expert witness.3The appraised value of each division includes the surface and mineral rights petitioner owned. The Keechi Creek Division had six acres fenced off for an oil pad, for which petitioner received rent. In 2010 petitioner earned over $900,000 of oil and gas royalties that he reported on a Schedule E, Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.), attached to his return.Headquarters includes the veterinary clinic (vet clinic), the horse center, the horsetraining facilities, and the Mill Creek Division, which includes more than 45 acresof lakes.6 The divisions are noncontiguous tracts of land except for Headquarters6As of 2006 petitioner's personal residence was on 20 acres of Headquarters property and was not considered234 part of Center Ranch.- 7 -[7] and Mill Creek Division. Petitioner purchased Coker Place as an investmentproperty. Coker Place is wooded, and the 320 acres are leased for hunting.During the years in issue petitioner also leased approximately 900 acres known asSadler Place Division for ranch purposes.Additionally, petitioner owned two duplexes on approximately 20 acres ofland in Centerville. Although they were in town, petitioner considered theduplexes part of Headquarters. They were purchased when Center Ranch neededhousing for ranch hands. If the duplexes were not needed to house ranch hands,they were leased month to month.B. Ranch OperationsIn 1987 petitioner's original intent was to grow hay as a cash crop and toraise some cattle on the first 130 acres he had purchased. Center Ranch is now amultioperational, 8,700-acre ranch with 25 full-time employees who receiveannual salaries ranging from $25,000 to $115,000.7 Petitioner also employs part-time ranch hands as needed. Over the years petitioner has realigned his workforceto reflect current needs, and he has fired employees for nonperformance or7The median household income for Leon County was $40,355 in 2010. U.S. Census Bureau,235 American FactFinder, https://factfinder.census.gov/bkmk/table/1.0/en/ACS/10_5YR/B19013/0500000U S48289 (last visited August 8, 2017). During the years in issue at least four Center Ranch employees' annual salaries were more than that.- 8 -[8] inappropriate behavior. The three main Center Ranch operations are cattle,hay, and horses, each of which will be discussed in more detail infra.Center Ranch also had a vet clinic that provided services for large and smallanimals.8 Construction on the vet clinic began in 2003; it was originally built tosupport Center Ranch's horse operation. All of the vet clinic's employees--exceptthe veterinarians--were Center Ranch employees. There was a licensedveterinarian on site during each of the years in issue. Petitioner rented the vetclinic facilities to the veterinarians and had management services agreements andlicensing agreements with them. The vet clinic provided services for CenterRanch animals under the management services agreements. It provided servicesfor animals owned by the public for a fee. The vet clinic was a separate entity andfiled its own tax returns for the years in issue.Center Ranch had a trucking operation and owned multiple 18-wheeler236 trucks that it used to move cattle and hay around the ranch and to transport cattlewhen they were purchased or sold. It also leased the trucks to move the cattle andthe hay of others, and it charged the third parties per load hauled. Center Ranch8The vet clinic did not start providing services for small animals until 2011, one year after the years in issue.- 9 -[9] also performed backhauls--picking up a load on a return trip--to maximize itstrucks' use.Additionally, there was a timber operation--including a timber manager--and there were several hundred acres leased for hunting on Center Ranch. In thelate 1980s petitioner did only "a little bit" of hunting on ranch property and hasdone none since then. During the years in issue Center Ranch had a website and aFacebook page, advertised in the Quarter Horse Directory online, and had videosof its operations and of its horses performing in various competitions posted toYouTube. As with his other business ventures, petitioner did not have a writtenbusiness plan for Center Ranch.During the years in issue petitioner subscribed to the following professionalpublications: Brangus Journal, Angus Journal, Showbox (Texas Junior LivestockAssociation237 publication), American Red Angus Magazine, Gulf Coast Cattleman,the Cattleman Magazine, the Maine Anjou Voice, Livestock Reporter, BrahmanJournal, Working Ranch Magazine, the Ear (a genetics marketing magazine), theProgressive Farmer, Rancher's Exchange, Western Horseman, Quarter HorseNews, Quarter Horse Journal, Cutting Horse Chatter, Reined Cow Horse News,Pacific Coast Journal, America's Horse, and Billings' Livestock CommissionHorse Sale Update.- 10 -[10] 1. Cattle Operation9Soon after purchasing the initial 130 acres of land, and upon the advice ofhis high school vocational agriculture teacher, petitioner purchased 34 bred heifersat auction with the intent of using their calves to start a club calf operation.10Initially, petitioner's former teacher was going to manage the club calf operationfor him. Unfortunately, he passed away shortly before petitioner purchased thecattle. After a short period of managing the club calf operation, petitioner decidedthat it would not be profitable because the prices were low, the bred heifers hepurchased were not the preferred club calf breed and did not sell well, andmarketing the operation was too time consuming. In total the club calf operation238 did not last more than five years.For business reasons petitioner decided to move to a beef cattle operationand began breeding purebred Maine Anjou cattle. Unfortunately, because thatbreed of cattle proved not well suited for the hot and humid climate of LeonCounty and did not do well, he again modified the operation. In 1996, after9Some common terms in the cattle industry include: (1) "calves", which are young cattle, (2) "heifers", which are young females that have not given birth to a calf, (3) "bred heifers", which are pregnant heifers, (4) "cows", which are mature females, and (5) "bulls", which are mature males.10Club calves are produced to be sold to participants in Future Farmers of America and 4-H who will raise and show them for educational purposes.- 11 -[11] conferring with his ranch manager, petitioner sold his Maine Anjou herd andpurchased Brangus cattle, which had been developed by crossing Brahmas andAngus cattle. They were known to thrive in heat and humidity. He addedpurebred Angus cattle to the operation and hired a purebred cattle manager. All ofpetitioner's Brangus and Angus cattle were registered--the Brangus with theInternational Brangus Breeders Association239 and the Angus with the AmericanAngus Association. Center Ranch's purebred herd operation used artificialinsemination for breeding purposes, which required constant care and supervisionof the purebred heifers in the herd. This proved to be too time intensive forpetitioner's ranch hands and was not successful; therefore, he sold his entirepurebred herd and fired the purebred cattle manager in 2006.Later that year petitioner, for business reasons, decided to hire a new cattlemanager and began raising a commercial cattle herd to operate a cow-calfoperation, in which the product was the calf.11 Petitioner's ranch employees hadpreviously worked his cattle operation on horseback and continued the traditionwith the commercial cattle herd. Because Center Ranch wanted to build the size11Commercial cattle are various breeds of cattle that are used to produce calves that are then sold when weaned for a price per pound. In contrast, feeder calves are weaned calves put on grain to gain weight, typically in a feed lot. Center Ranch planned to sell its calves when weaned and did not have a feeder calf operation.- 12 -[12] of its herd, it did not sell any of its calves during the years in issue. In240 addition a small herd of Longhorn cattle was also part of the cattle operation. TheLonghorn calves and the commercial calves were used in Center Ranch's horseoperation. Center Ranch's ranch manager estimated that it could carry a maximumof 2,000 head of mature cattle.12 During the years in issue portions ofHeadquarters and the Buffalo Creek, Trinity River, Stanmire/Riverbottom, andKeechi Creek Divisions were used for the cattle operation.2. Hay OperationIn 1988 petitioner began planting hay crop grasses and now grows CoastalBermuda grass and Tifton 85 Bermuda grass for hay crops in various pasturesacross Center Ranch. The weather conditions and cattle population would dictatewhich pastures were used, and if there was enough rainfall, the hayfields could beharvested four to five times a year. Because there were abnormally high toexceptionally high drought conditions in Leon County, Texas, during the years inissue, in an effort to reduce costs petitioner purchased specialized equipment thatcould spray herbicides at the same time the hay was fertilized. Additionally,Center Ranch cut its fertilizer costs by 10%-12% by spreading its own fertilizer.12This number does not include bulls and241 calves.- 13 -[13] The ranch hands who worked in the hay operation also worked in the cattleoperation.Center Ranch had also built its own feed mill that was used for the choppingand dry storage of the hay. The hay grown on Center Ranch was used to feed itslivestock and also to sell to third parties. Hay baled in round bales was to be fedto cattle in the pastures, and hay baled in square bales was to be fed to horses installs. Special baling equipment was purchased so that both large, one-ton-plusround bales and 40- to 70-pound square bales could be produced on CenterRanch's hayfields. Approximately two-thirds of the square hay bales were sold tothird parties as a cash crop. In the winter months when no hay was grown, CenterRanch incurred feed costs for its animals. In addition to hay the horses were fedpellets and alfalfa cubes that were purchased in bulk.- 14 -[14] 3. Horse Operation13In 1999 petitioner attended his first cutting horse show and purchased hisfirst cutting horses--a yearling colt and a yearling filly.14 Neither of those horseswas trained for competition. They were purchased for the ranch's working horseherd to more efficiently work its cattle herd. In 2001 petitioner242 purchased his firstcutting horse with the intent of showing it--a yearling mare, CR Cats Meow. Shewas not trained at Center Ranch but was sent to a professional trainer. CR CatsMeow never won a major competition and was eventually used solely in thebreeding program as a broodmare. In 2003 petitioner purchased a yearling colt,Smart Royal Rey, to be shown. Although Smart Royal Rey did not win a majorcompetition, in 2006 he did tie for seventh place in the National Cutting Horse13Some common terms in the horse industry include: (1) "foals", which are young horses, (2) "yearlings", which are horses between one and two years old,(3) "fillies", which are young females before they have foals, (4) "mares", which are female horses, (5) "broodmares", which are mature females expecting or nursing a foal, (6) "recipient mares", which are mares ready to be bred, typically through embryo transplant, (7) "colts", which are young male horses, (8) "stallions", which are male horses and when used for breeding are referred to as "studs", and (9) "sires", which is a term for the male parent of a horse.14A "cutting horse", although not breed specific, is typically an American quarter horse with natural243 instincts to isolate and remove single animals from a herd. The horses are trained to cut cattle from a herd and contain and deliver them to a certain location. A cutting horse's skills are showcased by competition in timed events.- 15 -[15] Association (NCHA) Futurity, the major cutting horse event.15 After SmartRoyal Rey's NCHA Futurity success, petitioner decided to train his horses atCenter Ranch in pursuit of future Futurity winners.In 2003 petitioner began construction of the horse center, which wascompleted in 2005. The horse center is a part of Headquarters; comprises sevenbuildings, which includes a residence for a horse trainer; and has special barns forstallions, 55 stalls, an arena for training the cutting horses, exercise lots, a walker,an exercise machine, fenced paddocks, a 200-acre pasture for recipient mares, a35-acre pasture for other mares, and a breeding facility, which operates in tandemwith the vet clinic at Center Ranch.16 See supra p. 8. All of the horse centerstructures, excluding the horse trainer's residence, are utilitarian work structures.Petitioner's expert witness valued the horse center at approximately $1,148,118.In 2004 petitioner purchased his first244 broodmares for a cutting horse breedingprogram, purchased his last horses used for working horses on Center Ranch, andbegan focusing Center Ranch's horse operation on cutting horses.15The Futurity is for cutting horses what the Kentucky Derby is for thoroughbreds. Rounding out the cutting horse "triple crown" are the Super Stakes and the Summer Spectacular. Center Ranch entered horses in all three competitions.16The vet clinic also has a aquatread that is used to condition horses for competition and to rehabilitate injured horses.- 16 -[16] Petitioner then spent two years studying cutting horse genetics andbloodlines in his search for a stallion to build Center Ranch's breeding program.He studied the patterns of cutting horse registrations to learn the bloodlines of thetop cutting horses. He was looking for an outcross17 to breed with the bloodlinesof the dominant stallions in the cutting horse industry. Petitioner also consultedcutting horse trainers, who are highly knowledgeable about and influential in thecutting horse industry.In late 2006 petitioner purchased his first two cutting horse stallions--PeppyPlays for Cash and Little Peppys Ultimo. He used Peppy Plays for Cash primarily245 for breeding cutting horse mares. Before and during the years in issue petitionerbought and sold almost 100 horses. Some of those horses were foaled at CenterRanch. For business reasons petitioner decided to sell many of those horses at aloss because of their underperformance or unsuitability for next-generationbreeding traits.18 Petitioner also purchased semen and embryos obtained fromhorses with the right pedigree in an attempt to upgrade the level of cutting horsestrained at Center Ranch.17An "outcross" is a related bloodline bred with one not closely related.18Although Peppy Plays for Cash is now too old for breeding, petitioner keeps him at Center Ranch and continues to incur costs for his care. Petitioner testified that he did not consider the other options for the horse humane.- 17 -[17] Petitioner decided that for Center Ranch's cutting horse operation to beprofitable he needed to breed or purchase a major stallion. To that end hepurchased then seven-year-old stallion Woody Be Tuff in early 2008.Petitioner's intent was for Center Ranch's horse operation to profit fromboth a breeding program and showing cutting horses. A breeding programgenerally includes the buying and selling246 of stallion semen and mare embryos;petitioner bought and sold both. It takes several years to develop a stallion into astud. The basis of a stallion's value as a stud is his progeny, and a stallion's foalsare not typically eligible for competition until four years after breeding.It will take five to six years before there is credible information about astallion's breeding capabilities and his ability to pass on vital cutting horse traits tohis progeny. A stallion's stud fees will increase over time if his progeny aresuccessful. Although he was a proven stallion bringing in lifetime earnings ofover $340,000, during the years in issue Woody Be Tuff was a yet unproven studfor a breeding program--his stud fee was no more than $1,500. But by 2013 hisstud fee had increased to $2,000 plus a chute fee,19 and by 2014 it had increased to$5,000 plus a chute fee. As of the date of trial Woody Be Tuff's progeny had19A "chute fee" covers the expenses of collecting a stallion's semen for artificial insemination.- 18 -[18] exhibited his genetic cutting horse traits and had generated prize winningsof over $500,000. Petitioner and Center Ranch can expect to collect semen fromWoody Be Tuff until he247 is in his mid-20s.Center Ranch has two of the top cutting horse trainers in the nation underemployment contract, both of whom have previously been Futurity championriders. Training a Futurity-level cutting horse takes several years, and the trainingprogram required 75 calves every two weeks to train the cutting horses.20 CenterRanch's cattle operation usually provided the calves for the cutting horseoperation. Additionally, Center Ranch consigned calves for the cutting horsetraining. Although Center Ranch was paid according to the calves' weight gainduring their time at Center Ranch, those payments typically would not cover thefull cost of consigning the calves for training.Center Ranch did most of the training, but some of its cutting horses weresent to outside professional trainers. Cutting horse training does not begin untilthe horse is two years old. The only three-year-old horses remaining in trainingare those that have outstanding potential. Half of the horses bred cannot cut atcompetitive levels and become work horses. Additionally, it is not uncommon for20Calves used for the cutting horse training have to be continually changed out because once they become accustomed to being248 around the horses they will not move.- 19 -[19] horses to be injured during training. An injured or crippled horse's value issubstantially reduced and would sell for very little.Petitioner's horses were entered into the major cutting horse competitions,and he paid thousands of dollars in show fees each year in issue for them tocompete, which included entry fees, fees for stalls and shavings, and novice horsefees. There were often multiple Center Ranch horses entered in any one majorshow. Petitioner's horses were successful, and cutting horse competition winningsincreased each year in issue, from $19,231.31 in 2007 to $61,754.55 in 2010.21The competition winnings are split between the owner of and the rider of thehorse.Petitioner has invested $9,684,283.52 of his own money as capital forCenter Ranch's horse operation.22 He estimated that approximately two-thirds ofhis assets and approximately 80% of his annual income are devoted to CenterRanch. During the years in issue petitioner kept books and records for CenterRanch, and Center Ranch had separate bank accounts.21Center Ranch's horses had winnings of $150,901.83 in 2011. Additionally, one of Woody Be Tuff's foals from his first foal249 crop at Center Ranch was a Futurity cochampion in 2012.22This amount includes capital for the vet clinic that overlaps with the horse breeding at Center Ranch. See supra p. 15.- 20 -[20] C. Tax Returns and the Notice of DeficiencyAll of the returns for the years in issue were timely filed, and each includeda Schedule F, Profit or Loss From Farming. For 2007 petitioners reported grossincome of $1,947,824, total expenses of $4,102,617, and a loss of $2,154,793 onthe Schedule F attached to their return. The three largest expenses reported were adepreciation and section 179 expense deduction not claimed elsewhere(depreciation) of $860,438, labor hired of $763,339, and feed of $361,093.For 2008 petitioners reported gross income of $1,740,903, total expenses of$5,763,284, and a loss of $4,022,381 on the Schedule F attached to their return.The three largest expenses reported were depreciation of $1,205,992, labor hiredof $849,352, and feed of $601,547.For 2009 petitioners reported gross income of $1,598,824, total expenses of$4,829,330, and a loss of $3,230,506 on the Schedule F attached to their return.The three largest expenses reported were depreciation of $1,001,300, labor hiredof $834,434, and250 feed of $442,858.For 2010 petitioner reported gross income of $1,557,821, total expenses of$4,944,260, and a loss of $3,386,439 on the Schedule F attached to his return. Thethree largest expenses reported were feed of $923,712, depreciation of $921,372,and labor hired of $757,917.- 21 -[21] Respondent issued petitioners a notice of deficiency for 2007, 2008, and2009 determining that the "activity, Schedule F - Livestock" was not engaged infor profit, that the income reported on the Schedules F should have been reportedas "Other Income" on the returns, and that petitioners were entitled to a deductionfor expenses up to the amount of income that had been reported on the SchedulesF on Schedules A, Itemized Deductions.23 Respondent issued petitioner a noticeof deficiency for 2010 determining that the "activity, Schedule F - Livestock" wasnot engaged in for profit, that the income reported on the Schedule F should havebeen reported as "Other Income" on the return, and that petitioner was entitled to adeduction for expenses up to the amount of income that had been reported onSchedule F on Schedule A.OPINIONI. Burden of ProofGenerally, the Commissioner's determination of a deficiency is251 presumedcorrect, and the taxpayer bears the burden of proving it incorrect. See Rule142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933). Moreover, deductions are23The Form 886-A, Explanation of Items, attached to the notice of deficiency included a statement that respondent had determined that sec. 6404(g) was applicable for 2007 and that notice was provided to petitioners on August 17, 2011. The parties did not address this issue.- 22 -[22] a matter of legislative grace, and the taxpayer bears the burden of provinghis entitlement to any deductions claimed. INDOPCO, Inc. v. Commissioner, 503U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934).Under certain circumstances the burden of proof as to factual matters mayshift to the Commissioner pursuant to section 7491(a). Petitioners did not arguefor a burden shift under section 7491(a), and the record does not establish that theprerequisites for a burden shift have been met; therefore, the burden of proofremains theirs.II. Section 183Generally, the Code allows deductions for ordinary and necessary expensespaid or incurred in conducting a trade or business or for the production of income.Secs. 162(a), 212(1). Under section 183, if an activity is not engaged in for profit,then no deduction attributable to that activity is allowed except as provided for insubsection (b).To determine whether and to what extent252 section 183 and the regulationsthereunder apply, the activity of the taxpayer must be ascertained. Sec. 1.183-1(d), Income Tax Regs. After all the facts and circumstances are taken intoconsideration, a taxpayer's multiple activities may be treated as one activity if theactivities are sufficiently interconnected. Id. Generally, the Commissioner will- 23 -[23] accept the taxpayer's characterization of multiple activities as either a singleactivity or separate activities. Id. The taxpayer's characterization will not beaccepted, however, when it appears that it is artificial and cannot be reasonablysupported by the facts and circumstances of the case. Id.A. Whether Center Ranch's Cattle, Hay, and Horse Operations Were One ActivityAlthough the parties did not specifically address whether Center Ranch'soperations were one activity or separate activities, the Court will analyze thefactors from the regulations and caselaw to ascertain how many activities wereconducted on Center Ranch. After a review of all of Center Ranch's operations inrelation to the factors enumerated in the regulations and caselaw, the Court holdsthat Center Ranch's operations were one activity.1. Factors in the RegulationsUnder the regulations253 the most important factors to be considered are: (1)the degree of organizational and economic interrelationship of the undertakings,(2) the business purpose served by carrying on the undertakings separately ortogether, and (3) the similarity of the undertakings. Id.All of Center Ranch's operations had a high degree of organizational andeconomic interrelationship. There was one ranch manager who oversaw all of its- 24 -[24] operations and employees, and he reported directly to petitioner. Manyranch hands worked in more than one of Center Ranch's operations. The staffworking out of Headquarters provided support to all of Center Ranch's operations.All of the operations were economically intertwined, with the hay operationproviding feed for the cattle and horses and the cattle operation providing calvesfor training Center Ranch's cutting horses. Petitioner also started supportingoperations at Center Ranch--such as the vet clinic and trucking operation--tobenefit the inner workings of Center Ranch and to provide for-hire services toothers. All of Center Ranch's major operations were similar in that they werecommon operations to be performed on a working ranch in Texas. While it wouldbe254 possible to operate a ranch with only one of the three major operations, it wouldnot be uncommon for other ranches to have the same operations as Center Ranch.The operations of Center Ranch meet all of the factors in the regulations to be oneactivity.2. Caselaw FactorsIn addition to the factors in the regulations, the Court considers thefollowing factors: (1) whether the activities are conducted at the same place; (2)whether the activities were part of the taxpayer's efforts to find sources of revenuefrom his land; (3) whether the activities were formed separately; (4) whether one- 25 -[25] activity benefited from the other; (5) whether the taxpayer used one activityto advertise the other; (6) the degree to which the activities shared management;(7) the degree to which one caretaker oversaw the assets of both activities; (8)whether the taxpayer used the same accountant for the activities; and (9) thedegree to which the activities shared books and records. See Topping v.Commissioner, T.C. Memo. 2007-92, slip op. at 15 (citing Mitchell v.Commissioner, T.C. Memo. 2006-145, slip op. at 10-11).The cattle, hay, and horse operations were all conducted on Center Ranch's8,700 acres. The cattle and hay operations were spread over seven of thenoncontiguous tracts255 of Center Ranch's land, and the horse operation was onHeadquarters acreage. Center Ranch lands were used as a source of revenue. Thecattle and horses grazed and were trained on Center Ranch's acreage, and the haygrown as a cash crop was sold to third parties. Although the three major CenterRanch operations did not all begin at the same time, they were each naturaloutgrowths of the use of Center Ranch lands.All of Center Ranch's operations were interrelated. The cattle and horseoperations both benefited from the hay operation because it provided feed for theanimals. The horse operation also benefited from the cattle operation because thecattle operation provided calves for the cutting horse training. The ranch manager- 26 -[26] oversaw all of Center Ranch's operations, with the cattle manager, horsemanagers, and trainers reporting to him. He also was the caretaker of eachoperation's assets. Petitioner kept books and records for each operation that werecombined as the books and records for Center Ranch.The Court also notes that for each of the years in issue petitioner attached tohis return a single Schedule F reporting Center Ranch's income and expenses,which indicated that he considered256 Center Ranch's operations one activity. Aftera review of all of the facts and circumstances and the factors in the regulations andcaselaw, the Court finds that Center Ranch's cattle, hay, and horse operations wereconducted as a single activity for the years in issue.B. Whether the Activity Was Engaged In for ProfitNow that petitioners' activity for the years in issue has been ascertained, seesec. 1.183-1(d), Income Tax Regs., the Court must decide whether the activity wasengaged in for profit. To decide whether a taxpayer is carrying on a trade orbusiness so that his expenses are deductible under section 162, the Court examineswhether the taxpayer's primary purpose and intention in engaging in the activity isto make a profit. Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 643 (1982), aff'd withoutpublished opinion, 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983). The taxpayer's expectation ofprofit need not be a reasonable one, but merely bona fide. Id.; sec. 1.183-2(a),- 27 -[27] Income Tax Regs. Whether a taxpayer expects to realize a profit is aquestion of fact and is resolved by examining all of the facts and circumstances ofthe case. Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 35 (1987); Dreicer v.Commissioner, 78 T.C. at 643-644; sec. 1.183-2(a), Income Tax Regs.The Court examines the facts and circumstances of the case using therelevant nonexclusive factors in section 1.183-2(b), Income Tax Regs.Dreicer v.Commissioner, 78 T.C. at 644. Those factors include: (1) the manner in whichthe257 taxpayer carries on the activity, (2) the expertise of the taxpayer or hisadvisors, (3) the time and effort expended by the taxpayer in carrying on theactivity, (4) the expectation that assets used in the activity may appreciate in value,(5) the success of the taxpayer in carrying on other similar or dissimilar activities,(6) the taxpayer's history of income or losses with respect to the activity, (7) the amount of occasional profits, if any, which are earned, (8) the financial status of the taxpayer, and (9) whether elements of personal pleasure or recreation are involved. Sec. 1.183-2(b), Income Tax Regs. No one factor is determinative. Id. After a thorough review of the facts and circumstances, the Court finds that Center Ranch was a for-profit activity, and the relevant facts and circumstances will be discussed infra.- 28 -[28] 1. The Manner in Which the Taxpayer Carries On the ActivityCenter Ranch's activity was carried on in a businesslike manner. Petitionerkept books and records for each of Center Ranch's operations to determine theirincomes and expenses. Indeed, petitioner used resources from his otherendeavors--namely, Welch Consulting--to keep track of such information.Respondent tried to make much of the258 fact that there were mistakes in petitioner'sbooks and records. The fact that there were some mistakes in the books andrecords of a multimillion-dollar activity does not negate that the activity wascarried on in a businesslike manner.24 Center Ranch also had separate bankaccounts, which is indicative of an activity being carried on in a businesslikemanner. See Wayts v. Commissioner, T.C. Memo 1992-82">T.C. Memo. 1992-82, 63 T.C.M. (CCH)2032, 2034 (1992) (finding horse racing and breeding activity was carried on in abusinesslike manner because it had a separate bank account) (citing Pryor v.Commissioner, T.C. Memo. 1991-109); Hopcus v. Commissioner, T.C. Memo.1988-181, 55 T.C.M. (CCH) 717">55 T.C.M. (CCH) 717, 719 (1988) (finding horse breeding and24Respondent argued that one such mistake--petitioner's inability to allocate overhead costs of each operation--made clear that Center Ranch was not carried on in a businesslike manner. Because the Court finds that Center Ranch's operations were one activity, the allocation of overhead costs between operations, e.g., salaries of ranch hands who worked in both the hay and cattle operations, is of little concern.- 29 -[29] boarding activity was carried on in a businesslike manner because it had aseparate bank account); cf. Faust v. Commissioner, T.C. Memo 2011-158">T.C. Memo. 2011-158, 102T.C.M. (CCH) 16, 17-18 (2011) (finding horse activity was not carried on in259 abusinesslike manner because it did not have a separate bank account).Respondent also argued that petitioner had no written business plan forCenter Ranch. The fact that petitioner had no written business plan does notnegate a profit motive. Petitioner's business plan was evidenced by his actions.See Annuzzi v. Commissioner, T.C. Memo. 2014-233, at 16 (stating that writtenfinancial plan not required for 32-horse farm where business plan was evidencedby action (citing Phillips v. Commissioner, T.C. Memo 1997-128">T.C. Memo. 1997-128, 73 T.C.M.(CCH) 2296, 2300 (1997))). Indeed, petitioner did not have a written businessplan for any of his endeavors, many of which have been highly profitable.Petitioner also made changes in the activity when he realized that certainoperations would not be profitable. These changes were business decisions.Petitioner changed Center Ranch's cattle operation three times--from club calves,to purebreeds, to a commercial cattle herd--when he realized that a particular cattleoperation would not be profitable.He also added other operations to Center Ranch when the third-party feesfor those operations became too costly. Petitioner built the vet clinic when he- 30 -[30] realized he could contract a full-time veterinarian for less than the fees hewas paying to outside veterinarians.260 He also reduced shipping expenses when headded a trucking operation to Center Ranch to haul his own cattle and hay. Thoseadditional operations required substantial capital investment but also reducedvariable costs; both of those operations also brought more income to Center Ranchbecause their services were offered to third parties for a fee. Center Ranchadvertised its operations and services through its website and its Facebook pageand in online cutting horse directories.Additionally, the Court finds that Center Ranch was operated in abusinesslike manner because of its size and vertical integration. Center Ranchcomprises over 8,700 acres in Leon County, Texas, outside of the town ofCenterville. It was a well-known and well-regarded working ranch that employed25 people full time during the years in issue and hired part-time ranch hands whenneeded. Center Ranch paid some of its employees wages above the county'smedian wage in its effort to retain the best ranch manager, cattle and horsemanagers, horse trainers, and ranch hands in the area.Center Ranch's operations were vertically integrated. The hay operationprovided feed to the cattle and horse operations. The cattle operation provided261 calves to the cutting horse operation for training. The vet clinic and trucking- 31 -[31] operation provided necessary services to Center Ranch and to outside partiesfor a fee. The integration of all of Center Ranch's operations came about aspetitioner decided how to operate the ranch more efficiently and to bring inadditional income. All of these decisions were business decisions and were notmerely made on the basis of petitioner's whim or fancy.This factor favors petitioner's argument that Center Ranch was a for-profitactivity for the years in issue.2. Expertise of the Taxpayer or His AdvisersPetitioner has been involved with agriculture since his middle school daysand with agricultural economics since college. His time in agricultural pursuitsalone would give him the professional expertise necessary to oversee a workingranch. Petitioner also subscribed to 20 professional journals that discussedranching, cattle, and horses. Petitioner hired professionals to manage CenterRanch and contracted with professionals to train its horses, having as many as fivemanagers and trainers during any of the years in issue. Additionally, petitionerhad licensed veterinarians at Center Ranch. A profit262 motive may be indicated if ataxpayer "employs competent and qualified persons to carry on the activity." Sec.1.183-2(b)(3), Income Tax Regs.- 32 -[32] The ranch manager had been involved with ranching almost his entireprofessional career, and petitioner contracted with the top two cutting horsetrainers in the country to train Center Ranch's cutting horses. When petitionerdecided to raise purebred cattle on Center Ranch, he hired a cattle manager whowas familiar with purebred stock. When petitioner decided, for business reasons,to change the makeup of his cattle herd, he discharged the purebred cattle managerbecause his expertise was no longer needed. Petitioner then hired a cattle managerfamiliar with managing a commercial cattle herd. Petitioner consistentlysurrounded himself with competent managers, trainers, and ranch hands so thatCenter Ranch operated in a businesslike manner.This factor favors petitioner's argument that Center Ranch was a for-profitactivity for the years in issue.3. The Taxpayer's Time and Effort Expended in Carrying On the ActivityRespondent argues that petitioner did not spend a significant amount of histime and effort on Center Ranch for it to be a for-profit activity because he wasonly263 at the ranch on the weekends. Petitioner's weekends at Center Ranch anddaily communications with his ranch managers can be sufficient to demonstrate aprofit motive. See Givens v. Commissioner, T.C. Memo 1989-529">T.C. Memo. 1989-529, 58 T.C.M.- 33 -[33] (CCH) 255, 259 (1989). Petitioner was at Center Ranch for at least threefull days of each week--Friday, Saturday, and Sunday--for the years in issue.25 Forthe other four days of the week, petitioner was devoting time to Welch Consultingand his other endeavors. That meant petitioner spent slightly less than half of eachweek at Center Ranch. While at Center Ranch petitioner met with the ranchmanager to discuss and visually inspect Center Ranch's operations. He also spokewith the ranch manager daily and with the cattle and horse managers regularly--allof them full-time ranch employees--when away from Center Ranch.Additionally, petitioner employed other full-time and part-time employeesto help operate Center Ranch. During the years in issue there were 25 full-timeemployees and several part-time ranch hands employed at Center Ranch. The full-time employees' annual salaries ranged from $25,000 to $115,000. Theemployment of "competent and qualified persons" to carry on an activity when thetaxpayer's264 time devoted to the activity is limited can indicate a profit motive. Sec.1.183-2(b)(3), Income Tax Regs.; see Annuzzi v. Commissioner, T.C. Memo.2014-233; McNaught v. Commissioner, T.C. Memo. 1999-25; Dawson v.Commissioner, T.C. Memo 1996-417">T.C. Memo. 1996-417, 72 T.C.M. (CCH) 624">72 T.C.M. (CCH) 624 (1996).25Sundays were generally quiet at Center Ranch. See supra p. 4.- 34 -[34] Petitioner expended significant time and effort--by himself and through hisemployees--to make Center Ranch a for-profit activity. This factor favors hisargument that Center Ranch was a for-profit activity for the years in issue.4. Expectation That the Activity's Assets May Appreciate"The term 'profit' encompasses appreciation in the value of assets, such asland, used in the activity." Sec. 1.183-2(b)(4), Income Tax Regs. Petitionerargues that he fully expected Center Ranch's land, cattle, and horses to allappreciate and entered into evidence expert witness reports for each.Respondent's only argument is that the land, cattle, and horses would notappreciate as much as petitioner and his experts argue that they would.An expert witness' opinion is admissible if it assists the trier of fact tounderstand the evidence or determine a fact in issue. Fed. R. Evid. 702. TheCourt evaluates an expert's opinion in light of his qualifications and the evidencein the record. See Parker v. Commissioner, 86 T.C. 547">86 T.C. 547, 561 (1986). The Courtmay accept an expert's opinion in its entirety265 or be selective as to the portions itfinds reliable. See Helvering v. Nat'l Grocery Co., 304 U.S. 282">304 U.S. 282, 295 (1938);Parker v. Commissioner, 86 T.C. at 561-562; Buffalo Tool & Die Mfg. Co. v.Commissioner, 74 T.C. 441">74 T.C. 441, 452 (1980). The Court finds petitioner's realproperty expert witness and his report credible.- 35 -[35] Respondent and petitioner agree that Center Ranch land was purchased tobe used as working ranch land--not primarily with the intent to profit from itsincrease in value--making the holding of the land and the farming one activity.26Seesec. 1.183-1(d), Income Tax Regs. Respondent disputes petitioner's valuationof Center Ranch land but offers no expert witness of his own.The same is true of petitioner's cattle and horse operations--respondent doesnot dispute that the operations would appreciate, only that petitioner's valuationsare incorrect. While respondent offers no expert witnesses of his own, he iscorrect in part that petitioner's expert witness reports for Center Ranch's horse andcattle operations were valued incorrectly. Both reports included the values ofhorse and cattle that were not a part of Center Ranch's herds during the years inissue. The Court will exclude those values. The Court also finds reliable theexpert witness reports for Center Ranch's cattle and horse operations.Respondent argues that petitioner must266 have a profit motive that expectsrecoupment of all of Center Ranch's past losses. This expectation is too much.26This does not include the 320 acres of Coker Place Division or the 20 acres in Centerville on which the duplexes were located. Petitioner testified that Coker Place was purchased primarily for investment purposes. Although the Court finds credible petitioner's testimony that the duplexes were used to house ranch hands when necessary, they were also available for rent when no ranch hands were staying there. Therefore, the duplexes had an income stream that was reported separate and apart from the Center Ranch activity.- 36 -[36] "An overall profit is present if net earnings and appreciation are sufficient torecoup the losses sustained in the 'intervening years' between a given tax year andthe time at which future profits were expected." Helmick v. Commissioner, T.C.Memo. 2009-220, 98 T.C.M. (CCH) 269">98 T.C.M. (CCH) 269, 275 (2009) (citing Bessenyey v.Commissioner, 45 T.C. 261">45 T.C. 261, 274 (1965), aff'd, 379 F.2d 252 (2d Cir. 1967)).Therefore, the question is not whether petitioner would recoup all of CenterRanch's losses but whether he would recoup the losses between the years in issueand the "hoped-for profitable future." See id. The Court finds that petitioner'sexpectation of an overall profit267 could be realized with the expectation of theappreciation of Center Ranch assets and the value of capital improvements madeon Center Ranch lands.The Court finds that this factor favors petitioner's argument that CenterRanch was a for-profit activity during the years in issue.5. The Taxpayer's Success in Carrying On Similar or Dissimilar ActivitiesPetitioner has been successful in other professional areas. He built WelchConsulting into a multimillion-dollar consulting firm and was an economicsprofessor for 40 years, teaching at more than one esteemed university. He alsowas a partner in a successful software company and incorporated a research- 37 -[37] corporation, of which he is still a manager. In his other professionalpursuits, petitioner has also made changes and adaptations when needed forbusiness reasons, even ending one pursuit altogether when it was apparent that itwould not be profitable. While petitioner has been successful in other endeavors,there is little interplay between his consulting and software businesses and hisranch activity. See Annuzzi v. Commissioner, T.C. Memo 2014-233">T.C. Memo. 2014-233.Because petitioner's success was in dissimilar activities, the Court finds thisfactor to be neutral.6. The Taxpayer's History of Income268 and Losses With Respect to the Activity and the Amount of Occasional Profits, If Any, Which Are EarnedThe parties agree to, and therefore did not brief, the facts that petitionerderived no occasional profits from Center Ranch and that it had reported losses forevery year in issue. Although it was not briefed by the parties, a short discussionof Center Ranch's gross income and losses is pertinent.Center Ranch generated millions of dollars of gross income for each year inissue. Indeed, Center Ranch's income has increased almost every year of itsexistence. But the steady increase in expenses and in capital investmentaccompanying this steady income growth has resulted in yearly losses.- 38 -[38] Nevertheless, the years in issue included the startup phases of both the horseoperation and the cattle operation, which is discussed in more detail infra.The startup phase for a horse-related activity is 5 to 10 years. Engdahl v.Commissioner, 72 T.C. 659">72 T.C. 659, 669 (1979). Additionally, horse breeding andperformance are speculative activities, with the opportunity for substantial incomeat every competition or purchase of the right stallion for breeding. See Chandlerv. Commissioner, T.C. Memo. 2010-92, 99 T.C.M. (CCH) 1376">99 T.C.M. (CCH) 1376, 1379 (2010),aff'd, 481 F. App'x 400 (9th Cir. 2012); see also Dawson v. Commissioner269 , 72T.C.M. (CCH) at 627 (finding that a taxpayer's belief that a champion horse couldgenerate substantial profits supported the existence of a profit motive). Althoughpetitioner purchased his first cutting horses in 1999, those horses were notpurchased to show or breed. It was not until 2001 that petitioner purchased hisfirst cutting horse to be shown. He began construction of Center Ranch's horsecenter and vet clinic in 2003. Petitioner testified that he did not shift CenterRanch's focus to cutting horses until 2004, and it was not until 2006 that hepurchased his first stallion for breeding. Petitioner did not purchase Woody BeTuff, a major cutting horse stallion, to breed until 2008, one of the years in issue.The parties stipulated that it takes five to six years to have credibleinformation about a stallion's breeding capabilities; thus during the years in issue,- 39 -[39] Woody Be Tuff's breeding capabilities were speculative. Indeed, Woody BeTuff's breeding fees steadily increased after the years in issue. In 2013 hisbreeding fee was $2,000 plus a chute fee, and in 2014 it had increased to $5,000plus a chute fee.Although petitioner testified that he did not focus Center Ranch's270 horseoperation on cutting horses until 2004, the Court finds that petitioner's cuttinghorse operation began in 2003 with the construction of the horse center and vetclinic. See Roberts v. Commissioner, 820 F.3d 247">820 F.3d 247 (7th Cir. 2016) (finding thattaxpayer's for-profit horse activity started with the decision to build a "bigger andbetter horse training facility"), aff'g in part and rev'g in partT.C. Memo 2014-74">T.C. Memo. 2014-74.Additionally, Center Ranch's prize winnings from showing its horses increasedfrom a little more than $19,000 in 2007 to over $61,000 in 2010. All of the yearsin issue--2007, 2008, 2009, and 2010--fall within the usual startup phase for ahorse operation.27 See Engdahl v. Commissioner, 72 T.C. at 669. In this highly27Respondent argues that it is not possible to have a profit motive when generating millions of dollars of losses. Because the Court finds that the horse operation was in its startup phase during the years in issue, it need not address at length respondent's argument. But the Court will note that a taxpayer's suffering years of multimillion-dollar losses beyond an activity's startup phase does not bar a profit motive. See, e.g., Metz v. Commissioner, T.C. Memo 2015-54">T.C. Memo. 2015-54.- 40 -[40] speculative activity, petitioner is slowly and steadily working towards ahighly profitable cutting horse operation.The Court finds that271 petitioner began his commercial cattle operation in2006. Although Center Ranch had previously operated club calf and purebredcattle operations, both of those operations--most notably the purebred operation--were more labor and time intensive than petitioner intended. Indeed, petitionercredibly testified that artificially inseminating the purebred heifers requiredextensive individual time and attention for each of the animals and obligated toomuch of his ranch hands' time. Center Ranch's wholesale change to a new type ofcattle operation restarted the clock for the startup period for that operation. Cf.Mathis v. Commissioner, T.C. Memo. 2013-294 (finding that a change in focus tobreeding from training cutting horses did not amount to a new activity). Thechange to a new type of cattle operation was a business decision that required anew cattle manager and a complete turnover of Center Ranch's cattle herd.Therefore, Center Ranch's commercial cattle operation was also in its startupphase. See Burrus v. Commissioner, T.C. Memo 2003-285">T.C. Memo. 2003-285, 86 T.C.M. (CCH)429, 438 (2003) (finding that losses incurred in the first six years of a cattleactivity were during the startup phase of the activity (citing Fields v.Commissioner, T.C. Memo. 1981-550)).- 41 -[41] Although Center Ranch has sustained continued272 losses and had nooccasional profits, the years in issue were during both the cattle and horseoperations' startup phases. Therefore, the Court finds that the activity's history ofincome and losses and the amount of occasional profits, if any, favor respondent,but it will not give these factors as much weight because the cattle and horseoperations were in their startup phases during the years in issue.7. The Taxpayer's Financial Status and Elements of Personal Pleasure and RecreationPetitioners did have substantial wealth and financial resources not related toCenter Ranch. Indeed, petitioner contributed over $9 million of his own moneyfor Center Ranch's capital. But wealth not associated with the activity in issue isnot a bar to that activity's being engaged in for profit. See Blackwell v.Commissioner, T.C. Memo. 2011-188, 102 T.C.M. (CCH) 137">102 T.C.M. (CCH) 137, 143 (2011).Additionally, the receipt of tax benefits standing alone does not establish the lackof a profit motive. See Engdahl v. Commissioner, 72 T.C. at 670. This, coupledwith the fact that the injuries petitioner sustained in an automobile accident whenhe was in college substantially restricted his ability to derive personal pleasurefrom Center Ranch's outdoor operations--he performed no manual labor on theranch, did not ride the273 ranch's horses, and did only a little hunting in the late- 42 -[42] 1980s--does not impede the Court's finding that Center Ranch was operatedfor profit.The Court finds petitioner's financial status and elements of personalpleasure or recreation to be neutral factors.III. ConclusionAfter a review of all of the facts and circumstances and for the reasonsstated above, the Court finds that petitioner was engaged in Center Ranch as a for-profit activity during the years in issue. In so holding, the Court is not declaringCenter Ranch a for-profit activity ad infinitum. If Center Ranch's future lossescannot be reined in, petitioner may again find his profit motives before this Court.The Court has considered all of the arguments made by the parties, and tothe extent they are not addressed herein, they are considered unnecessary, moot,irrelevant, or without merit.To reflect the foregoing,Decision will be enteredfor petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621219/	Jean L. Conti Price, Petitioner, v. Commissioner of Internal Revenue, RespondentPrice v. CommissionerDocket No. 85070United States Tax Court34 T.C. 163; 1960 U.S. Tax Ct. LEXIS 158; May 11, 1960, Filed 158 Decision will be entered for the respondent. Pleadings -- Stating a Cause of Action -- Sec. 214, I.R.C. 1954. -- The facts alleged in the petition do not support the contention that the Commissioner erred in disallowing a deduction under section 214 of the Internal Revenue Code of 1954 where the allegations are that the petitioner was married to her estranged husband in the taxable year but did not file a joint return with him for that year. Glen E. Hardy, Esq., for the respondent. Murdock, Judge. MURDOCK 163 OPINION.The Commissioner determined a deficiency of $ 100 in the income tax of this petitioner for 1957. He filed a motion on March 24, 1960, for judgment for failure of the petitioner to state a cause of action in her petition. That motion was set for hearing on May 4, 1960, at which time there was no appearance for the petitioner but on file were her objections to the motion, which objections have been fully considered.The only adjustment made by the Commissioner in determining the deficiency was the disallowance of a deduction of $ 500 claimed on the return for child care. He apparently explained this adjustment as follows:A child care deduction is159 not an allowable deduction in your return under Sec. 214, Internal Revenue Code, since you were not single as of 12/31/57. Information furnished by you indicates divorce occurred in 1958 and that no legal separation by Court Order existed prior to divorce.The allegations of fact in the petition include the following: The petitioner and her former husband, Conti, had a 5-year old daughter; the petitioner, during the taxable year, paid $ 10 a week for care of the child; the petitioner claimed a deduction therefor on her return for 1957; she was not living with her husband during 1957 but lived with her parents; "My estranged husband paid me $ 12 a week for my daughter"; the petitioner and Conti did not file a joint return for 1957; and they were not legally separated or divorced during that year.Section 214(a) allows as a deduction expenses paid during the taxable year by a female taxpayer for the care of a dependent if 164 such care is for the purpose of enabling the taxpayer to be gainfully employed. The deduction is limited to $ 600 for any year. Section 214(b)(2) provides that:In the case of a woman who is married, the deduction under subsection (a) -- (A) shall*160 not be allowed unless she files a joint return with her husband for the taxable year.Subsection (c)(3) provides that:A woman shall not be considered as married if she is legally separated from her spouse under a decree of divorce or of separate maintenance at the close of the taxable year.There was no decree of divorce or separate maintenance with respect to Conti and the petitioner during 1957. The petitioner was married to him during that year. She did not file a joint return for that year with her husband. The petition does not state a cause of action in that it does not allege facts showing that she is entitled to a deduction for child care or that the Commissioner erred in determining the deficiency by disallowing that deduction.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621222/	GEORGE P. WIGGINTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wigginton v. CommissionerDocket No. 11425.United States Board of Tax Appeals9 B.T.A. 1030; 1928 BTA LEXIS 4309; January 3, 1928, Promulgated 4309 Value of patents as of March 1, 1913, determined. John E. Hughes, Esq., for the petitioner. John F. Greaney, Esq., for the respondent. CIEFKIN 1030 This is a proceeding for the redetermination of income taxes for the year 1919 in the sum of $62,499.06. Two questions are presented for decision: (1) The valuation of certain letters patent as of March 1, 1913, the petitiner claiming a value of $250,000, the respondent having allowed $20,000; and (2) whether respondent erred in reducing the amount of $20,000 by $7,253.87 for exhaustion between March 1, 1913, and the date of sale in 1919. FINDINGS OF FACT. On May 26, 1919, petitioner sold letters patent serial No. 1010556, applied for April 8, 1911, and issued to him on December 5, 1911, and serial No. 1022452, applied for October 24, 1911, and issued to him on April 9, 1912, to the Kalamazoo Loose Leaf Binder Co., a corporation, hereinafter referred to as the Company, for the sum of $139,150. The respondent determined that the said two patents which were owned by petitioner on March 1, 1913, had a then fair market value of $20,000. He reduced this value by deducting depreciation based4310 on the life of the patents remaining after March 1, 1913, and held that the depreciated value of the patents on the date of sale was $12,746.13 ($20,000 less $7,253.87) and that the net gain from the sale of said patents was $126,403.87, which he added to petitioner's net income and computed thereon the deficiency contested in this proceeding. The facts concerning the invention and use of the two patents and the profits therefrom are as follows: 1031 George P. Wigginton was employed by the Company in February, 1907, as superintendent of its plant. In 1909 he invented the binder upon which the first patent was issued, and later made improvements thereon on which the latter patent was issued. 56, issued to George P. Wigginton on December 5, 1911, reads in part as follows: This invention relates to improvements in temporary binders. The main objects of this invention are: First, to provide in a temporary binder or loose sheet holder, an improved adjusting mechanism. Second, to provide an improved binder or loose sheet holder of the binding core or strip type in which the tension on the binding strips is not materially varied by the opening or closing4311 of the binder, or the swinging of the covers. Third, to provide in a temporary binder, an improved leaf clamping bar. Fourth, to provide an improved temporary binder by which any number of leaves up to the maximum may be effectively clamped and one in which the binder mechanism is so constructed that the covers may be made very thin. Fifth, to provide an improved binding mechanism which is particularly adapted for embodiment in light or small binders. Sixth, to provide in a temporary binder, an improved cover structure. Seventh, to provide an improved temporary binder which is very economical in structure and simple and easy to manipulate. Letters 52, issued to George P. Wigginton on April 9, 1912, reads in part as follows: This invention relates to improvements in temporary binders. My present invention is an adaptation and in some respects an improvement upon the apparatus shown in Letters , issued to me on the 5th day of December, 1911. The main objects of this invention are, first, to provide in a temporary binder or loose sheet holder, an improved adjusting mechanism. Second, to provide an improved temporary binder or loose sheet4312 holder which is capable of very rapid manipulation to permit the insertion or removal of sheets or leaves, and one in which the sheets may be securely clamped, the mechanism at the same time being simple and compact, so that it may be embodied in small binders. Third, to provide an improved temporary binder or loose sheet holder having a back strip or piece which is automatically adjusted upon the adjusting of the binder. Prior to the time of the aforesaid invention by Wigginton the Kalamazoo Loose Leaf Binder Co. was making a thong binder of heavy record type. At that time the binders on the market besides this heavy thong binder were a metal-back binder, a heavy record binder, post binders and ring binders. The binder covered by the said patents was known as the "Kalamazet Binder," and it differed from the binders which were on the market prior to its invention, among other things, in that it held the sheets by compression between the so-called clamping bars; it had no projecting posts; it would hold one sheet or many, the sheets could be removed easily by separating the sheet body, and it had an adjustable 1032 back which adjusted itself to the number of sheets in4313 the binder; it had greater durability than other binders and was neater in appearance; it was suitable for binding such things as price lists, catalogues, small sheets used for chronological case records, cash receipt and disbursement and sales records; it was cheaper to make than the other binders, and sold for less; the only machinery necessary to manufacture the Kalamazet binder was a punch press. Such a punch press cost approximately $150 and each press would make many thousands of binders. On March 1, 1913, a considerable amount of machinery was required to make the other binders then on the market, including stickers, wood-working machines of various kinds, including special machines, drill presses, punch presses, screw machine parts, special screw machine ends, dies and generally all wood-working machines and tools. When the Kalamazet binder was first put on the market it excited great interest among consumers and found a ready market. Of the total sales price of the Kalamazet binder on March 1, 1913, approximately 60 per cent thereof was net profit to the Company. On the sale of sheets and indexes the net profit was 10 per cent of the selling price. The company began4314 to manufacture the Kalamazet binder in 1910. By March 1, 1913, no further expense was needed to have a commercial article. Before it began to make this binder it was doing practically a local business, but immediately after the patent license hereinafter referred to was procured, it began to establish national business and now its business extends over the entire country. Wigginton allowed the Company to manufacture the binder without paying him any royalty or compensation from 1910 to the date of the contract of May 26, 1913, hereinafter referred to, in order to get the device on the market and to establish some indication of its value. Whenever the Kalamazet binder was sold on and prior to March 1, 1913, and at the present time, there is and was, as a general rule, incidental to the sale of this binder a sale of sheets and indexes to be contained in it. The prices obtained from the sales of sheets incidental to the sale of the binders averages two-thirds of the gross selling price of the binders. The company's sales of the Kalamazet binder and the profits thereon for the years from 1910 to and including 1912 and for the first three months of 1913 were as follows: YearSalesProfitYear ended Dec. 31:1910$2,541.70$1,525.02191114,384.208,630.52191233,891.8920,335.13First 3 months of 191315,219.054315 1033 The sales of this binder continued to increase until in 1925 they amounted to $237,772.88, and for the first five months of 1926 amounted to $130,577.41. The net profits of the company from the year 1910 to and including the year 1918 were as follows: 1910$15,124.91191119,874.22191233,558.49191366,333.48191444,254.621915$38,397.261916103,277.821917273,697.151918305,322.73Late in 1912 and early in 1913 the company began negotiations with Wigginton, its superintendent, for the purchase of the said patents from him. At that time he owned $500 worth of stock in the company. He owned the same amount when he sold these patents to the company in 1919. John J. Knight, who had been president of the company and was then chairman of its board of directors, offered Wigginton $150,000 for the two patents in January, 1913. Wigginton declined the offer, stating he would sell them for $250,000. Knight then discussed the matter with Frank W. Blowers, who was then president of the company. Blowers was authorized by the board of directors of the company to negotiate with Wigginton for the acquisition of the patents. He was4316 advised of the offer made to purchase the patents for $150,000 and of its rejection, and discussed it with Wigginton. He negotiated with Wigginton a contract which was entered into on February 24, 1913, and is as follows: MEMORANDUM OF AGREEMENT made and entered into between the Kalamazoo Loose Leal Binder Company, a Corporation organized and existing under the Laws of the State of Michigan and George P. Wigginton of No. 1409 Sherwood Avenue, in the City of Kalamazoo, Michigan. WHEREAS the said George P. Wigginton, is employed as General Manager of the Kalamazoo Loose Leaf Binder Company, at a salary of three thousand five hundred dollars per annum: AND WHEREAS the said George P. Wigginton has invented certain new and useful improvements in Temporary Binders or Loose Sheet Holders for which Letters Patent of the United States have been issued as follows: Serial Number 1010556 issued December 5th, 1911. Serial Number 1022452 issued April 9, 1912. The said Letters Patent being issued in the name of said George P. Wigginton and no other person, firm or corporation having any right, title or interest therein or thereto: AND WHEREAS the said Kalamazoo Loose Leaf, Binder4317 Company desires to acquire the full and exclusive right to the said inventions as fully set forth and described in the several Letters Patent of the United States above specified, and to any other new and useful improvements in Temporary Binders or Loose Holders that the said George P. Wigginton may now own or may hereinafter invent or acquire: 1034 AND WHEREAS the said George P. Wigginton in consideration of his assigning all his title and interest in the above-mentioned inventions and Letters Patent, to the said Kalamazoo Loose Leaf Binder Company, desires some remuneration over and above the salary paid to him as General Manager. Now, in consideration of the sum of one dollar in hand paid by each of the parties hereto to the other, the receipt of which is hereby mutually confessed and acknowledged, The Kalamazoo Loose Leaf Binder Company does hereby agree to pay to the said George P. Wigginton in addition to the salary of three thousand five hundred dollars per annum before mentioned, additional annual compensation during the term of this Agreement, the amount of such additional compensation for any one year to be based upon the Net Profits of the Company for the4318 year immediately preceding and to be equivalent in amount to Ten per centum of such Net Profits of the preceding year, said Net Profits to be computed from the same items of revenue and expenses, including proper charges for depreciation of the Company's plant, equipment, machinery, tools stocks of materials and supplies, etc., as are used to determine the Net Income as reported to the United States Internal Revenue Department under Section 38 Act of Congress approved August 5th, 1909, the said items of Revenue, Expenses and Depreciation and the Inventories of all property, machinery, tools, materials and stocks on hand, us ed in determining the amount of such Net Income or Profit shall be audited and approved by the Board of Directors of the said Company or by a Committee of said Board of Directors or by a competent Auditor or in such other way as may be directed by said Board: It being understood and agreed that the amount of said additional compensation charged to Expense in any one year shall be excluded from the expense items used in computing the amount of Net Profits for that year on which to base the additional compensation for the succeeding year. And the said Kalamazoo Loose4319 Leaf Binder Company agrees that the said George P. Wigginton shall continue to manage the business of the said Company during the term of this agreement subject to the direction of the President and the Board of Directors as required by the By-laws of the Company. The said George P. Wigginton does hereby agree to immediately assign to the Kalamazoo Loose Leaf Binder Company all of his right, title and interest in the inventions and Letters Patent issued for same as hereinbefore specified, and the said George P. Wigginton does hereby agree to assign to the Kalamazoo Loose Leaf Binder Company all of his right, title and interest in any and all other new and useful improvements in Temporary Binders or Loose Sheet Holders that he may now own or may invent or acquire, and in the Applications for Letters Patent and Letters Patent of the United States that may be obtained therefor during the term of this Agreement, and the said George P. Wigginton further agrees to devote his whole time and energy to the development and furtherance of the Kalamazoo Loose Leaf Binder Company's business during the term of this Agreement. It is hereby mutually agreed that in the event of the death of the4320 said George P. Wigginton during the term of this Agreement that the said Kalamazoo Loose Leaf Binder Company shall pay to the Estate of the said George P. Wigginton a sum equal to the value of all such Patents as shall have been assigned to the said Company by the said George P. Wigginton under the Terms of this Agreement, as the value of said Patents may appear at the time of said death; such value to be determined by three Arbitrators, one of whom shall be named by the Estate of said George P. Wigginton, one to be named by the said Kalamazoo Loose Leaf Binder Company, and these two arbitrators to select the third arbitrator. It is agreed that in determining the value of said Patents 1035 the value of each as an independent invention shall be considered, together with the value of said invention as forming a part of the business of the said Kalamazoo Loose Leaf Binder Company and the necessity and use of said invention in the manufacture of the Company's devices and in the operation of said Company's business. The decision of said Arbitrators to be final. It is hereby mutually agreed that in the event of the Kalamazoo Loose Leaf Binder Company desiring to sell out to4321 or consolidate with some other Company during the term of this Agreement that the said Kalamazoo Loose Leaf Binder Company shall pay to the said George P. Wigginton a sum equal to the value of all such Patents as shall have been assigned to the said Company under the terms of this Agreement, such value to be determined by three arbitrators selected as provided for above in the case of said Wigginton's demise and the value of such patents to be determined in a similar manner and upon the same basis. It is hereby mutually agreed that this Agreement shall take effect as of the First day of January, A.D. 1913, and shall continue in full force and effect for a period of Five years from said date, at which time it may be renewed at the option of the said Kalamazoo Loose Leaf Binder Company for a further period of five years under the same terms and conditions as hereinbefore set forth, it being mutually understood and agreed that at the expiration of any five year renewal the said Kalamazoo Loose Leaf Binder Company may at its option renew this agreement for a further period of five years under the same terms and conditions as herein set forth: Provided further, that in the event of4322 the said Kalamazoo Loose Leaf Binder Company not renewing this agreement for a further period as provided above, then the Kalamazoo Loose Leaf Binder Company will re-assign such applications for Letters Patent and Letters Patent as may have been assigned by the said George P. Wigginton to said Company under the terms of this Agreement, back to the said George P. Wigginton. It is further mutually agreed that the amount of the additional compensation provided herein for each year shall be paid to the said George P. Wigginton in two equal payments during such year, one half of the total amount being payable on the first day of February and the remaining half being payable on the first day of August. In witness whereof we have hereunto set our hands and seals this 25th day of February, 1913. KALAMAZOO LOOSE LEAF BINDER COMPANY, By F. W. BLOWERS, [L.S.] President.And By H. S. HUMPHREY, Vice-President.GEORGE P. WIGGINTON. It was understood by the parties to this contract that $3,500 was compensation for the services of Wigginton and the balance was royalty for the use of the patents. The corporation never charged off any depreciation on the patents on its4323 books, and Wigginton returned the annual payments in excess of $3,500 under the heading of "Royalties" in his income-tax returns for the years during which they were received. Up to the date of the sale of the patents to the company on May 26, 1919, Wigginton received under the said contract $76,000, which he returned as royalties in his income-tax returns. 1036 Prior to March 1, 1913, the company decided, in anticipation of future business to be procured for the sale of the patented articles, to construct a new building, partly for the purpose of taking care of the orders which it anticipated getting for the patented articles and the sheet business incidental thereto. This building increased the company's capacity about 100 per cent. In 1913 it expended the money for these enlargements. The building was at that time so constructed that two additional stories might be added to it. In 1911 or 1912 a board of officers was appointed by the Navy Department to examine the light-binder market in order to ascertain if a light, quick-operating binder could be found for the purpose of placing the naval regulations in loose leaf. The Weather Bureau also conducted such an4324 inquiry, and it was not until the Kalamazet binder was brought to their attention that they were able to find such a binder. Prior to March 1, 1913, the Navy Department had adopted the Kalamazet binder as the standard binder for holding loose-leaf regulations; the Quartermaster Corps of the Army and other Government departments had purchased this binder. These events led the company to reasonably anticipate large future sales to the Government departments, which anticipations were fully realized. On March 1, 1913, there was no similar binder on the market. There was no competition in the sale of the Kalamazet binder, but there was keen competition in the sale of other binders. The binders manufactured up to that time were so heavy that their use was restricted to a very limited field. with the introduction of the Kalamazet binder the field widened greatly, and by means of the sale of the Kalamazet binder the company was enabled to sell other devices manufactured by it. The Kalamazet binder was the controlling factor in building up the business of the company from a local organization to a national organization extending from coast to coast and from the Canadian border to the4325 Mexican Gulf. The company has never been troubled by infringers. Wigginton sold the patents to the company for $139,150 on May 26, 1919. As an incentive to induce him to sell the patents his salary was increased to $12,000 a year, and he was given an option to purchase stock of the company at its par value for $139,500, which option he exercised. The fair market value of the two patents on March 1, 1913, was $175,000. OPINION. SIEFKIN: The question of the March 1, 1913, value of two patents is presented by the parties. On that date petitioner had, by contract, granted an exclusive license for five years with privileges of further 1037 renewals for further five-year periods, covering the two patents and improvements thereon which should be made. The considerations flowing to petitioner by the contract were the payment of a royalty of 10 per cent of the net profits of the company, petitioner's employment by the company at a stated salary as manager, and an agreement that in case of his death the company should pay to his estate the value of the patents at the time of death. A similar clause provided for payment to the petitioner of the value of the patents in4326 the event that the company sold out or consolidated. The contract provided that petitioner should assign the patents to the company but should have them reassigned to him should the company not renew the agreement. Petitioner thus had, on March 1, 1913, his patent rights largely merged in, or at least limited by, his rights and duties under the contract, effective January 1, 1913. The patents had been granted late in 1911 and in 1912 and neither petitioner nor the company had developed the market for the patented articles to the extent that the earnings therefrom up to March 1, 1913, standing alone, were any fair indication of a fair market value on that date. All of the other circumstances affecting the patents must be considered. One such circumstance is an offer to purchase the patents for $150,000 early in 1913, which offer the prospective purchaser was able and willing to carry out. Others are testimony of witnesses familiar with the devices covered by the patents as to the probable market as it existed on March 1, 1913, the steps taken by the company which acquired the rights to manufacture under the patents in enlarging its plant, the acceptance of the devices by various4327 purchasing agencies of the Federal Government and numerous sales made to such agencies before March 1, 1913, as well as the opinions of experienced witnesses and the subsequent history of the earnings to petitioner. When we consider all this evidence, we are led to the conclusion that the fair market value of petitioner's interest in the patents on March 1, 1913, was far in excess of the amount determined by respondent. However, the subsequent history of the company and the earnings from the patents fully justified the expectations of petitioner, yet, even under such favorable conditions, the patents yielded him in royalties and sales price the total sum of $215,150 in a period of six years. Under such circumstances we believe the facts show the estimates of the witnesses to be unduly optimistic and that $175,000 more nearly represents the value. In computing the gain or loss on the sale in 1919, that amount should be reduced by the deductions for exhaustion allowable to petitioner, based upon an expiration date of December 11, 1928, the expiration date of the earlier patent, since we have no information showing that 1038 after that date the other patent will maintain the*4328 monopoly held by both up to that time. Judgment will be entered on 15 days' notice, under Rule 50.Considered by TRAMMELL, MORRIS, and MURDOCK.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621226/	Edwin F. Krist and Marion R. Krist v. Commissioner.Krist v. CommissionerDocket No. 7665-70 SCUnited States Tax CourtT.C. Memo 1972-100; 1972 Tax Ct. Memo LEXIS 160; 31 T.C.M. (CCH) 397; T.C.M. (RIA) 72100; April 27, 1972, Filed John J. Barnosky, 195 Willis Ave., Mineola, N. Y., for the petitioners. William J. Doherty, for the respondent. INGOLIAMemorandum Findings of Fact and Opinion INGOLIA, Commissioner: The respondent determined a deficiency in the petitioners' Federal income tax for the calendar year 1967 in the amount of $612.96. The only issue before the Court is whether travel expenses totaling $1,763.50 are deductible as "ordinary and necessary expenses paid or incurred during the taxable year in carrying161 on any trade or business", within the meaning of section 162(a) of the Code. 1Findings of Fact Some of the facts have been stipulated and are found accordingly. The petitioners, Edwin F. and Marion R. Krist, are husband and wife, and resided in Floral Park, New York, at the time their petition was filed. They filed their joint Federal income tax return for the year 1967 with the Brooklyn, New York, District of the Internal Revenue Service. Marion R. Krist (hereinafter referred to as the petitioner) is an elementary school teacher. She has been so employed for 18 years. She has a Bachelor's Degree in 398 secondary education to teach English and speech and a Master's Degree in elementary education to teach grades K to 6. She is certified by the State of New York to teach grades K to 6. In 1967 and for seven years prior thereto, she taught the first grade at Barnum Woods School in the East Meadow District of Long Island, New York. Approximately one-half of the time in the first grade was spent teaching the traditional subjects of reading, writing, and arithmetic. The other162 half was spent teaching science and social studies. The latter topic used a textbook entitled "Families and Social Needs". Some of the headings in the book were as follows: Unit One - Families In Our Country Unit Two - Where Families Live Unit Three - Maps and Clothes Unit Four - Families In Other Lands (a) In Japan(b) In Switzerland(c) In IndiaUnit Five - Houses In Other Lands (a) In Japan(b) In Switzerland(c) In India Sometimes the subjects taught overlapped. For example, reading might be combined with the use of a book about a Chinese family. In 1967, the petitioner applied to her superiors to take sabbatical leave from September 1, 1967, to June 30, 1968, for travel. Paragraph 14, Article VI of the Administrative Code for the East Meadow Schools, Long Island, New York, is as follows: 14. A teacher who has successfully completed at least seven years of satisfactory teaching service in the East Meadow School District shall be eligible to make application to the Superintendent of Schools for a sabbatical leave of absence of not more than one year. Generally speaking the approved purposes for a sabbatical leave of absence may be summarized as follows: 163 a. Approved travel that will broaden the background of the teacher's experience (itinerary submitted in advance). b. Graduate study related to teaching or school administration (full time). c. Recovery of health (documentation by either the personal or school doctor may be requested). Approved requests shall entitle the teacher to receive half pay during the time of the leave. Requests at any time shall be limited to approximately 2% of the total professional staff. While on sabbatical leave the teacher's total earnings for other work shall not exceed her annual school district salary inclusive of the half-pay received from the school district. When she applied for sabbatical leave, the petitioner discussed her trip with her supervisor and told him of her plans. She was required to write a report and to make a presentation to the faculty regarding her trip on her return. She was granted permission to take sabbatical leave by the school district and on September 22, 1967, she began her trip from New York City. Her itinerary and the cost allocable to her various activities as prepared by the petitioner are set forth below: DateTravel DetailsAmount9/22/67Belgian Line "SS Brenghel"$ 209.0010/ 4/67Antwerp to Brussels - train10/ 6/67Air Brussels to London10/ 8/67Air London to Dublin]46.0010/11/67Train Dublin to Limerick10/14/67Bus to Galway and Cong and return to Galway13.0010/19/67 &Bus to Cahir, Waterford and train to Dublin14.0010/20/6710/23/67Air Dublin to London18.2010/4-27/67Hotels230.0010/4-27/67Tours, sight-seeing, factories, museums, etc.60.0010/27/67Air London to Paris26.3210/27-30/67Travel, hotels in Paris, Loire Valley, Pherims50.0010/31/67-11/20/67Hotels, travel, tours through Cologne, Stuttgart, Munich, Vienna, Liechtenstein, Switzerland, Northern Italy, Genoa200.0011/20/67Air Nice to Barcelona to Madrid51.0011/20-22/67Pension tours15.0011/23/67Train to Lisbon from Madrid9.009.0011/23-30/67Travel, tours, hotels in and about Lisbon, Portugal60.0011/30/67S/S Funchal to Madeira return trip to Lisbon 12/10/6744.0012/10-19/67Further travel, tours, hotels Lisbon, Portugal45.0012/19/67S/S Tourens Freighter Wilhelmsen Lines leaving Lisbon pro- ceeding around African Coast to Manila, Hong Kong, Korea, Japan 672.98Total$1,763.50164 399 Petitioner, with her husband, took a Belgian freighter from New York to Belgium. They both went to London and to Dublin where her husband left her on October 14, 1967. She then went to Galway where she spent four days planning the remainder of her trip. From then on, the petitioner was on her own, staying at second-rate hotels and visiting schools and families as well as general points of interest any tourist might seek out. She visited schools in London, Spain, Switzerland, and later in 1968 in Japan. During her trip, the petitioner took hundreds of dollars worth of picture slides. The petitioner testified that her purpose in taking the trip was to aid her in her work as a teacher. She noted that had she been on vacation she would not have used freighters, she would have stayed at better hotels, and her activities would have been geared to swimming and skiing rather than the travel and visits she made which tired her each day. Some of the ideas and materials the petitioner brought back from her trip were used by her when she returned to her teaching job. After her trip, the superintendent of schools for petitioner's district certified that she had "completed the program165 for which she was granted leave" and that "The travel was undertaken for professional improvement in order to enhance her teaching skills * ." Opinion Section 162(a)(2) allows a deduction for "all the ordinary and necessary expenses paid * * during the taxable year in carrying on any trade or business, including * * * traveling expenses * * * while away from home in the pursuit of a trade or business." Because the law itself is necessarily broad, the regulations promulgated under it are especially important. They were first set forth in T.D. 6291, filed April 3, 1958. 2 They provide in essence, that education expenses (including travel such as is involved here) are deductible if the activity was either undertaken primarily to maintain or improve a taxpayer's job skills or to meet requirements the employer imposed for the taxpayer to retain his salary or status. They also provide that expenditures for travel (including travel while on sabbatical leave) are generally personal and therefore not deductible. However, the rule as to sabbatical leave was liberalized by the Commissioner in Rev. Rul. 64-176, C.B. 1964-1 (Part I) 87. 3 It recognizes that166 sabbatical leave travel expenses may be deductible even though it is of the "broadening, cultural type, which is generally considered to yield only a personal advantage," if at the same time it "has a direct relationship to the conduct of the individual's trade or business." 167 The regulations under section 162 were later revised on May 1, 1967, by T.D. 6918 (effective on or after January 1, 1968). 4 In the new regulations, the "primary purpose" test used in the old regulations has been eliminated and the expense is deductible if it maintains or improves a taxpayer's job 400 skills and is directly related to a taxpayer's trade or business. 168 For years prior to 1968, taxpayers may rely alternatively on either the 1958 or the 1967 regulations. Stanley Marlin, 54 T.C. 560">54 T.C. 560 (1970); Burke W. Bradley, Jr., 54 T.C. 216">54 T.C. 216 (1970); Ronald F. Weiszmann, 52 T.C. 1106">52 T.C. 1106 (1969). So here, the petitioner must show either that her primary purpose in taking the sabbatical leave travel was to maintain and improve her skills as a teacher (and, under Rev. Rul. 64-176, supra, that it was directly related to her job) or that it did maintain and improve her skills and was directly related to her duties. In a concise and well-written brief, the respondent argues that the petitioner's travel only incidentally maintained or improved her teaching skills and that a major portion of her activities did not directly maintain or improve her skills. The question presented is a factual one and there is little doubt but that one experiences difficulty in drawing a line of demarcation which places all the personal activities on one side and all the business-related activities on the other. There is an overlapping which is dictated by the nature of the activity itself. Nevertheless, we think the record here169 clearly supports the conclusion that the petitioner's primary purpose in taking the trip was to maintain or improve her skills and that the majority of her activities were directly related to her teaching job. The petitioner testified that she did not plan the trip as she would a vacation and that much of what she did was in the nature of work to her. We believe her testimony. She was obviously dedicated to the teaching profession and to the children she taught. Her testimony was forthright and unhesitating. When one relates her statements to the fact that she traveled for the most part alone, without her husband, that she did visit schools and families, that she did adopt teaching techniques she observed, that she brought back a great number of slides which she used at the school, that her mode of transportation and her accommodations were inferior to that of the normal tourist - they are consistent with the conclusion that she took the trip primarily to maintain and improve her skills. As to the direct relationship of her activities to her job, she taught social science (which includes geography, history, study of customs and culture, etc.) to her pupils. The textbook she used contained170 specific references to some of the places she visited and to the facilities and customs she was able to observe. We do not think the rulings and case law which refer to "general cultural improvement" are controlling here. Rather, we believe this petitioner was in the same situation as was the petitioner-wife in Stanley Marlin, supra, where the Court found a direct relationship between the wife's occupation as a history teacher and her visits to places of historic interest even though she was accompanied by her husband. So here, we believe a portion of the petitioner's expenses for travel were deductible under either the old or new regulations. We believe that a portion of the petitioner's trip, such as some of the time spent with her husband, involved personal expenditures. We must make an allocation between those expenditures and those which are business related. Reuben H. Hoover, 35 T.C. 566">35 T.C. 566 (1961). 5 On the basis of the entire record, we hold that 80 percent of the amount claimed, or $1,410.80, is deductible under section 162(a) 401 as a business expense, and 20 percent, or $352.70, is nondeductible personal expense under section 262. Cohan v. Commissioner, 39 F. 2d 540171 (C.A. 2, 1930).Reviewed and adopted as the report of the Small Tax Case Division. Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩2. Sec. 1.162-5 Expenses for education. - (a) Expenditures made by a taxpayer for his education are deductible if they are for education (including research activities) undertaken primarily for the purpose of: (1) Maintaining or improving skills required by the taxpayer in his employment or other trade or business, or (2) Meeting the express requirements of a taxpayer's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the taxpayer of his salary, status or employment. Whether or not education is of the type referred to in subparagraph (1) of this paragraph shall be determined upon the basis of all the facts of each case. * * * (c) In general, a taxpayer's expenditures for travel (including travel while on sabbatical leave) as a form of education shall be considered as primarily personal in nature and therefore not deductible. ↩3. Travel which has a direct relationship to the conduct of the individual's trade or business, even though it may also be of the broadening, cultural type, which is generally considered to yield only a personal advantage, may under certain circumstances be treated as the equivalent of education the cost of which may be deductible under section 1.162-5(a) of the regulations. For example, if a teacher of French, while on sabbatical leave granted for the purpose of travel, journeys throughout France in order to improve his knowledge of the French language, the expenses of his travel (including transportation and expenses necessarily incurred for meals and lodging) are deductible as education expenses if the taxpayer can show that his itinerary was chosen and the major portion of his activities during the trip was undertaken for the primary purpose of maintaining or improving his skills in the use and the teaching of the French language and that the places visited and his activities were of a nature calculated to result in actual or potential benefit to him in his position as a teacher of French. This is true even though his activities while traveling may consist largely of visiting French schools and families, attending motion pictures, plays or lectures in the French language, and the like.↩4. Sec. 1.162-5 Expenses for education. (a) General rule. Expenditures made by an individual for education (including research undertaken as part of his educational program) which are not expenditures of a type described in paragraph (b)(2) or (3) of this section are deductible as ordinary and necessary business expenses (even though the education may lead to a degree) if the education - (1) Maintains or improves skills required by the individual in his employment or other trade or business, or (2) Meets the express requirements of the individual's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation. * * * (d) Travel as a form of education. Subject to the provisions of paragraph (b) and (e) of this section, expenditures for travel (including travel while on sabbatical leave) as a form of education are deductible only to the extent such expenditures are attributable to a period of travel that is directly related to the duties of the individual in his employment or other trade or business. For this purpose, a period of travel shall be considered directly related to the duties of an individual in his employment or other trade or business only if the major portion of the activities during such period is of a nature which directly maintains or improves skills required by the individual in such employment or other trade or business. The approval of a travel program by an employer or the fact that travel is accepted by an employer in the fulfillment of its requirements for retention of rate of compensation, status or employment, is not determinative that the required relationship exists between the travel involved and the duties of the individual in his particular position.↩5. See also Helen V. Oehlke, T.C. Memo 1967-144">T.C. Memo. 1967-144; Alan Thomas James, T.C. Memo 1964-49">T.C. Memo. 1964-49; Sid Neschis, T.C. Memo. 1963-191↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621227/	Wilbur F. Bolin and Kathryn M. Bolin, et al. 1 v. Commissioner. Bolin v. CommissionerDocket Nos. 4970-63, 4742-65, 4743-65.United States Tax CourtT.C. Memo 1967-9; 1967 Tax Ct. Memo LEXIS 253; 26 T.C.M. (CCH) 62; T.C.M. (RIA) 67009; January 23, 1967Robert E. Teaford, 50 W. Broad, Columbus, Ohio, and Arthur H. Thomas, Jr., for the petitioners. W. Dean Short, for the respondent. DRENNENMemorandum Findings of Fact and Opinion DRENNEN, Judge: Respondent determined deficiencies in Federal income tax and additions to tax in these consolidated proceedings as follows: Additions to tax,Docketsec. 6653(a),No.PetitionerYearDeficiencyI.R.C. 19544970-63Wilbur F. Bolin and Kathryn M. Bolin1959$2,787.10$139.3619605,709.99285.5019612,323.40116.174743-65Wilbur F. Bolin196246.282.314742-65Wilbur F. Bolin and Damiris M. Bolin19631,031.1151.56255 Both respondent and petitioners have made concessions with respect to some of the issues raised in the notices of deficiency, and these concessions, found in the transcript of the opening statements of counsel and in the briefs filed by the parties, will be reflected in the Rule 50 computations. The questions remaining for decision are as follows: (1) Whether assessment of the deficiency in tax and the addition to tax determined by respondent for the taxable year 1959 is barred by the state of limitations. (2) Whether the deficiency in tax determined by respondent for the taxable year 1959 is invalid because an alleged second examination of petitioner's books and records for that year was in violation of section 7605(b), I.R.C. 1954. 2(3) Whether petitioners received ordinary income in the amount of $6,500 in 1959 as a result of a transfer of a residence to them in part payment of a business indebtedness, and in addition, whether they received ordinary business income in the amounts of $570.18 and $219.25 during the years 1959 and 1960, respectively, 256 as a result of payments made by a debtor on a mortgage on their residence in part payment of a business indebtedness. (4) Whether funds received by General Painting Co. should be included in income in the year of receipt, rather than in the year deposited. (5) Whether petitioners are entitled to depreciation for the years 1960 through 1963 on certain vehicles allegedly used in connection with the General Painting Co. business, and if so, the correct amount of depreciation allowable; also whether business deductions were overstated in those years because they included expenditures attributable to personal usage of automobiles. (6) Whether petitioners are entitled to a claimed interest deduction in the amount of $150 for 1960, and also whether a deduction of a portion of the mortgage payments on their residence, in the year 1960, is proper. (7) Whether an adjustment to basis should be made, after an allowance for the investment credit, for certain equipment purchased and used in the ordinary course of a trade or business. (8) Whether a refund in the amount of $2,614.08 of an advance premium deposit received from the Bureau of Workmen's Compensation of Ohio in 1962 should be257 reported in income for that year; and, in addition, whether an advance premium deposit in the amount of $1,775 paid to the Bureau in 1962 is deductible as an ordinary and necessary business expense. (9) Whether petitioners are liable for the addition to tax under section 6653(a) for the taxable years 1959 through 1963. Findings of Fact Wilbur F. Bolin (referred to herein as Wilbur or petitioner) and Kathryn M. Bolin (referred to herein as Kathryn) were husband and wife residing in Columbus, Ohio, during the years 1959, 1960, and 1961. They were divorced in 1962 and Wilbur married Damiris M. Bolin in 1963. Wilbur and Kathryn filed joint income tax returns for the calendar years 1959, 1960, and 1961, Wilbur filed an individual income tax return for the calendar year 1962, and Wilbur and Damiris filed a joint income tax return for the year 1963, all with the district director of internal revenue, Cincinnati, Ohio, and all on the cash basis of accounting. A written consent extending the time for assessment of the tax due for the year 1959 to June 30, 1964, was executed by, or in behalf of, Wilbur and Kathryn in February of 1963 and was executed by a delegate of the Secretary of258 the Treasury on March 12, 1963. Respondent mailed a notice of deficiency in tax due for the year 1959 to Wilbur and Kathryn on August 9, 1963. In 1960 an agent of respondent audited petitioner's books and records and determined that additional tax was due from petitioner for the year 1959, which was paid. In 1962 an agent of respondent asked Wilbur if he could see Wilbur's books and records for the years 1960 and 1961, and possibly 1962, and Wilbur made these books and records available to the agent. At some time, probably in late 1962 or early 1963, a special agent of respondent gave Wilbur an undated written memorandum listing certain records needed from Wilbur, which enumerated (1) accounts receivable from date General Painting Co. began work for Eureka Construction Co. to date last payment made by Eureka, (2) sales contract covering sale of General Painting Co. by James Bolin to Wilbur, and (3) record of payments made by Wilbur to James Bolin relative to sale of General Painting Co. Wilbur did not comply with this request on advice of his counsel. On March 20, 1963, a summons was issued to Wilbur by the special agent to produce for examination in connection with the matter of259 the tax liability of James Bolin the above records for the years 1955-60. Petitioner complied with this summons and the special agent examined these records in the presence of Wilbur and his counsel. On December 3, 1962, Wilbur's counsel wrote to the revenue agent examining Wilbur's returns advising that Wilbur would not accept the adjustments in his taxable income for the years 1959, 1960, and 1961 proposed by the agent, and requested issuance of a 30-day letter. Petitioner purchased General Painting Co., a proprietorship engaged in the contract painting business, in 1955 and continued to operate the business as a sole proprietorship throught the years here involved. 3 The income tax returns filed for the years in question reflect the following with respect to the business of General Painting Co. (referred to herein as Painting Co.): Total re-Cost of goodsOther businessYearceiptssoldGross profitdeductionsNet profit1959$293,579.95$244,448.39$49,131.56$26,677.20$22,454.361960278,516.12233,550.9444,965.1831,785.0313,180.151961438,434.45354,168.3884,266.0769,626.7014,639.371962329,014.62244,836.6784,177.9562,432.5221,745.431963380,951.02305,299.8975,651.1363,313.8912,337.24260 Painting Co. kept its books on the cash method of accounting for income and expenses. Painting Co. entered into an agreement with Eureka Construction Co. (referred to herein as Eureka) in 1957 to paint houses in Eureka's housing projects. Painting Co. had difficulty collecting the amounts due it from Eureka but because his brother was an owner and officer of Eureka, petitioner refrained from filing liens against Eureka's projects. However, in the latter part of 1958 Eureka agreed to transfer one of its houses, located at 2539 Regina Avenue, Columbus, Ohio, to petitioner in part payment for the amounts due from Eureka to Painting Co. For purposes of the agreement the property was valued at $26,000 and was to be transferred to petitioner free and clear of all liens. However, petitioner discovered that there was a mortgage on the property and petitioner had to place a $19,500 mortgage on it at the time of transfer to pay off the existing mortgage. The property was transferred to Wilbur and Kathryn by warranty deed dated March 6, 1959. Respondent261 determined that petitioners received additional income of $6,500 in 1959 as a result of the above transaction and also that petitioners received additional income in the amounts of $570.18 and $219.25 during the years 1959 and 1960, respectively, as a result of mortgage payments made on petitioner's behalf in part payment of the business indebtedness due him. Respondent determined that Painting Co. had business gross receipts, in the form of customers' checks and/or cash in payment for services rendered, on hand at the end of each of the years 1960 through 1963 which were not deposited in the bank nor included in gross income of Painting Co. until the following year; and that the gross income of the business should be increased for each of those years by the amounts on hand at the end of those years and decreased for the years 1961 through 1963 by the amounts on hand but not deposited at the beginning of each of those years. Respondent's determination was that business gross receipts should be increased by the amount of $8,105.80 for 1960, increased by the net amount of $593.77 for 1961, decreased by the net amount of $7,413.07 for 1962, and increased by the net amount of $2,344.50262 for 1963. The amounts, and the component parts thereof identified by respondent in his notice of deficiency, were deposited in Painting Co.'s bank account within the first few days of each of the years involved; no further evidence was offered with respect to the issue. Petitioners owned various automobiles, a station wagon, and a 3/4-ton Chevrolet truck during the years here involved, most of which were titled in the names of Wilbur and/or Kathryn, and some of which were titled in the name of Painting Co. Most of the cost of operating all of these vehicles was charged to the account of Painting Co. and deducted by it as business expense. A deduction for depreciation on most of these vehicles was also claimed by petitioners as a business expense. Respondent disallowed $1,000 of the business expenses claimed for each of the years 1960 through 1963 for personal use of these automobiles and also disallowed some or all of the deductions claimed for depreciation on some of these vehicles. The vehicles involved were: (1) 1958 Buick station wagon which cost $4,236.76 new in 1958. This vehicle was used by the superintendent of Painting Co. in its business. Petitioner claimed depreciation263 on this vehicle on the basis of a 3-year life new. Respondent determined that the vehicle had a remaining life of 3 years as of January 1, 1960, and had a salvage value of $200, and adjusted depreciation accordingly. (2) 1960 Chevrolet Biscayne which cost $2,855.07 when purchased new in February of 1960. This car was driven by petitioners' son, Wilbur F. Bolin, Jr., primarily for personal usage and occasionally on business as an employee of Painting Co. This car was wrecked in 1962 and replaced with a 1956 Chevrolet, which was used in a similar manner. Petitioners claimed depreciation on the 1960 Chevrolet on the basis of its full cost over a 3-year life. Respondent did not allow any depreciation on this automobile on the ground that it was not used in the business. (3) 1958 Cadillac which cost $6,250 new on December 28, 1957. This automobile was used for personal purposes by petitioner and Kathryn until a second Cadillac was acquired in 1960, at which time it was converted primarily to business use. Petitioner claimed no depreciation on this car for any of the years involved. Respondent determined that the car was converted to business use in 1960, had a value of $3,750 as of264 January 1, 1960, and a salvage value of $750, and had a 3-year remaining life at that time, and allowed a deduction for depreciation for each of the years 1960 through 1962 computed on that basis. (4) 1960 Cadillac which cost $8,349.68 new in February 1960. This car was used primarily for the personal use of Kathryn and the 1958 Cadillac was converted primarily to business use by petitioner after this car was acquired. This car was awarded to Kathryn in the divorce proceedings in 1962. Petitioners claimed depreciation on this car for each of the years 1960 through 1963 on the basis of full cost and a 3-year life. Respondent did not allow any depreciation on this car on the ground that it was used for personal and not business purposes. (5) 1961 Chevrolet sport coupe which cost $2,867.76 new in March 1961. Petitioners claimed depreciation on this car computed on the basis of full cost over a 3-year life. In his notice of deficiency respondent disallowed depreciation on this car as being for personal use, but conceded at the trial and on brief that petitioners are entitled to the depreciation claimed on this car. (6) 1960 3/4-ton Chevrolet truck which cost $2,217.31 new in October265 1960. This truck was used in the business. Petitioners depreciated this vehicle over a 3-year life. Respondent determined that it had a useful life of 5 years and adjusted the allowable depreciation accordingly. (7) 1956 Chevrolet which cost $775 when purchased in February of 1962. This car was used by Wilbur Bolin, Jr., in the manner above described after his 1960 Chevrolet was wrecked. Petitioners claimed depreciation on this car on the basis of a 3-year life for 1962 and 1963, which respondent disallowed on the ground that it was used for personal purposes. Petitioner used the basement of his home at 2539 Regina Avenue, Columbus, Ohio, as an office for Painting Co. during the year 1960. On their return for 1960 petitioners claimed as a business expense of Painting Co. depreciation on one-half of the value of the home. Depreciation claimed was $462.59. They also claimed as an itemized deduction for 1960 one-third of the payments on the mortgage on this property, in the amount of $640. Respondent disallowed the $640 claimed as an itemized deduction; he also determined that the value of the basement room used as an office was $2,500, that it had a useful life of 40 years, and266 allowed depreciation of $62.50 computed on that basis. Respondent also disallowed a deduction for interest claimed on petitioners' return for 1960 in the amount of $150 which was not identified either in the notice of deficiency or in the record. In his notices of deficiency for the years 1962 and 1963 respondent allowed petitioners an investment credit on certain equipment purchased by petitioners in those years for use in their business, which credit petitioners had not claimed on their returns. Respondent also reduced the basis of this equipment for depreciation purposes by the amounts of the investment credit allowed and adjusted depreciation claimed thereon accordingly. Painting Co. opened an account under Kathryn's name with the Bureau of Workmen's Compensation of Ohio in 1957. When the account was opened an advance premium deposit in the amount of $496 was paid by Painting Co. to the Bureau. On April 27, 1960, Painting Co. paid an additional advance premium deposit on this account to the Bureau in the amount of $2,234. This account was closed in October of 1961 and Painting Co. received a refund from this account in the amount of $2,614.08 in 1962. Painting Co. opened267 another account under Wilbur's name with the Bureau on May 25, 1961, and paid an advance premium deposit on that account to the Bureau in the amount to the Bureau in the amount of $425 at that time. Painting Co. paid an additional advance premium deposit on that account on July 27, 1962, in the amount of $1,775. Rule XIII of the Industrial Commission of Ohio and Bureau of Workmen's Compensation provides as follows: RULE XIII Rule Controlling the Making of the Initial Application for Rating The amount of premium due from individual employers is ascertained by applying the basic rate for the occupation or employment in which the employer is engaged to the estimated expenditure of wages for the ensuing six months and also for an additional adjustment period of two months, that is, the advance estimate should be made for a period of eight months. Employers are required to file with the Commission and Bureau an application setting forth the name and address of the employer, the location of all places where employees are employed, a description of the work done or industry conducted at each such place, the estimated average number of employees in each kind of work, the estimated268 total payroll for the ensuing six months, and an estimated total payroll for an additional adjustment period of two months, and such other information as may be requested by the Commission and Bureau. Upon receipt of the application, employment of the applicant will be classified and the applicant advised as to his classification, rate, and amount of his first premium, calculated on a basis of an estimated expenditure of wages for eight months in advance and at the same time he will be furnished with a pay-in-order authorizing the Treasurer of State to receive the amount of such premium. This advance premium deposit shall be retained as an adequate eight month premium deposit subject to a periodic review by the Commission and Bureau and any unearned portion of this deposit shall be returned to the employer upon cancellation of the coverage subject to audit. In his notice of deficiency for the year 1962 respondent determined that the deduction claimed by petitioner "for Workmen's Compensation Insurance should be adjusted to reflect refunds of deposits as follows: "Deposit refunded$2,614.08New advance deposit1,775.00Adjustment$4,389.08"In his notices of269 deficiency respondent determined that petitioners were liable for the addition to tax under section 6653(a) of the 1954 Code (negligence or intentional disregard of rules and regulations) for each of the years 1959 through 1963. In his notice of deficiency for the year 1961 respondent determined that certain business expenses, totaling $3,043.80, claimed as deductions on petitioners' return for 1961, were capital expenditures advanced to start and incorporate a janitor service business which was abandoned in 1961; that these amounts were not deductible as business expenses in 1961, but were allowable as a capital loss instead; however, the amount of the capital loss allowable in 1961 was determined to be $1,000 because of the limitations of section 1211 of the Code. In his notices of deficiency for 1962 and 1963 respondent made no adjustment reflecting a carryover of the unallowed portion of the capital loss determined for 1961. In their petitions filed in these proceedings petitioners alleged error in respondent's disallowance of the expenditures totaling $3,043.80 as business expenses for 1961, but claimed no capital loss carryover for the years 1962 and 1963. In his opening270 statement counsel for petitioners conceded that the items totaling $3,043.80 were not deductible as business expense in 1961 and were properly deductible as a capital loss, but claimed that the unallowable portion of the capital loss should be carried over into subsequent years. Opinion A number of the issues involved are factual and, unfortunately, petitioners have failed to produce sufficient evidence with respect to most of these issues to carry their burden of proving error in respondent's determinations, or for that matter to permit us to make findings of many facts relative thereto. Other issues raised in the pleadings and not conceded by either party have not been argued by petitioners on brief and we feel justified in assuming that they have been abandoned. Issues 1 and 2 Issue 1. Is assessment of the deficiency determined by respondent for the year 1959 barred by the statute of limitations? While this issue was raised separately in the petition, it was not argued separately by petitioners on brief, and we feel petitioners must be relying on their argument under Issue 2 to carry this issue. In any event the evidence is clear that while the notice of deficiency for271 the year 1959 was mailed more than 3 years after petitioners' return for that year was due, the parties, prior to April 15, 1963, executed a valid consent extending the time for assessment of the tax due for 1959 to June 30, 1964, and the notice of deficiency for 1959 was mailed to petitioners on August 9, 1963, well within the extended period Under sections 6501(c)(4) and 6503(a)(1), 4 assessment of the tax due for 1959 is not barred by limitations. 272 Issue 2. Whether the deficiency in tax determined by respondent for the year 1959 is invalid because on alleged second examination of petitioner's books and records for that year was in violation of section 7605(b). On brief petitioners rely on the language of section 7605(b) and on the case of Reineman v. United States, 301 F. 2d 267, in arguing that an unauthorized reexamination of a taxpayer's books during the process of examining the books relative to a different tax year bars the assertion of a deficiency for the year reexamined. Section 7605(b) provides as follows: (b) Restrictions on Examination of Taxpayer. - No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary or his delegate, after investigation, notifies the taxpayer in writing that an additional inspection is necessary. We need not deal with all the possible ramifications that could be involved in an issue such as this, such as the effect of an unauthorized second examination of a taxpayer's records on the validity of the273 notice of deficiency, whether the written memorandum given Wilbur by the special agent was sufficient notice within the meaning of the statute, etc., because petitioners have not shown by competent evidence that a second examination of the books for the year 1959 actually occurred, or that the deficiency determined for 1959 was based on a second examination of the books. Paragraph 4(b) of the petition in docket No. 4970-63, which presumably raises this ISSUE, ALLEGED ERROR IN RESPONDENT'S NOTICE OF DEFICIENCY IN THAT - The deficiency for the year 1959 was closed to further review by the Commissioner by an agreement between the taxpayers and the Commissioner as a result of an audit and additional assessment in December, 1960. Paragraph 5(b) of that petitioner alleges as the only supporting fact for the error alleged in paragraph 4(b): (b) The petitioners and respondent entered into an agreement on December 5, 1960 whereby further review for the year 1959 was closed. In his answer respondent denied both allegations. The only evidence presented in support of the above allegations is Wilbur's testimony that in 1960 a revenue agent did examine his books for 1959, proposed some274 adjustments which resulted in additional tax being due, and that he paid the additional tax. The notice of deficiency also indicates, in the computation of additional tax for 1959, that the tax paid was as previously adjusted per report dated December 5, 1960. However, there is no evidence that there was any agreement entered into between the parties at that time which might serve as a closing agreement or which would otherwise preclude respondent from making further adjustments in petitioners' tax liability for 1959. Consequently, petitioners have not proved the allegations of the petition set out above. As said in William Fleming, 3 T.C. 974">3 T.C. 974, 984: In the absence of a closing agreement, valid compromise, final adjudication, or the running of the statute of limitations, the Commissioner may make new and different assessments against the same taxpayer, for the same year, and in respect of the same type of tax. * * * But assuming that the above allegations do raise this issue as argued on brief, petitioners have still failed to prove that a second examination of their books occurred upon which the proposed deficiency for 1959 was based. Petitioner testified that sometime275 in 1962 or 1963 a revenue agent called him and asked petitioner if he could see his books for the years 1961 and 1962 (probably 1960 and 1961), which were made available to the agent. At some unknown date a special agent gave petitioner the written memorandum referred to in our findings of fact, requesting certain records which would include records for 1959, which request petitioner refused to comply with. By not later than December 3, 1962, petitioner or his attorney had been advised of adjustments the revenue agent proposed to make in petitioners' tax liability for 1959, 1960, and 1961, and refused to agree to them. It was not until March of 1963 that petitioner was served with a summons to produce the above records, which summons was issued by the special agent in connection with an examination of petitioner's brother, James Bolin, and which summons he complied with. The only adjustment made in petitioners' income for the year 1959 was an increase in gross receipts due to the transfer of a house and lot owned by Eureka, in which James Bolin was part owner, to petitioners in part payment of an indebtedness owed by Eureka to Painting Co., and a payment by Eureka on the mortgage276 on that property. Information to support this determination could have been obtained from various sources other than petitioner's books. In fact, petitioner testified that because there was some doubt concerning the value to be assigned to the property transferred, he made no entry on his books reflecting a credit to the account of Eureka because of the transfer. It seems more likely that respondent's agents happened on to this transaction in examining the books of Eureka, which would at least justify them in going back to take another look at petitioner's books for 1959. The evidence is not clear whether petitioner knew that the revenue agent was going to look at his books again with reference to this 1959 transaction; petitioner was uncertain about it in his testimony; but at some time prior to March 1963, petitioner was given the undated written notice referred to above asking for a record of his accounts receivable from Eureka for the period 1955 to 1960 and petitioner was also advised that the revenue agent was considering making an adjustment for this transaction in 1959. There is no evidence that the revenue agent had access to petitioner's books for 1959 until after he had277 proposed certain adjustments to petitioners' taxable income for 1959, 1960, and 1961. Petitioner or his attorney was advised of these proposed adjustments by early December 1962, and the summons for his records was not issued until March of 1963; and then in connection with an audit of James Bolin's returns. We do not know what adjustments the agent proposed for 1959 but they could have included, and in all likelihood did include, the adjustments made in the deficiency notice. We think it is pretty clear that the revenue agent was justified in checking this transaction, which would not have been apparent from petitioner's books when they were originally examined, that petitioner probably knew the agent was checking this item and made no objection thereto, and that if respondent's agent did actually conduct what would qualify as a second examination of petitioner's books and records for 1959, petitioner was notified thereof and waived any objection thereto. See M. O. Rife, Jr., 41 T.C. 732">41 T.C. 732, modified 356 F. 2d 883; William H. Parsons, 43 T.C. 378">43 T.C. 378. In Reineman v. United States, supra, relied on by petitioners, the Court found that278 the taxpayer had no knowledge that his books for the prior year were being reexamined or that adjustments in his tax liability for that year were being considered until after he received a 10-day letter, and had no remedy to correct the illegal action taken by the Commissioner unless the notice of deficiency was declared invalid. That case is factually distinguishable from this case and is not controlling. We cannot find on the evidence before us that respondent violated the provisions of section 7605(b) by conducting an unnecessary second examination of petitioner's books without notice. Nor can we find on the evidence that the conduct of the Internal Revenue Service was in violation of petitioners' rights under the Fourth Amendment to the Constitution, as mentioned by petitioners. Issue 3. Whether petitioners received additional income as a result of a transfer of a residence to them and payments on a mortgage on the property made by Eureka in part payment of an indebtedness from Eureka to Painting Co. Petitioners argue on brief that the contract between petitioners and Eureka calling for a transfer of the residential property to petitioners in part payment of the indebtedness279 was entered into in 1958, that the fair market value of the property should be determined as of 1958, and that if any income was realized by petitioners from this transaction it was taxable in 1958. Petitioners offered no evidence of the value of the house in 1958 or any other time. It is clear that the transaction was closed and the property was transferred to petitioners by Eureka in March 1959, in part payment of indebtedness due Painting Co. by Eureka for past services rendered. Wilbur agreed with Eureka that the value of the property for this purpose was $26,000. The property was apparently subject to a $19,500 mortgage which Wilbur had to assume, so Wilbur realized an economic benefit of $6,500 as a result of the transaction in 1959. There is no evidence that it was intended that the contract or agreement itself, which was dated in 1958, was accepted by Wilbur as part payment on the indebtedness so as to be income to him or Painting Co. in 1958. Petitioners offered no evidence or arguments with respect to respondent's determinations that petitioners received additional business income in the amounts of $570.18 and $219.25 in 1959 and 1960, respectively, as a result of payments280 made by Eureka on the mortgage on petitioners' residence in part payment of a business indebtedness. We conclude that petitioners have failed to carry their burden of proving error in respondent's determinations, and hold for respondent on this issue. Issue 4. Whether funds received by General Painting Co. should be included in income in the year of receipt, rather than in the year deposited. Respondent determined that, in order to place petitioners on a true cash basis, certain checks and/or cash, representing business receipts, received by Painting Co. near the end of the years 1960, 1961, 1962, and 1963, but not deposited by it in its bank account until the succeeding years, should properly be included in petitioners' income for the years of receipt rather than the following years, as reported by petitioners. Respondent also reduced petitioners' income for the years 1961, 1962, and 1963 by the amounts erroneously included in income by petitioners for those years but pushed back by respondent into the preceding years. Petitioners do not argue that respondent erred in making the adjustments he did make, nor do they question the amounts thereof, but they do claim that a similar281 adjustment should be made for the receipts on hand at the beginning of the year 1960. We agree with petitioners' claim but we have no evidence of what the receipts on hand at the beginning of 1960, if any, might be, or that they were included in the income reported by petitioners in 1960. The burden of proof was on petitioners and we must hold for respondent on this issue for petitioners' failure to carry that burden. It is no answer to say, as argued by petitioners on brief, that because petitioners followed the above practice consistently the adjustments should not be made. Issue 5. Depreciation on automobiles, and disallowance of business expenses for personal use of automobiles. Respondent made adjustments in the depreciation allowable to petitioners for automobiles used in the business, as set out in our findings of fact, disallowing all depreciation claimed on some vehicles because they were not used for business purposes, and adjusting the depreciation allowable on others by reducing their basis for depreciation by salvage value and extending their useful lives. Petitioners offered very little evidence with respect to the basis for depreciation of the automobiles involved282 or their useful lives in the business, and the presumptive correctness of respondent's determinations thereof must stand. The main thrust of petitioners' evidence was to prove that the automobiles determined by respondent to have been used for personal purposes only were used, in part at least, in the business. Two sets of automobiles are involved in this argument, which involves only the years 1960 and following. Petitioners claimed depreciation on the 1960 Cadillac for the years 1960 through 1963 and claimed no depreciation on the 1958 Cadillac in any of the years 1960-63. Respondent allowed depreciation on the 1958 Cadillac for each of the years 1960-62, but allowed no depreciation on the 1960 Cadillac. The other set of automobiles involved was the 1960 Chevrolet Biscayne driven by Wilbur Bolin, Jr., until it was wrecked in early 1962, and the 1956 Chevrolet he drove thereafter. Petitioners claimed depreciation on the 1960 Chevrolet for 1960, 1961, and part of 1962, and claimed depreciation on the 1956 Chevrolet for part of 1962 and for 1963. Respondent did not allow depreciation on either of these automobiles. Petitioner testified that in 1960 his wife drove the 1958 Cadillac283 and that he drove the 1960 Cadillac, mostly on business but sometimes for personal use; that in 1961 his wife made increased demands for use of the 1960 Cadillac and she used it 50 percent of the time and he alternated using the 1958 and the 1960 Cadillacs for business purposes; and that in 1962 after his wife was awarded the 1960 Cadillac in the divorce proceedings he drove the 1958 Cadillac exclusively. We are inclined to accept petitioner's testimony, except possibly as to the extent Kathryn used the new car in 1960, but the evidence is not specific enough to justify changing respondent's determinations with respect to these two automobiles. Respondent allowed no depreciation on the 1960 Cadillac, which of course had a higher depreciable basis in 1960 than did the 1958 Cadillac, but he allowed full depreciation on the 1958 Cadillac despite the fact that Wilbur admittedly used the car he was driving partially for personal purposes. Petitioner's own testimony does not support the right to claim full depreciation on the 1960 Cadillac for 1961 or the right to claim any depreciation on that car for 1962 and 1963. We sustain respondent's determinations with respect to these two automobiles. 284 The two Chevrolets driven by Wilbur Bolin, Jr., were owned by Painting Co. and both petitioner and Wilbur, Jr., testified that he used them partially on business and partially for personal use. While the evidence is not very specific, we believe it supports a finding that 25 percent of the use of these two cars was in the business of Painting Co., and we so find. Petitioners are entitled to deduct 25 percent of the depreciation claimed on these two Chevrolets for the years involved. Respondent disallowed a flat amount of $1,000 in business expenses claimed by petitioners for each of the years 1960 through 1963 on the ground that this represented the cost of operating two automobiles not used in the business but paid for by Painting Co. and claimed as a business expense for each of those years. This represents $500 for each of two cars, presumably those driven by petitioner's wife and son. While we think these amounts might be high, when depreciation is not included, there is no evidence of the number of miles driven, etc., to refute it. Petitioners also claim that Wilbur, Jr., paid all of the cost of operating the cars he drove himself; but when, on cross-examination, Wilbur, Jr. 285 , was presented with numerous gasoline station bills signed by him and charged to Painting Co. within a relatively short period, Wilbur, Jr., was not so sure of this. Nevertheless, we think petitioners have offered sufficient evidence to show that the amounts disallowed by respondent were too large. Using our best judgment, based on all the evidence, including the evidence that Wilbur, Jr., used the car he drove partially on company business, and the evidence that Wilbur and Kathryn were divorced in 1962 and it is doubtful that the expenses of operating her car were paid by Painting Co. thereafter, we conclude that the proper amounts to be disallowed as business expenses for this reason were $750 for each of the years 1960 and 1961, and $500 for each of the years 1962 and 1963. Issue 6. Deductions for interest in amount of $150 and mortgage payments on residence in amount of $640 for 1960. Petitioners offered no evidence with reference to the interest deduction disallowed by respondent and did not mention it on brief, so we assume they have abandoned this issue. In any event they have failed to carry their burden of proving respondent's determination to be in error. We hold for286 respondent with respect to this item. Petitioners appear to have deducted as an itemized deduction one-third of the payments made on the mortgage on their residence at 2539 Regina Avenue in 1960, presumably on the theory that one-third of the house (the basement) was used as an office for the business. They also claimed itemized deductions for one-third of the utility bills paid during the year, which respondent did not disallow. While petitioners admittedly used the basement of their residence as an office during 1960, payments on the principal of the mortgage would be capital expenditures and not deductible as business expense. Respondent has allowed depreciation on what he determined to be the cost or value of the basement and improvements used in the business. Petitioners offered no evidence on this issue and did not mention it on brief. We hold for respondent on this issue. Issue 7. Adjustment to basis for depreciation of equipment purchased for use in business because of allowance of investment credit. Petitioners did not claim the investment credit for certain equipment they purchased for use in their business in 1962 and 1963, but claimed depreciation on the full cost287 thereof. 5 Respondent computed the investment credit provided for in section 38 of the Code, effective for 1962 and 1963, allowed it as a credit against the tax, and reduced petitioners' basis for depreciation of these assets by the amount of the investment credit allowed. Petitioners do not specifically challenge these adjustments on brief and presented no evidence with respect thereto. Petitioners have shown no error in respondent's computation on this issue and we hold for respondent on it. See secs. 38, 46, and 48(g), effective for years 1962 and 1963, and regulations relative thereto. Issue 8. Deductibility of advance premium deposit to Bureau of Workmen's Compensation of Ohio in 1962 and inclusion in income in 1962 of refund of advance premium deposits paid in prior years. In his notice of deficiency for 1962 respondent determined that petitioner's "deduction for Workmen's Compensation Insurance should be adjusted to reflect refunds288 of deposits as follows: "Deposit refunded$2,614.08New advance deposit1,775.00Adjustment$4,389.08" The amount of $4,389.08 was added to petitioner's taxable income for 1962. The evidence indicates that Painting Co. opened an account with the Bureau of Workmen's Compensation of Ohio in Kathryn's name in 1957 and made an advance premium deposit of $496 in that year, and made an additional deposit to this account of $2,234 in 1960. Petitioner was apparently advised that it would be more economical for him to close this account and open a new one. As a result a new account was opened in his name in May of 1961, at which time petitioner paid to the Bureau an advance premium deposit of $425 on this new account, and paid an additional $1,775 on the new account in 1962. The old account was canceled in October 1961 and petitioner received a refund of the unused balance in the first account, in the amount of $2,614.08, in 1962. We are unable to determine from petitioners' income tax returns or from any evidence presented whether petitioner deducted these deposits in the years they were paid to the Bureau. Respondent has determined that the $1,775 paid in 1962 was erroneously289 deducted by petitioner and, absent evidence to the contrary, we must assume that that payment was deducted by petitioner in 1962. Respondent has made no determination on this point with respect to the $2,614.08 refunded in 1962. Respondent argues on brief that the advance premium deposits are returnable and are not used to pay premiums due, except possibly upon cancellation of the coverage or when an advance deposit is shown to be excessive, at which time the excessive portion may be applied against unpaid premiums; therefore, he argues, the deposits are not deductible when made, but only when applied to pay premiums. He also argues, with respect to the $2,614.08 refunded, that inasmuch as petitioner deducted the $1,775 when paid in 1962 it must be assumed, absent evidence to the contrary, that petitioner deducted all amounts deposited in the first account when deposited. Petitioner does not mention the $2,614.08 refund item on brief but argues only that the deposit of $1,775 in 1962 was a premium for insurance and is deductible as an ordinary business expense in the year paid. Presumably petitioner acknowledges that a refund of any unused premium deposit is includable in income, 290 and we consider that petitioner has abandoned his objection to the inclusion of the $2,614.08 refund in income for 1962. 6We cannot determine with any degree of certainty, from the evidence presented, just what the purpose of these advance premium deposits is, how they are used, or what the rights of the contributor in the deposit are at any particular time. The only evidence presented was a certified copy of Rule XIII of the Bureau, which we have set out in our findings of fact, and the somewhat confusing testimony of an employee of the Bureau called as a witness by respondent. The most we can determine from this evidence is that the employer is called upon to make an advance premium deposit, based on his estimated payroll for 8 months, when he first applies for coverage, that the deposit is not normally291 applied to payment of the premium for coverage but may be so applied if the deposit becomes excessive or upon cancellation of coverage, and that any balance of the deposit not so applied is refundable to the employer upon cancellation of coverage. Based on the evidence we have before us we cannot conclude that respondent's determination with respect to the $1,775 payments in 1962 is erroneous; and we hold for respondent on this issue because petitioner has failed to carry his burden of proving that respondent was in error. However, this shall not be interpreted as a ruling on the deductibility of these advance premium deposits as a matter of law. That is a question of some importance about which there are conflicting views, see e.g., United States v. Weber Paper Co., 320 F. 2d 199 (affirming 204 F. Supp. 394">204 F. Supp. 394, W.D. Mo. 1962), and Rev. Rul. 60-275, 2 C.B. 43">1960-2 C.B. 43, and should be left for determination when all the facts are before the Court. Issue 9. Additions to tax under section 6653(a). In his notices of deficiency respondent determined that additions to tax under section 6653(a) were due from petitioners for each of the years 1959 through292 1963. Under section 6653(a) 7 an amount equal to 5 percent of the underpayment of income tax is added to the tax where any part of the underpayment is due to negligence or intentional disregard of rules and regulations (but without intent to defraud). In order for petitioners to prevail on this issue it is incumbent upon them to introduce evidence to rebut the presumption of correctness which attaches to respondent's determination. James W. England, Jr., 34 T.C. 617">34 T.C. 617. This they have failed to do. Consequently, we must approve respondent's determination on this issue, although somewhat reluctantly. It would appear that inasmuch as we have approved respondent's determination293 that certain expenditures made by petitioners with respect to a janitor service business gave rise to a capital loss in 1961, only $1,000 of which was deductible in 1961, under section 1211(b) of the Code a capital loss carryover should be available for deduction by petitioners, within the limits provided by the Code, in subsequent years. Respondent did not allow any such deductions in his notices of deficiency for 1962 and 1963. The parties are instructed to reflect any allowable deductions by virtue of this loss in their Rule 50 computations for 1962 and 1963. To reflect the concessions made by the parties, adjustments resulting from our disposition of the questions presented, and the resulting necessary adjustments in medical expense deductions. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Wilbur F. Bolin and Damiris M. Bolin, docket No. 4742-65, and Wilbur F. Bolin, docket No. 4743-65.↩2. All section references hereinafter are to the Internal Revenue Code of 1954 unless otherwise noted.↩3. References herein to petitioner's business and business activities refer to the business of General Painting Co. unless otherwise indicated.↩4. SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION. * (c) Exceptions. - * *(4) Extension by agreement. - Where, before the expiration of the time prescribed in this section for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary or his delegate and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. SEC. 6503. SUSPENSION OF RUNNING OF PERIOD OF LIMITATION. (a) Issuance of Statutory Notice of Deficiency. - (1) General rule. - The running of the period of limitations provded in section 6501 or 6502 on the making of assessments or the collection in section 6501 or 6502 on the making of assessments or the collection by levy or a proceeding in court, in respect of any deficiency as defined in section 6211 (relating to income, estate, and gift taxes), shall (after the mailing of a notice under section 6212(a)) be suspended for the period during which the Secretary or his delegate is prohibited from making the assessment or from collecting by levy or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter.↩5. It appears from the depreciation schedule attached to petitioners' return for 1963 that petitioners did not claim depreciation on some of this equipment in 1963. However, respondent allowed a deduction for it in his notice of deficiency.↩6. It is not clear why, with the years 1960, 1961, and 1962 all before us, respondent did not disallow deduction of the amounts of the advance premium deposits paid in 1960 and 1961 rather than add the refund received in 1962 to income, unless it is because those years were covered by a different notice of deficiency than was the year 1962. Petitioners make no issue of this.↩7. SEC. 6653. FAILURE TO PAY TAX. (a) Negligence or Intentional Disregard of Rules and Regulations With Respect to Income or Gift Taxes. - If any part of any underpayment (as defined in subsection (c)(1)) of any tax imposed by subtitle A or by chapter 12 of subtitle B (relating to income taxes and gift taxes) is due to negligence or intentional disregard of rules and regulations (but without intent to defraud), there shall be added to the tax an amount equal to 5 percent of the underpayment.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621229/	ESTATE OF GEORGE W. YOULE, DECEASED, PAUL B. YOULE, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Youle v. CommissionerDocket No. 8811-87United States Tax CourtT.C. Memo 1989-138; 1989 Tax Ct. Memo LEXIS 138; 56 T.C.M. (CCH) 1594; T.C.M. (RIA) 89138; March 30, 1989Paul B. Youle, for the petitioner. Richard A. Stone, for the respondent. GERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent determined a $ 55,073.71 deficiency in the estate tax of George W. Youle (decedent). After concessions, the only issue remaining for consideration is whether a discount should be applied to a fractional interest in real estate in valuing it for Federal estate tax purposes. FINDINGS OF FACT The decedent, George W. Youle, died on May 8, 1983, a domiciliary of the State of Illinois. The estate of the decedent is being administered in Illinois. Paul B. Youle, executor of decedent's estate, resided at San Jose, Illinois, when the petition was filed in this case. The stipulation139 of facts and attached exhibits are incorporated by this reference. The subject real estate consists of approximately 254 acres of farmland in Tazewell County, Illinois, of which 246.6 acres are tillable land. The subject property is a narrow parcel approximately 1 mile in length, accessible only by a road on the eastern side of the parcel. The fair market value of the entire parcel at the decedent's death was $ 572,000. The decedent owned a one-half interest in the subject real estate as a tenant in common with his sister until her death in 1974. After her death, the decedent's co-tenants were the heirs of his sister. In 1983, there were eight of such heirs who resided throughout the United States. Ownership and management of tenancies in common present unique problems. For example, all co-owners must agree in order to participate in the Government farm program, without which the property would, most probably, operate at a loss. There are also other operational problems, such as crop rotation, fertilization and weed control that are compounded by a number of dispersed owners. There are few arm's-length sales of fractional interests in property. 140 Under Illinois law, any person holding an interest in land as a tenant in common may compel partition. Ill. Ann. Stat. ch. 110, sec. 17-101 (Smith-Hurd 1984). If the property cannot be easily partitioned or divided, Illinois law provides for a public sale of the entire property, with the proceeds split among the co-owners. Ill. Ann. Stat. ch. 110, sec. 17-116 (Smith-Hurd 1984). Property may be sold at a partition sale for as little as two-thirds of its market value. Ill. Ann. Stat. ch. 110, sec. 17-117 (Smith-Hurd 1984). In partition actions, Illinois law provides for the appointment of three commissioners who value and partition the property, or, in the alternative, value the property and report that it is not susceptible of partition (prior to public sale). Ill. Ann. Stat. ch. 100, secs. 17-106 to 17-117 (Smith-Hurd 1984). There would be costs associated with a partition suit, including a number of appraisals, commissioner costs and legal fees. The appraisals and commissioner costs could range from $ 10,000 to $ 15,000. In proceedings for the partition of real estate, each party pays his or her equitable portion of costs and141 fees. Ill. Ann. Stat. ch. 110, sec. 17-125 (Smith-Hurd 1984). On the estate tax return, the estate's executor claimed a value of $ 250,000 for the one-half interest in the parcel, an approximate 12.5-percent discount. Attached to the return was an appraisal performed by Leonard J. Brueckner. Respondent's deficiency determination is based on a value of $ 286,000 for the property. The value of the decedent's one-half tenancy in common interest at the date of his death was $ 250,000. OPINION A decedent's gross estate includes the value at the time of his death of all real property in which he had an interest. Sections 2031(a), 12033. The value of property includable in the decedent's gross estate is its fair market value. Section 20.2031-1(b), Estate Tax Regs. Fair market value is the price at which 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.; United States v. Cartwright,411 U.S. 546">411 U.S. 546, 551 (1973);142 Estate of Hall v. Commissioner, 92 T.C. (February 14, 1989). Both sides agree that the value of the entire parcel is $ 572,000. The dispute between the parties that we must resolve is whether and to what extent a discount should be applied to decedent's tenancy in common interest. Petitioner argues that a discount should be applied because of the difficulties associated with dispersed ownership, the undesirability of "buying" a partition suit and the associated costs, and the difficulty of partitioning the subject property. Respondent argues that under Illinois law partition is a relatively simple procedure, that partition of the subject property would be simple because of the road running along the eastern side and that, in any event, if partition is impossible the whole parcel could be sold at fair market value and the proceeds distributed. We agree, in the main, with petitioner. Real estate valuation, and the question of fractional interest143 discount, is a question of fact to be resolved on the basis of the entire record. Estate of Fawcett v. Commissioner,64 T.C. 889">64 T.C. 889, 898 (1975); Estate of Campanari v. Commissioner,5 T.C. 488">5 T.C. 488 (1945); Estate of Henry v. Commissioner,4 T.C. 423">4 T.C. 423 (1944), affd. 161 F.2d 574">161 F.2d 574 (3d Cir. 1947); Estate of Stewart v. Commissioner,31 B.T.A. 201">31 B.T.A. 201 (1934); Estate of Baer v. Commissioner,3 B.T.A. 881">3 B.T.A. 881 (1926); Estate of Barclay v. Commissioner,2 B.T.A. 696">2 B.T.A. 696 (1925); Estate of Claflin v. Commissioner,2 B.T.A. 126">2 B.T.A. 126 (1925). Respondent offered no expert testimony. Petitioner's expert, James W. Klopfenstein, 2 testified that it is common practice for Illinois appraisers to discount fractional interests in real property by 20 or 25 percent, for the reasons stated above. Although this type of bare testimony has been rejected in the past, see Estate of Barclay v. Commissioner, supra, and Estate of Claflin v. Commissioner, supra, there are additional facts supporting a lesser discount in this case. While other sales of fractional144 interests in real estate would be good indicators of fair market value, in this case there were no comparable arm's-length sales, unlike Estate of Barclay v. Commissioner, supra, and Estate of Baer v. Commissioner, supra.In addition, we are persuaded that there would be court costs, legal fees and appraisal costs associated with any partition suit. Petitioner's expert testified that commissioner costs could range from $ 10,000 to $ 15,000. In addition, even a sale of the entire parcel without partition would entail communication with heirs that reside throughout the United States. Further, respondent's argument that the land could be easily partitioned (with respect to its physical characteristics) is at odds with both Brueckner's expert report and Klopfenstein's expert testimony. The facts in this case provide sufficient evidence to support the amount claimed on the estate tax return, $ 250,000. See Propstra v. United States,680 F.2d 1248">680 F.2d 1248 (9th Cir. 1982). To reflect the foregoing and concessions of the parties, Decision will*145 be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect at the date of decedent's death.↩2. Leonard Brueckner, who prepared the original appraisal, was not available for trial.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621231/	Triangle Investors Limited Partnership, Charles T. Collier, Tax Matters Partner, Petitioner v. Commissioner of Internal Revenue, RespondentTriangle Investors P'ship v. Comm'rDocket No. 27387-89 United States Tax Court95 T.C. 610; 1990 U.S. Tax Ct. LEXIS 111; 95 T.C. No. 42; December 6, 1990, Filed 111 R issued an FPAA to a partnership that had not formally designated a tax matters partner. The FPAA was mailed to the address appearing on the partnership's return for the year in issue, although a revenue agent who performed an examination of the partnership's affairs had actual notice of the partnership's current address, which was not the address on the return. Later, R issued the FPAA to notice partners. P received the FPAA in sufficient time to file a timely petition as a notice partner. P filed an untimely petition for readjustment. Held, the FPAA was validly issued to the "Tax Matters Partner." Held, further, R was not properly notified of the change in the partnership's address. Sec. 301.6223(c)-1T(b), Temporary Proced. & Admin. Regs., applied. Held, further, R's motion to dismiss for lack of jurisdiction granted. Charles T. Collier, pro se.Curtis G. Wilson and William A. Heard, III, for the respondent. Nims, Chief Judge. NIMS610 OPINIONThis matter is before the Court on respondent's motion to dismiss for lack of jurisdiction. (Unless otherwise indicated, all section references are to the Internal Revenue112 Code as in effect for the year in issue and 611 all Rule references are to the Tax Court Rules of Practice and Procedure.) The issue for decision is whether the notice of final partnership administrative adjustment issued in this case was valid.BackgroundRespondent determined adjustments to the partnership return of Triangle Investors Limited Partnership (Triangle Investors) for its 1984 taxable year as set forth in his notice of final partnership administrative adjustment (FPAA) issued on May 24, 1989. The FPAA was addressed to the Tax Matters Partner, c/o Triangle Investors Limited P/S, 11240 Grandview Avenue, Wheaton, Maryland 20906 (the Wheaton address).On August 28, 1989, respondent mailed a copy of the FPAA to a partner of Triangle Investors, Charles T. Collier, at an address in St. Leonard, Maryland. Collier received the FPAA on or about September 4, 1989. The FPAA received by Collier stated that the FPAA had been mailed to the tax matters partner (TMP) on May 24, 1989, and included detailed instructions for partners who wished to challenge respondent's proposed adjustments.Collier filed a petition for readjustment of partnership items as TMP of Triangle113 Investors on November 13, 1989. At the time the readjustment petition was filed, the principal place of business of the partnership was Glen Burnie, Maryland.Respondent filed a motion to dismiss for lack of jurisdiction on the ground that the petition for readjustment was not filed within either of the time periods prescribed by section 6226(a) or (b). Collier claims that he timely filed the readjustment petition based on the date of August 28, 1989, appearing at the top of the copy of the FPAA he received. In the alternative, Collier attacks the validity of the FPAA mailed to the TMP in May 1989.In particular, Collier contends that respondent was aware that he was the TMP for Triangle Investors, and thus the FPAA should have been issued in his name as opposed to the generic form actually used. Moreover, Collier claims that respondent was aware that: (1) Triangle Investors no longer used the Wheaton address; and (2) correspondence 612 pertaining to partnership tax matters should have been mailed to Triangle Investors Ltd., c/o Blinn Salisbury, 112 Second Ave., S.W., Glen Burnie, Maryland 21061 (the Glen Burnie address). With respect to this latter point, the parties114 have stipulated that Collier submitted an executed Form 2848, power of attorney, to respondent in November 1987, reflecting that copies of all notices and correspondence to Triangle Investors for the year in issue should be sent to Salisbury at the Glen Burnie address. The power of attorney was executed by Collier as general partner of Triangle Investors.The parties also stipulated that, prior to the issuance of the FPAA to the TMP, Salisbury verbally advised the revenue agent assigned to the case that the Wheaton address was no longer operative. The parties further stipulated that subsequent to the execution of the power of attorney, and until the issuance of the FPAA to the TMP, respondent corresponded with the partnership at the Glen Burnie address.Respondent alleges that the FPAA mailed to the TMP in May 1989 was issued in generic fashion because Triangle Investors never designated a TMP for the 1984 taxable year. In addition, respondent maintains that he mailed the FPAA to the TMP at the Wheaton address because that was the address appearing on the partnership's tax return for 1984. Collier does not contest this latter assertion, and accordingly we must assume that it is115 true. (The partnership's 1984 return was not made a part of the record in this case.)DiscussionThe notice which Collier received stated that the FPAA had been mailed to the TMP on May 24, 1989. Respondent admits that the FPAA was not actually mailed to the TMP until May 25, 1989. Accordingly, the 90-day period provided in section 6226(a) for a TMP to timely file a petition for readjustment of partnership items expired on August 23, 1989 (computed from the May 25 actual mailing date). In this regard, Collier's reliance on the date of August 28, 1989, in computing the time within which to file the readjustment petition as TMP was erroneous.613 Consistent with the foregoing, the 60-day period (following expiration of the 90-day period) provided in section 6226(b) for any notice partner or 5-percent notice group of partners to timely file a readjustment petition expired on October 23, 1989. Because Collier did not file his petition for readjustment of partnership items until November 13, 1989, a prerequisite to our jurisdiction over the partnership action is lacking. See Rule 240(c). Accordingly, this case must be dismissed. The question presented is whether the116 case should be dismissed as a consequence of petitioner's failure to file in a timely manner or for respondent's failure to issue a valid FPAA.The standard for determining the validity of an FPAA is whether the FPAA provides adequate or minimal notice to the taxpayer that respondent has finally determined adjustments to the partnership return. Chomp Associates v. Commissioner, 91 T.C. 1069">91 T.C. 1069, 1073-1074 (1988); Byrd Investments v. Commissioner, 89 T.C. 1">89 T.C. 1, 6-7 (1987), affd. without published opinion 853 F.2d 928">853 F.2d 928 (11th Cir. 1988); Clovis I v. Commissioner, 88 T.C. 980">88 T.C. 980, 982 (1987). As noted, Collier claims that the FPAA mailed to the TMP did not provide adequate or "minimal" notice because it was not addressed specifically to Collier as TMP, nor was it mailed to the proper address.For purposes of issuing the notices specified in section 6223(a), including an FPAA, respondent is required to use the names, addresses, and profits interests shown on the partnership return for the year at issue as modified by "additional information furnished to him by the tax matters partner or any other person in accordance with regulations117 prescribed by the Secretary." Sec. 6223(c)(1) and (2). Section 301.6231(a)(7)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6791 (March 5, 1987), provides the methods by which a partnership may designate a tax matters partner. The partnership may make a designation on the partnership return in the space for such designation, or if there is no such space on the return, then by attaching to the return a statement which: (1) Identifies the partnership and the tax matters partner by name, address, and taxpayer identification number, (2) declares that the statement is a tax matters partner designation for a particular taxable year, 614 and (3) is signed by the partner signing the return. A designation can also be made after the return is filed by the majority interest general partners' filing a statement with respondent designating a partner as tax matters partner. Sec. 301.6231(a)(7)-1T(e), Temporary Proced. & Admin. Regs., supra.Respondent asserts that the FPAA issued to the TMP in May 1989 was not addressed specifically to Collier as TMP of Triangle Investors because there was confusion as to whether he was in fact the TMP. There is no evidence in the118 record that Triangle Investors properly designated Collier as TMP for the partnership for the year at issue. See sec. 301.6231(a)(7)-1T, Temporary Proced. & Admin. Regs., supra. Moreover, although it appears that the revenue agent was aware that Collier was acting as the TMP, the failure to specifically identify Collier as the TMP on the FPAA is not fatal to the validity of the notice. We approved of the issuance of generic FPAA's in Chomp Associates v. Commissioner, supra at 1073, noting that:section 6223 does not require that a specific TMP be enumerated on the FPAA. Moreover, the legislative history and the temporary regulations promulgated under section 6223 do not provide any specific guidance concerning respondent's addressing the FPAA to a specifically enumerated TMP where one exists and is known to respondent. [Fn. refs. omitted.]Accord Seneca Ltd. v. Commissioner, 92 T.C. 363">92 T.C. 363 (1989), affd. without published opinion 899 F.2d 1225">899 F.2d 1225 (9th Cir. 1990). Thus, the generic form of the FPAA did not render the notice invalid.We next turn to Collier's claim that the FPAA was invalid because it was not mailed to the119 proper address. As noted, Collier does not dispute that the Wheaton address appears as Triangle Investors' address on the partnership's return for the year in issue. However, Collier argues that respondent was given adequate notice of the partnership's new Glen Burnie address by virtue of Salisbury's discussions with the revenue agent prior to the mailing of the FPAA, as well as through the power of attorney submitted in November 1987. Consistent with this notification, Collier emphasizes that respondent used the Glen Burnie address, at least 615 on one occasion, to correspond with the partnership prior to the issuance of the FPAA.For reasons hereafter stated, we are unable to conclude that respondent is to be charged with knowledge of Triangle Investors' change of address. As previously indicated, section 6223(c)(1) and (2) contemplate that respondent may rely on the information contained in the partnership return for the year in issue, except as modified by additional information received in accordance with regulations. Section 301.6223(c)-1T(b), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6784 (March 5, 1987), provides:(b) Procedure for furnishing120 additional information -- (1) In General. Any person may furnish additional information at any time by filing a written statement with the Service. However, the information contained in the statement will be considered for purposes of determining whether a partner is entitled to a notice described in section 6223(a) only if the Service receives the statement at least 30 days before the date on which the Service mails the notice to the tax matters partner. Similarly, information contained in the statement generally will not be taken into account for other purposes by the Service until 30 days after the statement is received.(2) Where statement must be filed. A statement furnished under this section shall generally be filed with the service center with which the partnership return is filed. However, if the person filing the statement knows that the notice described in section 6223(a)(1) (beginning of an administrative proceeding) has already been mailed to the tax matters partner, the statement shall be filed with the Internal Revenue Sevice office that mailed such notice.(3) Contents of statement. The statement shall --(i) Identify the partnership, each partner121 for whom information is supplied, and the person supplying the information by name, address, and taxpayer identification number;(ii) Explain that the statement is furnished to correct or supplement earlier information with respect to the partners in the partnership.(iii) Specify the taxable year to which the information relates;(iv) Set out the corrected or additional information; and(v) Be signed by the person supplying the information.Thus, any person wishing to update the information contained in the relevant partnership return, after a notice of the beginning of an administrative proceeding has been mailed (of which such person has knowledge), must file a detailed statement with the IRS office that mailed such notice. Such a statement must: (1) Identify the partnership and furnish detailed information about each partner for 616 whom information is being updated; (2) explain that the statement is furnishing additional information; (3) specify the year involved; (4) furnish the additional information; and (5) contain the signature of the individual furnishing the information. Under the regulation, the information becomes effective 30 days after the statement has122 been received by the appropriate office of the Internal Revenue Service. In connection with ascertaining the appropriate IRS office in this case, it is reasonable to assume that Collier was aware of the IRS office that issued the notice of the beginning of the administrative proceeding (see section 6223(a)(1)) since he negotiated with the examining revenue agent in response thereto.In light of the detailed instructions as to how updating partnership information is to be furnished, it cannot be said that Salisbury's verbal exchanges with the revenue agent were sufficient to notify the appropriate IRS office of the partnership's change of address.Furthermore, the power of attorney, which requests that copies of notices and correspondence be sent to the Glen Burnie address, likewise is inadequate as notice to the IRS. We have held that copies of correspondence sent pursuant to a request in a power of attorney are a matter of courtesy and in no way affect the mailing requirements of section 6212. Houghton v. Commissioner, 48 T.C. 656">48 T.C. 656, 661 (1967). By analogy, the power of attorney in this case did not alter the IRS's obligations relating to the mailing of the FPAA123 issued to the Triangle TMP.For the foregoing reasons, we hold that the FPAA mailed to the TMP at the Wheaton address was valid.Notwithstanding Collier's failure to furnish the appropriate IRS office with information regarding the partnership's current address, resulting in his failure to receive the FPAA in time to file a petition as alleged TMP, we note that he had another remedy available, of which he failed to avail himself. Collier acknowledges receiving a copy of the FPAA on or about September 4, 1989, 50 days prior to the expiration of the 60-day period for notice partners to file petitions for readjustment. Regardless of his status as TMP for Triangle Investors, Collier was also entitled to file a petition as a notice partner and had ample time to do so. 617 See Barbados #6 Ltd. v. Commissioner, 85 T.C. 900 (1985). Such action if taken would have protected not only his own interest but that of the partnership.To summarize, the record establishes that respondent mailed a copy of the FPAA to Collier on August 28, 1989. Collier received the notice in due course. A plain reading of the notice alerts the reader as to the time periods within which124 the TMP and notice partners are permitted to seek judicial review of partnership adjustments. In addition, the notice provided a phone number and a contact person for questions. The copy of the FPAA included the date on which the 150-day period for filing a petition began to run pursuant to section 6226, that is, the date the FPAA was mailed to the TMP of Triangle Investors. All the information that Collier needed to protect his interests was presented to him in the FPAA. See Seneca Ltd. v. Commissioner, supra at 367. Under these circumstances, we cannot say that either Collier or the partnership failed to receive the adequate or "minimal" notice contemplated under the statutory scheme for the adjudication of partnerhsip actions.For the foregoing reasons, respondent's motion to dismiss for lack of jurisdiction will be granted.An appropriate order will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621235/	JOHN AND KATHLEEN LARAWAY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLaraway v. CommissionerDocket No. 16177-91United States Tax CourtT.C. Memo 1992-705; 1992 Tax Ct. Memo LEXIS 745; 64 T.C.M. (CCH) 1503; December 14, 1992, Filed 745 Decision will be entered for petitioners. For John and Kathleen Laraway, pro se. For Respondent: Donna F. Herbert. NAMEROFFNAMEROFFMEMORANDUM OPINION NAMEROFF, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1 Respondent determined a deficiency in petitioners' 1988 Federal income tax in the amount of $ 1,577.24. The sole issue for our decision is whether petitioner John Laraway (hereinafter petitioner) worked as an employee or a self-employed contractor during the year at issue. Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time of the filing of the petition herein, petitioners resided in Altadena, California. Petitioners bear the burden of showing respondent's determinations746 are erroneous. Rule 142(a); Welch v. Halvering, 290 U.S. 111">290 U.S. 111 (1933). From the period 1984 through at least 1989, petitioner worked as an automobile mechanic at Vintage Racing Services (hereafter referred to as VRS). VRS, owned by Anton Krivanek, restores and repairs "exotic" automobiles. During the year at issue, petitioner primarily worked part-time. On the days he worked, his hours were generally from 10:00 a.m. to 5:00 p.m. Upon arriving at the shop, Mr. Krivanek would assign petitioner a particular car to repair or restore. Petitioner was to work under the instructions of either Mr. Krivanek or the shop foreman, Robert Dale. Although petitioner supplied some of his own tools, such as wrenches and screw drivers, the specialty tools and heavy equipment were supplied by VRS. At the end of each day, petitioner was responsible for completing daily logs which detailed the hours he worked and the work performed. VRS billed and collected fees from its customers and then paid petitioner an established hourly rate. Petitioner did not invest in VRS's facilities, advertise his services, or solicit customers. VRS treated all of the mechanics and the747 shop foreman as independent contractors. Subsequent to a meeting between Mr. Krivanek and his accountant early in 1989, VRS began to treat the mechanics and shop foreman as employees. For 1988, VRS paid petitioner a total of $ 12,113.78, from which no Federal taxes were withheld, and issued him a Form 1099, which reflected his earnings as non-employee compensation. For 1989, VRS issued petitioner a Form W-2 treating his compensation as wages from which Federal taxes were withheld. For 1989, other than the issuance of a Form W-2, nothing significant changed in the relationship between petitioner and VRS compared to 1988. Petitioners filed a timely Federal income tax return for 1988, which included the amounts received from VRS in gross income. However, petitioner neither filed a Schedule SE nor paid any self-employment tax for 1988. Respondent contends that petitioner was an independent contractor in 1988 while working for VRS, and therefore is subject to the self-employment tax. Section 1401 imposes a tax upon each individual's "self-employment income". Section 1402(b) defines "self-employment income" as "net earnings from self-employment", with exceptions not applicable 748 in the instant case. "Net earnings from self-employment" means the "gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business". Sec. 1402(a). However, the self-employment tax does not apply to employees. Secs. 1402(c)(2) and (3). Section 1402(d) defines "employee" by reference to section 3121, which section applies the usual common-law principles for determining the employee-employer relationship. See sec. 3121(d)(2). Whether an individual is an employee or an independent contractor is a question of fact. Matthews v. Commissioner, 92 T.C. 351">92 T.C. 351, 360 (1989), affd. 907 F.2d 1173">907 F.2d 1173 (D.C. Cir. 1990); Professional & Executive Leasing, Inc. v. Commissioner, 89 T.C. 225">89 T.C. 225, 232 (1987), affd. 862 F.2d 751">862 F.2d 751, 753 (9th Cir. 1988). Courts have looked to several factors in deciding whether an employment relationship exists. Among them are the following: (1) The alleged employer's right to control the manner in which the work is to be performed; (2) 749 whether the individual performing the work has an opportunity for profit or loss; (3) the individual's investment in the work facilities; (4) whether or not the service involved requires any special skills; (5) the permanency of the relationship between the parties; (6) whether the service rendered is an integral part of the alleged employer's business; (7) the relationship the parties think they are creating; and (8) whether the alleged employer has the right to discharge the individual. United States v. Silk, 331 U.S. 704">331 U.S. 704, 716 (1947); Simpson v. Commissioner, 64 T.C. 974">64 T.C. 974, 984-985 (1975). The relative importance of these factors must be viewed under the special facts and circumstances of each case. No one factor is controlling. Based on the application of the enumerated factors to this record, we believe that petitioner was an employee of VRS. Petitioner's activities were supervised and conducted under the direction of Mr. Krivanek or Mr. Dale. VRS scheduled the work, billed the customers, collected the fees, and provided most of the necessary tools and equipment. Moreover, petitioner had set hours and was paid an750 hourly rate. Finally, petitioner neither invested in the facilities of VRS nor had an opportunity for profit or loss. Accordingly, we find that petitioner was an employee of VRS during 1988 and is not liable for self-employment taxes. To reflect the foregoing, Decision will be entered for petitioners. Footnotes1. All section references are to the Internal Revenue Code in effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621239/	Lillian E. Yaeger v. Commissioner. Emma M. Heber and Estate of Henry D. Heber, Deceased, Emma M. Heber, Administratrix v. Commissioner.Yaeger v. CommissionerDocket Nos. 4496-62, 4543-62.United States Tax CourtT.C. Memo 1964-215; 1964 Tax Ct. Memo LEXIS 121; 23 T.C.M. (CCH) 1293; T.C.M. (RIA) 64215; August 17, 1964Richard B. Dodge, P.O. Box 1495, Santa Ana, Calif., and Jack J. Rimel, for the petitioner in Docket No. 4496-62. F. Edward Little, 458 S. Spring St., Los Angeles, Calif., for the petitioners in Docket No. 4543-62. Roger Rhodes, for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined deficiencies in the income tax of petitioner Lillian E. Yaeger, as follows: YearDeficiency1955$7,248.5419562,753.2119572,929.9919581,177.30122 Respondent determined deficiencies in the income tax of petitioners Emma M. Heber and Henry D. Heber, as follows: YearDeficiency1956$1,273.8919577,163.571958304.66There is, in essence, one issue presented for decision. That issue is whether petitioners Lillian E. Yaeger and Emma M. Heber, during their taxable years in issue, each owned a one-half interest in the net income produced by certain rental real estate, or whether petitioner Lillian E. Yaeger owned the entire net income produced by said real estate. Another aspect of this issue is whether the amounts received by petitioner Emma M. Heber from Lillian E. Yaeger during the years before us represent the proceeds from the sale of Emma Heber's partnership interest to Lillian Yaeger in 1944 or whether these amounts, in fact, constitute commuted payments of Emma Heber's share of the net income from the real estate. Findings of Fact Some of the facts have been stipulated, and the stipulations of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioner Lillian E. Yaeger (hereinafter referred to as Yaeger) was during the calendar years 1955 through123 1958 an unmarried individual residing in Fullerton, California. During those years, she filed her Federal income tax returns, prepared on the basis of a calendar year and the cash method of accounting, with the district director of internal revenue at Los Angeles, California. Petitioner Emma M. Heber (hereinafter referred to as Heber) and Henry D. Heber were, during the years 1956, 1957, and 1958, husband and wife. During those years they filed joint Federal income tax returns, prepared on the basis of a calendar year and the cash method of accounting, with the district director of internal revenue at Los Angeles, California. 1Heber and Yaeger had been friends and companions since 1928. During the year 1935, and for a number of years thereafter, they resided together in Fullerton, California. Heber, at all times relevant hereto, since 1927 has been a registered nurse. Yaeger has been a real124 estate broker for over 50 years. On or about September 2, 1939, Heber entered into a partnership agreement with Yaeger under the terms of which they acknowledged that they were the equal owners of certain properties described therein as Parcels 1 and 2; that they intended to acquire additional properties in which they were to have an equal interest; that they were to own and operate these and other properties as equal partners; that should either partner become dissatisfied, or desire to withdraw, such partner should not be permitted to do so before making a proposal either to sell or purchase the undivided one-half interest in the fee ownership of properties owned by the other party; and that in the event no sale occurred within a period of thirty days, the partnership was to be dissolved by operation of law. In the event of a dissolution of the partnership, the properties or the proceeds thereof were to be divided equally between Heber and Yaeger. Parcels 1 and 2, which were located in Fullerton, California, contained certain improvements consisting of buildings which produced rental income. Legal title to Parcels 1 and 2 was held by Security-First National Bank of Los Angeles125 as trustee for the partnership. After the execution of the said partnership agreement on or about September 2, 1939, the partnership acquired a liquor store and additional properties designated as Parcels 3, 4, 5, and 6, representing vacant lots, title to which was transferred to Yaeger's attorney. In January or February of 1944, the partnership also acquired some property designated as Parcel 7, which contained a number of citrus trees, but was not productive of income. All of the properties of the partnership were managed solely by Yaeger. Heber did not participate in the management thereof. On August 10, 1944, Heber and Yaeger executed an agreement (hereinafter referred to as the termination agreement) which recited that they had formed a partnership on September 2, 1939, relating to their property holdings. The termination agreement specifically described these various properties and then provided that: [The] parties hereto [Heber and Yaeger] desire to clarify and modify the terms of said documents [the deeds to the various properties and the partnership agreement], as well as covenant and agree by the terms hereof to partition and divide said properties, as hereinbefore126 set forth. The termination agreement then provided that: (1) * * the property now held in trust known as Parcels One and Two in this Agreement, shall be conveyed in fee to the party of the first part [Yaeger], but reserving a life estate in and to one-half of the rents, issues and profits to the party of the second part [Heber] for and during the period of her natural life; (2) That Parcels Three, Four, Five and Six, the fee title of which is now vested in the party of the second part [Heber], shall be conveyed in fee to the party of the first part [Yaeger], but reserving a life estate in and to one-half of the rents, issues and profits to the party of the second part [Heber] for and during the period of her natural life; (3) That Parcel Seven, the fee title of which is now vested in the party of the first part [Yaeger], there shall be conveyed to the party of the second part [Heber] a life estate, consisting of one-half of the rents, issues and profits, for and during the period of her natural life, and the fee title, subject to said life estate, shall remain in the party of the first part [Yaeger]; * * (5) That the parties hereto do mutually agree127 to dispose of all the property herein mentioned, real and personal, excepting Parcels One and Two, and to apply the net proceeds received or derived from the sale of said separate parcels toward the liquidation of the present indebtedness on parcels One and Two, to the end that said properties may be freed from indebtedness and improved, so as to obtain a maximum rental income for the benefit of the parties hereto; (6) That, beginning on the first day of September, 1944, each of the parties hereto shall be entitled to a drawing account in an equal amount of at least One hundred Dollars ($100.00) per month, which sum shall be withdrawn by check from the accounts of the properties, real and personal, hereinabove mentioned, and that all sums so withdrawn shall be accounted for and charged against the net income to which each of the parties may be entitled; * * (9) It is stipulated and agreed between the parties hereto that should the undivided one-half of the net income of the properties then owned be insufficient to care for the parties hereto respectively, by reason of illness, want or other necessity, and to obtain necessary medical or other assistance, for and during such128 period or periods of illness, want or other necessity, then the parties hereto agree to use so much of the principal or corpus of the properties hereinbefore mentioned as shall be necessary in order to enable the party thus in need to be maintained and cared for during such period or periods of illness, want or other necessity; (10) It being further stipulated and agreed between the parties hereto that no indebtedness shall be contracted on behalf of any of the properties herein mentioned without the concurrence of both parties hereto, except for the necessary operating expense of said properties, or any parcel thereof; provided, however, that each of the parties agree to sign any document or instrument necessary to renew present existing indebtedness when the same becomes due and payable or, when opportunity presents itself, to renew the indebtedness upon more favorable terms for the benefit of the parties hereto; (11) It being further stipulated and agreed by and between the parties hereto that there shall be kept at all times just and true books of account wherein shall be entered and set down all moneys received, paid, laid out and expended in and about the management and maintenance129 of the properties hereinbefore mentioned; (12) It is stipulated and agreed that hereafter, on the 31st day of December of each year a full, true and accurate account shall be made in writing of all assets and liabilities relating to any of the properties herein mentioned, and also of the receipts and disbursements, and the net profits thereof shall be ascertained. In preparing such an account there shall be charged the drawing accounts of each of the parties hereto, as well as all other expense of conducting the said properties, and also all losses and other charges incident and necessary in caring [carking] on and maintaining said properties; that said books shall be audited and closed and such statements rendered and delivered to the parties hereto, and there shall be an annual settlement accordingly, and both parties may withdraw the balance of her share of the net profits, if any; * Pursuant to the termination agreement, deeds were executed containing the following language. (1) With respect to Parcels 1 and 2: SECURITY - FIRST NATIONAL BANK * * does hereby grant to EMMA M. STEEVE [Heber] * * * a life estate consisting of one-half of the net rents, issues130 and profits for and during the period of her natural life only, and to LILLIAN E. YAEGER * * the remaining net income, together with title in fee, subject to such life estate, in and to that real property * * * (2) With respect to Parcels 3, 4, 5, and 6: EMMA M. STEEVE [Heber] * * * does hereby grant to LILLIAN E. YAEGER * * * all that real property situate in the County of Orange, State of California, described as follows [describing Parcels, 3, 4, 5, and 6]. EXCEPTING AND RESERVING * * * to the Grantor, for and during the period of her natural life only, an estate consisting of one-half of the rents, issues and profits received or derived therefrom. (3) With respect to Parcel 7: LILLIAN E. YAEGER * * * does hereby grant to EMMA M. STEEVE [Heber] * * * a life estate consisting of one-half of the rents, issues and profits received or derived from all that real property * * * Subsequent to August 10, 1944, Parcels 3 through 6 were sold to third parties and the proceeds applied to reduce the indebtedness on Parcels 1 and 2. Parcels 1, 2, and 7 were retained, and it is the income from these properties that gives rise to the tax controversy involved in these proceedings. 131 (Parcels 1, 2, and 7 will hereinafter be referred to collectively as the Fullerton properties.) The deeds were then recorded in accordance with the termination agreement. Thereafter, at all times relevant hereto, Yaeger continued to manage and control the Fullerton properties, taking charge of collecting the rents and paying the property taxes and other expenses of said properties. Yaeger's purpose in causing Heber to execute the termination agreement was to reshuffle their interests in the partnership properties in order to reflect the fact that Heber, because of illness, had become unable to assist Yaeger in any of the affairs of the partnership. When Heber and Yaeger executed the termination agreement, it was the belief and intention of each of them that the partnership theretofore existing between them was thenceforth terminated. Each of them was aware at that time that Heber was receiving thereby a life estate in an undivided one-half of the Fullerton properties and that Yaeger was also receiving, as a tenant in common a life interest in an undivided one-half of said properties, measured by Heber's life, plus the entire ownership of the properties upon Heber's death. The132 basic manner in which the former partnership properties were to be operated and maintained was significantly altered as a result of the execution of the termination agreement. Instead of continuing to acquire new properties, it was agreed that certain nonincome-producing properties were to be sold. Pursuant to the terms of the termination agreement, Yaeger used the proceeds from the sales to effect substantial renovations of the Fullerton properties and to reduce the outstanding indebtedness thereon. Yaeger also used a portion of the net rentals produced by said properties to effect these ends. After the execution of the termination agreement, Heber moved to Los Angeles. Yaeger remitted to Heber the $100 per month as provided for in paragraph 6 of the termination agreement until January 1, 1948. Thereafter, Yaeger ceased paying any monies to Heber with respect to her interest in the Fullerton properties, but began to pay herself $200 per month as a manager's salary, charging this amount against the rental income produced by the Fullerton properties. In January 1949 Heber sought legal counsel pertaining to her rights under the termination agreement. On August 4, 1949, Heber initiated133 proceedings against Yaeger in the Superior Court, Orange County, California. Heber's complaint set up separate causes of action for rescission of the termination agreement, reformation, declaratory relief, and quiet title. That court in an unreported opinion found, among other things, that Heber was, by virtue of the termination agreement, vested with a life estate in and to an undivided one-half interest in the Fullerton properties for and during her life; that Yaeger, by virtue of the termination agreement, acceded to ownership of the remainder interest in said properties; that Yaeger had not sold all of the property agreed to be sold for the purpose of paying off the encumbrances on the Fullerton properties; and that Yaeger had not paid Heber her full share of the income from the Fullerton properties. That court, moreover, in approving the report and account prepared by a referee, found in accordance therewith that Yaeger had collected, as rents and income from the Fullerton properties, during the period in question, namely, from August 10, 1944, through December 31, 1952, the total sum of $167,998.18; that she had expended $101,926.50 for maintenance of the property, leaving a134 net income of $66,071.68, of which Heber was entitled to one-half or $33,035.84; and that Yaeger had paid Heber only $5,942.39, leaving a balance of $27,093.45 owned to her. The court held that in the determination of Heber's share of the net income from the Fullerton properties, Yaeger was not entitled to deduct depreciation on the properties. A final judgment was entered in accordance with these findings, and Heber was awarded a total of $27,093.45, plus interest from August 10, 1944, through December 31, 1952. On October 26, 1956, this judgment was affirmed on appeal by the District Court of Appeals, Fourth District, California sub nom. Steeve v. Yaeger, 145 Cal. App. 2d 455">145 Cal. App. 2d 455, 302 P. 2d 704 (1956). Yaeger paid the amounts awarded to Heber pursuant to this judgment, as follows: YearPayments onPaidJudgmentInterest1955$ 9,086.39195718,007.06$5,509.30Total$27,093.45$5,509.30During the years 1953 through 1955, Fullerton properties had net income, adjusted in accordance with the decision in Steeve v. Yaeger, supra, in the total amount of $31,956.76. In accordance with the principles set forth in that decision, 135 Heber's share thereof was $15,978.38. Payments to Heber of her share of the net income from the Fullerton properties allowable to the years 1953, 1954, and 1955 were made as follows: Year PaidAmount1954$ 1,200.0019551,100.0019565,536.3019578,142.081958Total$15,978.38During the calendar years 1956 through 1958, the Fullerton properties had net income, adjusted in accordance with the decision in Steeve v. Yaeger, supra, as follows: YearNet Income1956$ 8,697.33195710,063.5519588,814.03The amounts allocated on the books of Fullerton properties as Heber's allocable share of the net income for those years were as follows: Share net in-come allocatedYearto Heber1956$ 4,348.6719575,031.7819584,407.02Total$13,787.47The amounts actually received by Heber during each of those years in respect of such allocable share of net income were as follows: Amount of share ofnet income actuallyYearreceived by Heber1956$ 1,200.0019574,348.6719585,031.78Total$10,580.45During the years 1956 through 1958, Heber received the following136 aggregate amounts in respect of her interest in the Fullerton properties: Total AmountYearReceived1956$ 6,736.30195736,805.1719585,031.78During the taxable year 1956, Heber reported the receipt of ordinary income in the amount of $4,547.27 from the Fullerton properties. Respondent, pursuant to statutory notice of deficiency, determined that Heber during 1956 had received ordinary income from the Fullerton properties in the aggregate amount of $9,884.96 and increased her taxable income that year by $5,337.69. In her income tax return for 1957, Heber reported the receipt from the Fullerton properties of $5,840.38 and claimed that of that amount of $3,929.08 represented gain arising from the sale of a capital asset held for more than six months. Prior to 1957, Heber had reported all money received by her with respect to her interest in the Fullerton properties as ordinary income. In 1957, after receiving payment of some $36,805 in respect of her interest in the Fullerton properties, Heber was advised by her accountant to treat all amounts received by her from said properties as proceeds from the sale or exchange of a capital asset held in excess137 of six months. The capital gain of $3,929.08 reported in Heber's 1957 income tax return attributed to the Fullerton properties, was determined by her accountant pursuant to a "RECOMPUTATION OF [HER] FEDERAL INCOME TAX FOR [THE] YEARS 1945 THROUGH 1956 INCLUSIVE." The accountant "recomputed" Heber's income tax for those years (1) by deducting from her gross income as reported for each such year the amount of income received by her from the Fullerton properties during such year and (2) by adding thereto an amount labeled "Capital Gain Resulting from Sale of Fullerton Properties." There is nothing in the record to indicate the ground upon which Heber's accountant proceeded to recompute her net or taxable income during such years. Respondent, pursuant to a statutory notice of deficiency, increased Heber's taxable income for the year 1957 as follows: Taxable income as disclosed by origi-nal return$ 7,921.53Additional income and un-allowable deductions: (a) Interest income$ 5,509.30(b) Judgment income14,166.90(c) Ordinary income -Fullerton properties5,031.7724,707.97Total$32,629.50Nontaxable income and ad-ditional deductions: (d) Capital gain$ 2,258.54(e) Exemption600.002,858.54Taxable income as corrected$29,770.96138 Respondent explained these adjustments by stating in part, that Heber had failed to report interest income in the amount of $5,509.30; that the net amount of $14,166.90 received by you from a judgment in 1957 constitutes taxable income for 1957 * * * [and] that you are not entitled to compute the tax on such income under the provisions of sections 1301- 1307 of the Internal Revenue Code of 1954and that she received as ordinary income $5,031.77 as opposed to the $3,929.08 reported by petitioner as long-term capital gain from the Fullerton properties. Heber's income tax return for 1958 showed that she received $5,031.78 from the Fullerton properties. Of that amount, $3,923.50 was reported as long-term capital gain. Respondent, pursuant to a statutory notice, determined that "such gain is taxable as ordinary income in the amount of $3,298.74" and increased Heber's taxable income by that amount. With respect to Yaeger, respondent in his statutory notice of deficiency increased her taxable income for the year 1955 by $7,207.88. He explained this action by stating: (a) It is determined that your income from the "Fullerton Properties" totaled $11,990.62139 instead of the $4,782.74 reported on your income tax return for 1955. * * Respondent also decreased Yaeger's taxable income by the $2,400 management fee which the court in Steeve v. Yaeger, supra, ruled should be returned to the net income of the Fullerton properties. Respondent, pursuant to his statutory notice of deficiency, increased Yaeger's taxable income for the years 1956 through 1958 by determining that the entire net income of the Fullerton properties during each of these years, rather than one-half of the net income as reported by Yaeger, should be included in her taxable income. Respondent further determined in the deficiency notice that Yaeger was not entitled to deductions in the respective amounts of $9,086.39 and $3,766.32 during 1955 and 1957 as a result of payments on the judgment awarded Heber in the decision Steeve v. Yaeger, supra. Opinion Respondent took inconsistent positions in the notices of deficiency issued to Yaeger and Heber, respectively. Essentially it was respondent's position, in the notice issued to Yaeger, that Yaeger was the owner of all the net rentals produced by the Fullerton properties but that during the140 years 1955 through 1958 she failed to include the entire amount of such rentals in her gross income, reporting only 50 percent thereof. With respect to Heber, it was respondent's position, in effect, that Heber was entitled to one-half of the net income produced by the Fullerton properties; that all amounts which she received during the years 1956 through 1958 from Yaeger or the Fullerton properties were with respect to her interest in the net income of said properties; and that all such amounts constituted ordinary income rather than gain from the sale of Heber's partnership interest to Yaeger in 1944. At the trial and on brief, respondent assumed a neutral position and presented no legal arguments. He merely contended that if the execution of the termination agreement on August 10, 1944, by Heber and Yaeger constituted a sale of Heber's partnership interest, then, as a result, the tax consequences to the respective partners would be (1) that Yaeger would be taxable on the entire net income produced by the Fullerton properties during the years 1955 through 1958 and (2) that the amounts received by Heber during 1956 through 1958 would constitute gain received upon the sale or exchange141 of a capital asset held in excess of six months. Respondent further took the position that if, by virtue of the termination agreement, the partnership was terminated by a dissolution and Heber was distributed a life estate in an undivided half of the Fullerton properties and Yaeger the remainder interest, then Yaeger and Heber would each be taxable on one-half of the net income of the properties. Both Heber and Yaeger, it appears, agree with respondent's legal conclusions concerning the two different tax consequences that would result if the execution of the termination agreement were found to have terminated the partnership by a dissolution, on the one hand, or by Heber's sale of her partnership interest, on the other hand. It is argued on behalf of Heber that the effect of the termination agreement was that Yaeger purchased Heber's interest in the partnership. It is contended on behalf of Yaeger that the termination agreement effected a dissolution of the partnership in 1944, with Heber receiving a life estate in an undivided one-half of the properties and Yaeger receiving the remainder interest as liquidating distributions in kind. In the alternative, Yaeger raises the contention142 that the partnership between herself and Heber did not cease upon the execution of the termination agreement but continues in full force and effect down to the present time. Yaeger's alternative contention is groundless. A review of all the circumstances before us leads us to conclude that after the execution of the termination agreement and the accompanying deeds on August 10, 1944, the partnership between Heber and Yaeger terminated. 2 We have set forth in our Findings of Fact the various factors upon which we base this conclusion. Several of the more significant factors upon which we rely are: (1) Heber and Yaeger intended, by their execution of the termination agreement, to terminate the partnership, see Commissioner v. Tower, 327 U.S. 280">327 U.S. 280 (1946); and L. C. Olinger, 10 T.C. 423">10 T.C. 423 (1948); (2) that after the execution of the termination agreement, Yaeger so thoroughly dominated the conduct of the Fullerton properties and operated them for her own purposes that Heber did not occupy the status, or enjoy the benefits, of a partner. At best, their joint ownership of the Fullerton properties could most adequately be described by that term coined by Roman jurists, 143 a Societas Leonina.3 See Edward C. James, 16 T.C. 930">16 T.C. 930, 940 (1951), affd. 197 F. 2d 813 (C.A. 5, 1952); and Joe Balestrieri & Co. v. Commissioner, 177 F. 2d 867 (C.A. 9, 1949), affirming a Memorandum Opinion of this Court. And (3) moreover, this was not a situation where the business of the partnership continued to be carried on while it was in the process of liquidation. Cf. Heiner v. Mellon, 304 U.S. 271">304 U.S. 271 (1938). The assets of the partnership were received in kind by the former partners upon the execution of the termination agreement. See Anne Jacobs, 7 T.C. 1481">7 T.C. 1481, 1483 (1946). (This is so whether Heber is treated as having sold her partnership interest 4 or whether Heber and Yaeger are treated as having received their interests in the former partnership properties as a liquidating distribution in kind from the partnership.) The interests which Heber and Yaeger received in the former partnership properties were substantially altered after the execution of the termination agreement, as were the relationship between Heber and Yaeger and the manner in which the properties were operated and maintained. The execution144 of the termination agreement did not affect a mere reorganization or modification of the partnership. ( Section 708 of the Internal Revenue Code of 1954, which embodies an entirely different approach from prior law concerning the continuation or termination of partnerships does not apply to the facts before us.) In our opinion, the145 parties have misdirected their analyses of the issue before us; for it makes no difference in the tax consequences pertaining to Heber and Yaeger during the years in issue, at least to the extent questioned by respondent, whether the partnership was dissolved by the execution of the termination agreement or whether Heber, by the execution of the termination agreement, effected a sale of her partnership interest to Yaeger. The reason for this result is that the tax consequences to both Heber and Yaeger, for their respective taxable years in issue, depend upon the character and amount of income received by each of them during said years from the Fullerton properties. The character and amount of income received by each of them are, in turn, determined by the nature of the interests in the former partnership properties that Heber and Yaeger were left with after their execution of the termination agreement and the accompanying deeds. Upon an examination of all the facts before us, 5 it is clear that after the execution of the termination agreement and the various deeds mentioned therein, Heber, in lieu of her partnership interest, was left with a life estate in an undivided one-half146 of the former partnership properties. In lieu of her partnership interest, Yaeger received (1), as a tenant in common with Heber, a present interest in the Fullerton properties, namely a life estate, measured by Heber's life, in an undivided one-half of said properties, plus (2) a future interest, namely, the entire fee interest therein upon Heber's death. 6 Cf. Rev. Rul. 56-221, C.B. 1956-1, 58. 147 Therefore, whether we conclude (1) that Heber sold her partnership interest to Yaeger in return for a life estate in an undivided one-half of the Fullerton properties or (2) that Heber received said life estate as a liquidating distribution, in kind, upon the dissolution and termination of the partnership, Heber, neverthless, must report, as ordinary income (reduced by any available deductions for amortization or depreciation), her 50 percent share of the net rentals produced by said properties and attributable to her life estate therein. See section 1.61-8, Income Tax Regs.7Since Heber, during the years in question, prepared her income tax returns on the cash method of accounting, she148 is taxable only upon her receipt of the amounts paid to her in respect of her life estate in the Fullerton properties. These amounts include the sum of $18,007.06, paid to Heber in 1957 by Yaeger in partial discharge of the judgment awarded Heber with respect to her share of the net rentals of the Fullerton properties between January 1, 1948, through December 31, 1952, as well as interest thereon in the amount of $5,509.30. See Western Products Co., 28 T.C. 1196">28 T.C. 1196, 1207-1208 and 1210-1211 (1957), relating to the inclusion in income, in the year of receipt, of certain amounts awarded to the petitioner therein, pursuant to a judgment rendered in an action for an accounting, in lieu of certain dividends and rents that had been improperly withheld from said petitioner. See also Parr v. Scofield, 185 F. 2d 535 (C.A. 5, 1950); and Farrell v. Commissioner, 134 F. 2d 193 (C.A. 5, 1943), affirming 45 B.T.A. 162">45 B.T.A. 162 (1941). 8 The amounts awarded to Heber pursuant to the judgment in Steeve v. Yaeger, supra, were in lieu of Heber's share of the net rentals from the Fullerton properties during the years 1948 through 1952, which monies149 the California court found actually belonged to Heber but had been improperly withheld by Yaeger.9150 Heber is also taxable upon her receipt of the payments to her in 1956 and 1957 of the amounts of $5,536.30 and $8,142.08, respectively. The payments, totaling $13,678.38, represent the major portion of Heber's share of the net income ($15,978.38) from the Fullerton properties for the years 1953 through 1955. An examination of the record as a whole indicates that, because of Yaeger's complete control over the affairs and operation of the Fullerton properties at all times relevant hereto, no part of these amounts can be considered to have been set aside for Heber during the years 1953 through 1955 subject to her dominion or unfettered control. It would appear that Yaeger was withholding these monies from Heber pending the decision on appeal in Steeve v. Yaeger, supra.Unlike the situation that generally prevails in the case of joint owners, it does not appear to us that one-half of the net rents earned by the Fullerton properties during the years 1953 through 1955 were constructively received by Heber during such years. Cf. C. W. Gallagher, 2 B.T.A. 1057">2 B.T.A. 1057 (1925). Therefore, it is our conclusion that the $5,536.30 and $8,142.08 received by Heber during 1956151 and 1957 are includable in her gross income during such years. 10On the basis of the foregoing, we further conclude that, during Yaeger's taxable years in issue, only one-half of the net rentals generated by the Fullerton properties are includable in her gross income. Since Yaeger has made no argument on brief concerning respondent's disallowance of the deductions she claimed during the years 1955 and 1957 for payments made by her to Heber in the respective amounts of $9,086.39 and $3,766.32, pursuant to the judgment*152 in Steeve v. Yaeger, supra, we conclude that she has abandoned this issue. Decisions will be entered under Rule 50. Footnotes1. Henry D. Heber died on or about July 29, 1962. Petitioner Emma M. Heber was duly appointed, and presently is, the administratrix of the estate of Henry D. Heber. The estate was joined as a petitioner solely because of the fact that joint returns were filed during the years in issue.↩2. None of the parties has questioned the fact that the agreement of September 2, 1939, between Yaeger and Heber created a partnership. Nor do we believe there would be any ground for so doing. When the 1939 agreement was executed, the parties thereto, from all that appears in this record, intended to form a partnership and did, in fact, function as such, despite the fact that most of the management functions devolved upon Yaeger. ↩3. This epithet is an allusion to the fable of the lion, who after entering into a partnership with the other wild beasts for hunting, appropriated the whole prey to himself. ↩4. If Heber is treated as having sold her partnership interest to Yaeger, it would have been impossible for Yaeger to have continued to operate the properties in partnership form. Cf. Reg. 111, sec. 29.3797-1, I.R.C. 1939↩.5. The parties have stipulated to the litigation reported in Steeve v. Yaeger, 145 Cal. App. 2d 455">145 Cal. App. 2d 455, 302 P. 2d 704↩ (1956), and we interpret that their purpose in so doing was to provide this Court with some further background in the subject controversy. 6. Heber does not contend, nor would the record support an argument to the effect, that the consideration received by Heber for selling her partnership interest was merely Yaeger's promise to pay a percentage of the net profits of the Fullerton properties. Cf. United States v. Yerger, 55 F. Supp. 521">55 F. Supp. 521 (D.C.E.D. Pa. 1944); and Burnet v. Logan, 283 U.S. 404">283 U.S. 404 (1931); see also May T. Hrobon, 41 T.C. 476">41 T.C. 476, 492-498 (1964). The District Court of Appeals, Fourth District of California, in Steeve v. Yaeger, supra↩, held that upon the execution of the termination agreement in 1944 Heber received a life estate in an undivided one-half of the Fullerton properties. Upon an independent examination of all of the facts before us, it is our conclusion that, for tax purposes, the interest Heber received upon the execution of the termination agreement was the same as that found by the California court. We have set forth in some detail in our Findings of Fact the particular factors which cause us to reach this conclusion. Some of those factors which we rely upon are that Heber had a right to one-half of the net rents from the Fullerton properties only during her lifetime; that her interest included a right to invade the corpus in the event of lack of sufficient income in time of Heber's illness; her right to veto the incurrence of further indebtedness on the Fullerton properties; and her right to a yearly accounting with respect to the receipts and expenses of the Fullerton properties.7. The only questions that would be resolved by a determination of whether a sale of a partnership interest or a liquidation and termination of the partnership occurred are (1) whether Heber should have recognized gain or loss upon her receipt in 1944 of the above-mentioned life estate and (2) the correct bases of Heber and Yaeger in the respective assets they were left with upon the execution of the termination agreement and the termination of the partnership.↩8. Pursuant to the provisions of sec. 1305, I.R.C. 1954, the tax attributable to Heber's receipt of damages as a result of the decision in Steeve v. Yaeger, supra, may not exceed the aggregate of the increases in her taxes for the years 1948 through 1952 had the allocable portions of such damages been included in her gross income for such years. It is to be noted that sec. 1305(b), I.R.C. 1954, as in effect during the years in issue, specifically provided that in the computation of the tax thereunder the taxpayer shall be entitled to deduct all credits and deductions for depletion, depreciation, and other such items to which he would have been entitled had such income been received by the taxpayer in the year he would have received it but for the breach of contract or fiduciary duty. The effect of this provision is specifically to exempt amounts subject to sec. 1305 from applicability of the rule that a deduction for depreciation or amortization is allowable only in the year the depreciation was sustained. (Cf. Motor Car Supply Co., 9 B.T.A. 556">9 B.T.A. 556 (1927); Fort Orange Paper Co., 1 B.T.A. 1230">1 B.T.A. 1230 (1925); and Parr v. Scofield, 185 F. 2d 535↩ (C.A. 5, 1950)).9. This is not a situation involving impounded earnings, the taxes upon which have been paid by a receiver or trustee pending determination of title thereto. Therefore, the line of decisions holding that such funds are not includable upon their recovery by a successful litigant is not relevant to the damages awarded to Heber. Cf. North American Oil v. Burnet, 286 U.S. 417">286 U.S. 417, 422-423 (1932); and Lee McRitchie, 27 T.C. 65">27 T.C. 65 (1956). If Yaeger, during the years 1948 through 1952, paid any taxes upon her receipt of Heber's share of the income from the Fullerton properties with respect to which the judgment in Steeve v. Yaeger, supra, was awarded to Heber, Yaeger paid such taxes under a claim of right, rather than as a trustee under an express trust for Heber. Cf. Vincent v. Commissioner, 219 F. 2d 228 (C.A. 9, 1955), reversing 18 T.C. 339">18 T.C. 339 (1952); and Western Products Co., 28 T.C. 1196">28 T.C. 1196, 1210-1211↩ (1957).10. The amelioratory provisions of sec. 1305, I.R.C. 1954, in effect during the years in issue, are not applicable to the aforementioned amounts of $5,536.30 and $8,142.08 because they were not received by Heber as a result of a civil action for breach of contract or breach of fiduciary duty of relationship, but were received in payment of Heber's share of the net income from the Fullerton properties for the years 1953 through 1955 as a result of her life estate in an undivided one-half of said properties. The parties in the Rule 50 computations can give effect to the proper amount of depreciation or amortization deductions allowable.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621240/	RUTH BENDETOVITCH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBendetovitch v. CommissionerDocket No. 1654-92United States Tax CourtT.C. Memo 1993-443; 1993 Tax Ct. Memo LEXIS 455; 66 T.C.M. (CCH) 825; September 23, 1993, Filed 455 Decision will be entered under Rule 155. Ruth Bendetovitch, pro se. For respondent: Melanie M. Garger. POWELLPOWELLMEMORANDUM OPINION POWELL, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined a deficiency in petitioner's Federal income tax and an addition to tax under section 6651(a)(1) in the respective amounts of $ 3,242 and $ 711 for the taxable year 1986. Petitioner filed a timely petition with the Court. At the time the petition was filed, petitioner resided in New York, New York. The primary issue is whether petitioner was engaged in a trade or business as a financial consultant during 1986. The facts may be summarized as follows. Petitioner has a MBA and Doctorate in Finance. From 1972 to 1977 she was a Lecturer at New York University. 456 From 1977 through 1979, she was employed by the Office of the Treasurer of the Hearst Corporation. In 1981, she joined GTE Investment Management Corporation (GTE) as a portfolio manager for GTE's pension fund. During 1982, GTE decided to move the pension funds out of the corporation, and it placed the funds with Aetna Life Insurance Company (Aetna). Petitioner moved from GTE to Aetna and continued to manage the fund. In 1984, she became dissatisfied with Aetna and left. In 1985, petitioner was employed by Pace University (Pace), Lubin Graduate School of Business, as a full-time Assistant Professor of Finance. Pace supplied her with an office and did not require that she keep an office in her home. Pace has three campus sites -- Downtown Manhattan, Midtown Manhattan, and Pleasantville, New York. Petitioner taught courses at the three sites, using her automobile to travel between her home and the first site and then to the other sites. She left Pace in 1987. After leaving Aetna, petitioner wanted to start her own investment management business. In 1984, she registered as a Investment Adviser with the Securities and Exchange Commission. She reregistered in 1989. She had457 business cards printed in the name of "Ruth Bendetovitch & Co. Investment Management Consultant." The address listed is petitioner's home. She subscribed to various investment services such as Value Line and Daily Graph, and newspapers such as Wall Street Journal and New York Times. Petitioner contacted various corporations to obtain funds of over $ 5 million for management. In spite of her attempts to get clients, petitioner had no client money under management during 1984, 1985, 1986, 1987, and 1988 and received no consultant fees during these years. Since 1984, petitioner, her son, and her mother have lived in an apartment that consisted of one bedroom, a small kitchen, bathroom, and living room. The apartment occupied 600 square feet. In the living room, petitioner had a "double-sided wall unit" installed to separate an area where she worked from the other living areas. Petitioner has a relatively small ($ 10-20,000) amount of personal assets that she invests. For 1986 she reported interest income of slightly over $ 1,000 and dividend income of $ 392. She also reported a long-term capital gain in the amount of $ 6,190. Petitioner invests in securities for the long term; 458 she does not actively trade securities. On her 1986 income tax return, petitioner deducted one-third of the expenses of the apartment either as investment expenses (Schedule A), employee expenses (Schedule A), or business expenses (Schedule C). For example, the total rent was $ 9,138 and she deducted one-third, allocating $ 2,358 to the alleged investment business, $ 100 to investment expenses, and $ 588 to employee business expenses. On the Schedule C for 1986, petitioner deducted the following expenses: Transportation$ 2,742 Depreciation3,467Dues and Publications838Laundry and Cleaning420Legal services822Office expense188Rent on business property2,358Supplies156Travel and entertainment1,401Utilities and telephone856Computer software180Books88Clerical help468$ 13,984The depreciation expense includes a car, computer, and file cabinets. The transportation expense includes 70 percent of the oil, gas, insurance, garage, etc. On Schedule A she deducted "Professor's Expense" of $ 2,257 and "Investment Expense" of $ 666. Although there is no breakdown of these expenses, presumably they include allocated expenses for the apartment, 459 depreciation, transportation, etc. 2 Petitioner also deducted medical payments on Schedule A in the amount of $ 10,501, which included $ 478 spent for dentures for her mother. Petitioner's 1986 Federal income tax return, after an automatic extension, was due to be filed on August 15, 1987. That return was not filed until May 4, 1989. Upon examination of the 1986 return, respondent allowed $ 463 as an employee business expense for transportation expenses incurred by petitioner in traveling between the different campus sites. Respondent also allowed automobile depreciation in the amount of $ 294 for the same reason. With regard to the travel expenses claimed, respondent allowed $ 316 as an employee business expense on Schedule A. All of the deductions claimed on Schedule C and the other investment and professor's expenses claimed on Schedule A were disallowed. Respondent also disallowed460 $ 478 of the medical expenses claimed on Schedule A. 1. Investment Business ExpensesSection 162(a) allows a deduction for all ordinary and necessary business expenses incurred in carrying on a trade or business. With respect to the deductions claimed by petitioner that were allocated to the investment management business on petitioner's Schedule C, respondent contends that petitioner was not engaged in a trade or business, and, therefore, the expenses claimed with respect to that activity are not deductible. The issue whether a taxpayer is engaged in a trade or business is primarily factual. Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, 475 (1943). The burden of establishing that a trade or business exists generally rests on the taxpayer. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933). While neither the Code nor the regulations defines a trade or business, in Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 35 (1987), the Supreme Court noted "that to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary461 purpose for engaging in the activity must be for income or profit." The concept of a trade or business does not encompass every activity, but rather is used in the "realistic and practical sense of a going trade or business." Koons v. Commissioner, 35 T.C. 1092">35 T.C. 1092, 1100 (1961). Petitioner maintains that she devoted approximately 15 hours a week to her teaching activities and another 30 hours to her investment management activities. While we have difficulty in accepting this considering her full-time teaching obligations and the travel between campus sites, the time spent on an activity, standing alone, is insufficient to show that a taxpayer is engaged in a trade or business. Bert v. Commissioner, T.C. Memo. 1989-503. When a taxpayer claims to be in a trade or business of selling services, at a minimum, he or she must establish that there are clients or at least a reasonable prospect of getting clients in the future.3 A client base or prospective client base is totally lacking here. While petitioner claims that she has a list of prospective clients, she did not call any witnesses, and, indeed, refused to disclose the462 list to respondent during discovery. We infer that the persons on that list, if they had been called as witnesses, would not have aided petitioner's cause. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1158 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947). The most that can be said about petitioner's investment management activities is that petitioner hoped some day to obtain clients and that some day she would be able to support herself from these activities. 463 4 That day had not arrived during the year before the Court, and the expenses incurred are not deductible under section 162(a). Compare Richmond Television Corp. v. United States, 345 F.2d 901 (4th Cir. 1965), vacated and remanded on other grounds 382 U.S. 68">382 U.S. 68 (1965); Bennett Paper Corp. v. Commissioner, 78 T.C. 458 (1982), affd. 699 F.2d 450">699 F.2d 450 (8th Cir. 1983). Petitioner has not established that she was in the trade or business of providing investment management services. 5464 2. Investment and Employee ExpensesWhile we reject petitioner's argument that her investment management activity constituted a trade or business, petitioner had other activities that merit some discussion. First, with regard to her business of teaching, petitioner claimed expenses of her apartment. Clearly, however, Pace was petitioner's principal place of business with regard to her teaching activity and these deductions are barred by section 280A. Commissioner v. Soliman, 506 U.S. , 113 S. Ct. 701 (1993). The apartment expenses are not allowed under section 280A with regard to her investment activities. Moller v. United States, 721 F.2d 810 (Fed. Cir. 1983). With respect to the automobile expenses, including the cost of the garage and depreciation, these expenses, to the extent that they were not allowed by respondent, were personal expenses and not deductible. Sec. 262. Petitioner, however, claimed one group of expenses that cause some concern. She claimed aliquot parts of subscriptions that would appear to relate to her activities as a professor and as an investor. See secs. 162(a), 212. While465 the record is unclear with regard to some of these expenses, others appear to be clearly deductible. Using our judgment, we hold that petitioner is entitled to deduct $ 500 for subscriptions on Schedule A. See Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 544 (2d Cir. 1930). 63. Medical ExpenseRespondent disallowed $ 478 of the medical expenses claimed. Petitioner claims that she paid cash for a set of dentures for her mother who was her dependent. We accept petitioner's testimony on this point, and find that petitioner is entitled to an additional medical deduction in the amount of $ 478. 4. Addition to TaxSection 6651(a)(1) provides for an addition to tax if a return required466 to be filed is not timely filed unless it is established that the failure is due to reasonable cause and not due to willful neglect. There is no question here that petitioner's 1986 return was not timely filed. Petitioner contends that she was without employment, her mother was ill, and "Things were not easy" during this period. As soon as she "learned that * * * [she] might have a job * * * [she] prepared the return and filed it." Willful neglect means "a conscious, intentional failure or reckless indifference." United States v. Boyle, 469 U.S. 241">469 U.S. 241, 245 (1985). Reasonable cause means the taxpayer has exercised "'ordinary business care and prudence' but nevertheless * * * [he or she] was 'unable to file the return within the prescribed time.'" United States v. Boyle, supra at 246 (quoting 26 C.F.R. 301.6651-1(c)(1) (1984)). Petitioner has not shown reasonable cause. Rather, it appears that her failure to timely file the return was due to willful neglect. We sustain respondent's determination on this issue. Decision will be entered under Rule 155. Footnotes1. 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.↩2. Although not before the Court, petitioner deducted similar expenses on her 1984, 1985, and 1987 Federal income tax returns.↩3. In Commissioner v. Groetzinger, 480 U.S. 23↩ (1987), the Supreme Court rejected the test that to be in a trade or business involves holding one's self out to others as engaged in selling goods or services. Nonetheless, when the alleged business that a taxpayer is engaged in involves selling services, there must be the reasonable prospect that someone will purchase the services offered and that the services offered are marketable. This is the crucial point here.4. Petitioner also must have realized that she was swimming up a waterfall. She was aware that few, if any, corporations used money managers who are in business by themselves. Furthermore, it does not appear that petitioner sought or was interested in money management for individuals.↩5. It also should be noted that, as far as we can tell, petitioner maintained no books and records of her alleged investment management business apart from her own records of personal expenditures. She further admits that her allocation of the expenses was "arbitrary."↩6. It may be that petitioner used her computer in her investment and professorial activities. There are, however, restrictions on the deductibility of depreciation for computers contained in sec. 280F(b), and petitioner has not shown that the restrictions do not apply. See, e.g., sec. 280F(d)(3).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621241/	LOUISE D. MORRELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Morrell v. CommissionerDocket No. 83941.United States Board of Tax Appeals38 B.T.A. 239; 1938 BTA LEXIS 894; August 3, 1938, Promulgated 894 St. John's Orphan Asylum, a charitable corporation, owns and operates a home for orphan or dependent boys between the ages of 7 and 12. It also owns the St. Francis Industrial School, which is separately endowed and to which it transfers each year approximately 60 boys who have reached the age of 12. For a number of years prior to the taxable year the income from the endowment fund had been insufficient to meet the expenses of the school and it had been the custom of petitioner to pay the deficit. In the taxable year and prior to the selection of the boys to be transferred from the orphan asylum to the school, petitioner entered into a written agreement with the corporation to the effect that she would pay to the school the amount of its expenses in maintaining the boys to be transferred that year. For that year, and in accordance with her custom in previous years, she paid the amount of the school's deficit, including the sum computed under the written agreement. Held, that petitioner's payments pursuant to the agreement were essentially contributions to a charitable institution and did not entitle her to credit for dependents. Emanuel Friedman, Esq., and 895 Wm. Cutler Thompson, Esq., for the petitioner. E. M. Woolf, Esq., for the respondent. TURNER 239 This proceeding was brought to redetermine a deficiency in income tax for the year 1933 in the amount of $1,002.67. The only issue is whether the petitioner is entitled to reduce net income by way of a credit for dependents. Among the claimed dependents were 64 boys transferred in the taxable year from St. John's Orphan Asylum and the Catholic Children's Bureau to the St. Francis Industrial School. In the petition, however, issue is raised in respect of the credit claimed for only 61 boys. FINDINGS OF FACT. Petitioner is an individual residing at Torresdale, Philadelphia, Pennsylvania. She filed her Federal income tax return for the year 1933 with the collector of internal revenue at Philadelphia. St. John's Orphan Asylum in Philadelphia is an incorporated charitable institution, operated under the direction and supervision of the Archbishop of the Archdiocese of Philadelphia. In 1933 and 10 or 12 years prior thereto, its average enrollment was between five and six hundred boys from St. Vincent's Hospital. They remain at St. John's Orphan896 Asylum until they have completed the course of study or have reached the approximate age of 12 years, when provision is made for their further care and training elsewhere. 240 The St. Francis Industrial School at Eddington, Pennsylvania, is owned by St. John's Orphan Asylum, but is separately operated and maintained. A part of its operating expenses is provided by an endowment fund originally established by petitioner's sister in 1888, when the school was founded. From time to time thereafter and prior to the hearing in this proceeding various individuals, including petitioner's counsel, made contributions to the endowment fund. The enrollment in the school ranges between 245 and 255 and is never less than 245. The school provides a four-year course of study and training along industrial and commercial lines. It also provides a home, food, clothing, and medical and dental care for the boys enrolled. The requirements for entrance are that the boy be able to pass at least the fifth grade and that he be an orphan or that the parents be separated. In June of each year the Catholic Children's Bureau in Philadelphia is advised as to the number of graduates from the school, 897 and the number of places so vacated by graduation usually is filled by transfers from St. John's Orphan Asylum. In June 1933, 64 boys were received at the school; 59 were transferred from St. John's Orphan Asylum and 5 came directly from the Catholic Children's Bureau. Many of the children received by St. Vincent's Hospital, St. John's Orphan Asylum, and the St. Francis Industrial School were originally committed to the Catholic Children's Bureau by the Municipal Court for the City of Philadelphia. In that city there are several placing agencies for children, among which are the Children's Aid Society, the Catholic Children's Board, and the Jewish Welfare Organization. The usual procedure in the municipal court is that the children are committed upon the recommendation of the various agencies. In the case of Catholic children, the Catholic Children's Bureau is ordinarily requested to make provision for the care of the child. Where the court considers it necessary, an order is entered allowing the institution selected a certain sum each week for the child's maintenance. A majority of the boys transferred to the St. Francis Industrial School in 1933 were originally committed898 to St. John's Orphan Asylum or the Catholic Children's Bureau under court orders providing specified sums for their maintenance. Upon their transfer to the St. Francis Industrial School, however, those orders were vacated and it was necessary that some other means of maintenance be provided. In each instance the nearest relative of the boy had signed an agreement which permitted the boy's transfer to the school. Throughout the period during which the boys remained in one of the various institutions the officials were trying to place them in private homes or with relatives. Most of the boys transferred to the school during 1933 were orphans, or had lost one parent. In 241 some instances the father had deserted or was separated from his wife. In so far as the record shows, each boy so transferred was destitute and had no known means of support. For a number of years the income from the endowment fund of the St. Francis Industrial School had been insufficient to pay the expenses of the school and in each year it had been petitioner's custom to contribute the difference. The director of the school would submit an itemized monthly statement to petitioner and she would899 make monthly payments to take care of the deficit. After a conference with the Archbishop in May of 1933, the following instrument was drawn by petitioner's attorney and on May 10, 1933, executed by the petitioner and for St. John's Orphan Asylum by the Archbishop, D. J. Dougherty, its president: This Agreement made the 10th day of May, 1933, between St. John's Orphan Asylum, a Corporation organized under the laws of the Commonwealth of Pennsylvania, hereinafter called "First Party," and Louise Drexel Morrell, of the City of Philadelphia, Commonwealth of Pennsylvania, hereinafter called "Second Party." WHEREAS, there are boys at St. John's Orphan Asylum who have reached the usual age for transfer or discharge, and for whom it is now necessary to make provision, as they are entirely without means of support, and WHEREAS, these boys are acceptable for admission to St. Francis Industrial School, at Eddington, Pa., which is a part of this Corporation, but the income from the endowment of said School is insufficient to maintain any additional students, and WHEREAS, the Second Party has agreed to assume the expense of maintaining said boys at St. Francis Industrial School, if900 they be admitted, Now THIS AGREEMENT WITNESSETH, that, for and in consideration of the mutual promises and covenants herein contained, the parties agree, to and with each other, as follows: 1. First Party shall admit to St. Francis Industrial School the boys whose names and ages are set forth in Schedule "A", which is attached hereto, for whom it shall provide thereat all necessary maintenance, including food, shelter, clothing, tuition, medical and dental services, for the period of one year from the date hereof. 2. Second Party shall pay to First Party the entire expense of maintaining the boys as aforesaid, in such installments as may be convenient for Second Party, but the whole amount thereof is to be paid to First Party within the period of one year from the date hereof. IN WITNESS WHEREOF, the First Party has hereunto caused its Corporate Seal to be affixed and these presents to be signed by its President and attested by its Secretary, and Second Party has hereunto set her hand and seal the day and year aforesaid. [Signed] ST. JOHN'S ORPHAN ASYLUM By: D. J. DOUGHERTY, President.Attest: GEORGE V. MITCHELL, Secretary.LOUISE DREXEL MORRELL. 901 242 When the above agreement was executed schedule A, showing the names of the boys to be transferred, was not made out or attached because at that time it was not known which boys would be selected for transfer by the "Superior" at St. John's Orphan Asylum. It was understood, however, that approximately 60 boys in the upper class would be selected and a list of the names attached to the agreement at some later date. Subsequently a list containing the names of 59 boys transferred from St. John's Orphan Asylum and 5 boys transferred directly from the Catholic Children's Bureau was attached to the agreement. The 64 boys so listed constituted the total year 1933. year 19339 The endowment fund for the St. Francis Industrial School is handled by Drexel & Co. of Philadelphia and the income is turned over to the director of the school in monthly payments and is used by him to pay current operating expenses. In 1933 the total income from the endowment fund was $52,000, and, as in several of the years preceding, was insufficient to meet the expenses of the school. By reason of that fact the petitioner, as in previous years, received monthly bills showing the additional amount902 required to meet current monthly expenses. No separate accounts were kept by the school to show or cover the expenses of providing for the 64 boys named in schedule A to the above agreement. The sums received from Drexel & Co. and petitioner were used by the school to pay current running expenses and the monthly bills submitted to the petitioner did not show that the money had been spent for the support and maintenance of any particular boy or group of boys. On December 1, 1933, the director of the school sent the following statement to petitioner: December 1, 1933 Mrs. Edward Morrell, San Jose, Torresdale, Phila., Pa.To St. Francis Industrial School, Dr. Eddington, Penna. In accordance with the written Agreement between the Institution and Mrs. Morrell: Board and Tuition of sixty-one boys for the months of July, August, September, October, November and December at $33.33 1/3 per month$12,200.00Board and Tuition of John Scattone for the months of July and August at $33.33 1/3 per month66.67Board and Tuition of John Haederer for the month of July at $33.33 1/3 per month33.33Board and Tuition of Frederick Galgani for the months of June, July, August, September, October, November & December233.33Total$12,533.33903 243 The director's estimate of the average cost of providing for one boy for a period of one month was $33.33 1/3 and that estimate was approved by petitioner. She paid the total amount shown sometime during December 1933. The record does not show whether she received a further bill on December 1, 1933, to cover the deficit, if any, in current operating costs. The total operating expenses of the school for the year 1933 were approximately $88,000 and the petitioner paid to the school the difference between the income from the endowment fund and the total operating expenses. The amount so paid included the amount of $12,533.33 covered by the statement of December 1, 1933, above set forth. Several years prior to 1933 the total operating expenses of the school, the amount received from its endowment fund, and the amount contributed by the petitioner were approximately the same as for the year 1933. In her income tax return for 1933 petitioner claimed a credit against net income for 64 dependents in the St. Francis Industrial School in the total amount of $12,533.33 and the credit so claimed was disallowed by the respondent in his determination of the deficiency herein. 904 The petitioner has been allowed the full deduction in respect of contributions to charitable organizations provided by the statute. OPINION. TURNER: The sole question presented for our determination is whether the payment of $12,533.33 made by the petitioner to the St. Francis Industrial School should be allowed as a credit for dependents under section 25(d) of the Revenue Act of 1932. 1 The record shows that the petitioner regularly and for a number of years prior to the taxable year had been contributing monthly amounts sufficient to cover the difference between the income from the school's endowment fund and its operating costs. The school used those funds, together with the income from the endowment fund, for the purpose of carrying on its activities, which included housing, feeding, educating, and otherwise maintaining approximately 250 boys who were selected and transferred to it by the Catholic Children's Bureau or St. John's Orphan Asylum. It is conceded by the respondent that the payments so made by the petitioner 244 were deductible as contributions to a charitable organization under section 23(n) 2 of the act, subject only to the limitations provided therein. 905 The petitioner now claims that, by reason of the execution of the instrument of May 10, 1933, and the inclusion therein of the names of the boys who entered the school during that year, the amount so paid to the St. Francis Industrial School during 1933 constituted, to the extent of $12,533.33, payments made for the chief or sole support of 64 boys within the meaning of section 25(d). 906 We have examined the facts carefully and are unable to subscribe to the application of the statute contended for. In the first place, the mere fact that an agreement to make a contribution is reduced to writing does not convert it into something different, and in the second place, the facts definitely show that the petitioner continued to do what she had done before, that is, to contribute to the St. Francis Industrial School an amount sufficient to make up the excess of its operating expenses over the income from its endowment fund, and from the funds derived from its endowment and the contributions so made by the petitioner the St. Francis Industrial School supported and maintained the boys in question. The listing of inmates or anticipated inmates of a charitable institution in an agreement to contribute to such an institution does not convert the individuals named into dependents within the meaning of section 25(d), supra, and in determining taxable income the allowance for such contributions is to be made under section 23(n), supra, and not as credits for dependents. Decision will be entered for the respondent.Footnotes1. SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME. There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net income: * * (d) CREDIT FOR DEPENDENTS. - $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective. ↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (n) CHARITABLE AND OTHER CONTRIBUTIONS. - In the case of an individual, contributions or gifts made within the taxable year to or for the use of: * * * (2) a corporation, or trust, or 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; * * * to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection. * * * ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621243/	David A. Foxman and Dorothy A. Foxman, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentFoxman v. CommissionerDocket Nos. 93416, 93460, 93472United States Tax Court41 T.C. 535; 1964 U.S. Tax Ct. LEXIS 163; January 16, 1964, Filed 163 Decisions will be entered under Rule 50. 1. Held, petitioner J on May 21, 1957, "sold" his one-third interest in a partnership to his two partners, petitioners F and G, under section 741, I.R.C. 1954. The transaction did not constitute a "liquidation" of J's interest under sections 736 and 761(d).2. Held, amount of J's share of distributive partnership income for the short fiscal period March 1-May 21, 1957, determined to be $ 16,790 in accordance with final agreement among partners which modified to that extent the prior partnership agreement. Sec. 761(c).3. Held, partnership did not "terminate" on June 2, 1958, as a result of certain transactions consummated on that day, section 708; F and G were therefore not required to report in their 1958 returns their distributive shares of partnership income for the short fiscal period March 1, 1958-June 2, 1958. Bernard J. Long, for the petitioners in docket Nos. 93416 and 93472.Sidney L. Cramoy, for the petitioners in docket No. 93460.Alvin C. Martin, for the respondent. Raum, Judge. RAUM535 The Commissioner167 determined deficiencies in income tax for 1958 in the amounts of $ 57,754.29, $ 57,735.46, and $ 129,092.04 against David A. and Dorothy A. Foxman, Horace W. and Judith Grenell, and Norman B. and Laura Jacobowitz, respectively. By amended pleadings the Commissioner revised the first two of these determinations, claiming total deficiencies in the amounts of $ 144,754.44 against the Foxmans and $ 144,441.45 against the Grenells.The principal issue common to all three cases is whether an agreement dated May 21, 1957, between petitioner Jacobowitz and petitioners 536 Foxman and Grenell resulted in a "sale" of Jacobowitz's interest in a partnership to the two remaining partners under section 741, I.R.C. 1954, or whether the transaction must be considered a "liquidation" of Jacobowitz's partnership interest under sections 736 and 761(d). A second issue is whether $ 16,790 received by Jacobowitz represents his share of the partnership earnings for the period March 1-May 21, 1957, in accordance with the partnership agreement, as modified by the foregoing agreement of May 21, 1957, pursuant to section 761(c). The third issue, involving only Foxman and Grenell, is whether the partnership168 "terminated" on June 2, 1958, under section 708, by reason of a certain transaction, so as to render them accountable in their 1958 returns for their respective shares of distributive partnership income during the period March 1-June 2, 1958. If the partnership did "terminate" on June 2, 1958, then a number of other questions are presented involving the determination of the partnership's income for the period March 1-June 2, 1958; these include nonrecognition of gain under section 351 realized upon the transfer of partnership assets to a corporation, the determination of the amount of that gain if it is to be recognized, and the proper allowance for depreciation of the partnership's assets prior to such transfer.FINDINGS OF FACTSome of the facts and exhibits have been stipulated and are incorporated herein by this reference.The petitioners in each case, David A. and Dorothy A. Foxman, Horace W. and Judith Grenell, and Norman B. and Laura Jacobowitz, are husband and wife, all residing in New Jersey. They timely filed their respective 1958 joint income tax returns with the district director of internal revenue, Newark, N.J. The wives are parties herein merely by reason of the 169 joint returns.Prior to 1954, Abbey Record Manufacturing Co. was a partnership composed of petitioner Jacobowitz and two associates named Zayde and Brody, engaged in the business of custom manufacturing of phonograph records. The enterprise had been founded about 1948, with Jacobowitz as the active principal. Prior to 1954 the partnership, hereinafter referred to as Abbey, manufactured primarily 10-inch 78 r.p.m. records on contract for various companies. Petitioner Grenell purchased the interests of Zayde and Brody on December 31, 1953, and became an equal partner with Jacobowitz on January 2, 1954. Early in 1954 the partners agreed to enter the business of manufacturing 12-inch long playing records, known as LPs. Petitioner Foxman, who had been a consultant to the business when it was originally formed in 1948, was hired as a salaried employee in June 1954 to provide the necessary technical assistance for the changeover in machinery and production methods. Thereafter, as a result of certain 537 agreements dated February 1, 1955, and January 26, 1956, Foxman, Grenell, and Jacobowitz became equal partners in Abbey, each with a one-third interest.Abbey kept its accounts170 and filed its Federal income tax returns on an accrual basis of accounting and on the basis of a fiscal year ending February 28.A related venture commenced by Jacobowitz, Foxman, and Grenell, individually, was represented by Sound Plastics, Inc., a corporation in which each owned one-third of the stock; it was engaged in the business of manufacturing "biscuits" or vinyl forms used in the making of records.During the early period of the changeover to LPs, Abbey faced many problems in production and quality control. However, with Foxman and Jacobowitz in charge of production and with Grenell responsible for much of the selling, Abbey's fortunes were on the upswing. Its net income for the fiscal year ending February 29, 1956, was approximately $ 108,000, and for the fiscal year ending February 28, 1957, was approximately $ 218,000. Grenell, who acted as consultant and repertory director for two mail-order record companies, Music Treasures of the World and Children's Record Guild, was able to get these companies as customers of Abbey and they accounted for approximately 50-75 percent of Abbey's business.The Agreement of May 21, 1957Notwithstanding Abbey's success there was 171 considerable disharmony among and between the partners. As a result there were discussions during the spring of 1956 relating to the withdrawal of Jacobowitz from Abbey. These negotiations did not lead to any agreement and the partners continued to work and to quarrel. Early in 1957, Foxman and Grenell decided to resolve the conflict by continuing the partnership without Jacobowitz and discussions were resumed again in March 1957. It was at about this time that Foxman offered Jacobowitz $ 225,000 in cash, an automobile which was in Abbey's name, and Foxman's and Grenell's interest in Sound Plastics, Inc., for Jacobowitz's interest in Abbey. Jacobowitz prepared a draft of an option agreement providing for Foxman's purchase of his one-third interest in the partnership and sent it to Foxman. Foxman never signed the option agreement. During the latter part of March or early April 1957, the negotiations of the three partners led to a tentative agreement whereby Jacobowitz's partnership interest would be purchased for $ 225,000 plus the aforementioned auto and stock in Sound Plastics, Inc. Jacobowitz, who did not trust either Foxman or Grenell, initially desired cash. Foxman and172 Grenell explored the possibilities of a $ 200,000 bank loan from the First National Bank of Jersey City, hereinafter referred to as First National, and informed 538 First National of their tentative agreement to buy Jacobowitz's interest for $ 225,000; they had further discussions with First National concerning a possible loan on May 1, 1957, and on May 3, 1957. First National indicated, on the basis of an examination of the financial assets of Abbey, that it would consider a loan of approximately only $ 50,000.The negotiations of the three partners culminated in an agreement dated May 21, 1957, for the "sale" of Jacobowitz's partnership interest; the terms of this agreement were essentially the same terms as the terms of the option agreement which Foxman did not execute.Relevant portions of the May 21, 1957, agreement are as follows:Agreement, made this 21st day of May 1957, between Norman B. Jacobowitz, hereinafter referred to as the "First Party", and Horace W. Grenell, and David A. Foxman, individually, jointly and severally, hereinafter referred to as the "Second Parties" and Abbey Record Mfg. Co., hereinafter referred to as the "Third Party", Witnesseth:Whereas, the173 parties hereto are equal owners and the sole partners of Abbey Record Mfg. Co., a partnership, hereinafter referred to as "Abbey", and are also the sole stockholders, officers and directors of Sound Plastics Inc., a corporation organized under the laws of the State of New York; andWhereas, the first party is desirous of selling, conveying, transferring and assigning all of his right, title and interest in and to his one-third share and interest in the said Abbey to the second parties; andWhereas, the second parties are desirous of conveying, transferring and assigning all of their right, title and interest in and to their combined two-thirds shares and interest in Sound Plastics, Inc. to the first party;Now, Therefore, it is Mutually Agreed as Follows:First: The second parties hereby purchase all the right, title, share and interest of the first party in Abbey and the first party does hereby sell, transfer, convey and assign all of his right, title, interest and share in Abbey and in the moneys in banks, trade names, accounts due, or to become due, and in all other assets of any kind whatsoever, belonging to said Abbey, for and in consideration of the following:A) The payment174 of the sum of two hundred forty two thousand five hundred & fifty ($ 242,550.00) dollars, payable as follows:$ 67,500.00, on the signing of this agreement, the receipt of which is hereby acknowledged;$ 67,500.00 on January 2nd, 1958;$ 90,000.00 in eighteen (18) equal monthly installments of $ 5,000.00 each, commencing on February 1st, 1958 and continuing on the first day of each and every consecutive month thereafter for seventeen (17) months;$ 17,550.00, for services as a consultant, payable in seventy-eight (78) equal weekly installments of $ 225.00 each, commencing on February 1st, 1958 and continuing weekly on the same day of each and every consecutive week thereafter for seventy-seven (77) weeks.The balance set forth hereinabove is represented by a series of non-interest bearing promissory notes, bearing even date herewith, and contain an acceleration clause and a grace period of ten (10) days.Said balance is further secured by a chattel mortgage, bearing even date herewith and contains a provision that same shall be cancelled and discharged upon the payment of the sum of $ 67,500.00 on or before January 2nd, 1958.539 The right is hereby granted to the second parties175 to prepay all or part of the balance due to the first party. If prepayment is made of both of the sums of $ 67,500.00 and $ 90,000.00 set forth above, prior to February 1st, 1958, there shall be no further liability for the balance of $ 17,550.00 or any of the payments of $ 225.00 weekly required thereunder. If such prepayment is made after February 1st, 1958, the first party shall be entitled to retain payments made to date of payment of the full sums of $ 67,500.00 and $ 90,000.00 (plus any weekly payments as aforesaid to date of payment) and there shall be no further liability for any remaining weekly payments.B) In addition to the payments required under paragraph "A" hereof, the second parties hereby transfer, convey and assign all of their right, title and interest in Sound Plastics, Inc. to the first party. Simultaneously herewith, the second parties have delivered duly executed transfers of certificates of stock, together with their resignations as officers and directors of said Sound Plastics, Inc. Receipt thereof by the first party is hereby acknowledged.C) In addition to the payments required under paragraph "A" hereof and the transfer of stock referred to in paragraph176 "B" hereof, the second parties hereby transfer, convey and assign all of their right, title and interest in and to one, 1956 Chrysler New Yorker Sedan, as evidenced by the transfer of registration thereof, duly executed herewith, the receipt of which by the first party is hereby acknowledged.Second: So long as a balance remains due to the first party, the second parties agree to continue the partnership of Abbey and each of the second parties agree to devote the same time, energy, effort, ability, endeavors and attention to furthering the business of said Abbey and to promote its success as heretofore and will not engage in any other business or effort, except that Horace W. Grenell shall be permitted to continue to create master records for other persons or companies.The second parties further agree not to substantially change the form of business, engage in a new business, assign or transfer any of the assets or the lease of Abbey, without the written consent of the first party, unless such new business and/or assignee and/or transferee, by an agreement in writing, assumes all the obligations, terms, covenants and conditions of this agreement and delivers such assumption agreement177 to the first party in person or by registered mail, within five (5) days from the date of the commencement of such new business and/or assignment and/or transfer. It is expressly understood and agreed that such assumption agreement shall in no wise release the second parties from any of their obligations hereunder. * * Fourth: All parties do hereby agree that the true and accurate status of Abbey and Sound Plastics, Inc. as to liabilities and assets are reflected in the balance sheets attached hereto and made a part hereof and represent the true condition of the companies as of March 1, 1957. First party shall not be entitled to any further share of profits that may accrue since March 1, 1957 and may retain any sums received therefrom to date hereof. [Italicized words inserted by hand.]Fifth: Except as herein otherwise expressly provided, the second parties do hereby forever release and discharge the first party from any and all liability of whatsoever nature, description, character or kind arising out of any transaction or matter connected directly or indirectly between themselves or in connection with Abbey and/or Sound Plastics, Inc. * * Eleventh: The second parties178 agree that they will forever indemnify and save the first party, free, clear and harmless of and from all debts, taxes (other 540 than personal income taxes) claims, damages or expenses, upon, or in consequence of any debt, claim or liability, of whatsoever kind or nature due or claimed by any creditor to be due from Abbey and/or the first party, by reason of the first party having been a member of the partnership of Abbey, except as set forth in paragraphs "Eighth" and "Fourth" hereof. The first party likewise agrees that he will forever indemnify and save the second parties, free, clear and harmless of and from all debts, taxes (other than personal income taxes) claims, damages or expenses, upon, or in consequence of any debt, claim or liability of whatsoever kind or nature due or claimed by any creditor to be due from Sound Plastics, Inc., and/or the second parties, by reason of the second parties having been stockholders, officers and directors of said corporation, except as provided in paragraph "Fourth" hereof.Paragraph Twelfth of the agreement provides that "The first party [Jacobowitz] hereby retires from the partnership." The part of the agreement designating payment179 of $ 17,550 in weekly installments of $ 225 per week found in paragraph "First: A)" was embodied in a separate document also dated May 21, 1957; it was signed by Abbey, Foxman, and Grenell, respectively.The chattel mortgage mentioned in "First A)" of the agreement, in describing the translation provided for in the agreement of May 21, 1957, stated in part:the party of the second part [Jacobowitz] has sold, transferred, assigned and conveyed all his right, title and interest as a partner * * * to the parties of the first part [Foxman and Grenell, individually and trading as Abbey].Samuel Feldman, a New York City attorney who represented Foxman and Grenell, drafted the agreement of May 21, 1957; at Feldman's suggestion, Abbey was added as a party to the agreement. An earlier draft of the proposed agreement did not include Abbey as a party. During the negotiations leading to the May 21, 1957, agreement, the words "retirement" or "liquidation of a partner's interest" were not mentioned. There was no specific undertaking by the third party (Abbey) any place in the instrument. A sale of a partnership interest was the only transaction ever discussed.Jacobowitz unsuccessfully tried180 to obtain guarantees of payment of the notes he held from the wives of Foxman and Grenell; he was also unsuccessful in trying to obtain the homes of Foxman and Grenell as security on the notes.The first $ 67,500 payment due on the signing of the agreement was made by cashier's check. On the promissory note due January 2, 1958, the name of Abbey appears as maker; the signatures of Foxman and Grenell appear on the face of the note as signatories in behalf of Abbey and on the back of it as indorsers. The 18 promissory notes, each in the amount of $ 5,000, also bear the signatures of Foxman and Grenell on the face of the instrument as signatories in behalf of Abbey, the maker, and on the back of the instrument as indorsers.541 Payments to Jacobowitz pursuant to the May 21, 1957, agreement were timely made. Foxman and Grenell made an election to prepay pursuant to "First A)" of the May 21, 1957, agreement, and Jacobowitz returned the series of 18 promissory notes of Abbey, in the amount of $ 5,000 each, and the promissory note of Abbey in the amount of $ 17,550 payable in 78 weekly installments of $ 225. Jacobowitz was paid this $ 90,000 amount by check with Abbey's name appearing181 as drawer and the names of Foxman and Grenell appearing as signatories in behalf of Abbey; they did not indorse this check. Payments made to Jacobowitz for his interest were charged to Abbey's account. The parties did not contemplate any performance of services by Jacobowitz in order for him to receive the $ 17,550 under the May 21, 1957, agreement; this amount was considered by the parties either as a penalty or in lieu of interest if Foxman and Grenell failed to pay the $ 90,000 amount prior to February 1, 1958.Just prior to May 21, 1957, Abbey borrowed $ 9,000 from each of four savings banks and also borrowed $ 9,000 from Foxman and Grenell. On December 27, 1957, Abbey borrowed $ 75,000 from First National.Abbey had no adjusted basis for goodwill as of February 28, 1957, nor at any time subsequent thereto. The balance sheets of Abbey for its fiscal years ending February 28, 1957, and February 28, 1958, do not reflect an account for goodwill. The balance sheet of Abbey as of February 28, 1957, was as follows:AssetsCash$ 63,702.30Notes and accounts receivable141,521.88Inventories16,630.73Buildings and other fixed depreciable assets:(a) Less: Accumulated depreciation and amortization73,803.91Other assets6,176.91Total assets301,835.73Liabilities and CapitalAccounts and notes payable97,365.55Partners' capital accounts204,470.18Total liabilities and capital301,835.73182 On May 21, 1957, Foxman and Grenell entered into an agreement providing for a continuation of the Abbey partnership which recited that Abbey had purchased the interest of Jacobowitz in Abbey.After May 21, 1957, the date of Jacobowitz's termination of his interest in Abbey, improvements were made at Abbey's plant.542 The reported earnings of Abbey for the fiscal year ending February 28, 1958, without reduction for alleged payments to partners, were $ 303,221.52.In its tax return for the fiscal year ending February 28, 1958, Abbey treated the sum of $ 159,656.09 as a distribution of partnership earnings to Jacobowitz in the nature of a guaranteed payment under section 736 of the Internal Revenue Code of 1954. This amount was computed as follows:Cash payments$ 225,000.00Value of automobile2,812.82Share of Jacobowitz's liabilities32,455.18Total partnership payments260,268.00Less Jacobowitz's share of partnership property100,611.91Balance159,656.09Jacobowitz, on the other hand, treated the transaction as a sale in his return for 1957, reporting a long-term capital gain in the amount of $ 164,356.09.The $ 16,790 ItemJacobowitz received183 $ 16,790 from Abbey during the period March 1, 1957, to May 21, 1957; the books and records of Abbey show that $ 2,790 was debited to an account entitled "Salaries-Partners," and $ 14,000 was debited to his drawing account. Abbey had earnings before partners' salaries of $ 39,807.43, $ 38,164.32, and $ 27,478.26 for the months of March, April, and May 1957, respectively. This $ 16,790 amount was reported by Jacobowitz on his 1957 income tax return as ordinary income, and was subtracted from the partnership income for its fiscal year ending February 28, 1958, in determining the distributive shares of Foxman and Grenell.The handwritten insertion in Paragraph Fourth of the May 21, 1957, agreement was made at Jacobowitz's suggestion so that he could keep the foregoing $ 16,790 received by him during the period March 1 to May 21, 1957; it was also a waiver of his right to the balance of his share of Abbey's earnings during that period, and thus constituted a modification of the partnership agreement in respect of his distributive share of earnings for that period.The May 29-June 2, 1958, Transfer of the Record Manufacturing Business to Abbey Record Manufacturing Co., Inc.For some184 time prior to May 9, 1958, Richard D. Gittlin, in behalf of himself and two brothers, A. S. Gittlin and B. Morton Gittlin, had been negotiating with Foxman and Grenell to acquire a one-half 543 interest in the Abbey enterprise. These negotiations culminated in an agreement executed May 9, 1958, by Foxman, Grenell, and the Gittlins. The agreement contemplated the payment of $ 300,022.98 by the Gittlins who would emerge as the owners of 50 percent of the stock and debentures of a corporation named Abbey Record Manufacturing Co., Inc., which was to succeed to the entire business and assets of the partnership; the remaining 50 percent of the stock and debentures was to be owned by Foxman and Grenell individually. The corporation had been organized on April 11, 1955, with Foxman, Grenell, and an employee of the partnership named Ben Goldman, each owning five shares of stock. The corporation had remained dormant since its incorporation and had no assets of any consequence prior to the transaction here under consideration. The agreement of May 9, 1958, contemplated that the 15 outstanding shares would be cancelled and new shares and debentures issued in accordance with the agreement. 185 The agreement provided in form for a sale of the fixed assets of the partnership to the Gittlins for $ 300,022.98, such fixed assets to be transferred by them, in turn, to the corporation. The agreement read in part as follows:Transfer of business and assets of Abbey Record Mfg. Co. to Abbey Record Manufacturing Co., Inc. and Related Matters1. May 29, 1958, Abbey Record Mfg. Co., a New Jersey partnership (the "partnership"), will sell all of its fixed assets (including all deposits on equipment and under leases) to Richard D. Gittlin ("R. D. Gittlin") for an aggregate purchase price of $ 300,022.98. Against such sale to him, R. D. Gittlin will pay $ 22.98 in cash and R. D. Gittlin, A. S. Gittlin and B. Morton Gittlin will deliver to David A. Foxman ("Foxman") and Horace W. Grenell ("Grenell"), trading as Abbey Record Mfg. Co. their three 5% promissory notes each in the amount of $ 100,000 and each payable jointly to Foxman and Grenell, trading as Abbey Record Mfg. Co. The first such note will be due on July 15, 1958, the second on September 2, 1958 and the third on January 15, 1959 (with provision being made for acceleration of the maturity thereof in the event of default186 under any of said notes). Payment of the indebtedness represented by said notes will be secured by the capital stock of the below-mentioned Corporation issued to R. D. Gittlin, A. S. Gittlin, and B. Morton Gittlin and all of the Debentures (hereinbelow defined) issued to R. D. Gittlin as herein provided, such stock to be held in escrow until payment in full of said notes provided that on or after July 15, 1958, such Debentures or part thereof may be withdrawn from the escrow and discounted or pledged, provided that the proceeds therefrom shall be applied to payment of any balance remaining on said notes then outstanding.2. On June 2, 1958, R. D. Gittlin will transfer to Abbey Record Manufacturing Co., Inc., a New Jersey corporation (the "Corporation"), all of the aforesaid fixed assets received from the partnership, after Foxman and Grenell will have transferred on May 29, 1958, the balance of the partnership assets subject to all of its liabilities to the Corporation. In exchange therefor, the Corporation will then issue:(a) to R. D. Gittlin, 498 shares of its capital stock, without par value; to A. S. Gittlin, 1 share of said capital stock; to B. Morton Gittlin, 1 share of said187 capital stock;544 (b) to Foxman, 250 shares of said capital stock;(c) to Grenell, 250 shares of said capital stock, said shares to constitute all of the outstanding shares of capital stock of the Corporation; and(d) 6% Debentures of the Corporation maturing in 10 years in the amount of $ 400,000 (the "Debentures"), one-half of which shall be issued to R. D. Gittlin, one-fourth of which shall be issued to Foxman, and one-fourth of which shall be issued to Grenell.3. Foxman and Grenell have delivered to R. D. Gittlin an audited balance sheet of the partnership as of March 31, 1958, indicating a net worth of the partnership at said date of $ 176,082.55. As promptly as practicable, the accountants now servicing the books of the partnership will prepare a certified audit of the partnership as at April 30, 1958.* * * The balance sheet of Abbey, as of May 31, 1958 (but before giving effect to the "sale" of assets on May 29, 1958), reflected the following:AssetsCurrent Assets: * * Total current assets$ 259,023.01AccumulatedFixed assets:CostdepreciationValueMachinery and equipment$ 95,077.32$ 39,598.85$ 55,478.47Dies29,524.5322,452.807,071.73Automobiles11,730.102,720.309,009.80Leasehold improvements7,294.063,593.023,701.04Total fixed assets143,626.0168,364.9775,261.04Other Assets: * * Total other assets8,695.07Total assets342,979.12Liabilities and Net WorthCurrent liabilities:Notes payable -- First National Bank of Jersey City due June 2, 1958$ 58,333.32 * * Total current liabilities$ 139,810.41Net Worth: * * 203,168.71Total liabilities and net worth342,979.12188 On May 29, 1958, Abbey transferred its fixed assets to R. D. Gittlin for $ 300,022.98, $ 300,000 of which was in the form of three promissory notes; and R. D. Gittlin, at about the same time, transferred the identical fixed assets to the corporation for 500 shares of its capital stock and $ 200,000 6-percent 10-year debentures. Also, on May 29, 1958, Abbey transferred its remaining assets, subject to its liabilities, to the corporation in return for 500 shares of the latter's capital stock and $ 200,000 6-percent 10-year debentures, all of which were distributed to Foxman and Grenell in equal amounts. The original 15 shares of stock which had been issued on April 13, 1955, to Foxman, Grenell, and Ben Goldman, were canceled.545 Abbey reported a capital gain of $ 201,550.40 in a partnership return filed by it for the fiscal year ending February 28, 1959, in respect of the foregoing "sale" of its assets to the Gittlins.The minutes of a special meeting of the board of directors of the corporation held on May 29, 1958, show that the following resolution was adopted:Resolved, that it is the judgment of this Board of Directors that:(a) the fair value of certain fixed assets to189 be acquired by this corporation from R. D. Gittlin, as provided in the preceding resolutions, is $ 300,022.98 in the aggregate, consisting of office equipment, valued at $ 13,270, automobiles, valued at $ 6250, dies, valued at $ 37,550, machinery and equipment, valued at $ 234,741.44, deposit on lease, valued at $ 3,411.54 and deposit on machinery, valued at $ 4,800, all of which assets are more particularly listed together with the value of each on "Schedule A" appended to these minutes; and(b) the fair value of certain assets of Abbey Record Mfg. Co. to be acquired by this Corporation from David A. Foxman and Horace W. Grenell, trading as Abbey Record Mfg. Co., as provided in the preceding resolutions, is $ 439,810.41, consisting of assets valued at $ 259,506.54, all of which assets are more particularly listed together with the value of each on "Schedule B" appended to these minutes, and good will, valued at $ 180,303.87, subject to liabilities of Abbey Record Mfg. Co. in the amount of $ 139,810.41, which are being assumed by this Corporation, the net fair value to this Corporation being $ 300,000;* * * Resolved, that the value of the consideration to be received by this Corporation190 for the issuance of said 1,000 shares of its Capital Stock, as provided in these resolutions, is found by this Board to be and is hereby determined to be $ 200,022.98; and that such consideration shall be, and is hereby determined to be, allocated in its entirety to the Capital Stock Account of this Corporation.In a letter agreement dated May 29, 1958, Foxman and Grenell, purporting to act "individually and as partners trading as Abbey Record Mfg. Co.," agreed to pay $ 15,000 to a man named Lawrence Jasie for his services in bringing about the foregoing transaction with the Gittlins. Jasie appeared as the writer of the letter, and the terms of payment were spelled out therein as follows:(1) $ 5,000 on the closing of such transaction by check to my order, receipt of which is hereby acknowledged; and(2) $ 5,000 on or before July 1, 1959, and $ 5,000 on or before Jan. 2, 1960, each such payment to be evidenced by the promissory note of David A. Foxman and Horace W. Grenell, trading as Abbey Record Mfg. Co., bearing interest at the rate of 5% per annum, one payable on or before July 1, 1959, and the other payable on or before Jan. 2, 1960.In connection with the transfer of assets191 to the corporation, Abbey closed out its then existing asset and liability accounts. Abbey, upon receiving the aforementioned notes from the Gittlins in exchange for its fixed assets, recorded their receipt in an entry in its journal. Abbey also set up a liability account, Accrued Commissions Payable, in the amount of $ 15,000 to accrue the commission due to Lawrence Jasie.546 In recording the transfer of assets from Abbey to the corporation, an account titled Goodwill was set up on the books of the corporation in the amount of $ 180,303.87. The corporation reflected the acquisition of fixed assets from the Gittlins in its journal dated June 2, 1958, as follows:Machinery and equipment$ 234,741.44Office equipment13,270.00Dies37,550.00Automobile6,250.00Deposit on lease3,411.54The three aforementioned $ 100,000 notes issued by the Gittlins bore interest at 5 percent and were payable to the order of Foxman and Grenell, trading as Abbey; the notes were due on July 15, 1958, September 2, 1958, and January 15, 1959, respectively. On May 29, 1958, Foxman and Grenell discounted the $ 100,000 note due on July 15, 1958, and shared equally the $ 99,995.74 proceeds192 of the discounted note. Foxman and Grenell redeposited $ 20,000, in total, to their capital accounts. The remaining $ 200,000 notes were retained by Abbey until paid; the final payment was received on or about January 15, 1959.Abbey's sole business activity was the manufacture of phonograph records; prior to June 2, 1958, it never owned any real estate or mortgages. After the transfer of assets to the corporation on May 29, 1958, Abbey did not engage in the manufacture of phonograph records, and did not have any sales income or any expenses from the manufacture of phonograph records.Upon the advice of an accountant, in an effort to prevent the termination of the partnership, Foxman and Grenell began to look for some income-producing property for Abbey prior to June 2, 1958. In furtherance of that objective Abbey purchased a 6-percent mortgage in the face amount of $ 5,000 on July 28, 1958, and thereafter, on September 16, 1958, it purchased real estate for about $ 6,500 or $ 7,000 from the wife of one of the partners in the accountant's firm. The real estate was in a "very low-income housing area," and consisted of land and a frame residential building containing several apartments. 193 The return filed on behalf of Abbey for the fiscal year ending February 28, 1959, showed rents of $ 485 from this property, but a net loss of $ 62.11 after deducting expenses and depreciation. Neither the foregoing mortgage nor the real estate was related in any way to Abbey's previous record manufacturing business. Subsequent to June 2, 1958, Abbey received not only the foregoing rent but also interest on the mortgage and interest on the Gittlin notes. Foxman and Grenell had no intention of terminating Abbey during 1958.547 On January 13, 1959, an agreement was entered into between Foxman and Grenell whereby Grenell purchased Foxman's interest in Abbey, his 250 shares of stock in the corporation, his $ 100,000 6-percent 10-year debentures of the corporation, and his 220 shares of stock in Arco Recording Corporation, which had been organized to handle sales for the corporation. In return, Foxman received $ 65,000, an automobile belonging to the corporation, and the assumption by Grenell of Foxman's deficit in his capital account in Abbey in the amount of $ 1,200. Various distributions had previously been made by Abbey to Foxman and Grenell.At the time of the sale by 194 Foxman there was outstanding the $ 10,000 liability to Jasie and Abbey had among its assets the then unmatured third Gittlin $ 100,000 note and the mortgage and property purchased after June 2, 1958.On January 13, 1959, there was filed with the State of New Jersey a "Cancellation of Business Name, Form 868" which noted the dissolution of Abbey.On April 11, 1959, the Gittlins sold their 50-percent stock interest in the corporation and the $ 200,000 face value debentures to Grenell for $ 410,000. On April 11, 1959, the corporation sold its assets to National Aircraft Corporation for $ 750,000 cash.Respondent, in his Amendment to Answer, alleged:The assets of Abbey were transferred on or about May 29, 1958 and June 2, 1958 to Abbey Record Manufacturing Co., Inc. (hereafter "Abbey, Inc.").Since June 2, 1958, no part of any business, financial operation, or venture of Abbey continued to be carried on by any of its partners in the Abbey partnership.On June 2, 1958, the Abbey partnership was terminated.The taxable year of Abbey commencing on March 1, 1958 was closed on June 2, 1958.OPINION1. Tax consequences of termination of Jacobowitz's interest in Abbey; the agreement of May195 21, 1957. -- On May 21, 1957, Jacobowitz's status as a partner in Abbey came to an end pursuant to an agreement executed on that day. The first issue before us is whether Jacobowitz thus made a "sale" of his partnership interest to Foxman and Grenell within section 7412196 of the 1954 Code, as contended by him, or whether the payments to him required by the agreement are to be regarded as "made in liquidation" of his interest 548 within section 736, 3197 as contended by Foxman and Grenell. Jacobowitz treated the transaction as constituting a "sale," and reported a capital gain thereon in his return for 1957. Foxman and Grenell, on the other hand, treated the payments as having been "made in liquidation" 4 of Jacobowitz's interest under section 736, with the result that a substantial portion thereof reduced their distributive shares of partnership income for the fiscal year ending February 28, 1958.The Commissioner, in order to protect the revenues, took inconsistent positions. In Jacobowitz's case, his determination proceeded upon the assumption that there was a section 736 "liquidation," with the result that payments thereunder were charged to Jacobowitz for the partnership fiscal year ending February 28, 1958, thus not only attributing to Jacobowitz additional income for his calendar year 1958 but also treating it as ordinary income rather than capital gain. In the cases of Foxman and Grenell, the Commissioner adopted Jacobowitz's position that there was a section 741 "sale" on May 21, 1957, to Foxman and Grenell, thus disallowing the deductions in respect thereof from the partnership's income for198 its fiscal year ending February 28, 1958; as a consequence, there was a corresponding increase 549 in the distributive partnership income of Foxman and Grenell for that fiscal year which was reflected in the deficiencies determined for the calendar year 1958 in respect of each of them.As is obvious, the real controversy herein is not between the various petitioners and the Government, 5 but rather between Jacobowitz and his two former partners. We hold, in favor of Jacobowitz, that the May 21, 1957, transaction was a "sale" under section 741.The provisions of sections 736 and 741 of the 1954 Code have no counterpart in prior law. They are contained in "Subchapter K" 6 which for the first time, in 1954, undertook to deal comprehensively with the income tax problems of partners and partnerships.199 That a partnership interest may be "sold" to one or more members of the partnership within section 741 is not disputed by any of the parties. Indeed, the Income Tax Regulations, section 1.741-1(b), explicitly state:Sec. 1.741-1Recognition and character of gain or loss on sale or exchange. * * (b) Section 741 shall apply whether the partnership interest is sold to one or more members of the partnership or to one or more persons who are not members of the partnership. * And it is clear that in such circumstances, sections 736 and 761(d), do not apply. See regulations, sec. 1.736-1(a)(1)(i):Sec. 1.736-1Payments to a retiring partner or a deceased partner's successor in interest.(a) Payments considered as distributive share or guaranteed payment. (1)(i) Section 736 and this section apply only to payments made to a retiring partner or to a deceased partner's successor in interest in liquidation of such partner's entire interest in the partnership. See section 761(d). * * Section 736 and this section apply only to payments made by the partnership and not to transactions between the partners. Thus, a sale by partner A to partner B of his entire one-fourth interest200 in partnership ABCD would not come within the scope of section 736. [Italics supplied.]Did Jacobowitz sell his interest to Foxman and Grenell, or did he merely enter into an arrangement to receive "payments * * in liquidation of [his] * * * interest" from the partnership? We think the record establishes that he sold his interest.At first blush, one may indeed wonder why Congress provided for such drastically different tax consequences, depending upon whether the amounts received by the withdrawing partner are to be classified as the proceeds of a "sale" or as "payments * * * in liquidation" 550 of his interest. 7202 For, there may be very little, if any, difference in ultimate economic effect between a "sale" of a partnership interest to the remaining partners and a "liquidation" of that interest. In the case of a sale the remaining partners may well obtain part or all of the needed cash to pay the purchase price from the partnership assets, funds borrowed by the partnership or future earnings of the partnership. See A.L.I., Federal Income Taxation of Partners and Partnerships 176 (1957). Yet the practical difference between such transaction and one in which the201 withdrawing partner agrees merely to receive payments in liquidation directly from the partnership itself would hardly be a meaningful one in most circumstances. 8 Why then the enormous disparity in tax burden, turning upon what for practical purposes is merely the difference between Tweedledum and Tweedledee, and what criteria are we to apply in our effort to discover that difference in a particular case? The answer to the first part of this question is to be found in the legislative history of subchapter K, and it goes far towards supplying the answer to the second part.In its report on the bill which became the 1954 Code the House Ways and Means Committee stated that the then "existing tax treatment of partners and partnerships is among the most confused in the entire tax field"; that "partners * * cannot form, operate, or dissolve a partnership with any assurance as to tax consequences"; 203 that the proposed statutory provisions [subchapter K] represented the "first comprehensive statutory treatment of partners and partnerships in the history of the income tax laws"; and that the "principal objectives have been simplicity, flexibility, and equity as between the partners." H. Rept. No. 1337, 83d Cong., 2d Sess., p. 65. Like thoughts were expressed in virtually identical language by the Senate Finance Committee. S. Rept. No. 1622, 83d Cong., 2d Sess., p. 89.551 Although there can be little doubt that the attempt to achieve "simplicity" has resulted in utter failure, 9205 the new legislation was intended to and in fact did bring into play an element of "flexibility." Tax law in respect of partners may often involve a delicate mechanism, for a ruling in favor of one partner may automatically produce adverse consequences to the others. Accordingly, one of the underlying philosophic objectives of the 1954 Code was to permit the partners themselves to determine their tax burdens inter sese to a certain extent, and this is what the committee reports meant when they referred to "flexibility." The theory was that the partners would take their prospective tax liabilities204 into account in bargaining with one another. 10 Nor is this concept before us for the first time. We considered it in the interpretation of some related provisions of section 736 in V. Zay Smith, 37 T.C. 1033">37 T.C. 1033, affirmed 313 F. 2d 16 (C.A. 10), involving payments in respect of goodwill in the liquidation of a partner's interest. We there said (37 T.C. at 1038):This interpretation will also make for the flexibility and equity between the partners stressed by Congress. It will allow the partners flexibility in that they may determine the tax consequences of a liquidation payment by the choice of words in the partnership agreement. * * Recurring to the problem immediately before us, this policy of "flexibility" is particularly pertinent in determining the tax consequences of the withdrawal of a partner. Where the practical differences between a "sale" and a "liquidation" are, at most, slight, if they exist at all, and where the tax consequences to the partners can vary greatly, it is in accord with the purpose of the statutory provisions to allow the partners themselves, through arm's-length negotiations, to determine whether to take the "sale" route or the "liquidation" route, thereby allocating the tax burden among themselves. 11206 552 And in this case the record leaves no doubt that they intended to and in fact did adopt the "sale" route. 12207 The agreement of May 21, 1957, indicates a clear intention on the part of Jacobowitz to sell, and Foxman and Grenell to purchase, Jacobowitz's partnership interest. The second "whereas" clause refers to Jacobowitz as "selling" his interest and part "First" of the agreement explicitly states not only that the "second parties [Foxman and Grenell] hereby purchase * * * the * * * interest of * * * [Jacobowitz] * * * in Abbey," but also that "the first party [Jacobowitz] does hereby sell" his interest in Abbey. Thus, Foxman and Grenell obligated themselves individually to purchase Jacobowitz's interest. Nowhere in the agreement was there any obligation on the part of Abbey to compensate Jacobowitz for withdrawing from the partnership. Indeed, a portion of the consideration received by him was the Sound Plastics stock, not a partnership asset at all. That stock was owned by Foxman and Grenell as individuals and their undertaking to turn it over to Jacobowitz as part of the consideration for Jacobowitz's partnership interest reinforces the conclusion that they as individuals were buying his interest, and that the transaction represented a "sale" of his interest to them rather208 than a "liquidation" of that interest by the partnership. Moreover, the chattel mortgage referred to in part "First" of the agreement of May 21, 1957, states that Jacobowitz "has sold * * his * * * interest as a partner."In addition to the foregoing, we are satisfied from the evidence before us that Foxman and Grenell knew that Jacobowitz was interested only in a sale of his partnership interest. The record convincingly establishes that the bargaining between them was consistently upon the basis of a proposed sale. 13 And the agreement of May 21, 1957, which represents the culmination of that bargaining, reflects that understanding with unambiguous precision. The subsequent 553 position of Foxman and Grenell, disavowing a "sale," indicates nothing more than an attempt at hindsight tax planning to the disadvantage of Jacobowitz.209 Foxman and Grenell argue that Jacobowitz looked only to Abbey for payment, that he was in fact paid by Abbey, that there was "in substance" a liquidation of his interest, and that these considerations should be controlling in determining whether section 736 or section 741 applies. But their contention is not well taken.Jacobowitz distrusted Foxman and Grenell and wanted all the security he could get; he asked for, but did not receive, guarantees from their wives and mortgages on their homes. Obviously, the assets of Abbey and its future earnings were of the highest importance to Jacobowitz as security that Foxman and Grenell would carry out their part of the bargain. But the fact remains that the payments received by Jacobowitz were in discharge of their obligation under the agreement, and not that of Abbey. It was they who procured those payments in their own behalf from the assets of the partnership which they controlled. The use of Abbey to make payment was wholly within their discretion and of no concern to Jacobowitz; his only interest was payment. The terms of the May 21, 1957, agreement did not obligate Abbey to pay Jacobowitz.Nor is their position measurably stronger210 by reason of the fact that Jacobowitz was given promissory notes signed in behalf of Abbey. These notes were endorsed by Foxman and Grenell individually, and the liability of Abbey thereon was merely in the nature of security for their primary obligation under the agreement of May 21, 1957. The fact that they utilized partnership resources to discharge their own individual liability in such manner can hardly convert into a section 736 "liquidation" what would otherwise qualify as a section 741 "sale." It is important to bear in mind the object of "flexibility" which Congress attempted to attain, and we should be slow to give a different meaning to the arrangement which the partners entered into among themselves than that which the words of their agreement fairly spell out. Otherwise, the reasonable expectations of the partners in arranging their tax burdens inter sese would come to naught, and the purpose of the statute would be defeated. While we do not suggest that it is never possible to look behind the words of an agreement in dealing with problems like the one before us, the considerations which Foxman and Grenell urge us to take into account here are at best of an ambiguous211 character and are in any event consistent with the words used. We hold that the Commissioner's determination in respect of this issue was in error in Jacobowitz's case but was correct in the cases involving Foxman and Grenell. Cf. Charles F. Phillips, 40 T.C. 157">40 T.C. 157; Karan v. Commissioner, 319 F. 2d 303 (C.A. 7).554 2. The $ 16,790 received by Jacobowitz from Abbey. -- During the period March 1, 1957, to May 21, 1957, inclusive, Jacobowitz received a total of $ 16,790 from Abbey, and reported it as ordinary income in his 1957 return. The Commissioner treated this item as reportable by Jacobowitz in 1958, but made a corresponding inconsistent adjustment in the cases of Foxman and Grenell by ruling that this amount was improperly subtracted from the partnership income for its fiscal year ending February 28, 1958, in computing the distributive shares of Foxman and Grenell. Jacobowitz now contends that this item represented merely a withdrawal of capital. We hold that Jacobowitz correctly reported this amount as ordinary income in his 1957 return, and that it was properly taken into account by Foxman and Grenell212 in the computation of their distributive shares of partnership income in their 1958 returns.Section 702(a) requires a partner to take into account his distributive share of the partnership's taxable income in determining his income tax. 14213 Section 704(a) provides that a partner's distributive share of income shall be determined by the partnership agreement.15 Under section 761(c) a partnership agreement "includes any modifications of the partnership agreement made prior to, or at, the time prescribed by law for the filing of the partnership return for the taxable year (not including extensions) which are agreed to by all the partners, or which are adopted in such other manner as may be provided by the partnership agreement." The effect of such modification is that it relates back to the beginning of the taxable year in which the modification occurs. Thus the partners may, by agreement, adjust among themselves their interests in earnings and are taxable accordingly. Cf. Hellman v. United States, 44 F. 2d 83 (Ct. Cl.); Raymond R. Goodlatte, 4 B.T.A. 165">4 B.T.A. 165 (acq. VI-2 C.B. 3).Prior to May 21, 1957, the partners shared profits equally. In paragraph Fourth of the agreement of May 21, 1957, the following handwritten provision was inserted at the request of Jacobowitz:First party [Jacobowitz] shall not be entitled to any further share of profits that may accrue since March 1, 1957 and may retain any sums received therefrom to date hereof.Absent this modification of the partners' agreement to share net profits equally, Jacobowitz would have had to include in his taxable 555 income for his taxable year ending December 31, 1957, one-third of Abbey's earnings during the period March 1, 1957, to May 21, 1957, 16 since the taxable year of Abbey closed on May 21, 1957, under section 706(c)(2)(A)(i) with respect to Jacobowitz, who sold his entire interest in Abbey at that time, although it did not close at that time, 214 pursuant to section 706(c)(1), in respect of the remaining partners. 17215 The language "may retain any sums received therefrom to date hereof" plainly refers to the $ 16,790, which, the record shows, consists in part of "salary" and in part of "drawings." Jacobowitz's own testimony bears this out. He testified that it was his intention that the $ 16,790 represented moneys coming out of profits and pursuant to this reported it as ordinary income in his 1957 return. The option letter prepared by Jacobowitz also indicates that this amount was intended to be a charge against profits; it stated, in part: "Pending final settlement, you [Jacobowitz] will continue to draw $ 225.00 per week. If we consummate the agreement, you [Jacobowitz] relinquish all rights to profits and drawings from March 1, 1957, except those you have already received."We are satisfied that the $ 16,790 reflects Jacobowitz's share of Abbey profits for the period March 1, 1957, to May 21, 1957, and was ordinary income to him for his taxable year ending December 31, 1957; Foxman and Grenell are entitled to have Abbey's income for the year ending February 28, 1958, reduced by that amount in computing their respective shares of Abbey profits for that fiscal year. 18216 556 3. Whether Abbey "terminated" on June 2, 1958. -- By amendments to the Commissioner's pleadings a number of additional issues are raised, all of them depending in the first instance upon a new major issue as to whether Abbey "terminated" on June 2, 1958, within the meaning of section 708. 19 These new matters do not involve Jacobowitz; they relate solely to Foxman's and Grenell's cases.Abbey was 217 on a fiscal year ending February 28, and Foxman and Grenell each reported in his 1958 return his distributive share of Abbey's income for its fiscal year ending February 28, 1958, as reflected in the partnership return for that fiscal year. The first two issues in these cases, dealt with above, relate to a revision of Abbey's reportable income and the distributive shares of the partners for Abbey's fiscal year ending February 28, 1958. The third issue, now under consideration, relates to Abbey's income realized after February 28, 1958. A "final" return was filed on Abbey's behalf purportedly for the fiscal year ending February 28, 1959, and Foxman and Grenell reported in their own returns for the calendar year 1959 their respective distributive shares of the income shown on that partnership return. The Commissioner, on the other hand, has taken the position in his amended pleadings that Abbey "terminated" on June 2, 1958, with the consequence that Foxman and Grenell were charged in 1958 with their distributive shares of Abbey's income for the short taxable year March 1, 1958, to June 2, 1958, in addition to their distributive shares for the full fiscal year ending February 218 28, 1958. Important subsidiary issues are also raised in this respect by the Commissioner involving the determination of the partnership's income for that short period. These subsidiary issues include the question whether the transfer of Abbey's assets to the corporation was nonrecognizable under section 351, the amount of gain realized if the transfer were recognizable, the amount of partnership income otherwise realized by Abbey during the period March 1-June 2, 1958, which in turn depends in part upon a proposed revision by the Commissioner of the depreciation allowance claimed on Abbey's behalf. We hold that Abbey did not terminate on June 2, 1958, as urged by the Commissioner. The subsidiary issues in this connection therefore become moot.Upon consummation of the so-called Gittlin transaction on June 2, 1958, all of Abbey's assets had been transferred to the corporation, 557 and the stock and debentures allocable to Abbey had been distributed to Foxman and Grenell. Also, the first of the three $ 100,000 Gittlin notes had been discounted and the proceeds distributed to Foxman and Grenell. Nevertheless, Foxman and Grenell promptly redeposited an aggregate of $ 20,000219 of such proceeds to their capital accounts in Abbey, and Abbey continued to own the two remaining $ 100,000 Gittlin notes, one due on September 2, 1958, and the other on January 15, 1959. Moreover, there were still outstanding the two Jasie notes in the amounts of $ 5,000 each, due July 1, 1959, and January 2, 1960. The evidence further shows that in an effort to prevent the termination of Abbey, Foxman and Grenell began looking for income-producing property prior to June 2, 1958, to be purchased in behalf of Abbey. Two such items were in fact purchased by Abbey, a mortgage in July and rental property in September of 1958. While it is true that these items were of comparatively minor character in contrast to the enterprise previously carried on by Abbey, the fact that they were actually acquired by Abbey cannot be ignored. Abbey did receive interest on the Gittlin notes after June 2, 1958, as well as interest on the mortgage and rents from the real estate. It continued to be liable on the Jasie notes. Its affairs were not wound up on June 2, 1958. Cf. Income Tax Regs., sec. 1.708-1(b)(1)(iii). The situation is similar to that in Emmette L. Barran, 39 T.C. 515">39 T.C. 515.220 The Commissioner attempts to distinguish Barran on the ground that a comparatively minor piece of real estate was not included among the assets that the partnership transferred to the new owner in that case. We think that, notwithstanding this circumstance and notwithstanding the different manner in which Barran arose, the cases are not fairly distinguishable. The Court in Barran could not find that the partnership had terminated under any part of section 708. We reached the same result. We hold that the Commissioner has failed to establish that Abbey "terminated" on June 2, 1958. Accordingly, the various proposed adjustments based upon such alleged termination cannot be approved.Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Norman B. Jacobowitz and Laura Jacobowitz, docket No. 93460; and Horace W. Grenell and Judith Grenell, docket No. 93472.↩2. SEC. 741. RECOGNITION AND CHARACTER OF GAIN OR LOSS ON SALE OR EXCHANGE.In the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner. Such gain or loss shall be considered as gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751 (relating to unrealized receivables and inventory items which have appreciated substantially in value).↩3. SEC. 736. PAYMENTS TO A RETIRING PARTNER OR A DECEASED PARTNER'S SUCCESSOR IN INTEREST.(a) Payments Considered as Distributive Share or Guaranteed Payment. -- Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, except as provided in subsection (b), be considered -- (1) as a distributive share to the recipient of partnership income if the amount thereof is determined with regard to the income of the partnership, or(2) as a guaranteed payment described in section 707(c) if the amount thereof is determined without regard to the income of the partnership.(b) Payments for Interest in Partnership. -- (1) General rule. -- Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, to the extent such payments (other than payments described in paragraph (2)) are determined, under regulations prescribed by the Secretary or his delegate, to be made in exchange for the interest of such partner in partnership property, be considered as a distribution by the partnership and not as a distributive share or guaranteed payment under subsection (a).(2) Special rules. -- For purposes of this subsection, payments in exchange for an interest in partnership property shall not include amounts paid for -- (A) unrealized receivables of the partnership (as defined in section 751(c)), or(B) good will of the partnership, except to the extent that the partnership agreement provides for a payment with respect to good will.Section 707(c), made applicable by section 736(a)(2), supra, provides as follows:SEC. 707. TRANSACTIONS BETWEEN PARTNER AND PARTNERSHIP.(c) Guaranteed Payments. -- To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and section 162(a) (relating to trade or business expenses).↩4. "Liquidation" of a partner's interest is defined in section 761(d) as follows:SEC. 761. TERMS DEFINED.(d) Liquidation of a Partner's Interest. -- For purposes of this subchapter, the term "liquidation of a partner's interest" means the termination of a partner's entire interest in a partnership by means of a distribution, or a series of distributions, to the partner by the partnership.↩5. The Government has undertaken, on brief for the first time, to support Jacobowitz's position.↩6. "Subchapter K" is a subdivision of "Chapter 1" of "Subtitle A" which contains the income tax provisions of the Code.↩7. If the transaction were a "sale" under section 741, Jacobowitz's gain would be taxed as capital gain (there being no section 751 problem in respect of unrealized receivables or inventory items which have appreciated substantially in value), and would be reportable in 1957 rather than in 1958. On the other hand, if the transaction were a section 736 "liquidation," the amounts received by him (to the extent that they were not for his "interest * * in partnership property" pursuant to section 736(b)(1)) would be taxable as ordinary income and would be reportable by him in 1958, rather than in 1957. The tax liabilities of the remaining partners, Foxman and Grenell, would be affected accordingly, depending upon whether section 736 or 741↩ governed the transaction.8. The only difference suggested by counsel for Foxman and Grenell, for the first time in their reply brief, is that in the event of bankruptcy of the partnership the liability to the withdrawing partner might be subject to a different order of priority depending upon whether there is involved the liability of the partnership itself, as in the case of a "liquidation," or the liability of the purchasing partners, as in the case of a "sale." However, it stretches credulity to the breaking point to assume that any such consideration motivated the parties in determining to enter into a "sale" rather than a "liquidation," or vice versa, where the only immediate matter of economic consequence was the substantial difference in tax liability depending upon which course was followed.↩9. The distressingly complex and confusing nature of the provisions of subchapter K present a formidable obstacle to the comprehension of these provisions without the expenditure of a disproportionate amount of time and effort even by one who is sophisticated in tax matters with many years of experience in the tax field. Cf. Thomas G. Lewis, 35 T.C. 71">35 T.C. 71, where we had occasion to comment (p. 76) upon the exasperating efforts required to deal with certain other provisions of the 1954 Code. See also Van Products, Inc., 40 T.C. 1018">40 T.C. 1018, 1028. If there should be any lingering doubt on this matter one has only to reread section 736 in its entirety, footnote 3, supra, and give an honest answer to the question whether it is reasonably comprehensible to the average lawyer or even to the average tax expert who has not given special attention and extended study to the tax problems of partners. Surely, a statute has not achieved "simplicity" when its complex provisions may confidently be dealt with by at most only a comparatively small number of specialists who have been initiated into its mysteries. For a critical discussion of the complexities of the 1954 Code see, generally, Cary, "The ALI Tax Project and the Code," 60 Col. L. Rev. 259↩.10. Whether this was a realistic assumption in view of the large number of small partnerships that may not have the benefit of the highly specialized tax advice required, or whether, in view of the almost incomprehensible character of some of the provisions in subchapter K, the parties could with confidence allocate the tax burden among themselves -- these are matters on which we express no opinion. The point is that Congress did intend to provide a certain amount of "flexibility" in this respect.↩11. See S. Rept. No. 1616, 86th Cong., 2d Sess., in respect of the proposed "Trust and Partnership Income Tax Revision Act of 1960" (H.R. 9662):"under present law even though there is no economic difference it is possible for partners to arrange different tax effects for the disposition of the interest of a retiring or deceased partner, merely by casting the transaction as a sale rather than a liquidating distribution (p. 76)."* * * Under present law, if the transaction is in the form of a sale of an interest, then section 741 (rather than section 736↩) would govern, even though the interest of the selling partner is transferred to the other member of a two-man partnership (p. 103)."12. In Bolling v. Patterson, F. Supp. (N.D. Ala.), 7 A.F.T.R. 2d 1464↩, 1465, 61-1U.S.T.C. par. 9417, the judge, in his charge to the jury, instructed it that the one question it must answer is did "the partners * * * intend to liquidate Ramsey's interest in the partnership or did the two partners * * * intend to buy and did Ramsey intend to sell * * * his partnership interest."13. Various items of evidence support this conclusion. Of particular interest is the fact that the first payment to Jacobowitz, $ 67,500, was computed so as to enable him to report his gain as having been derived from an installment sale↩. However, a miscalculation (by failing to take into account the Sound Plastics stock and the Chrysler automobile) resulted in Jacobowitz's receiving more than the permissible 30 percent in 1957 (sec. 453(b)(2)(A)(ii), 1954 Code), and he therefore reported his entire gain in his 1957 return. The point remains, nevertheless, that a "sale" was planned and executed.14. SEC. 702. INCOME AND CREDITS OF PARTNER.(a) General Rule. -- In determining his income tax, each partner shall take into account separately his distributive share of the partnership's -- * * * *(9) taxable income or loss, exclusive of items requiring separate computation under other paragraphs of this subsection.↩15. SEC. 704. PARTNER'S DISTRIBUTIVE SHARE.(a) Effect of Partnership Agreement. -- A partner's distributive share of income, gain, loss, deduction, or credit shall, except as otherwise provided in this section, be determined by the partnership agreement.↩16. Abbey had earnings, before partners' salaries in the amounts of $ 39,807.43, $ 38,164.32, and $ 27,478.26 for the months of March, April, and May 1957, respectively.↩17. SEC. 706. TAXABLE YEARS OF PARTNER AND PARTNERSHIP.(c) Closing of Partnership Year. -- (1) General rule. -- Except in the case of a termination of a partnership and except as provided in paragraph (2) of this subsection, the taxable year of a partnership shall not close as the result of the death of a partner, the entry of a new partner, the liquidation of a partner's interest in the partnership, or the sale or exchange of a partner's interest in the partnership.(2) Partner who retires or sells interest in partnership. -- (A) Disposition of entire interest. -- The taxable year of a partnership shall close --(i) with respect to a partner who sells or exchanges his entire interest in a partnership, and(ii) with respect to a partner whose interest is liquidated, except that the taxable year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership's taxable year.Such partner's distributive share of items described in section 702(a) for such year shall be determined, under regulations prescribed by the Secretary or his delegate, for the period ending with such sale, exchange, or liquidation.See Income Tax Regs., sec. 1.706-1(c)(2)↩.18. A superficially similar situation was present in Ray H. Schulz, 34 T.C. 235">34 T.C. 235, 250, 251, affirmed 294 F. 2d 52↩ (C.A. 9), where, however, the problem arose under the 1939 Code and where the facts were critically different. There, we regarded the retiring partner's membership in the firm as having in fact terminated at the close of the prior fiscal year. He did not in fact participate in the operation of the partnership nor was he entitled to share in its profits after that date. Here, there can be no question as to Jacobowitz's status as a full partner until May 21, 1957.19. SEC. 708. CONTINUATION OF PARTNERSHIP.(a) General Rule. -- For purposes of this subchapter, an existing partnership shall be considered as continuing if it is not terminated.(b) Termination. -- (1) General rule. -- For purposes of subsection (a), a partnership shall be considered as terminated only if -- (A) no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership, or(B) within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621244/	Estate of Charlotte H. Burghardt, Deceased, Ralph Kimm, Ancillary Administrator, c.t.a., Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Burghardt v. CommissionerDocket No. 20766-81United States Tax Court80 T.C. 705; 1983 U.S. Tax Ct. LEXIS 98; 80 T.C. No. 33; April 11, 1983, Filed 98 Decision will be entered for the petitioner. Petitioner, the estate of a nonresident alien, claimed, under the estate tax convention between the United States and Italy, a credit against its estate tax in excess of the credit permitted under sec. 2102(c)(1), I.R.C. 1954. Held, the sec. 2010 unified credit is a "specific exemption" as that term is used in the Italian treaty; petitioner is entitled to the higher credit. Erik J. Stapper, for the petitioner.Vincent R. Barrella, for the respondent. Tannenwald, Chief Judge. TANNENWALD705 OPINIONRespondent determined a deficiency of $ 4,983.11 in petitioner's Federal estate tax. The sole issue for decision is whether petitioner, the estate of a nonresident alien, is entitled, under the estate tax convention between the United States and the Republic of Italy (the Italian treaty), 1 to a percentage of the unified credit available 706 to estates of citizens or residents of the United States under section 2010 2101 in lieu of the $ 3,600 credit allowed nonresident aliens under section 2102(c)(1). 3The case was submitted fully stipulated pursuant to Rule 122. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.Petitioner is the Estate of Charlotte H. Burghardt (Burghardt) represented by its ancillary administrator, c.t.a., Ralph Kimm. At the time he filed the petition in this case, Ralph Kimm resided in Mawah, N.J. Burghardt died in Tscherms, Italy, on February 20, 1978; she was, at that time, for purposes of U.S. tax law, a nonresident alien (a nonresident not a citizen of the United States). 4 Burghardt's total gross estate wherever situated was $ 165,583.60, 5 of which $ 124,640 was located in the United States in an investment advisory account with102 Bankers Trust Co. in New York City.On November 22, 1978, Bankers Trust Co., as a person in possession of property belonging to the decedent, filed a U.S. estate tax return. The return listed decedent's taxable estate at $ 118,882 but claimed no estate tax due by reason of the Italian treaty.Respondent determined the tentative U.S. estate tax imposed by section 2101 to be $ 8,583.11. Petitioner concedes the tentative tax but contends that it is entitled, under the Italian treaty, to a credit in that amount. 6103 Respondent argues that 707 petitioner is limited to the $ 3,600 credit provided for nonresident aliens by section 2102(c)(1). 7 The question presented herein is one of first impression.The Italian treaty, which became effective on October 26, 1956, is designed, according to its title, to prevent double taxation and avoid fiscal evasion. Article IV of the treaty provides nonresident aliens of the respective contracting States with a prorated "specific exemption" equal to a proportion of the "specific exemption which would be allowable under [the law of the taxing country] if the decedent had been domiciled in that state." 8 "Specific exemption" is not defined in the treaty. Paragraph 2 of article II of the treaty provides, however, that "any term not otherwise defined shall, unless the context otherwise requires, have the meaning which such term has under its own laws."104 We must determine the meaning of the term "specific exemption." 9 Petitioner argues that the phrase "specific exemption" is a general term that describes the level at which estate taxation begins. Accordingly, petitioner contends that the phrase should be interpreted to include the unified credit established by the Tax Reform Act of 1976 to replace the exemption applicable to estates of citizens and residents of the United States. Respondent contends, on the other hand, that "specific exemption" is synonymous with the $ 60,000 estate 708 tax exemption allowed to estates of citizens and residents of the United States pursuant to section 2052, which was repealed by the Tax Reform Act of 1976.105 To decide this case, we must examine the following questions. First, does the context of article IV of the Italian treaty require that we define "specific exemption" in any particular way? If not, what is the meaning of "specific exemption" under U.S. tax law? Finally, is the unified credit a "specific exemption" as that term is used in the Italian treaty? We turn first to article IV of the treaty.The basic aim of treaty interpretation is to ascertain the intent of the parties. Maximov v. United States, 299 F.2d 565">299 F.2d 565, 568 (2d Cir. 1962), affd. 373 U.S. 49">373 U.S. 49 (1963). Courts must "give the specific words of a treaty a meaning consistent with the genuine shared expectations of the contracting parties." Maximov v. United States, supra at 568; Johansson v. United States, 336 F.2d 809">336 F.2d 809, 813 (5th Cir. 1964). When treaties are ambiguous, they are to be construed "in a broad and liberal spirit, one which prefers the favoring of rights granted under it over a restrictive view of those rights." Samann v. Commissioner, 36 T.C. 1011">36 T.C. 1011, 1014-1015 (1961),106 affd. 313 F.2d 461">313 F.2d 461 (4th Cir. 1963).10Neither the Italian treaty nor the legislative history of its adoption defines "specific exemption." The Joint Committee on Internal Revenue Taxation, however, did provide the Senate Foreign Relations Committee with this analysis of article IV:Under the Internal107 Revenue Code a specific exemption of $ 60,000 is allowed in cases of decedents who were citizens of or domiciled in the United States at the time of death, whereas an exemption of only $ 2,000 is allowed the estates of nonresident alien decedents. Article IV of the pending convention liberalizes the exemption allowable in the case of nonresident alien decedents by providing, in effect, that the estates of decedents not 709 nationals of nor domiciled in the taxing state shall be allowed an exemption not less than the proportion of the exemption allowed in the case of decedents domiciled in that state which the value of the property situated in the taxing state bears to the value of the property in the entire gross estate.This article is similar to articles contained in conventions now in effect with Australia, Canada, Finland, Switzerland, Norway, and Greece. The effect of this article is to exempt from the Federal estate tax those cases in which the gross estate of a nonresident alien does not exceed $ 60,000 and to provide a proportionately increased exemption in the case of a larger estate. * * 11 [S. Exec. Rept. 12, 84th Cong., 1st Sess. 8 (1955), reprinted108 in 3 Joint Comm. on Int. Rev. Tax., 87th Cong., 1st Sess., 3 Legislative History of United States Tax Conventions 3550 (1962) (hereinafter Legislative History).][Emphasis added.]Respondent places great emphasis on the phrase "specific exemption of $ 60,000." He contends that this phrase is a direct reference to the predecessor of repealed section 2052 and that there can be "little doubt" that the negotiators of the Italian treaty "were employing that term in the context of its then current usage under United States law." Respondent's position thus appears to be that, since small estates were exempted from paying taxes through the mechanism of a deduction when the treaty was negotiated and since the Joint Committee referred to the amount of the deduction, the negotiators of the treaty intended that a deduction was to be the only method by which estates of nonresident aliens could be exempted109 from the U.S. estate tax. We do not agree. There is nothing inconsistent between the phrase "specific exemption of $ 60,000" and petitioner's position that "specific exemption" refers to the level at which estate taxation begins. We think that, by employing the phrase "specific exemption," the treaty negotiators did not mean to specify the particular mechanism by which small estates were to be exempted from paying tax (deduction versus some other method). Such a construction comports with the objective to "liberalize" the allowable exemption. Moreover, it is directly supported by the second sentence of the second paragraph of the Joint Committee's analysis, wherein the committee states that "The effect of this article is to exempt from the Federal estate tax those cases in 710 which the gross estate of a nonresident alien does not exceed [a certain dollar amount]." 3 Legislative History, supra at 3550. (Emphasis added.) See note 11 supra.None of the other treaties which employ or employed either the phrase "specific exemption" or some other phrase which respondent believes to be the equivalent of it 12 or the legislative histories of any of them defines or110 discusses "specific exemption" in a manner inconsistent with the foregoing analysis. On the other hand, our analysis is directly supported by the history of the Canadian treaty.Article V of the Canadian treaty, the first estate tax treaty entered111 into by the United States (in 1944) spoke, inter alia, in terms of a prorated "personal," rather than "specific," exemption. 13112 When the treaty was modified in 1950 to provide for a proportionate "specific" exemption, the transmittal letter gave as the reason for the change "so there will be no allowance of any part of the marital deduction." S. Exec. Doc. S, 81st Cong., 2d Sess. 3 (1950), reprinted in 3 Legislative History, supra at 3099. (Emphasis added.) Thus, the term "specific exemption" was adopted, not to specify a particular deduction, but to differentiate the marital deduction from the method whereby small estates were exempted from the estate tax. 14113 711 In view of the foregoing, we are satisfied that the context of article IV of the treaty permits us to read "specific exemption" in the broad sense to mean the method by which small estates are exempted from the estate tax.We must still resolve the impact of paragraph 2 of article II of the Italian treaty, which mandates us to look at U.S. law with respect to the meaning of a term not otherwise defined in the treaty. See p. 707 supra. Respondent contends that we must define "specific exemption" narrowly because of the term's "well-established meaning" under U.S. tax law. Specifically, he argues that "specific exemption" has been, since 1942, synonymous with repealed section 2052 and/or its predecessor, section 935(c) of the Internal Revenue Code of 1939.We note initially that neither the Internal Revenue Code nor the Treasury Regulations use the term "specific exemption" in the estate tax area. Although section 2521 of the Code as it existed prior to 1977 referred to a gift tax "specific exemption" (presumably to distinguish the $ 30,000 lifetime exemption from the $ 3,000 annual exclusion per donee), the term used in the estate tax area under repealed section 2052114 was merely "exemption." For the reasons given below, we find "specific exemption" does not have, under U.S. tax law, the narrow meaning respondent suggests.Respondent cites committee reports to the Revenue Act of 1942 using the phrase "specific exemption" which he claims "leave no doubt" that when the Italian treaty was negotiated, "specific exemption" was synonymous with section 935(c) of the Internal Revenue Code of 1939. All of the sentences respondent cites us to merely refer to "a" or "the" specific exemption and state the amount. 15116 We cannot agree that 712 either these legislative references to "specific exemption" or subsequent legislative references to the same effect cited by respondent 16 illustrate any "well-established meaning" under U.S. tax law. None of the material respondent cites is used in a context that refutes petitioner's assertion that the term describes the level at which estate taxation begins. Indeed, the constant references to a dollar amount in the legislative material lend support to petitioner's assertion. Moreover, we think that the term was used in the 1942 committee reports 713 merely to distinguish the exemption establishing the115 floor below which estates are not subject to tax from the previously existing "life insurance exemption" which was abolished in the same act. Such a reading is consistent with the later actions of the Federal Government in its move to modify the Canadian treaty to distinguish the general "floor" exemption from the marital deduction. See pp. 709-710 supra.From the inception of the estate tax in 1916 until 1977, the Code has referred to "exemption" rather than "specific exemption" in the estate tax area. We cannot find, as respondent urges, that under117 U.S. law "specific exemption" is synonymous with repealed section 2052. Instead, we find that "specific exemption" has been employed in U.S. tax law merely to describe the mechanism whereby small estates are excluded from the scope of the U.S. estate tax.We must now decide whether the section 2010 unified credit, which establishes a credit against tax rather than a deduction from the estate and which can be applied against both the estate tax and the gift tax rather than against just the estate tax, is a "specific exemption" under the Italian treaty. Because both parties rely on the law of treaty modification in support of their contentions concerning this issue, we shall first review the effect of subsequent legislation on the vitality of a treaty.It is well settled that a treaty may be modified by a subsequent act of Congress. Moser v. United States, 341 U.S. 41">341 U.S. 41, 45 (1951); Head Money Cases, 112 U.S. 580">112 U.S. 580, 599 (1884). It is equally true, however, that when a treaty and a statute relate to the same subject, courts will always attempt to construe them so as to give effect to both ( Whitney v. Robertson, 124 U.S. 190">124 U.S. 190, 194 (1888)),118 because "the intention to abrogate or modify a treaty is not to be lightly imputed to the Congress." Menominee Tribe v. United States, 391 U.S. 404">391 U.S. 404, 413 (1968), quoting Pigeon River Co. v. Cox Co., 291 U.S. 138">291 U.S. 138, 160 (1934); see also United States v. Payne, 264 U.S. 446">264 U.S. 446, 448 (1924). Bearing these rules in mind, we turn to the changes in estate taxation brought by the Tax Reform Act of 1976.Petitioner and respondent agree that subsequent legislation does not modify an earlier treaty unless Congress' intent is clear. Respondent contends that the "unified credit" cannot be substituted for the "specific exemption" in the treaty because Congress did not intend to modify the treaty. This contention 714 is based on the theory, which we have already rejected, that "specific exemption" is synonymous with repealed section 2052. Petitioner contends, on the other hand, that the unified credit is a "specific exemption" because Congress did not intend to extinguish the treaty right to a prorated exemption. We agree with petitioner.Respondent contends that the unified credit is not a "specific119 exemption" because repealed section 2052, which both parties agree was a "specific exemption," and section 2010's unified credit, "By their nature * * have a dramatically different impact on an estate's ultimate tax liability." 17 Respondent points first to the fact that repealed section 2052 provided for a deduction from the gross estate, whereas the unified credit provides a dollar-for-dollar credit against the tentative tax due, and observes that, due to the progressivity of the estate tax, the unified credit is of more value to a smaller estate. 715 Respondent also notes that the unified credit may be applied against both estate tax and gift tax liability whereas repealed section 2052's deduction was applicable only to the estate tax. Although respondent correctly describes the changes made by the 1976 Act, we are not convinced that Congress intended these changes to modify treaties employing the phrase "specific exemption."120 The impetus behind the movement for estate tax reform in the early 1970's was the opposition to the broader impact, due to inflation, of the estate tax. H. Rept. 94-1380 (1976), 1976-3 C.B. (Vol. 3) 735, 749. This broader impact was viewed as inconsistent with the function of estate and gift taxes to restrain the undue accumulation of wealth and its transmission from generation to generation. Hearings on the General Subject of Federal Estate and Gift Taxes Before the House Comm. on Ways and Means, 94th Cong., 2d Sess. 1176 (1976) (House Hearings), Testimony of Charles M. Walker, Assistant Secretary for Tax Policy, Department of the Treasury. To remedy this situation, President Ford proposed increasing the estate tax exemption from $ 60,000 to $ 150,000. The President's Remarks of March 5, 1976, at Springfield, Ill., 12 Pres. Doc. 339 (1976). Senators Nelson and Packwood proposed, instead, that the estate tax deduction be replaced with a credit. 18House Hearings, supra at 440. The credit, Senator Nelson explained, would be (1) more efficient and more equitable, because increases in the exemption reduce the progressivity of the tax structure and121 aid larger estates more than smaller ones, and (2) less costly to the Treasury. Hearings on H.R. 10612 Before the Senate Comm. on Finance, 94th Cong., 2d Sess. 35-36 (1976) (Senate Hearings), Colloquy between Senator Nelson and William E. Simon, Secretary of the Treasury. Subsequently, Charles M. Walker, Assistant Secretary of the Treasury for Tax Policy, testified that the Treasury "considered the choice between a credit and increasing the exemption and came down on the side of increasing the exemption." House Hearings, supra at 1200; emphasis added.This statement indicating that the credit and the exemption 716 should be considered flip sides of the same coin is reinforced by the statement of Representative Al Ullman, Chairman of the House Ways and Means Committee, who stated, in an announcement regarding122 the estate and gift tax reform legislation which was to become the Tax Reform Act of 1976, that the bill "would provide a unified rate schedule for estate and gift taxes and an increased specific exemption in the form of a credit against the tax imposed." 122 Cong. Rec. 14270 (1976). (Emphasis added.) In the same vein, the House Ways and Means Committee discussed a credit in terms of an exemption equivalent and observed that the 1976 Act "provides a unified credit * * in lieu of the specific exemptions provided under present law." H. Rept. 94-1380 (1976), 1976-3 C.B. (Vol. 3) 735, 749-750. Finally, as the Joint Comm. on Taxation observed in its General Explanation of the Tax Reform Act of 1976, 1976-3 C.B. (Vol. 2) 1, 24, "The Act increases from $ 60,000 to $ 175,000 the level at which the taxation of estates begins." (Emphasis added.)Respondent's argument that the unified credit cannot be a specific exemption under an estate tax treaty because the credit can be applied against gift tax as well as estate tax liability by residents of the United States is not persuasive. The dual tax system was replaced with a unified123 system to remove the incentive to make lifetime gifts. See statements by Prof. A. James Casner on behalf of the American Law Institute and Gerald R. Jantscher of the Brookings Institution, House Hearings, supra at 378, 1423. The unification was not designed, in and of itself, to have any effect on the amount of property that could be transferred free of tax; it only removed an incentive as to the timing. The treaty says that the United States shall allow nonresident aliens a percentage of the "specific exemption which would be allowable under its law if the decedent had been domiciled in [the United States]." Clearly, the full credit is "allowable" to one who has not made gifts that, but for the credit, would have been subject to taxation. Moreover, the fact that the unified credit may have additional functions beyond replacing the exemption does not, in and of itself, require us to conclude that the credit should not be considered as being encompassed within the term "specific exemption."Respondent also contends, more so in Rev. Rul. 81-303, 717 2 C.B. 255">1981-2 C.B. 255, than on brief, that legislation enacted since ratification of 124 these treaties has removed the rationale for the prorated exemptions. Specifically, respondent observes that the exemption for estates of nonresident aliens rose from $ 2,000 to $ 30,000 in 1966 and to a $ 3,600 credit ($ 60,000 equivalent) in 1976. Notwithstanding the fact that one of the reasons given in 1966 for increasing the exemption was to "more closely equate" the taxation of estates of U.S. citizens and estates of nonresident aliens (S. Rept. 1707, 89th Cong., 2d Sess. (1966), 2 C.B. 1059">1966-2 C.B. 1059, 1093), we cannot find any intent on the part of Congress in so doing to abrogate any provision of the Italian treaty. See H. Rept. 1450, 89th Cong., 2d Sess. (1966), 2 C.B. 967">1966-2 C.B. 967, 999; S. Rept. 1707, 89th Cong., 2d Sess. (1966), 2 C.B. 1059">1966-2 C.B. 1059, 1093. See also H. Rept. 94-1380 (1976), 1976-3 C.B. (Vol. 3) 735, 749-751. If respondent feels that the Italian treaty provides estate tax benefits that are no longer necessary or desirable, he can request that the proper officials seek to negotiate the appropriate changes.The long and the short of this case is that the term "specific125 exemption," as used in the Italian treaty, should be construed as including the unified credit. To hold otherwise, as respondent would have us do, would read the "specific exemption" provision out of the Italian treaty; such a result would have the effect of placing nonresident aliens of the United States who are either nationals of, or domiciled in, Italy in the same category as any non-U.S. national domiciled in a foreign country with which the United States has no tax convention. Under these circumstances, one of the objectives of a tax convention, namely, to obtain an advantage for certain nationals of the parties to the convention, would be lost. Indeed, it appears that the treaty provision involved herein was designed to eliminate the discrimination which would otherwise exist against estates of nonresident citizens of the treaty country and in favor of the estates of citizens or residents of the United States. See the analysis of the Joint Comm. on Internal Revenue Taxation quoted on pp. 708-709 supra; R. Stephens, G. Maxfield & S. Lind, Federal Estate and Gift Taxation 7-17 (1978 ed.). If we were to sustain respondent's position, we would be reinstating such discriminatory126 treatment. Beyond this, a holding that unification, which was only intended to make the tax laws more equitable, abrogated certain provisions 718 of the Italian treaty would violate the maxim that treaties are to to be liberally construed ( Samann v. Commissioner, 36 T.C. at 1014-1015), the maxim that the intention to modify a treaty is not to be lightly imputed to Congress (see, e.g., Menominee Tribe v. United States, 391 U.S. at 413), and the reasonable expectations of the parties. Maximov v. United States, 299 F.2d at 568.We are unimpressed by respondent's argument that petitioner should be remitted to the statutory credit provided for in section 2102 because it is at least as beneficial to petitioner as the prior $ 60,000 exemption. The happenstance of a mathematical coincidence is irrelevant to the issue of the proper interpretation of the language of the treaty. To respondent's assertion that our interpretation mixes apples (the unified credit) and oranges (the specific exemption), we think the literary quote more appropriate to the issue involved herein is a "Rose is a rose127 is a rose is a rose." G. Stein, "Sacred Emily," Geography and Plays, p. 187 (1922).Decision will be entered for the petitioner. Footnotes1. The treaty's official title is "Convention Between the United States of America and the Italian Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates and Inheritances." 7 U.S.T. (Part 3) 2977, T.I.A.S. No. 3678.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect at the time of death, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩3. When the Italian treaty was signed, sec. 2106(a)(3), the predecessor of sec. 2102(a)↩, provided that the value of a nonresident alien's gross estate was "determined by deducting from the value of * * his gross estate * * * [an] exemption of $ 2,000." The amount of the exemption was increased to $ 30,000 by the Foreign Investors Tax Act of 1966, Pub. L. 89-809, sec. 108(e), 80 Stat. 1572.4. Burghardt was a citizen of Germany, where she was born, and a resident of Italy, having established her domicile in Merano, Italy, in 1964.↩5. The estate tax return filed for decedent listed total gross estate wherever situated at $ 154,026. Petitioner concedes, however, that the higher figure is correct.↩6. The credit nonresident aliens are entitled to under the treaty, petitioner contends, is determined by the following formula:Gross estate in the United States/Total gross estate wherever situated x Unified credit pursuant to sec. 2010 = Tentative creditBased upon petitioner's contentions, the computation of the unified credit would be as follows:$ 124,640.00/$ 165,583.60 x $ 34,000 = $ 25,592.87This $ 25,592.87 amount would then be limited by the tentative tax of $ 8,583.11.↩7. Respondent's position on this issue was made public in Rev. Rul. 81-303, 2 C.B. 255">1981-2 C.B. 255↩.8. The complete text of art. IV reads:"The contracting State which imposes tax in the case of a decedent who at the time of his death was not a national of such State and was not domiciled in that State but was a national of or domiciled in the other State --"(a) shall allow a specific exemption which would be allowable under its law if the decedent had been domiciled in that State in an amount not less than the proportion thereof which the value of the property subjected to its tax bears to the value of the property which would have been subjected to its tax if the decedent had been domiciled in that State; and"(b) shall (except for the purposes of subparagraph (a) of this Article and for the purpose of any other proportionate allowance otherwise provided) take no account of property situated outside that State in determining the rate and the amount of tax."↩9. "Specific exemption" has been used in several estate tax treaties. According to Rev. Rul. 81-303, 2 C.B. 255">1981-2 C.B. 255↩, provisions similar to art. IV of the Italian treaty are incorporated in treaties between the United States and six other countries -- Australia, Finland, Greece, Japan, Norway, and Switzerland.10. See also Factor v. Laubenheimer, 290 U.S. 276">290 U.S. 276 (1933), in which the Supreme Court stated that --"In choosing between conflicting interpretations of a treaty obligation, a narrow and restricted construction is to be avoided as not consonant with the principles deemed controlling in the interpretation of international agreements. Considerations which should govern the diplomatic relations between nations, and the good faith of treaties, as well, require that their obligations should be liberally construed so as to effect the apparent intention of the parties to secure equality and reciprocity between them. * * * [290 U.S. at 293↩.]"11. The latter portion of the quoted language is obviously incorrect. The maximum allowable exemption would have been $ 60,000.↩12. The Greek treaty allows a proportionate amount of "every abatement, exemption, deduction, or credit (except the marital deduction)." The Senate Foreign Relations Committee report reveals that one of the purposes of this provision was to liberalize the United States rule relating to the $ 2,000 specific exemption given the estates of nonresident aliens. S. Exec. Rept. 1, 82d Cong., 1st Sess. 6-7, reprinted in 1 Legislative History of United States Tax Conventions 590-591 (1962). Rev. Rul. 81-303, 2 C.B. 255">1981-2 C.B. 255↩, asserts that the provision in the Greek treaty is similar to those provisions using the term "specific exemption" and that conclusions regarding the phrase "specific exemption" are equally applicable to the Greek treaty.13. The transmittal letter from Secretary of State Cordell Hull accompanying the proposed treaty stated that in accepting this provision, the United States was conforming to Canadian practice of allowing a "proportionate exemption." Canada, in turn, agreed to conform to the U.S. practice of determining the tax rate without taking into account the value of property outside the territory of the taxing government. S. Exec. Doc. G., 78th Cong., 2d Sess. 3 (1944), reprinted in 3 Legislative History, supra↩ at 3057.14. Language employed in the French and Greek treaties also supports the distinction drawn between the marital deduction and the method by which small estates are exempted from paying tax. The French treaty permits nonresident aliens to utilize the marital deduction by allowing "every abatement, exemption, deduction, or credit," Convention and Supplementary Protocol between the United States of America and France, Treaties and Other International Acts Series (T.I.A.S.) 1982, at 10, reprinted in 1 Legislative History, supra at 1170; the Greek treaty denies the marital deduction by allowing "every abatement, exemption, deduction, or credit" (except the marital deduction), Convention and Protocol between the United States of America and Greece, 5 U.S.T. (Part 1) 12, 25, T.I.A.S. No. 2901. See also S. Exec. Rept. 1, 82d Cong., 1st Sess. 7, reprinted in 1 Legislative History, supra at 591. For respondent's position as to why Greek nonresident aliens are not entitled, under the language of the treaty ("every * * * credit"), to a prorated unified credit, see Rev. Rul. 81-303, 2 C.B. 255">1981-2 C.B. 255, 256. See also note 12 supra↩.15. Respondent's brief reads as follows:Pertinent parts of the House Committee Report, H.R. Rep. No. 2333, 77th Cong., 1st Sess., 2 C.B. 372">1942-2 C.B. 372, and Senate Committee Report, S. Rep. No. 1631, 77th Cong., 2d Sess., 2 C.B. 504">1942-2 C.B. 504, are as follows:1. SPECIFIC EXEMPTION AND INSURANCE EXCLUSION COMBINEDThe present law excludes from the gross estate of a decedent the first $ 40,000 of life insurance. In addition, a specific exemption of $ 40,000 is allowed each estate regardless of whether the decedent had life insurance.* * * The bill corrects this inequity by providing a specific exemption of $ 60,000 applicable to all estates regardless of whether life insurance is present. As a corollary, the $ 40,000 exclusion of insurance is repealed. (Emphasis Added) H.R. Rep. No. 2333, 1942-2 C.B. at 400-01.PROCEEDS OF LIFE INSURANCE * * The increase in the specific exemption from $ 40,000 to $ 60,000 compensates in some measure for the discontinuance of the $ 40,000 exclusion. (Emphasis Added) H.R. Rep. No. 2333, 1942-2 C.B. at 417-418.SECTION 413. SPECIFIC EXEMPTION.This section eliminates the life insurance exemption of $ 40,000 and increases the exemption for additional estate tax purposes from $ 40,000 to $ 60,000. (Emphasis Added) H.R. Rep. No. 2333, 1942-2 C.B. at 495.INSURANCE EXCLUSION FOR ESTATE TAXUnder the present law, there is excluded from the gross estate of a decedent the first $ 40,000 of life insurance. In addition, a specific exemption of $ 40,000 is allowed to each estate regardless of whether the decedent had life insurance. The House bill, in lieu of these exemptions, granted a specific exemption of $ 60,000 applicable to all estates regardless of whether life insurance was present. (Emphasis Added) S. Rep. No. 1631, 1942-2 C.B. at 549.SECTION 404. PROCEEDS OF LIFE INSURANCE * * the $ 40,000 exemption applicable under existing law to the latter class of proceeds, which was eliminated in the House bill, is restored in your committee bill, along with the $ 40,000 specific exemption under the additional estate tax, which had been replaced by a $ 60,000 specific exemption in section 413 of the House bill. (Emphasis Added) S. Rep. No. 1631, 1942-2 C.B. at 676.Brief for respondent at 10-11.↩16. Respondent's citation to subsequent legislative references reads in full:"Subsequent legislative references to the estate tax exemption under Repealed section 2052 as a "specific exemption," confirming that the terms are synonymous, are found in the committee reports to the Foreign Investors Tax Act of 1966, Pub. L. No. 89-809, and the legislative history of the Tax Reform Act of 1976, Pub. L. No. 94-455. See, H.R. Rep. No. 1450, 89th Cong., 2nd Sess., 2 C.B. 967">1966-2 C.B. 967, 996; S. Rep. No. 1707, 89th Cong., 2nd Sess., 2 C.B. 1059">1966-2 C.B. 1059, 1093; Joint Committee Explanation Tax Reform Act of 1976, Pub. L. No. 94-455, 94th Cong., 2nd Sess., 1976-3 C.B. (Vol. 2) 13, 537, 542, 543; H.R. Rep. No. 94-1380, 94th Cong., 2nd Sess., 1976-3 C.B. (Vol. 2) 738, 744, 749."Brief for respondent at 12 n.4.↩17. Repealed sec. 2052 read as follows:For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate an exemption of $ 60,000.In 1977, sec. 2010 read as follows:(a) General Rule. -- A credit of $ 47,000 shall be allowed to the estate of every decedent against the tax imposed by section 2001.(b) Phase-in of $ 47,000 Credit. --Subsection (a) shall be appliedIn the case of decedentsby substituting for "$ 47,000"dying in: the following amount:1977$ 30,000197834,000 197938,000 198042,500 * * *(d) Limitation Based on Amount of Tax. -- The amount of the credit allowed by subsection (a) shall not exceed the amount of the tax imposed by section 2001.For estates of decedents dying after Dec. 31, 1981, sec. 2010(a) and (b) reads as follows:(a) General Rule. -- A credit of $ 192,800 shall be allowed to the estate of every decedent against the tax imposed by section 2001.(b) Phase-in of Credit. --↩Subsection (a) shall be appliedIn the case of decedentsby substituting for "$ 192,800"dying in: the following amount:1982$ 62,800198379,300198496,3001985121,8001986155,80018. Several others submitted proposals as well. See, e.g., Hearings on the General Subject of Federal Estate and Gift Taxes Before the House Comm. on Ways and Means, 94th Cong., 2d Sess. 433 (1976).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621245/	LARCHMONT FOUNDATION, INC. and PAUL R. STOUT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLarchmont Foundation, Inc. v. CommissionerDocket No. 9860-75.United States Tax CourtT.C. Memo 1982-145; 1982 Tax Ct. Memo LEXIS 602; 43 T.C.M. (CCH) 838; T.C.M. (RIA) 82145; March 23, 1982. 602 In Larchmont Foundation, Inc. v. Commissioner,72 T.C. 131">72 T.C. 131 (1979), this Court held that the provisions of sec. 4945(b), I.R.C. 1954, relating to the second-tier taxes on private foundations and their managers were unenforceable. Such provisions were amended on Dec. 24, 1980. Such amendments are applicable to taxes assessed after the date of their enactment, except where the doctrine of res judicata is applicable. The decision of this Court was on appeal at the time of the enactment of the amendments. Held, since the Court of Appeals for the Seventh Circuit vacated and remanded the decision of this Court, res judicata is not applicable, and the amendments of the second-tier tax provisions are applicable in this case. Held, further, the foundation and its manager have failed to prove that they are not liable for the second-tier taxes determined by the Commissioner. Paul R. Stout, pro se. Carolyn A. Boyer, for the respondent. SIMPSONMEMORANDUM OPINION SIMPSON, Judge: This case is now before606 us as a result of a remand by the Court of Appeals for the Seventh Circuit in which such court vacated the portion of our decision holding that the provisions of section 4945(b) of the Internal Revenue Code of 19541 imposing "second-tier taxes" on private foundations and their managers were invalid and unenforceable. On June 11, 1981, the circuit court directed us to reconsider such decision to determine if the foundation and its manager are liable for such taxes under the amendments made by the Act of December 24, 1980, Pub. L. 96-596, 94 Stat. 3469. The applicability of the amendments turns on whether the doctrine of res judicata is applicable to the earlier decision of this Court. The petitioner, Paul R. Stout, filed a joint petition with Larchmont Foundation, Inc. (Larchmont). Mr. Stout was the president of Larchmont, a nonprofit corporation chartered by the State of Illinois. Such foundation was granted an exemption from Federal income tax under section 501(a) as an organization described in section 501(c)(3). 607 Larchmont was created to promote scientific research and education, to enable needy students to obtain a college education, and to make grants to exempt organizations in furtherance of such aims. In his notice of deficiency, the Commissioner determined that $ 891 of disbursements listed on Larchmont's return for 1971 were taxable expenditures within the meaning of section 4945. Accordingly, among other conclusions, he determined that Larchmont was liable for the initial excise tax under section 4945(a)(1) and the second-tier tax under section 4945(b)(1). He also determined that Mr. Stout was liable for the second-tier tax under section 4945(b)(2) on foundation managers. In Larchmont Foundation, Inc. v. Commissioner,72 T.C. 131">72 T.C. 131 (1979), we held that the foundation was liable for the initial excise tax under section 4945(a)(1) since it failed to establish that the expenditures were not taxable expenditures within the meaning of section 4945(d). As to the second-tier taxes on the foundation and the manager under section 4945(b), we followed our decision in Adams v. Commissioner,72 T.C. 81">72 T.C. 81 (1979), on appeal (2d Cir., June 23, 1981), and held608 that the provisions for imposing such taxes were unenforceable and that therefore Larchmont and Mr. Stout were not liable for any deficiency in such taxes. The Commissioner appealed our decision to the Seventh Circuit on October 19, 1979. Subsequent to our decisions in Adams,Larchmont, and H. Fort Flowers Foundation, Inc. v. Commissioner,72 T.C. 399">72 T.C. 399 (1979), Congress passed the Act "to insure the courts have jurisdiction to enforce the second-tier taxes." See H. Rept. 96-912, to accompany H.R. 5391 (Pub. L. 96-596) 2 (1980), 4 I.R.B. 35">1981-4 I.R.B. 35, 36; S. Rept. 96-1034, to accompany H.R. 5391 (Pub. L. 96-596) 4 (1980). Under the amendments, the second-tier taxes are imposed on the foundation and the manager when a taxable expenditure is not corrected within the taxable period. Sec. 4945(b). The taxable period ends on the date of the mailing of the notice of deficiency or the date of the assessment of the initial tax, whichever occurs earlier. Sec. 4945(i)(2). However, a second-tier tax may be abated under section 4961 if the taxable expenditure is corrected within the correction period, and section 4962(e) defines the correction period. The609 effective date provision of the Act states: (2) Second tier taxes.--The amendments made by this section with respect to any second tier tax shall apply only with respect to taxes assessed after the date of the enactment of this Act. Nothing in the preceding sentence shall be construed to permit the assessment of a tax in a case to which, on the date of the enactment of this Act, the doctrine of res judicata applies. [Pub. L. 96-596, sec. 2(d)(2), 94 Stat. 3474; emphasis added.] As a result of the enactment of the Act, the Seventh Circuit vacated and remanded our decision with the order that: The new statute amends section 4945(b)(1) of the Code and may affect the outcome of this case. The new section applies to this case, as no assessment for additional taxes has been made. * * We vacate that portion of the Tax Court's decision relating to its refusal to assess additional taxes under I.R.C. § 4945(b). We remand to the Tax Court for consideration in light of Pub. L. No. 96-596. Thus, we are required to decide whether the amendments made by the Act are to be applied in this case. Since the enactment of the Act, we have held that610 the amendments are applicable to a case which had been commenced before their enactment but which had not been tried at such time. Howell v. Commissioner,77 T.C. 916">77 T.C. 916 (1981)Barth Foundation v. Commissioner,77 T.C. 1008">77 T.C. 1008 (1981). 2 Since there had been no trial in Howell and since the Court had not rendered an opinion on the merits of the issue, there was no question concerning the applicability of the doctrine of res judicata. 77 T.C. at 920. The outcome turned on the meaning of the word "assessed" as used in the first sentence of the effective date provision of the Act. We held that such word is a term of art (see sec. 6203), and the taxes cannot be assessed until a decision of the Tax Court becomes final where the taxpayer petitions the Court for a review of the determination by the Commissioner. Secs. 6213, 7481. Since any taxes under section 4941 could not be assessed in Howell until after the enactment of the Act, we held that the amendment were applicable in that case. 611 In the present case, the decision of the Tax Court has not become final, the accordingly, there has been no assessment of any taxes under section 4945 against Larchmont or Mr. Stout. However, this Court has rendered a decision, and hence, we must decide whether the doctrine of res judicata is applicable so as to prevent the application of the amendments in this case. The legislative history is not helpful in determining what was meant by Congress when it used such term. The Ways and Means Committee Report stated: The bill applies to second-tier taxes assessed after the date of enactment of the bill (except in cases where a court decision with respect to that tax is final on that date). [H. Rept. 96-912, supra at 3, 1981-4 I.R.B. at 36; emphasis added.] However, the Senate Finance Committee Report, in referring to the same statutory provision, said: The bill applies to second-tier taxes assessed after the date of enactment of the bill (except in cases where a court decision with respect to which res judicata applies on that date). [S. Rept. 96-1034, supra at 5; emphasis added.] To resolve our question, we must look to other sources to ascertain612 the general meaning of the term res judicata. The term res judicata literally means a matter adjudged. See Black's Law Dictionary 1174 (5th ed. 1979). Once a court has entered its decision on a matter, the court has adjudged the matter, and the doctrine is applicable notwithstanding the fact that the court's judgment may be on appeal. See 1B Moore, Federal Practice, par. 0.416[3], p. 2252 (2d ed. 1980). However, if the matter is appealed, it is the disposition of the appellate court which becomes determinative; and a decision that is vacated, reversed, or set aside by the appellate court is thereby deprived of its conclusive effect as res judicata. See 1B, Moore, supra at par. 0.416[2], p. 2231; see generally, Scott, "Collateral Estoppel by Judgment," 56 Harv. L. Rev. 1">56 Harv. L. Rev. 1, 15 (1942). At the time of the enactment of the Act, this Court had rendered its opinion holding that Larchmont and Mr. Stout were not liable for the second-tier taxes. However, by its order, the Seventh Circuit has exercised its authority and vacated such portion of the decision of this Court. 613 That court decided that "The new section applies to this case." Consequently, the doctrine of res judicata can no longer apply to such portion of the decision of this Court, and such decision constitutes no bar to the application of the amendments made by the Act in this case. Moreover, to apply the amendments in this case carries out the general purpose of the Act. Those amendments were made by Congress to correct the defects in the original statutory provisions imposing the second-tier taxes, and they were designed "to insure the courts have jurisdiction to enforce the second-tier taxes." S. Rept. 96-1034, supra at 4. It is altogether appropriate for the courts to give a broad interpretation to such legislation designed to correct technical defects in the statute. Howell v. Commissioner,77 T.C. at 921-922. Having concluded that the amendments are applicable in this case, we now reach the question of whether Larchmont and Mr. Stout are liable for the second-tier taxes. As amended, section 4945(b) provides, in part: (1) On the foundation.--In any case in which614 an initial tax is imposed by subsection (a)(1) on a taxable expenditure and such expenditure is not corrected within the taxable period, there is hereby imposed a tax equal to 100 percent of the amount of the expenditure. * * (2) On the management.--In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount of the taxable expenditure. * * * In his briefs in this case, Mr. Stout maintained that the Commissioner had the burden of proof with respect to all the excise taxes under section 4945 and the penalty under section 6684 set forth in the notice of deficiency. Mr. Stout relied on the provisions of section 7454(b) and Rule 142(c), Tax Court Rules of Practice and Procedure. However, in our earlier opinion, we pointed out that those provisions shift the burden of proof to the Commissioner only when the manager is charged with "knowing" conduct. Hence, we held that Larchmont had the burden of proving that it was not liable for the initial tax under section 4945(a)(1) since the imposition of that tax did not depend upon a finding of615 "knowing" conduct on the part of the foundation. For the reasons set out in that opinion, it follows that section 7454(b) and Rule 142(c) are also not applicable to the second-tier taxes imposed by section 4945(b) since their imposition does not depend upon a finding of "knowing" conduct on the part of either the foundation or its manager. Sec. 53.4945-1(b)(1) (foundation) and (2) (foundation manager), Foundation Excise Tax Regs.; compare sec. 53.4945-1(a)(2) (initial tax on foundation manager), Foundation Excise Tax Regs. Thus, Larchmont and Mr. Stout have the burden of proving that they are not liable for such taxes.At the original trial of this case, the petitioners offered no evidence to show that there had been any correction of the taxable expenditures. Following the remand by the Seventh Circuit, the case was again set for hearing, and again, the petitioners made no effort to establish that there had been any correction of the taxable expenditures. Accordingly, we conclude and hold that Larchmont and Mr. Stout are liable for the second-tier taxes imposed by section 4945(b). However, they still have an opportunity to avoid such taxes by correcting the taxable expenditures616 within the correction period as defined in section 4962(e), and if appropriate, they may seek a supplemental proceeding under section 4961(b).Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue, unless otherwise indicated.↩2. See also Allan H. Applestein Foundation Trust v. Commissioner,T.C. Memo 1981-650">T.C. Memo. 1981-650; The Barth Foundation v. Commissioner,T.C. Memo. 1981-635↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621253/	PAUL A. PURSER AND KATHLEEN PURSER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPurser v. CommissionerDocket No. 22774-81.United States Tax CourtT.C. Memo 1986-181; 1986 Tax Ct. Memo LEXIS 428; 51 T.C.M. (CCH) 968; T.C.M. (RIA) 86181; May 1, 1986. 428 Perry O. Lemmons, for the petitioners. Bonnie L. Cameron, for the respondent. CLAPPMEMORANDUM FINDINGS OF FACT AND OPINION CLAPP, Judge: Respondent determined deficiencies in petitioners' Federal income tax and additions to tax under section 6653(b) 1 as follows: Additions to TaxYearDeficiencySec. 6653(b)1973$30,181.08$15,090.54197439,507.9819,753.99This Court has already held that petitioners are liable for the additions to tax imposed by section 6653(b) on any deficiencies finally determined for the years at issue. 2 After concessions by the parties, the only issues remaining are whether petitioners received additional unreported income of $23,314.80 and were entitled to a $3,000 business expense deduction, both from Paul Purser's carpet installation business and both for the year 1974. FINDINGS OF FACT The stipulation of facts and the exhibits attached thereto are incorporated herein429 by this reference. Petitioners resided at Kennesaw, Georgia at the time they filed their petition. Petitioner, Paul A. Purser (Paul or petitioner), has been in the carpet installation business since 1969. He operated as a sole proprietorship until at least December 1973 when he formed Purser Enterprises, Inc., a Georgia corporation. However, petitioner continued to report the income and expenses of his carpet installation business on his joint individual tax returns. He never filed a Federal corporate income tax return, nor did the corporation issue stock, hold corporate meetings, or file annual reports to the state. Both parties have ignored the corporation and have continued to treat petitioner's business as a sole proprietorship through the year 1974.We will do likewise. Substantially all of petitioner's carpet installation work during the years at issue originated with Asia Rug Company (Asia Rug) a sole proprietorship, which was owned and managed by petitioner's father William H. Purser (William). Asia Rug contracted for the sale and installation of carpet. Paul did the majority of the installation, particularly in the Metro Atlanta area. Asia Rug paid petitioner for430 his installation services either by its checks payable to him or by endorsement to him of checks payable to Asia Rug. These payments were net after any expenses such as payroll, supplies, or materials incurred by petitioner but paid by Asia Rug. Petitioner maintained no carpet inventory. His expenses of doing business were paid by Asia Rug. Petitioner had a small crew of men who helped him install carpets during the years at issue, but these men were paid by Asia Rug and all payroll accounting, including income tax and social security withholding and preparation of Forms W-2, was done by Asia Rug. Petitioner did not maintain formal books and records for his business operations as a carpet installer, but relied upon cancelled checks and check stubs to prepare his income tax returns. Asia Rug (William) maintained job order books to reflect the normal day-to-day operations of the business. The books were in William's handwriting. These books contained information regarding the location of a job, the customer, the charges for the carpet, the sales tax, and the cost of installation. The books contained periodic summaries of business activity. Although informal and not very sophisticated, 431 these books provided a reasonably accurate basis from which Asia Rug could determine the amounts due from customers and the amounts of its expenses including the amounts due to petitioner for installation work. The business books and records of Asia Rug leave quite a bit to be desired, but they were superior to the almost nonexistent records of petitioner. Respondent's agents, during the course of the tax audit, attempted to reconstruct from the records of Asia Rug and from bank records available to them the proper amount of petitioner's income for the years 1973 and 1974. The results served as a basis for the deficiencies determined by respondent. The parties have agreed on all deficiencies for the year 1973 and on all items but $23,314.80 of allegedly understated income and $3,000.00 of allegedly overstated expenses for the year 1974. OPINION Respondent's determinations of deficiencies in income tax are presumed to be correct and the burden of proof to overcome that presumption and to establish the correct amounts is upon petitioner. ; Rule 142(a). 3432 The additional understatement of income in the amount of $23,314.80 as determined by respondent, was derived from business records maintained by William, which William believed to be very accurate and which we have found not to be inaccurate, but only rather informal and unsophisticated. From these records, the total amounts due petitioner for the years 1973 and 1974 were aggregated. Respondent then subtracted the amounts paid to petitioner by Asis Rug either by its checks or by endorsement of customer's checks (which total amount was the same as the amount shown on the Form 1099 provided by Asia Rug to petitioner) and the difference was $23,314.80. Petitioner originally reported less than the amount shown on the Form 1099, but has since conceded that the total amount of the Form 1099 should have been included in his income. Respondent also determined that there was unreported income from customers of petitioner other than Asia Rug and petitioner has conceded those amounts in full so they are no longer in issue. We are concerned only with the $23,314.80 by which the amounts due to petitioner exceed the amounts paid to petitioner as shown by the records of Asia Rug. Respondent's433 agent found two deposits in the total amount of $25,000 made to petitioner's bank accounts in early 1974 which were above and beyond the amounts shown by Asia Rug's records to have been paid to petitioner. Respondent concluded that this $25,000, which petitioner concedes came from William and/or Asia Rug, was a payment of the excess due to petitioner and accordingly, determined the $23,314.80 of additional income. Petitioner argues with respect to the $23,314.80 of additional income that the $25,000 constituted a loan made to petitioner by William for the purpose of assisting him in the purchase of a home which loan was later forgiven thus constituting a gift to petitioner. In either event, whether this was a loan or a gift, petitioner argues that it was not income. The evidence supporting the loan-gift theory is something less than conclusive and is muddied by the statements made by petitioner to the revenue agent in the course of the audit that the $25,000 was cash that he had accumulated in a shoe box over the prior half-dozen years or so, which he used to help buy his house. Petitioner conceded that he had made the earlier statements, but alleges that they were made out of434 fear and confusion with respect to tax consequences and in his testimony at the trial stated that the loan-gift theory was what actually happened. Due to the inadequacy of petitioner's records and the informality of Asia Rug's records, it is difficult to reconstruct exactly what happened here. Respondent's agents have devoted considerable time to the reconciliation of the records available with bank deposits and the ultimate reconstruction of petitioner's income for the years at issue. Petitioner's loan-gift theory with respect to the $25,000 is rather shaky, particularly in view of the fact that no evidence was introduced to show that the $23,314.80 which was admittedly due to petitioner was in fact paid by Asia Rug at any other time or in any other form. Petitioner has not carried his burden of proving that respondent's determination was erroneous. With respect to the additional $3,000 of expenses claimed by petitioner, we also find for respondent. Petitioner has produced no check or other evidence that the $3,000 was paid. The only evidence on this subject produced by petitioner was an invoice showing the amount to be due, which is clearly different in form from all of435 the other invoices in the record. This raises substantial questions as to the authenticity of that invoice and we find that it falls far short of establishing the $3,000 expense claimed by petitioner. Again, petitioner has failed to meet his burden of proof. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue.↩2. .↩3. All references to Rules are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4621255/	C. A. Hughes & Company v. Commissioner.C. A. Hughes & Co. v. CommissionerDocket No. 44917.United States Tax CourtT.C. Memo 1955-51; 1955 Tax Ct. Memo LEXIS 287; 14 T.C.M. (CCH) 172; T.C.M. (RIA) 55051; March 9, 1955287 Jerome H. Simonds, Esq., and Arnold Levy, Esq., Washington Building, Washington, D.C., for the petitioner. James A. Anderson, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent determined deficiencies of $5,145.02 and $9,522.12 in the petitioner's income tax for 1947 and 1948, respectively. The issues for determination are the correctness of the respondent's action (1) in determining that the amounts paid by petitioner during the taxable years to a strip mining contractor are to be excluded from the petitioner's gross income from a certain coal mine in determining depletion allowances on the percentage basis, and (2) that in determining petitioner's net income for 1948 from various coal properties for percentage depletion purposes a deduction is to be taken in the case of each property of a pro rata portion of certain receivership fees paid by petitioner. Findings of Fact General Findings of Fact Some of the facts have been stipulated and are found accordingly. The petitioner is a Pennsylvania corporation with its principal office in Cresson, Cambria County, Pennsylvania. For each of the taxable years here288 involved the petitioner maintained its books and records on the accrual basis of accounting and filed its income tax returns on a calendar year basis with the collector for the twenty-third district of Pennsylvania. During the taxable years in controversy, and for a considerable period prior thereto, petitioner was engaged in the mining, production and sale of bituminous coal. Its products are marketed principally in the northeastern part of the United States, while its specialty product, blacksmithing coal, is sold in almost every state in the United States. Prior to 1946 petitioner sold coal, which it mined and produced, through its own sales organization. Since that time all coal mined and produced by petitioner, except blacksmithing coal, has been sold by Winslow-Knickerbocker Coal Company of Philadelphia, Pennsylvania, pursuant to a sales agency agreement between that company and the petitioner. All of the coal sold by petitioner during 1947 and 1948 from its Lilly No. 5 mine, hereinafter referred to more particularly, was sold through Winslow-Knickerbocker. Issue 1. Payments to strip mining contractor Findings of Fact Argyle Coal Company, sometimes hereinafter referred289 to as Argyle, has been engaged in the production of bituminous coal for many years, operating in the same field as petitioner. Since about 1900 Argyle has been a lessee of Bethlehem Steel Company. For a number of years the coal lands owned by petitioner in fee have been in the same general area as those of Argyle and of Bethlehem and certain of its subsidiaries, sometimes referred to as the Bethlehem interests. Because petitioner's lands were intertwined with those of the Bethlehem interests, it has had dealings with them extending over a long period. In 1944 petitioner negotiated a large lease from Bethlehem of a deep seam of coal, known as B seam coal, which it is still mining by the deep or underground method. Prior to 1946 petitioner had engaged exclusively in deep mining. Early in 1946 petitioner's management concluded that there was E seam coal (geologically about 200 feet above B seam coal) in lands owned by the Bethlehem interests susceptible of being mined by the strip method. This coal was in the fringe of deep mine workings of Argyle. Petitioner did not know whether Argyle had rights to mine the E seam coal and contacted Bethlehem about obtaining them. Since Bethlehem290 was in doubt as to the matter, it advised petitioner to negotiate directly with Argyle. By an agreement, dated September 10, 1946, Argyle agreed to lease to petitioner the above-mentioned E seam of coal which subsequently became part of the operation known as petitioner's Lilly No. 5 mine. Simultaneously with the execution of the agreement, Bethlehem gave Argyle stripping rights. By this time petitioner had obtained the necessary rights-of-way in order to strip mine the coal. Petitioner obtained from the Pennsylvania Department of Mines a registration certificate required for the strip mine operations and posted the requisite surety bonds to guarantee the restoration of stripped areas. Petitioner made surveys for, and developed, a drainage plan for the disposition of mine water without stream pollution. It also obtained from the Pennsylvania Sanitary Water Board a permit for the disposition of mine water in accordance with the plan. The agreement of September 10, 1946, the first of three leases between Argyle and petitioner for the strip mining of coal, recited the ownership of the mineral rights by the Bethlehem interests, and conveyed to the petitioner the right of removing and291 carrying away designated areas of E seam coal by the stripping method, along with all the necessary rights and privileges for that purpose. By the agreement Argyle was released from any claim for damage that might result from the stripping of the coal. Under the agreement petitioner was obligated to conduct the operations in a work-manlike manner and to pay Argyle a royalty of 35 cents per net ton for all coal stripped and removed. The royalty was based on the then market price of $3.85 per ton for such coal. In the event the then market price of the coal declined, the royalty was subject to reduction but in no event to a reduction of more than 10 cents per ton. By the contract petitioner was to confine the water arising from the stripping operation to a stated watershed. In addition, the petitioner was required to have any contract made by it with a stripping contractor provide that the contractor was obligated to comply with the Pennsylvania statutes relating to the conservation of lands which have been strip mined and those relating to stream pollution. The agreement also provided that six months after its execution it might be canceled and terminated by either Argyle or the petitioner292 on 60 days' notice. Prior to September 1946 petitioner had never done any strip mining and, consequently, did not own any strip mining equipment. If it had engaged in the actual stripping operation at the Lilly No. 5 mine, it probably would have been required to make an investment of about one-half million dollars in dirt moving equipment. In September 1946 petitioner was in receivership and did not have funds for making that type of investment. In the coal field in which the above-mentioned E seam of coal was situated were a great many contractors who prior to World War II had been engaged in road building. With the advent of World War II and the cessation of road building, they contracted to do strip mining of coal and used their equipment for such work. Among these were S. J. Groves & Sons Company, sometimes hereinafter referred to as Groves. During the time petitioner was negotiating the above-mentioned agreement with Argyle, Groves was engaged in a strip mining operation near the above-mentioned E seam of coal and was nearing completion of the operation. When the necessary papers incident to petitioner's agreement with Argyle were being prepared, and in August 1946, petitioner293 approached Groves with the view of getting it to strip mine the E seam of coal. Groves was acquainted with the circumstances and conditions under which petitioner was acquiring the rights to strip mine the coal. In negotiating the price Groves would receive for stripping the coal, petitioner was faced with the fact that O.P.A. controls were in effect and the maximum selling price of the coal was $3.85 per ton, that from that price, 35 cents per ton would have to be paid to Argyle as royalty and 20 cents per ton for selling commissions. Both Groves and petitioner had considerable doubts as to whether the operation could be conducted profitably. As a consequence, they agreed that either Groves or the petitioner could, at any time either desired, terminate such contract as they might enter into with respect to the operation. Groves, faced with rising operating and labor costs, hesitated to agree to strip mine for less than $3 per ton and petitioner hesitated to agree to pay $3 per ton. Their differences were resolved by the petitioner agreeing to the $3 per ton desired by Groves and by the parties agreeing that their relationship under such strip mining contract as they might enter294 into with respect to the operation should be such that Groves would not be entitled to a depletion allowance with respect to the operation. On September 10, 1946, and subject to the above-mentioned agreements respecting termination and depletion, petitioner and Groves entered into a contract whereby Groves agreed to strip mine the E seam coal according to the best practices of strip mining. By the contract Groves was to strip the coal using its own equipment and labor, deliver the coal to the petitioner at a tipple owned by petitioner, then run it through a cleaning plant constructed of materials furnished by petitioner and erected by Groves, and then in properly cleaned condition on to railroad cars at the tipple. For its services Groves was to be paid an agreed price per ton, the basis of which was set forth in the contract as follows: "7. * * * Any coal passing inspection and placed into railroad cars shall be accepted by the operator [petitioner] as clean and marketable coal and paid for accordingly and the contractor's [Groves'] responsibility for the condition and quality of said coal shall cease when it is delivered into the railroad cars after being passed through the295 cleaning plant. "8. The parties hereto agree that the contractor shall receive from income derived from the sale of said coal the sum of Three ($3.00) Dollars per net ton for each ton of marketable coal mined and loaded onto railroad cars as aforesaid; said payment shall be made on the basis of Pennsylvania Railroad Company weigh bills, access to which shall be freely granted to the contractor or his agents by the operator at any time when so desired. The operator will act as shipper of the coal and be responsible for all phases of the work pertaining thereto from the time when said coal is placed in the railroad cars. "9. The aforementioned sum of Three ($3.00) Dollars per net ton has been determined on the basis of a maximum price classification of Three and 85/100 ($3.85) Dollars per net ton of prepared coal F.O.B. railroad cars. In the event of an increase in price classification over the above or aforesaid Three and 85/100 ($3.85) Dollars for the sale of the said coal seventy-five (75) per cent of the increase shall be added to the aforesaid sum of Three ($3.00) Dollars per net ton and paid to the contractor as hereinbefore provided." Under the contract the petitioner was296 obligated to indemnify Groves against any liability arising out of damage to the surface of the land and was to furnish all rights-of-way and easements. Groves was obligated to comply with the laws of Pennsylvania relating to strip mine operations and stream pollution. Groves also was obligated to keep itself insured under the workmen's compensation law and to carry adequate public liability insurance for injuries to persons and damages to property in the course of the operation. Groves also assumed liability for the payment of five cents per ton to the Health and Welfare Fund of the United Mine Workers of America in the event it was found that such payment was applicable to the coal produced under the contract. On December 1, 1947, the petitioner, effective as of July 1, 1947, assumed the latter obligations. The contract did not contain any provisions respecting the quantity of coal to be mined by or at any given time or during any given period or periods, nor did it authorize Groves to mine any coal except that to be delivered to petitioner. Groves was not authorized to sell any of the coal to anyone. The contract of September 10, 1946, between Groves and petitioner was terminable297 at will by either party. On July 12, 1947, petitioner and Argyle executed a second lease which amended the first Argyle lease of September 10, 1946, and covered E seam coal in a tract immediately adjacent to the E seam coal in the tract covered by the first lease. On August 12, 1948, petitioner and Argyle executed a third lease which amended the first and second Argyle leases and covered D seam coal which underlay the E seam coal referred to in the second Argyle lease. The terms and conditions of the second and third Argyle leases were substantially the same as those in the first lease. The coal lands covered by the three leases collectively are sometimes referred to herein as petitioner's Lilly No. 5 mine or property. Petitioner employed Groves to extract the coal covered by the second and third Argyle leases. This employment was under the same terms and conditions surrounding, and contained in, their contract of September 10, 1946, applicable to the extraction of coal under the first Argyle lease, except to the extent previously modified, and except, further, that since extraction under the third Argyle lease entailed costs additional to those under the earlier leases, the parties298 entered into a supplemental agreement by letter, under date of October 18, 1948, which provided, in part, as follows: "Therefore, on coal mined from Gallitzin, we [petitioner] will pay you [Groves] $3.1825 per net ton on coal shipped to the Consolidated Gas, and $3.35 per net ton on coal shipped to Winslow-Poe Classification. "In addition to this, we will make monthly settlements, paying you one-half of the added cost of trucking, or 12 1/2 cents per ton, on all coal mined from the 'D' Seam, and one-half of the cost of weighing, or four (.04) cents per load on all coal mined from Gallitzin. "The other terms of our agreement with you, and the modifications thereto, to be continued in full force and effect." In carrying out the provision of the contract of September 10, 1946, between petitioner and Groves that Groves should receive its compensation "from income derived from the sale of said coal [extracted by it]," the petitioner paid such compensation, and Groves accepted payment, from petitioner's general corporate funds. Such payments were made before the end of the month following that in which the coal was loaded on the railroad cars, and were made irrespective of299 whether the coal had been sold by petitioner's sales agent. No segregation was made on the books of the petitioner respecting the sale of coal extracted by Groves. During 1947 and 1948 there were a number of occasions when Groves agreed to accept lesser compensation than that provided for in the agreement of September 10, 1946. Groves did so in order to enable petitioner currently to sell the coal and thereby make it possible for Groves to continue mining operations. Coal extracted and sold on these occasions was at prices substantially below the maximum O.P.A. selling price for such coal set out in the contract of September 10, 1946. Groves' stripping equipment was found to be incapable of extracting the coal in certain spots or sections at what Groves considered a reasonable cost. Such coal was extracted by petitioner with equipment obtained by it and was sold by petitioner without Groves having any right to compensation with respect thereto. Petitioner did all of the engineering in connection with the Lilly No. 5 operations, including surveying, location of cuts, working out a plan of production and working out a drainage plan. Petitioner exercised complete supervision over300 the operation of the Lilly No. 5 property. Its vice-president in charge of production was there daily, and petitioner kept a coal inspector there. Petitioner determined the amount of coal to be mined, told Groves when it could, and when it could not, work. Groves' labor foreman contacted petitioner each night for instructions as to whether Groves could work the following day. Under the contract between petitioner and Groves, the latter was to do, and did, the back filling of the mined out area and petitioner was to do, and did, the reforestation, all as required by the laws of Pennsylvania. Insofar as safety matters with respect to the Lilly No. 5 mine were concerned, petitioner, as operator, was looked to as the responsible party for compliance with the laws of Pennsylvania. Petitioner's gross receipts from sales of coal from its Lilly No. 5 mine were $600,245.65 in 1947 and $742,314.78 (including $9,873.44 received as royalties) in 1948. Petitioner, as lessee, paid Argyle royalties of $53,298.59 in 1947 and $58,983.88 in 1948. Petitioner paid Groves as compensation for its services in 1947 and 1948 the amounts of $459,305.36 and $507,129.11, respectively. In determining the301 deficiencies here involved, the respondent determined that the amounts paid Groves should be excluded from petitioner's gross income from the Lilly No. 5 mine in determining depletion allowances on the percentage basis for the respective years. Groves had no economic interest in the coal it mined during 1947 and 1948 from the petitioner's Lilly No. 5 mine. Opinion The issue here is whether, in computing petitioner's percentage depletion allowances for the years in controversy, the amounts paid to Groves for strip mining fringe coal are to be excluded from petitioner's gross income from the Lilly No. 5 property. The determination of that question depends on a determination of whether Groves, by reason of the arrangements entered into with the petitioner, had an economic interest in the coal or the proceeds from its sale. The parties are in agreement as to the amounts of the petitioner's allowances for depletion with respect to the Lilly No. 5 property for the years in question in the event it is found that Groves had an economic interest in the coal or in the proceeds from its sale. They are also in agreement as to the amount of such allowances in the event it is found that it302 did not have such interest. All the petitioner's leases from Argyle to petitioner relating to the Lilly No. 5 property were terminable by either party after six months from the date thereof and upon 60 days' notice. With that back drop and for reasons satisfactory to themselves, Groves and petitioner made their contract of September 10, 1946, and subsequent arrangements, for the extraction of coal from the property, terminable by either party at will. The contractor acquires no economic interest in the coal under contracts or arrangements which are so terminable. ; . The rationale of those cases is applicable here. Accordingly, we have found that Groves did not acquire an economic interest in the Lilly No. 5 coal or the proceeds from its sale. The holdings in ; ; and , certiorari denied , reversing , relied on by respondent, are not applicable here because of factual differences. In303 view of the foregoing, we conclude that the amounts paid Groves are not to be excluded from petitioner's gross income from the Lilly No. 5 property in computing the petitioner's percentage depletion allowances with respect to that property. Issue 2. Receivership fees Findings of Fact From February 1945 to May 24, 1948, the petitioner was in receivership. R. H. Moore, the present president of petitioner, and who had participated in the formation of the petitioner in 1932 and had been connected with it from its organization, served as receiver during the pendency of the receivership. C. R. Hughes also participated in the formation of the petitioner and owned 30 per cent of its stock. Difficulties arose between Hughes and Moore and difficulties and misunderstandings arose between them and a group of others. Such difficulties and misunderstandings brought petitioner to the position where it could not operate. This situation resulted in the receivership. During the course of the receivership a nominee of Hughes filed exceptions to certain accounts which Moore, as receiver of petitioner, had filed with the Cambria County Court, Ebensburg, Pennsylvania. In connection with the filing304 of the exceptions Hughes employed counsel. During the period of the receivership Hughes frequently consulted the receiver and advised with him and spent time with him "on various matters connected with the general problems of the business." Hughes requested the receiver to pay him for his services, and while the receiver was willing to pay what he considered was a reasonable sum, Hughes requested more. No hearing was had by the court on the exceptions which had been filed against the receiver's accounts, as the receivership was terminated as a result of all matters requiring a continuation of the receivership and the continued supervision of the court having been disposed by amicable agreement of all persons interested in the petitioner. The order and decree of the court of May 24, 1948, discharging the receiver and terminating the receivership directed that the following payments be made by petitioner: $15,833.33 to the receiver for his services, $7,500 to the attorneys for the receiver as counsel fees, $2,500 to Morton Meyers, attorney for the exceptants, "for services in connection with the Receivership," and $6,000 to Hughes "for services rendered by him during the Receivership. 305 " In its income tax return for 1948 the petitioner reported a total gross income for the year of $3,002,246.03. Of that amount, $2,996,615.98 was shown as having been derived from petitioner's operation of four coal mines. The remainder, $5,630.50, was shown as having been derived from royalties, capital gain, rents and from miscellaneous sources. For the purpose of determining its net income from its respective mining operations for the computation of its percentage depletion allowance, petitioner allocated an amount of $25,166.76 of receiver's fees and expense (which, so far as appears, included the $15,833.33 and the $7,500 directed by the court on May 24, 1948, to be paid to the receiver and to his attorneys, respectively) to its various mining operations. However, it treated the amounts of $2,500 and $6,000 directed by the court to be paid to the attorney for the exceptants and to Hughes, respectively, as a miscellaneous deduction. In determining the deficiency for 1948 the respondent made no change in the petitioner's allocation of the $25,166.76 of receiver's fees and expenses but determined that, for the purpose of computing petitioner's net income from its respective mining306 operations for the computation of the percentage depletion allowance, the abovementioned $2,500 and $6,000 should be allocated to each of the mining properties on the basis of the units of production obtained therefrom. Opinion There is no controversy as to the allocation made by petitioner of the $25,166.76 of receiver's fees and expenses. Nor does either party contend that the $8,500, composed of the $6,000 payment to Hughes and the $2,500 payment to the attorney for the exceptants, was not a deductible expense in determining petitioner's net income subject to tax. The controversy is as to the respondent's determination as to the treatment to be accorded it in determining petitioner's depletion allowance. Relying on testimony of Moore, who was the receiver and now is president of petitioner, to the effect that he was not able fairly to relate the $8,500 payment to any mining activity of the petitioner, and upon the holding in Tennessee, the petitioner contends that we should conclude that the respondent's determination was erroneous. The respondent, relying on the holding in , petition307 for review dismissed , contends that his action was correct and should be sustained. The evidence shows that the petitioner was placed in receivership because it had been reduced to a condition where it was unable to operate as a result of difficulties between Hughes and Moore and difficulties and misunderstandings between them and others. Although the record is not clear with respect to his jurisdiction, we conclude the receiver was placed in charge of all of petitioner's properties and business and not a portion of them. Of the $8,500, $6,000 was paid to Hughes for the services rendered by him to the receiver during the receivership and $2,500 was paid to the attorney for the exceptants for services rendered during the receivership. Although the receiver stated that he was unable to relate the $8,500 to any mining activity, the circumstances presented show that it related to the conduct and operation of the petitioner's business. Concededly, petitioner's business was the mining, production and sale of coal. While approximately $5,600 of its gross income of more than $3,002,000 for the year was derived from rents, royalties, capital gain and miscellaneous308 sources, yet so far as the record discloses the amount so derived was from activities which were merely incidental to, and not in addition to, the mining, production and sale of coal. On the record before us we can not find that petitioner was engaged in any substantial activities other than its business of producing and selling coal. In , where it was not shown that the petitioner had any substantial business activities other than its business of producing and selling oil and other petroleum products, it was held that interest paid during the taxable year on Federal income tax deficiencies for prior years was an overhead expense attributable to the mineral properties upon which depletion was claimed and should be deducted from the gross income from the properties in computing the net income of the taxpayer therefrom for the purpose of determining the percentage depletion allowance. In Tennessee, the taxpayer in addition to mining and selling coal from lands which it owned, operated two commissaries, rented approximately 225 houses to employees, ran a theater and engaged in other business activities. *309 The question there was not whether certain indirect expenses should be allocated to the taxpayer's coal properties on which depletion was claimed but was as to the mann in which such indirect expenses were to be allocated between the various operations of the taxpayer. On the basis of opinion evidence submitted by taxpayer which was supported by convincing reasons, we approved the allocation claimed by taxpayer instead of that employed by respondent in making his determination. In view of what has been said above, we think that because of the factual differences involved the holding in Tennessee, is without application here. Since it does not appear that the petitioner had any substantial activity other than the production and sale of coal, we think the holding in , is applicable and controlling here. Accordingly, the action of the respondent with respect to this issue is sustained. Decision will be entered under Rule 50.	01-04-2023	11-21-2020

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