Split (1)

train · 657k rows

url stringlengths 56 59	text stringlengths 3 913k	downloaded_timestamp stringclasses 1 value	created_timestamp stringlengths 10 10
https://www.courtlistener.com/api/rest/v3/opinions/4622076/	Marlowe King, Petitioner v. Commissioner of Internal Revenue, RespondentKing v. CommissionerDocket No. 15350-84United States Tax Court89 T.C. 445; 1987 U.S. Tax Ct. LEXIS 125; 89 T.C. No. 35; September 9, 1987; As amended September 24, 1987 September 9, 1987, Filed 125 Decision will be entered under Rule 155. Petitioner was engaged in the trade or business of commodities futures trading. In 1978, petitioner took delivery of 10,000 ounces of gold pursuant to the terms of 100 long gold futures contracts. In 1980, petitioner disposed of the gold pursuant to 100 short gold futures contracts. Petitioner realized a long-term capital gain with respect to his disposition of the gold. During the years 1979 and 1980, petitioner deducted interest expenses resulting from carrying the physical gold. Held, to the extent a trader has incurred debt in order to carry on ordinary trading activities as part of his trade or business of trading, the interest paid thereon is not subject to the investment interest limitations of sec. 163(d), I.R.C. 1954. Held, further, the carrying of the physical gold by petitioner was part of his trade or business of trading commodity futures and sec. 163(d), I.R.C. 1954, is therefore not applicable to the interest incurred thereon. Stephen Lewis, Bradford Ferguson, Frederick Hickman, Peter Freeman, and Michael Clark, for the petitioner.Judy Jacobs and Alan Jacobson, for the respondent. Clapp, Judge126 . CLAPP446 Respondent determined deficiencies in petitioner's Federal income taxes as follows:YearDeficiency1979$ 19,989.3419801,525,852.76Following the granting of petitioner's motion for partial summary judgment in King v. Commissioner, 87 T.C. 1213">87 T.C. 1213 (1986), the only issue remaining for our decision is whether section 163(d)1 is applicable to certain interest deductions claimed by petitioner for the years in issue.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation and attached exhibits are incorporated herein by this reference. Petitioner resided at Highland Park, Illinois, at the time the petition herein was filed.BackgroundPetitioner is a registered member of the Chicago Mercantile Exchange (CME), a domestic board of trade designated as a contract market by the Commodity Futures127 Trading Commission. Petitioner is also a member of the International Monetary Market (IMM), a division of the CME, and has been a member of the IMM since its establishment in 1972. From approximately 1954 through 1985, petitioner was also a member of the Chicago Board of Trade (CBOT).Petitioner has spent his entire business career in various aspects of the commodity futures business. Following his graduation from New York University in 1948, petitioner worked in New York for 2 years for two firms dealing in butter and eggs, and cheese, respectively. Since 1950, when petitioner moved to Chicago and purchased a seat on the CME, his principal source of income has been the trading of regulated futures contracts on the CME, IMM, and CBOT. Petitioner engaged in such trading from 1950 to the present. In the 1950's, petitioner principally traded egg and onion futures. Petitioner began trading pork belly and live cattle futures in the early 1960's, and also traded futures 447 for hogs and feeder cattle at various times. After the IMM was established, petitioner also began trading foreign currency, gold, and Treasury bill futures.Until 1968, in addition to trading for his own128 account, petitioner also acted as a broker. In 1962, petitioner and his brother established King & King, Inc., which engaged in brokerage and in trading for speculation. King & King is a clearing member of the CME and IMM (i.e., a member of the CME Clearing House which the CME organization established to guarantee performance of and provide for settlement of all contracts traded on the CME) and clears petitioner's trades and the trades of a few other customers. In 1979 and 1980, petitioner was the president and sole shareholder of King & King. Since 1968, petitioner has traded primarily for his own account.Petitioner's Daily Exchange ActivitiesPetitioner monitors the trading on the CME and IMM on a regular basis on most days that the exchanges are open for trading. Since 1975, petitioner has not conducted his trading activity on the trading floor. Rather, he monitors trading through television screens in his offices and Highland Park home, and telephones instructions to King & King for execution by floor brokers. During the years in issue, petitioner had an office in Palm Springs, California, and an office in King & King's offices in Riverside Plaza in Chicago.Petitioner129 normally spends approximately 6 hours per day on trading and activities related to his trading. Petitioner normally arrives in his office 1 hour before the opening of the futures markets. He ordinarily calls a consultant to discuss information on the cash markets for the commodities he is trading. Petitioner also customarily consults with a clerk on the CME floor to obtain any statistics published by the CME. Petitioner also, if possible prior to the opening of the markets, calls to consult other traders around the country with whom petitioner is acquainted and who, like petitioner, trade on the basis of supply and demand.Once the futures markets on the CME open, petitioner continually monitors the activity, via a television screen, in markets in which he has positions. The television screen 448 shows petitioner the last sales price, the high and the low for the particular commodity, as well as news events. If petitioner wishes to place an order, he calls his 800 number for the King & King Chicago office and instructs the clerk to place an order with a floor broker. Once the order is filled, a King & King runner telephones petitioner with the confirmation of the trade. 130 Petitioner monitors the activities on the CME until the exchange closes. Following the close of trading, he ordinarily telephones a consultant to obtain information on closing market prices and other information on deliveries.During the period 1978 through 1980, petitioner maintained nine trading accounts with King & King for trading futures contracts traded on the CME. In addition, petitioner maintained accounts with Rosenthal & Co. and Marc Commodities for trading futures contracts traded on the CBOT and the New York Mercantile Exchange, respectively. During the taxable years in issue, petitioner traded, with varying degrees of frequency, in futures contracts for 20 different commodities, including gold, Swiss francs, Japanese yen, Canadian dollars, British pounds, Mexican pesos, Treasury bills, Deutschemarks, lumber, broiler chickens, live hogs, live cattle, feeder cattle, frozen pork bellies, eggs, wheat, corn, soybeans, GNMA collateralized deposit receipts, and potatoes.General Elements of Commodity TradingA commodity futures contract is an executory contract representing a commitment to deliver or receive a specified quantity and grade of a commodity during a specified131 month in the future at a price designated by the trading participants. One who commits to deliver pursuant to a futures contract is commonly referred to as a "seller." A seller is said to have a "short" position in the futures market. Opposite the seller in the execution of every futures contract is one who commits to receive pursuant to a futures contract, commonly referred to as a buyer. A buyer is said to have a "long" position in the futures market.A futures contract may be satisfied either by offset -- acquisition of an equal and opposite futures position to the position previously held -- or by making or receiving delivery 449 of the physical commodity required to be delivered or received under the futures contract. Futures and physical prices are inextricably linked at all times through the ability of a trader holding futures contracts to make or insist on receiving delivery. Most professional traders will at one time or another be involved in deliveries and in the ownership of physical commodities. From the standpoint of the professional trader, the physical commodity market, or "cash market," is part and parcel of the futures market.Trading in a futures contract132 for a particular commodity and delivery month may begin as much as 2 or more years prior to the delivery month, while delivery pursuant to the contract can only occur during the delivery month. Ninety-seven to ninety-nine percent of futures contracts are satisfied through offset, rather than delivery. However, if a contract is held to the delivery month, it is more than likely that the contract will be satisfied by delivery rather than offset. Every delivery month entails varying quantities delivered against the expiring contract, and, in terms of the means of satisfaction of futures contracts once the designated delivery month has arrived, delivery is commonplace.When a trader accepts delivery under a futures contract, he is required to pay in cash the delivery price. The cash outlay required to hold the physical commodity is substantially more than the cash outlay required for holding a futures contract, which may be held on margins as little as 5 or 10 percent of the total price of the contract. As a result, when a professional trader takes delivery pursuant to a futures contract, the trader will ordinarily find it necessary to borrow money to pay the delivery price.Commodities133 Futures Trading During Years in IssuePetitioner employed a "fundamentalist" approach to trading, acquiring positions and holding them for varying lengths of time depending upon his view of supply trends in the cash market and the impact of such supply on cash and futures prices. Petitioner did not employ a "charting" approach -- disposing of or acquiring a position based on market movement in comparison with historical price trends -- or a "scalping" approach -- rapidly trading positions based on market movement from the volume of bids coming 450 into the pits. Petitioner frequently adjusted his positions in response to his assessment of supply trends and market conditions and traded substantial numbers of contracts in each year in issue. In 1979, petitioner closed through offset 11,040 futures contracts. In 1980, petitioner suffered a heart attack and traded fewer contracts, but still closed 6,711 contracts through offset.In addition to the delivery of gold described infra, petitioner took delivery of other physical commodities under the terms of regulated futures contracts during the years 1979 and 1980. During these years, petitioner took delivery under 34 futures134 contracts for feeder cattle, live cattle, and pork bellies, and held these commodities for varying periods of time ranging from a few hours to 26 days. In some cases, petitioner effected disposition of these commodities by redelivering them in satisfaction of a short CME futures contract for the current delivery month, and, in other cases, disposition was effected by selling the commodity to a purchaser in a transaction off the exchange.Petitioner also made off-exchange purchases of various quantities of 30-pound cans of salt egg yolks and various quantities of frozen boneless beef trimmings during the year 1978. Petitioner held these physical commodities for periods as long as 8 months before selling such commodities. Petitioner made no off-exchange purchases during 1979 or 1980. Other than the one gold acquisition at issue in this case, petitioner never took delivery of or purchased gold, silver, or any other precious metal.Petitioner normally financed his holdings of physical commodities through borrowing. During the years in issue, petitioner had available for use a $ 5 million to $ 10 million line of credit from Harris Trust.Gold Straddle Trading StrategyA commodity135 straddle is a trading vehicle that involves a combination of a "long" market position (i.e., actual ownership of a commodity or a contract obligation to buy a commodity) and a "short" market position (i.e., a contract obligation to sell a commodity) in which the long and short positions relate to different time periods. Typically, the long positions and short positions will be affected in opposite 451 (but not equal) ways by market movements, so that a gain on the long position will be approximately balanced by a loss on the short position, and vice versa. Therefore, holding positions as part of a straddle substantially diminishes the risk that would be involved if the long or short positions were held separately. But risk remains in most straddles, as the countervailing market movements are rarely identical, and there is a corresponding opportunity to profit from most straddles if transaction costs are not considered.Futures straddles (more commonly known as spreads) are established by buying a regulated futures contract for one delivery month in a commodity (a long position) and selling a contract in the same commodity for a different month (a short position). In trading136 straddles, a trader is concerned with changes in the difference between the price of each position comprising the straddle. Gold price spreads at all times closely reflect short-term interest rates. Gold is continuously in ample supply and incurs trivial storage costs. This means that the cost of carry in its futures markets is simply the interest foregone over the holding period from one delivery month to a later one. Thus, if a trader knows today's gold price and the prime rate of interest, he can predict the price spreads between futures delivery months to a very close approximation. Therefore the risk in a simple spread position in gold futures derives from the prospect of any change in interest rates or in the price level of gold. In general, these risks are not great over short-time intervals, but in periods of interest rate volatility or gold price volatility they can be significant.In general, if gold prices are increasing, prices for distant delivery months can be expected to increase more than prices for nearby months. Thus, if a rising market is anticipated, a straddle consisting of a short contract for the nearby month and a long contract for the more distant month137 should produce a profit.Carrying costs consist of the cost of borrowing money (i.e., interest) to take possession of the actual commodity and the cost of storing the commodity. As those costs increase, the cost of taking delivery of gold and holding it for future use also increases, producing a similar increase in the price of contracts for distant delivery months relative to 452 the price of contracts for nearby months. A rise in interest rates will thus tend to result in profits in a straddle where the straddle is short the nearby month and long the faraway month. Also, conversely, if interest rates fall, a trader will tend to profit if he is long the nearby month and short the distant month.For a commodity such as gold, where there are adequate supplies of the commodity and sufficient storage capacity, the futures price for that commodity will have a definite relationship to the current price for purchasing the underlying physical commodity (the cash price). The futures price will tend to exceed the cash price of gold or similar commodities by approximately the amount of the cost of carrying the commodity from the time of the purchase of the physical commodity until138 the time for delivery under the futures contract.A cash and carry transaction involves the acquisition of a physical commodity (a long position in the commodity) and the holding of a short futures contract to sell that commodity at some future time (a short position in the commodity). A spread position between the physical commodity and a futures contract is identical to a futures-futures spread except that the long position is in the physical commodity and the short position is in futures. A futures spread in which the long side is nearby and the short side is distant becomes a cash-futures (physical-futures) spread when the nearby month becomes the spot (present) month. This is inherent in the terms of a futures contract.It is particularly easy for traders involved in the gold market to be involved in deliveries, and, consequently, in cash-futures gold spreads. Gold is easily and cheaply held in vaults for storage and is not subject to storage congestion or movement congestion, as are grains or other bulk commodities. Gold taken on delivery in satisfaction of a futures contract is also easier to hold for long periods of time than perishable commodities, such as live cattle139 or eggs, which are costly to hold beyond the delivery period and are ordinarily resold promptly. Wheat or soybeans involve substantial storage costs compared to gold, and the price of such commodities for later future delivery months 453 may not fully reflect the carrying charges. In contrast, gold received in delivery can be held for considerable periods because the cost of carrying (interest on the funds borrowed to acquire the physical gold) will ordinarily be reflected in prices for later delivery.While futures-futures spreads and cash-futures spreads are dictated by the same forces, i.e., interest rate changes and gold price changes, their behavior over time differs in one respect. Two futures contracts which are 60 days apart will always be 60-days interest apart. But a physical position which is 60 days from the delivery month, by virtue of being deliverable in 60 days, converges to the same price as that futures contract. This means that such a position may be profitably closed out if there is a sudden narrowing in the spread due to a drop in interest rates and/or a drop in gold prices. On the other hand, it can be carried to delivery guaranteeing the existing140 spread and is not subject to losses from any widening in spreads. This elimination of the possibility of loss entails a cost, i.e., the interest cost of owning physical gold.One who has a cash and carry position, owning physical gold against short futures, can make a profit by closing out the position if the spread falls below the convergence trend line to zero spread. He in effect can thus earn carrying charges at a faster rate than that which was assured when he entered the position. Alternatively, if he can borrow at a lower interest rate than that reflected in gold spreads, he can loan to the gold futures market at the higher rate reflected in the spread.The futures-futures spreader, on the other hand, if he takes a bear spread position -- such as that reflected in a cash and carry position -- can profit to the full extent that the spread narrows but will lose to the full extent that it widens. His front futures position never converges to his back futures position, so he has no backstop against losses from widening spreads.IMM Gold Trading Mechanics and Transaction Costs (1978-80)The minimum price fluctuation for the IMM gold contract, consisting of 100 troy ounces141 of gold no less than .995 fine, 454 was $ 0.10 (10 points) per fine troy ounce, or $ 10 per contract (100 troy ounces multiplied by $ 0.10 per contract). IMM gold contracts are traded for the delivery months of March, June, September, and December for up to approximately 2 years from the date of trading. In addition, contracts for January, February, April, May, July, August, October, and November may be traded during the delivery month.Because of King & King's status as a clearing member of the CME and IMM, petitioner paid no clearing member fees on execution of his trades. Also, petitioner paid no floor brokerage commissions or exchange fees with respect to his trades. Instead, King & King paid these charges and did not pass them on to petitioner. Had petitioner incurred such fees, the floor brokerage commissions would have been $ 1.75 per trade per contract ($ 3.50 per roundturn trade 2 per contract), and exchange fees would have been $ 0.25 per trade ($ 0.50 per roundturn trade per contract). Total roundturn commission and exchange fees per contract would thus have been $ 4, had petitioner paid such fees.142 1978-80 Cash and Carry StraddleOn December 4, 1978, petitioner acquired 10,000 ounces of gold. This acquisition of the cash gold commodity was effected by taking delivery of warehouse receipts representing ownership of gold under 100 long gold futures contracts, which called for delivery in December 1978 at a price of $ 211.10 per ounce. On the day petitioner took delivery of the gold, settlement prices for futures contracts for gold delivery months in 1980 were as follows:MonthPriceMarch$ 224.20June230.00September236.70DecemberContract not availableUnder the CME rules, the actual delivery price is set at the settlement price on the day the seller provides notice to the CME Clearing House, rather than at the price at which the trader initially acquired the long futures contract. The 455 settlement price is further adjusted for premiums and discounts resulting from grade and quantity variations and from storage, insurance, and other miscellaneous charges. With respect to petitioner's acquisition of gold, the relevant seller provided notice to the Clearing House on November 30, 1978, and the settlement price on that date for December 1978 gold143 was $ 192.90 per ounce. The adjustments under CME rules resulted in an increase in the delivery price to $ 192.916517 per ounce for a total delivery price of $ 1,929,165.17 for the 10,000 ounces of physical gold.Petitioner paid the $ 1,929,165.17 delivery price on December 4, 1978, and received, on that date, warehouse receipts signifying his ownership of the 10,000 ounces of gold. To finance the gold acquisition, petitioner borrowed the $ 1,929,165.17 delivery price from the King & King, Inc. Profit Sharing Plan and Trust on December 4, 1978. On that date, petitioner executed a promissory note in the amount of the loan due December 4, 1979, with simple interest at 12 percent per annum. On December 4, 1979, the first note was replaced by a second promissory note (due December 4, 1980) with simple interest at 15 1/2 percent per annum. On May 5, 1980, the $ 1,929,165.17 principal amount of the second note was paid in full. The total interest paid on the indebtedness incurred to purchase the physical gold was $ 231,499.84 in 1979 and $ 124,591.92 in 1980, for a total interest cost of $ 356,091.76.The gold was stored in four locations: Chase Manhattan Bank, N.A., New York, New144 York; Citibank, N.A., New York, New York; The First National Bank of Chicago, Chicago, Illinois; and Continental Bank, Chicago, Illinois. Petitioner's total carrying costs incurred to hold the gold were $ 356,091.76 interest plus $ 6,382.10 storage costs, or $ 362,473.86. Other than the interest and storage costs described above, petitioner incurred no transaction costs or carrying costs with respect to the acquisition and carrying of the 10,000 ounces of physical gold.On May 5, 1980, petitioner disposed of the 10,000 ounces of gold by delivering the warehouse receipts to the CME Clearing House in satisfaction of his delivery obligation under 100 short gold futures contracts acquired on May 1, 456 1980, which called for May 1980 delivery at a price of $ 481 per ounce. 3 As noted above, the actual delivery price is set at the settlement price on the day the seller provides notice to the Clearing House, with adjustments for premiums and discounts resulting from grade and quantity variations, storage, maintenance, and other miscellaneous charges. Petitioner gave notice of delivery on May 1, 1980, and the settlement price for May 1980 gold futures was $ 516 per ounce on that145 date. The adjustment indicated above increased this price to $ 516.0259 per ounce, for a total delivery price of $ 5,160,259.OPINIONOur only issue for decision is whether the amounts of $ 231,499.84 and $ 124,591.92 paid by petitioner as interest in 1979 and 1980, respectively, are subject to the limitations of section 163(d). 4146 As relevant to this case, section 163(d) restricts the deduction of "investment interest" otherwise allowable as a deduction to the amount of $ 10,000 plus the amount of net investment income. Investment interest is defined as "interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment." Sec. 163(d)(3)(D) (emphasis added). Petitioner argues that he was engaged in the trade or business of commodities trading and that the gold transaction here in issue was a part of that trade or business. Petitioner concludes that because the gold was held as a part of his trade or business, it was not held for investment within the meaning of section 163(d).457 Respondent has not contested that petitioner's futures trading activities qualify as a trade or business. On the other hand, respondent argues that petitioner was not in the trade or business of trading physical commodities and that such trading, or at least the gold transaction here in issue, was not a part of his trade or business of trading futures.One who regularly buys and sells on an exchange may be either a dealer or a trader. In this regard, we have stated,147 Those who sell "to customers" are comparable to a merchant in that they purchase their stock in trade, in this case securities, with the expectation of reselling at a profit, not because of a rise in value during the interval of time between purchase and resale, but merely because they have or hope to find a market of buyers who will purchase from them at a price in excess of their cost. This excess or mark-up represents remuneration for their labors as a middle man bringing together buyer and seller, and performing the usual services of retailer or wholesaler of goods. * * Such sellers are known as "dealers."Contrasted to "dealers" are those sellers of securities who perform no such merchandising functions and whose status as to the source of supply is not significantly different from that of those to whom they sell. That is, the securities are as easily accessible to one as the other and the seller performs no services that need be compensated for by a mark-up of the price of the securities he sells. The sellers depend upon such circumstances as a rise in value or an advantageous purchase to enable them to sell at a price in excess of cost. Such sellers are known as "traders." 148 [Kemon v. Commissioner, 16 T.C. 1026">16 T.C. 1026, 1032-1033 (1951); citations omitted.]As a result of Congress' amending the predecessor of section 1221 (sec. 117 of the Revenue Act of 1934), traders, as opposed to dealers, occupy an unusual position with respect to the tax laws. Traders may engage in a trade or business which produces capital gains and losses rather than ordinary income and losses. The history behind this anomaly was explained in Wood v. Commissioner, 16 T.C. 213">16 T.C. 213, 219-220 (1951),Prior to 1934, a trader, as distinguished from a dealer, in securities was taxable on the gains derived from his trading activities in the same manner as the gains of dealers in securities, namely, as ordinary income. Such gains were excluded from the operation of the capital gains provisions of the statute because "capital assets" were defined as not including "property held by the taxpayer primarily for sale in the course 458 of his trade or business." In 1934 Congress amended section 117 for the purpose of treating certain transactions in securities as transactions in capital assets in order that losses incurred in these transactions149 could not be deducted in full. * * In the Revenue Act of 1934 Congress sought to accomplish this * * * result by amending the definition of "capital asset" in the new section 117 so as to exclude, not all property held primarily for sale in the course of business, but only such property as was held primarily for sale "to customers" in the "ordinary" course of business. Since the sale on a securities exchange is not usually considered to be a sale "to customers," it was asserted that this amendment made it "impossible to contend that a stock speculator trading on his own account is not subject to the provisions of Section 117" [H. Conf. Rept. 1385, 73d Cong., 2d Sess. 22 (1934)] -- or, to state it in the positive, that a stock speculator trading on his own account would be subject to capital gain and loss treatment under section 117, as so amended. See Francis Shelton Farr, 44 B.T.A. 683">44 B.T.A. 683 (1941). [Fn. refs. omitted; emphasis in original.]As a result, a primary distinction for Federal tax purposes between a trader and a dealer in securities or commodities is that a dealer does not hold securities or commodities as capital assets if held in connection150 with his trade or business, where as a trader holds securities or commodities as capital assets whether or not such assets are held in connection with his trade or business. 5 A dealer falls within an exception to capital asset treatment because he deals in property held primarily for sale to customers in the ordinary course of his trade or business. A trader, on the other hand, does not have customers and is therefore not considered to fall within an exception to capital asset treatment.The distinction between a "trader" and an "investor" also turns on the nature of the activity in which the taxpayer is involved. A trader seeks profit from short-term151 market swings and receives income principally from selling on an exchange rather than from dividends, interest, or long-term appreciation. Groetzinger v. Commissioner, 771 F.2d 269">771 F.2d 269, 274-275 (7th Cir. 1985), affd. 480 U.S. (1987); Moller v. United States, 721 F.2d 810">721 F.2d 810, 813 (Fed. Cir. 1983). Further, a trader will be deemed to be engaged in a trade or business if his trading is frequent and substantial. Groetzinger v. 459 at 275; Fuld v. Commissioner, 139 F.2d 465 (2d Cir. 1943), affg. 44 B.T.A. 1268">44 B.T.A. 1268 (1941). An investor, on the other hand, makes purchases for capital appreciation and income, usually without regard to short-term developments that would influence prices on the daily market. Groetzinger v. Commissioner, 82 T.C. 793">82 T.C. 793, 801 (1984), affd. 771 F.2d 269">771 F.2d 269 (7th Cir. 1985), affd. 480 U.S. (1987); Liang v. Commissioner, 23 T.C. 1040">23 T.C. 1040, 1043 (1955). No matter how extensive his activities might be, an investor 152 is never considered to be engaged in a trade or business with respect to his investment activities. Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212, 216, 218 (1941); Groetzinger v. Commissioner, 771 F.2d at 275.Petitioner clearly was in the trade or business of trading commodity futures during the years in issue. 6153 Petitioner's trading was frequent and substantial but he traded solely for his own account during the years in issue and neither had customers nor performed services analogous to those performed by a merchant. 7 The parties appear to agree that petitioner was in the trade or business of trading commodities futures. 8154 460 Based on the above, we are faced with the unusual situation of a taxpayer engaged in a trade or business which produces capital gains and losses. The application of section 163(d) to such a taxpayer has been presented by the parties as a novel issue.Initially, respondent argues that petitioner's holding of the physical gold was subject to the provisions of section 163(d) whether or not such property was held in connection with petitioner's trade or business. Respondent argues that this conclusion necessarily follows from both the legislative history of section 163(d), as well as from this Court's opinion in Miller v. Commissioner, 70 T.C. 448">70 T.C. 448 (1978).The legislative history of section 163(d) describes the abuse which Congress intended to curb by the enactment of section 163(d):The itemized deduction presently allowed individuals for interest, makes it possible for taxpayers to voluntarily incur substantial interest expenses on funds borrowed to acquire or carry investment assets. Where the interest expense exceeds the taxpayer's investment income, it, in effect, is used to insulate other income from taxation. For example, a taxpayer155 may borrow substantial amounts to purchase stocks which have growth potential but which return small dividends currently. Despite the fact that the receipt of the income from the investment may be postponed (and may be capital), the taxpayer will receive a current deduction for the interest expense even though it is substantially in excess of the income from the investment. [H. Rept. 91-413 (Part 1)(1969), 3 C.B. 200">1969-3 C.B. 200, 245.]The House report also adds, however, that "interest on funds borrowed in connection with a trade or business would not be affected by the limitation."Respondent argues that a trader such as petitioner makes purchases and incurs debt in order to earn income which will be postponed and capital, and that the assets purchased 461 by petitioner, unlike stock, produce no income of any type prior to disposition. Respondent concludes that petitioner's trading activities fall within the scope of the abuse described in the legislative history. As we previously stated, however, the primary characteristic which differentiates the activities of a trader from those of an investor is that a trader seeks short-swing gains while an investor156 seeks long-term appreciation. See Liang v. Commissioner, supra at 1043. As such, the general activities of a trader do not fit the description of the abuse described in the legislative history of section 163(d), i.e., investing for postponed income and current interest deductions. Further, the case law cited above distinguishes traders and investors. To the extent a trader is holding assets as part of his trading activities, he is not an investor and therefore does not hold property for investment. The statement in the legislative history that the limitations of section 163(d) are not to apply to "interest on funds borrowed in connection with a trade or business" is clear and unambiguous. From the above we conclude that section 163(d) does not apply to the extent a trader has incurred indebtedness in order to carry on ordinary trading activities as part of his trade or business. 9157 Nonetheless, respondent argues that this Court's holding in Miller v. Commissioner, supra, is controlling with respect to the application of section 163(d). In Miller, a partnership borrowed money to purchase a controlling interest in the stock of a bank. The taxpayer therein, a partner in the partnership and president of the bank, deducted his proportionate share of the interest incurred by the partnership on the loan used to purchase the bank's stock. Respondent determined that the interest should be treated as "interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment." 10 The partnership reported the gains on sale of the bank stock as capital gains. In holding that the partnership's interest payments were made on indebtedness incurred or continued 462 to purchase or carry property held for investment, we stated that --section 57, like section 163(d), attempts to deal with an abuse which is present whenever interest is incurred to obtain or maintain property held with sufficient investment intent for the gain on its disposition to constitute capital gain. Such property is investment158 property and the interest on funds borrowed to finance its purchase is investment interest. We, therefore, must look to the stock purchased by [the partnership] with the borrowed funds to determine whether the stock was held with sufficient investment intent to make it a capital asset. [70 T.C. at 455.]Our Miller decision neither involved nor considered the unusual situation of a trader of securities or commodities. Rather, our opinion therein159 dealt with a factual pattern in which the taxpayer attempted to argue the applicability of the doctrine put forth in Corn Products Refining Co. v. Commissioner, 350 U.S. 46 (1955). In reaching our conclusion in Miller, we noted statements made by this Court in W.W. Windle Co. v. Commissioner, 65 T.C. 694">65 T.C. 694, 714 n. 15 (1976), that "stock is normally a capital asset" held for investment, and that only where the "original purpose of [the] acquisition and the reason for continued retention are both devoid of substantial investment intent should the stock be treated otherwise." Miller v. Commissioner, supra at 455.Under the factual scenario in Miller, whether the taxpayer therein could properly claim capital gains treatment was synonymous with whether the taxpayer held the property for investment. See Corn Products Refining Co. v. Commissioner, supra; W.W. Windle Co. v. Commissioner, supra.A trader, on the other hand, receives capital gains treatment whether or not the property is held for investment or held in connection 160 with his trade or business. As discussed supra, to the extent a trader holds property as part of his trade or business of trading, he receives capital gains treatment even though such property is not held for investment. Our holding in Miller is limited to the factual situation involved therein, i.e., a taxpayer attempting to prove that stock is not held for investment due to the application of the doctrine set forth in Corn Products Refining Co. v. Commissioner, supra.11161 463 Accordingly, we find that to the extent a trader has incurred debt in order to carry on ordinary trading activities as part of his trade or business of trading, the interest paid thereon is not subject to the limitations of section 163(d).We next consider whether the holding of the gold by petitioner should nonetheless be treated as the holding of property for investment either because petitioner was not engaged in the business of trading physical commodities or because this particular transaction was not a part of petitioner's trade or business.Petitioner acquired the 10,000 ounces of gold on December 4, 1978, by taking delivery of warehouse receipts representing ownership of gold under 100 long gold futures contracts, which called for delivery in December 1978. On May 5, 1980, petitioner disposed of the 10,000 ounces of gold by delivering the warehouse receipts to the CME Clearing House in satisfaction of his delivery obligation under 100 short gold futures contracts which called for May 1980 delivery. On the date petitioner took delivery of the gold, he executed a note to the King & King, Inc. Profit Sharing Plan and Trust. This note was due on December 4, 1979, 162 one year after its execution. On December 4, 1979, petitioner executed a second note with a due date of December 4, 1980.In addition to the delivery of gold here in issue, petitioner took delivery during the years 1979 and 1980 under 34 futures contracts and held these commodities for varying periods of time ranging from a few hours to 26 days. In some cases, petitioner affected disposition of these commodities by redelivering them in satisfaction of a short CME futures contract for the current delivery month, and, in other cases, disposition was affected by selling the commodity to a purchaser in a transaction off the exchange. Petitioner also made off-exchange purchases of various commodities during the year 1978 and held these physical commodities for periods as long as 8 months. Petitioner made no off-exchange purchases during 1979 or 1980. Other 464 than the one gold acquisition at issue in this case, petitioner never took delivery of or purchased gold, silver, or any other precious metal.Respondent directs our attention to statements of the Supreme Court in Higgins v. Commissioner, supra, in arguing that petitioner's dealings in physical163 commodities, or at least the gold transaction here in issue, can be separated out from petitioner's trade or business of trading in commodities futures. In Higgins, the taxpayer had extensive investment in real estate, bonds, and stocks, and devoted a considerable portion of his time to the oversight of his interests. He hired others to assist him with his investments, in offices rented for that purpose, and claimed that the salaries and expenses incident to looking after his properties were deductible under section 23(a) of the Revenue Act of 1932, the predecessor of section 162(a). The Supreme Court held that the taxpayer's expenses attributable to investment in securities were not deductible notwithstanding that the taxpayer was engaged in another trade or business, i.e., real estate. The taxpayer therein argued that --his activities in managing his estate, both realty and personalty, were a unified business. Since it was admittedly a business in so far as the realty is concerned, he urges, there is no statutory authority to sever expenses allocable to the securities. * * * [312 U.S. at 218.]The Court rejected this argument stating "we164 see no reason why expenses not attributable, as we have just held these are not, to carrying on business cannot be apportioned." 312 U.S. at 218.As we have stated, petitioner herein was clearly in the trade or business of trading commodities futures. Petitioner acquired the gold in issue pursuant to delivery on long gold futures contracts which he acquired in the regular course of his business. Petitioner also disposed of the gold pursuant to short gold futures contracts. While petitioner had not regularly held physical commodities for extended periods of time, petitioner did periodically, in the course of his business, take delivery of physical commodities. Further, petitioner took no affirmative action to set apart or distinguish this transaction from other transactions which were entered into in the normal course of his business. These factors strongly suggest that petitioner's gold transaction 465 was part of his trade or business of trading commodity futures.This case is not factually similar to Higgins in that the transaction here in issue was integrally related to transactions which were indisputably part of petitioner's trade or 165 business, i.e., the closing of the futures contracts by which the gold was acquired and disposed. In Higgins, the only relationship between the taxpayer's investment activities and real estate activities was that they were directed through the same office. Higgins does not lead us to the conclusion that the transaction here in issue should be separated out from petitioner's trade or business.We are not aware of any case which has held that a taxpayer may hold property both as a trader of commodity futures and as an investor in commodities. Past cases have held that a taxpayer may be both a trader and a dealer with respect to securities, but these cases have not dealt with the issue of whether the taxpayer therein was a trader or investor. Kemon v. Commissioner, supra at 1033; Carl Marks & Co. v. Commissioner, 12 T.C. 1196">12 T.C. 1196 (1949).In Reinach v. Commissioner, 373 F.2d 900 (2d Cir. 1967), affg. a Memorandum Opinion of this Court, a self-employed writer of put and call options sold such options through the services of a broker. In every case of an exercised put option, i.e., when 166 the option holder exercised the option to sell stock to the taxpayer, the taxpayer disposed of the put stock immediately. In every case of an exercised call option, i.e., when the option holder exercised the option to buy stock from the taxpayer, the taxpayer never owned (nor was long) the stock. At the time a call option was exercised the taxpayer would, through the services of his broker, purchase the stock to deliver to the optionee. At issue were seven transactions in which a call option was exercised and the taxpayer's broker covered the call but the taxpayer did not immediately replace the stock that the broker delivered to the optionee. As to these seven transactions, the taxpayer maintained short positions for periods ranging from 1 1/2 years to 3 1/2 years.There was no dispute in Reinach that the taxpayer therein was in the trade or business of writing options, and that the profits and losses resulting from his option writing 466 business were ordinary in nature. The taxpayer argued that losses resulting from the seven short positions should also be treated as ordinary losses because his intent was not to "buy or sell stock except as required to fulfill options167 which he wrote." 373 F.2d at 904. The Court of Appeals concluded,Whatever we might think about stock bought to honor a call or disposed of following a put within a few days after their exercise, we do not consider stock borrowed for one and one-half to three and one-half years thereafter to have been "held by the taxpayer primarily for sale to customers * * ." * * When [the taxpayer] persisted in his decision to go short for such lengthy periods of time rather than covering immediately, it could not [sic] longer be said that the stock he sold short was held primarily for sale to any alleged customer. [The taxpayer] made his choice to keep the transaction open; that implied a parallel choice to transform this transaction from the ordinary exercise of an option into a short sale extending over a period of many months or even years.[373 F.2d at 904; emphasis in original; fn. ref. omitted.]The Court in Reinach did not consider whether the taxpayer therein was a trader or investor with respect to the seven short sales in issue. 12 Further, the opinion in Reinach does not furnish us with a basis for determining168 when a given commodities transaction can be separated out from the trade or business of a commodity futures trader. Even if we were to assume that the gold transaction here in issue could be examined on the same basis as the transaction in Reinach, we do not believe that it would lead to the conclusion advocated by respondent. The seven short positions there in issue were held for periods from 1 1/2 to 3 1/2 years. The very fact that the taxpayer therein entered into seven such transactions suggests that he intended to depart from his normal business practices, and the Court therein found that he "went short for a purpose entirely divorced from his put and call writing." 373 F.2d at 904. The gold here in issue was held for less than 1 1/2 years and was not part of a series of transactions suggesting an intent on the 467 part of petitioner to depart from his regular business practices.169 Based on the above, we find that the gold here in issue was not property held for investment within the meaning of section 163(d) and that the investment interest limitations do not apply to petitioner's 1979 and 1980 interest payments made with respect to the holding of such property.Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect during the years in issue.↩2. A roundturn trade consists of entering into a futures contract (long or short) and subsequently entering into an offsetting short or long contract to close the transaction.↩3. In our earlier opinion, we stated that petitioner disposed of the gold on May 2, 1980. The parties have now stipulated that the disposition occurred on May 5, 1980. This discrepancy is not relevant to our decision herein.↩4. The statutory notice of deficiency issued by respondent to petitioner disallowed the interest expense claimed by petitioner in 1979 to the extent of $ 149,175.34 pursuant to sec. 163(d). The disallowed 1979 interest was allowed by respondent in 1980 along with the interest incurred to carry the gold in 1980. Sec. 163(d)(1) allows investment interest only to the extent of $ 10,000 plus investment income, but sec. 163(d)(2)↩ permits the carryover of disallowed investment interest. In the notice of deficiency respondent had determined that the gain from closing the short sale with gold was net short-term capital gain (which qualifies as investment income) rather than long-term capital gain (which does not qualify as investment income). Therefore, respondent allowed the above interest amounts in 1980. In our earlier opinion, we determined that petitioner's gain in 1980 was long-term capital gain. As a result, the interest deductions allowed by respondent in 1980 are now in issue.5. The same capital treatment to which traders in securities are subject has also been held applicable to traders of commodity futures. Commissioner v. Covington, 120 F.2d 768 (5th Cir. 1941), affg. on this issue 42 B.T.A. 601">42 B.T.A. 601 (1940); Vickers v. Commissioner, 80 T.C. 394">80 T.C. 394, 405↩ (1983).6. We note that in our earlier opinion, relating to petitioner's motion for partial summary judgment, we stated that the parties were in agreement that "petitioner was a dealer in commodities within the meaning of Section 108(f)" of the Tax Reform Act of 1984 (Division A of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630), as amended by sec. 1808(d) of the Tax Reform Act of 1986. Sec. 108(f), as amended, provides in relevant part "For purposes of this section, the term 'commodities dealer' means any taxpayer who -- (1) at any time before January 1, 1982, was an individual described in section 1402(i)(2)(B)." Sec. 1402(i)(2)(B) defines, for purposes of sec. 1402(i) a commodities dealer as "a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission." A sec. 1256 contract is defined as including "any regulated futures contract." Sec. 1256(b)(1).Petitioner was a registered member of the CME, a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, and was actively engaged in trading regulated futures contracts. Therefore, pursuant to sec. 108(f), petitioner was a commodities dealer for purposes of sec. 108 of the Tax Reform Act of 1984, as amended by sec. 1808(d) of the Tax Reform Act of 1986. This status as a commodities dealer, however, applies solely for purposes of sec. 108 and does not, for any other purpose, affect petitioner's status as a trader who is not a dealer. See H. Rept. 99-426, at 911 (1985).↩7. Until 1968, petitioner acted as a broker as well as trading for his own account. At that time, petitioner may have been a dealer with respect to futures contracts, but this is not relevant to the years in issue.↩8. We also note that sec. 108(a) and (b) of the Tax Reform Act of 1984, 98 Stat. 630, as amended by sec. 1808(d) of the Tax Reform Act of 1986, 100 Stat. 2817-2818, provides,SEC. 108(a). General Rule. - For purposes of the Internal Revenue Code of 1954, in the case of any disposition of 1 or more positions -- (1) which are entered into before 1982 and form part of a straddle, and(2) to which the amendments made by title V of such Act do not apply,any loss from such disposition shall be allowed for the taxable year of the disposition if such loss is incurred in a trade or business, or if such loss is incurred in a transaction entered into for profit though not connected with a trade or business.(b) Loss Incurred in a Trade or Business. -- For purposes of subsection (a), any loss incurred by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business.Based on the foregoing, we determined in our earlier opinion that certain short-term capital losses claimed by petitioner were allowable. Such losses were incurred by a commodities dealer within the meaning of sec. 108(f) (see note 6 supra), in the trading of commodities and were therefore to be treated as incurred in a trade or business for purposes of sec. 108(a). The character of such losses as capital losses, however, is not affected by their treatment as losses incurred in a trade or business for purposes of sec. 108.↩9. We express no opinion as to whether sec. 163(d)↩ is applicable to property held as part of normal trading activities when such activities do not rise to the level of a trade or business.10. The actual issue in Miller related to whether such interest was an item of tax preference pursuant to the alternative minimum tax provisions. See sec. 57. In Miller, we found that sec. 57 and sec. 163(d) were enacted to deal with the same abuse and that, with respect to investment interest, such sections have the same scope. 70 T.C. at 454-455. See also S. Rept. 91-552 (1969), 3 C.B. 423">1969-3 C.B. 423, 617; H. Rept. 91-413 (Part 1) (1969), 3 C.B. 200">1969-3 C.B. 200↩, 245.11. To the extent respondent would argue that Miller establishes a per se rule that sec. 163(d) is applicable anytime interest is incurred to purchase or maintain property which upon disposition produces capital gains or losses, his argument must be rejected. Besides property held by a trader as part of his trade or business of trading, personal use property receives capital treatment upon disposition even though such property is not held for investment. We do not believe that respondent would argue that sec. 163(d)↩ should be applied, for example, to personal residences.12. The Court in Reinach did draw an analogy between the investment intent of the taxpayer therein and an ordinary trader, but to the extent this might be read as stating that the taxpayer was a trader with respect to the short sales, it is dicta. Reinach v. Commissioner, 373 F.2d 900">373 F.2d 900, 904↩ (2d Cir. 1967).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622077/	Estate of George C. Smith, Jr., Deceased, Artemas Holmes and Ormand V. Gould, Executors v. Commissioner.Estate of Smith v. CommissionerDocket No. 108152.United States Tax Court1943 Tax Ct. Memo LEXIS 403; 1 T.C.M. (CCH) 759; T.C.M. (RIA) 43122; March 16, 1943403 Raymond J. Walsh, Esq., for the petitioners. Arthur Groman, Esq., for the respondent. STERNHAGEN Memorandum Opinion STERNHAGEN, Judge: The Commissioner determined a deficiency of $14,582.67 in 1936 income tax of petitioners' decedent on the sole ground "that the sum of $25,000.00 received by the decedent during the taxable year from the estate of his father as executor's commissions and not reported, represents taxable income." George C. Smith, Jr., the deceased taxpayer, filed his personal income tax return for 1936 in the Third District, New York. He died on April 7, 1937, and petitioners were appointed executors of his estate. A waiver of the statute of limitations was executed February 10, 1940. George C. Smith, Sr., the taxpayer's father, died on April 27, 1933. His will provided: I nominate and appoint my son, GEORGE C. SMITH, JR., and my son-in-law, ARTEMAS HOLMES, Executors of and Trustees under this, my Last Will and Testament, * . I give and bequeath to my son, GEORGE C. SMITH, JR., the sum of Twenty-five Thousand Dallars ($25,000), and to my son-in-law, ARTEMAS HOLMES, the sum of Twenty-five Thousand Dollars ($25,000), in case they shall accept th trusts hereunder404 and prove my Will, the said sums to be received and accepted by them respectively in lieu of commissions as Executors and Trustees. On petition of the taxpayer and Holmes, the will was admitted to probate on May 8, 1933, and letters were issued to them. On May 5, 1936, the taxpayer, as executor, paid himself $25,000, but did not include it in gross income on his return for 1936, which was on a cash basis. He continued to act as such executor and trustee until his death. There is no essential difference between the controlling facts in this proceeding and those in (January 4, 1943), and in . The $25,000 received by the taxpayer was a legacy and not compensation for services, although it was bequeathed upon condition that Smith accept the trust and prove the will. The Commissioner incorrectly included the amount in the taxpayer's income. This decision of the substantive question makes it unnecessary to decide the other question raised by the petitioners as to whether, if the substantive decision went *405 the other way, the assessment would be barred by the statute of limitations. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622078/	CITIZENS NATIONAL TRUST & SAVINGS BANK OF LOS ANGELES, EXECUTOR OF THE ESTATE OF MIRA HERSHEY, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Citizens Nat'l Trust & Sav. Bank v. CommissionerDocket No. 68018.United States Board of Tax Appeals34 B.T.A. 140; 1936 BTA LEXIS 745; March 18, 1936, Promulgated 745 On the date of her death decedent owned unpaid installment obligations from the sale of real estate and in respect of which gain had not been reported for any prior year. Held, that said gain should be reported and computed under the provisions of section 44(d) of the Revenue Act of 1928 for the taxable period ended with decedent's death; held, further, that the said section is not unconstitutional. P. D. Johnston, Esq., for the petitioner. E. C. Algire, Esq., for the respondent. TURNER 140 This proceeding is based upon the determination by the respondent of a deficiency in income tax in the amount of $75.75 for the period beginning January 1, 1930, and ending on March 6 of the same year. The petitioner claims that there has been an overpayment of income tax for that period in the amount of $9,132.52. The only issue presented for determination involves the constitutionality of section 44(d) of the Revenue Act of 1928, and the applicability of that section to the transmission of installment obligations by reason of the death of the owner thereof. Two other issues involving 141 the March 1, 1913, value of certain of the real746 estate, the sale of which gave rise to the installment obligations here in question, are now conceded by the petitioner. No oral testimony was offered and the case was submitted on a stipulation of facts and certain written documents filed as exhibits thereto. FINDINGS OF FACT. The petitioner, Citizens National Trust & Savings Bank of Los Angeles, is the executor of the estate of Mira Hershey, deceased. Mira Hershey died on March 6, 1930, and the petitioner was appointed executor on the 27th day of the same month. On September 15, 1923, Mira Hershey, by written agreement, sold to William Green and Gertrude A. Green, his wife, the Hershey Arms Hotel, located at 2600 Wilshire Boulevard, Los Angeles, California, for a total sales price of $300,000, payable $74,250 down and $25,000 on the 15th day of September of the years 1924 to 1932, inclusive. No payments other than the down payment of $74,250 were made during the year 1923. At the time of Mira Hershey's death there remained unpaid of the principal, or sales price, under the contract the sum of $75,750, of which the sum of $22,122.66 represented capital gain or profit over and above the decedent's basis for the unpaid747 balance. During previous years she had reported her gain from this transaction on the installment basis and had not reported the $22,122.66 for any year. During 1923, on or prior to March 20, 1923, Mira Hershey entered into an agreement with one C. E. Toberman, whereby she agreed to sell the property here known as the Toberman-Hay Canyon property for the sum of $425,000, payable $42,500 in cash and the balance payable on or before seven years from and after the date of recording of a quitclaim deed canceling a certain oil lease dated February 16, 1921, given by Mira Hershey to H. S. Montgomery, the said balance to bear interest from the date of the recording of such deed at the rate of 7 percent per annum on the amount of principal from time to time remaining unpaid. No payments other than the down payment of $42,500 were made during the year 1923. On February 26, 1923, Mira Hershey deeded the Toberman-Hay Canyon property to the Title Insurance & Trust Co. for a recited consideration of $10. On March 20, 1923, Title Insurance & Trust Co. executed a declaration of trust with reference to the said property wherein Mira Hershey was designated as the payee and C. E. Toberman as748 the beneficiary. The trust instrument recited further that the title to the property in question was held in trust for the benefit of the said C. E. Toberman as beneficiary thereunder and under the terms and conditions set forth therein and for certain 142 specified uses and purposes, the first purpose being to secure "in the manner hereinafter provided, (a) the payment of the debt hereinbefore described owing to said payee, (b) the payment of all other sums in this declaration provided to be paid by said beneficiary, (c) and the performance of each and every act herein provided to be performed by said beneficiary." The trust instrument also contained provisions for the subdivision, improvement and sale of the property. It set forth the terms for release by the trustee of parcels sold. It also provided that costs of development, taxes, insurance, and other similar items were to be paid by the beneficiary. Provision was also made for the enforcement of the beneficiary's obligations by advertisement and sale upon proper notice being given of the interest of said beneficiary in the property. At the time of the death of Mira Hershey there remained unpaid of the principal, 749 or sales price, under the contract with Toberman, the sum of $195,000, of which the sum of $55,553.30 represented capital gain or profit over and above the decedent's basis for the unpaid balance. The decedent had reported her gain from this transaction during previous years on the installment basis. The said $55,553.30 had not been reported in any income tax return of the decedent for any year. During 1924, on or prior to January 23, Mira Hershey entered into an agreement with J. N. Richards, J. C. Merwin and Hattie T. Merwin, his wife, George W. Carson and Mary F. Carson, his wife, and John E. Carson, whereby she agreed to sell to the said parties the property here known as the La Crescenta Canada property for the total sum of $125,000, payable $20,000 down and the balance on or before five years from February 2, 1924, together with interest from February 2, 1924, on the amount of principal from time to time remaining unpaid, at the rate of 7 percent per annum, payable quarterly, and should the interest not be paid when due it was to be added to the principal of the debt and should thereafter bear interest at the same rate as principal. On December 22, 1923, Mira Hershey750 deeded the La Crescenta Canada property to the Title Insurance & Trust Co. for a recited consideration of $10. On January 23, 1924, Title Insurance & Trust Co. executed a declaration of trust with reference to the property, wherein Mira Hershey was designated as payee and the individuals named above as purchasers of the property as the beneficiaries. The trust instrument was in substance, for the purposes of this case, the same as the trust instrument executed with reference to the Toberman-Hay Canyon property. At the time of Mira Hershey's death there remained unpaid of the principal, or sales price, the sum of $32,000, of which sum $12,736 represented capital gain or profit over and above the decedent's basis 143 for the unpaid balance. The decedent had reported her gain from this transaction in previous years on the installment basis. The said $12,736 had not been reported by her on any income tax return for any year. The petitioner, as executor of the estate of Mira Hershey, filed an income tax return in due course for the period beginning January 1, 1930, and ending March 6, 1930, disclosing ordinary net income of $10,131.54 and income tax liability in the amount751 of $2.75. Upon an examination of the return, the respondent determined a deficiency in the amount of $9,129.77. The deficiency resulted from the addition to income of capital net gain in the amount of $90,155.96 with respect to the three real estate transactions previously described. Upon agreement by the petitioner the amount of this deficiency was assessed and paid during the year 1931 and it is this amount, plus the original tax, that is claimed as an overpayment. Thereafter the respondent determined a further deficiency for the period in question, in the amount of $75.75, and on or about August 18, 1932, mailed a notice of this determination to the petitioner. This deficiency resulted from an increase in the amount of capital gain from $90,155.96, as shown in the previous determination, to $90,411.96. OPINION. TURNER: The only issue for determination is whether or not the installment obligations arising from the sales of the Hershey Arms property, Toberman-Hay Canyon property, and the La Crescenta Canada property, which were unpaid at the date of Mira Hershey's death, were transmitted by reason of her death within the meaning of section 44(d) of the Revenue Act of752 1928, so as to require the inclusion in income for the period here in question of the excess of the fair market value of the obligations on that date over the basis prescribed therefor in the said section; and, further, if section 44(d) is applicable, whether or not it is constitutional. The constitutionality of section 44(d), supra, and its applicability to cases such as we have here have already been considered and determined adversely to the petitioner. , affirming ; , affirming on this point ; ; , affirming . Under authority of these cases the issue stated above is decided for the respondent. In the petitioner's brief, contention is made that the transactions disposing of the Toberman-Hay Canyon property and the La Crescenta Canada property were not sales but options to purchase under 144 subdividing agreements. As753 a basis for this contention the petitioner relies on the declarations of trust executed by the Title Insurance & Trust Co. in respect of the two properties. This contention does not come within any of the issues raised by the petition and is not supported by the facts disclosed by the record. In the petition it is alleged that the sales of the properties in question were made in 1923 and 1924, and the taxpayer elected to report the income therefrom on an installment basis, and that the deficiency herein resulted from the inclusion in income by the respondent of unreported profits on installment obligations transmitted by the death of the taxpayer. In short, the petition alleges sales of the properties on an installment basis and contains no allegation whatever raising an issue that the contracts covering the disposition of the Toberman-Hay Canyon property and the La Crescenta Canada Property were option contracts rather than agreements of sale. Certain provisions of the trust instruments closely resemble the provisions contained in the instrument considered in 754 , which was held to be an option agreement rather than a contract of sale. In this case, however, it is to be noted that the instrument relied on is not an agreement between the parties at all, but is a declaration of trust executed by the Title Insurance & Trust Co. on March 20, 1923, for the benefit of Toberman and to secure payment of the debt owing to Mira Hershey. Further, it is stipulated here than on or prior to March 20, 1923, the date of the declaration of trust, Mira Hershey entered into an agreement of sale with one C. E. Toberman, whereby she agreed to sell Toberman the property here referred to as the Toberman-Hay Canyon property and there is nothing whatever in the trust instrument that in any way negatives the stipulated fact that an agreement of sale was entered into between Mira Hershey and C. E. Toberman on or prior to the date of the declaration of trust. In this respect the facts with reference to the La Crescenta Canada property are the same. It is thus apparent that regardless of the fact that no issue was made that the agreements in respect of the two properties were option agreements rather than sales, the755 facts in the record would not support such an issue if it had been raised. Long after the filing of the brief herein and subsequent to the decision of the Circuit Court of Appeals for the Ninth Circuit in , the petitioner filed a motion to restore this proceeding to the trial calendar for the purpose of presenting proof to show that the transactions mentioned were option transactions and not sales. After hearing on the motion and consideration of the arguments advanced, the motion was denied for the reason that it was not timely and sought to present proof outside of 145 the issues contained in the petition, which had never been amended and in respect of which no motion to amend has at any time been made. Consideration will not be given to issues not raised by the pleadings. ; ; ; ; 756 ; ; . Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622081/	Joseph E. Hall, Petitioner v. Commissioner of Internal Revenue, RespondentHall v. Comm'rDocket No. 15095-86United States Tax Court92 T.C. 1027; 1989 U.S. Tax Ct. LEXIS 66; 92 T.C. No. 64; May 15, 1989. May 15, 1989, Filed 66 Decision will be entered under Rule 155. Petitioner failed to adequately identify which shares of uncertificated mutual fund stocks he sold. Respondent correctly applied the FIFO method of accounting, as provided in sec. 1.1012-1(c), Income Tax Regs., in determining petitioner's basis in the stock he sold for purposes of determining petitioner's gains and losses. W. Louis Beecher, for the petitioner.Elizabeth G. Beck, for the respondent. Drennen, Judge. DRENNEN1027 Respondent, in a statutory notice of deficiency dated March 11, 1986, determined a deficiency in petitioner's Federal income tax in the amount of $ 33,149.The issues for consideration are: (1) Whether petitioner correctly computed gain and loss on 1982 sales of Kemper Technology Fund, Inc. (Technology) noncertificate stock; and (2) whether petitioner correctly computed gain and loss on 1982 sales of Kemper Summit Fund, Inc. (Summit) noncertificate stock.FINDINGS OF FACTThis case was submitted fully stipulated pursuant to Rule 122. 1 The stipulation of facts, together with the exhibits attached thereto, is incorporated by this reference.67 Petitioner Joseph E. Hall had his legal residence at 316 Glencoe, Apt. D, Waterloo, Iowa, 50701, at the time the 1028 petition herein was filed. Petitioner timely filed his Federal income tax return for the taxable year 1982 with the Office of the Internal Revenue Service at St. Louis, Missouri.Technology is an open-end diversified investment company, otherwise known as a mutual fund. Its primary objective is the growth of capital and income through the investment in securities of companies which will benefit from technological advances and improvements. Summit is also a mutual fund. Its primary objective is to maximize appreciation of investors' capital through investments in common stocks and securities convertible into or exchangeable for common stocks. Petitioner owned both certificate and noncertificate shares in Technology and Summit. Certificate shares are shares represented by stock certificates, whereas noncertificate shares are not represented by stock certificates.The central issue in this case is whether petitioner should have used the last in/first out (LIFO) or the first in/first out (FIFO) method for computing gains and losses recognized on sales of noncertificate68 shares in Technology and Summit. Under the LIFO method, shares of stock transferred are charged against the last of such lots purchased or acquired. Under the FIFO method, shares of stock transferred are charged against the first lots of such stock purchased or acquired.Petitioner initiated purchases and sales of Technology and Summit shares by telephonic communication with the shareholder servicing agent for the two mutual funds; DST Systems, (DST) (sometimes hereinafter referred to as agent-broker). DST personnel do not advise or recommend trading strategies. They simply execute the trades as specified by the client. According to petitioner's trial brief, the telephoning client is required to identify himself by name and code number in order to insure proper authorization. In initiating sales of noncertificate stock of these companies during the years here involved, petitioner did not designate when the shares to be sold were acquired nor the cost thereof; he simply told the agent-broker the number of shares he wanted to sell and the selling prices.With respect to the sale of noncertificate shares, the agent-broker of petitioner confirmed such sale orders in 1029 writing69 shortly after the transaction was complete. At the end of the calendar year, the agent-broker mailed petitioner a "confirmation of transactions" for that calendar year. Each such confirmation of transactions indicated the confirmation date, trade date, transaction, dollar amount of the transaction, share price, number of shares sold, and balance of shares owned by petitioner. The confirmation of transactions did not identify the noncertificate shares sold by their respective costs or acquisition dates.On August 1, 1969, petitioner purchased 100,682 shares of Technology in certificate form. Subsequent to August 1, 1969, petitioner purchased additional shares in Technology, by both direct purchase and dividend reinvestment. As of December 31, 1976, petitioner owned 77,585 shares of Technology in certificate form; none in noncertificate form. Petitioner did not sell or otherwise exchange certificated shares in Technology from December 31, 1976, through December 31, 1980. The parties have stipulated that neither purchases nor sales of these certificate shares are in controversy in this proceeding.Noncertificate shares of Technology were purchased by petitioner between 1980 and70 1983. With respect to those purchases, the parties have stipulated trade dates, confirmation dates, dollar amounts, share totals, and share prices. They have also stipulated yearly totals of shares owned. For years beginning after 1979 those totals are:Dec. 31, 1980:Certificate shares -- 77,585Noncertificate shares -- 13,624.513Dec. 31, 1981:Certificate shares -- 77,585Noncertificate shares -- 19,332.587Dec. 31, 1982:Certificate shares -- 60,865Noncertificate shares -- 9,084.013Dec. 31, 1983:Certificate shares -- 60,865Noncertificate shares -- 6,185.907The shares in Technology sold during 1982 which are at issue herein were all held in noncertificate form. Petitioner used the LIFO method of accounting in computing gains and losses from the 1982 sales of these shares. The resulting taxable gains and losses on petitioner's sales of these shares were reported on petitioner's 1982 Federal income tax return as follows: 1030 Number ofDateDatesharesSalessoldacquiredsoldprice01/26/8211/30/812187.833$ 22,687.8301/26/8211/30/811220.74412,659.1101/26/8209/30/813438.09635,653.0609/10/8209/30/815923.79164,391.6009/10/8208/04/82673.2917,318.6709/10/8205/13/82602.1516,545.3809/10/8202/04/82509.8355,541.9009/10/8208/28/81392.8964,270.7709/10/8205/29/81385.6814,192.3509/10/8202/27/81419.0334,554.8809/10/8211/02/79292.9543,184.4571 Short-termLong-termDategain orgain orsoldCostlossloss01/26/82$ 25,138.21$ (2,450.38)01/26/8214,026.35(1,367.24)01/26/8237,887.82(2,234.76)09/10/8265,280.19(888.59)09/10/826,382.80935.87 09/10/826,340.65204.73 09/10/825,404.25137.65 09/10/825,040.85$ (770.08)09/10/825,017.71(825.36)09/10/825,472.57(917.69)09/10/822,671.74512.71 Total (5,662.72)(2,000.42)Respondent computed taxable gains and losses from sales of petitioner's noncertificate shares in Technology during 1982 based on the FIFO method of accounting. The resulting taxable gains and losses on petitioner's sales transactions, as determined by respondent, are as follows:Number ofDateDatesharesSalessoldacquiredsoldprice01/26/8211/02/771182.698$ 12,264.5801/26/8202/05/79377.3313,912.9201/26/8205/15/79475.6314,932.2901/26/8211/02/791053.16610,921.3401/26/8211/02/792535.68726,295.0801/26/8202/27/81419.0334,345.3701/26/8205/29/81385.6813,999.5101/26/8208/28/81392.8964,074.3301/26/8209/30/8124.550254.5809/10/8209/30/819199.632100,000.0012/02/8209/30/81137.7051,757.1212/02/8211/30/81862.29511,002.8872 Short-termLong-termDategain orgain orsoldCostlossloss01/26/82$ 7,758.50$ 4,506.0801/26/8238,150.71762.2101/26/823,957.25975.0401/26/829,604.871,316.4701/26/8223,125.473,169.6101/26/825,472.57$ (1,127.20)01/26/825,017.71(1,018.20)01/26/825,040.85(966.52)01/26/82270.54(15.96)09/10/82101,379.94(1,379.94)12/02/821,517.50239.6212/02/829,907.761,095.12Total (4,507.82)12,064.15On January 27, 1975, petitioner purchased 4,473.026 noncertificate shares in Summit. On December 30, 1975, petitioner purchased 1,184 additional shares in certificate form of Summit. As with the Technology purchases, written confirmations of those transactions set forth trade dates, confirmation dates, dollar amounts, selling prices per share, and share totals. Yearly share ownership totals were as follows: 1031 Dec. 31, 1980:Certificate shares -- 1,184Noncertificate shares -- 45,228.943Dec. 31, 1981:Certificate shares -- 1,184Noncertificate shares -- 47,298.63Dec. 31, 1982:Certificate shares -- 1,184Noncertificate shares -- 40,613,670Petitioner used the LIFO method of 73 accounting in reporting gains and losses on his 1982 sales of noncertificate shares in Summit. The resulting gains and losses, as reported on petitioner's 1982 Federal income tax return were as follows:Number ofDateDatesharesSalessoldacquiredsoldprice01/26/8210/30/812586.207$ 42,000.0002/24/8210/30/811341.58321,250.67 02/24/8212/03/802105.24933,347.14 02/24/8212/05/792866.29945,402.19 09/10/8203/31/825750.431100,000.00 Short-termLong-termDategain orgain orsoldCostlossloss01/26/82$ 42,077.59$ (77.59)02/24/8221,827.56 (576.89)02/24/8242,841.82 $ (9,494.68)02/24/8240,615.45 4,786.74 09/10/8289,361.69 10,638.31 Total 9,983.83 (4,707.94)Respondent used the FIFO method of accounting in computing gains and losses on petitioner's 1982 sales of noncertificate shares in Summit. The resulting gains and losses, as determined by respondent were as follows:Number ofDateDatesharesSalessoldacquiredsoldprice01/26/8201/27/752586.207$ 42,000.0002/24/8201/27/751763.59027,935.2702/24/8201/27/7523.229367.9502/24/8201/30/754526.31271,696.7809/10/8201/30/755750.431100,000.0074 Short-termLong-termDategain orgain orsoldCostlossloss01/26/82$ 14,922.41$ 27,077.5902/24/8210,175.9217,759.3502/24/82134.03233.9202/24/8226,750.5044,946.2809/10/8233,985.0566,014.95Total 156,032.09The parties have stipulated that petitioner did not elect to use the averaging methods, as provided in section 1.1012-1(e), Income Tax Regs., in computing reportable gains and losses from his sales of Technology and Summit noncertificate shares. The parties have also stipulated that petitioner has never filed a request, pursuant to section 1.446-1(e), Income Tax Regs., to change his method of computing gain or loss on the sale of noncertificate shares of the subject mutual funds.The parties have stipulated transaction summaries of Summit and Technology purchases and sales. Those summaries 1032 were prepared by petitioner's accountant, Robert Maas, CPA (Maas), on December 31, 1983. Maas' summaries set forth transaction dates, per-share costs, number of shares, sales prices, and gain or loss on disposal. Although those schedules do specify costs used to determine gain or loss recognized on a given75 disposition, no direct data is provided to delineate why those specific costs were appropriate. In other words, those costs were not related directly to specific shares sold.The summaries provided by Maas simply reflect the LIFO method of accounting. On brief, petitioner states that "the cost basis assigned to the shares being sold was that of the immediately preceding 'purchase' or 'dividend reinvestment' entry. (The last chronological noncertificate share acquisition.) If the number of shares being sold was greater than the number of shares reported for the most recent acquisition, these remaining shares were assigned the cost basis of the second most recent purchase or dividend reinvestment."Petitioner conceded an increase in his taxable income for the year 1982 in the amount of $ 7,449 as reported in the auditor's report.Petitioner also concedes that he sold 1,000 shares of Technology noncertificate stock at $ 12.76 per share for a total dollar amount of $ 12,760, which should have been but was not reported on his 1982 return.OPINIONThe central issue in this case is whether petitioner correctly computed gains and losses realized as a result of the disposition of noncertificate76 shares in Technology and Summit. Petitioner contends that he is free to use the LIFO method of accounting in allocating basis for purposes of computing those gains and losses. Respondent, on the other hand, argues that section 1.1012-1(c), Income Tax Regs., 21033 mandates that petitioner use the FIFO method in allocating basis.77 Section 1001(a) provides that gain from the sale or other disposition of property is the amount realized less the adjusted basis of the property. Sections 1011 and 1012, insofar as here pertinent, provide that the basis of property sold is its cost to the taxpayer. When a taxpayer has acquired stock on different dates or at different costs and sells only a portion of that stock, a problem arises identifying the cost or basis of the stock sold. However, the taxpayer has the burden of proving his basis in the specific stock he sells. Respondent, recognizing this problem, has provided by regulations several safe harbor means of complying with the statute requirements.Section 1.1012-1(c), Income Tax Regs., sets forth the rules governing the bases of stock sold by a taxpayer who has acquired blocks of stock on different dates or at different costs. Subdivision (1) of that section provides that the FIFO rule shall govern unless the lot from which the stock is sold can be adequately identified. In other words, absent adequate 1034 identification of the lot from which the stock was sold, the basis of the stock sold shall be the basis of the first stock acquired by the taxpayer. 78 This subdivision of the regulation was promulgated in 1958, and has been recognized and applied by the courts for many years. See Kluger Associates, Inc. v. Commissioner, 617 F.2d 323 (1980), affg. 69 T.C. 925">69 T.C. 925 (1978); Beran v. Commissioner, T.C. Memo. 1980-119, for discussions. The burden is on the taxpayer to adequately identify the stock which is sold. Rule 142(a); Beran v. Commissioner, supra.For the reasons stated below, we find that petitioner has failed to meet his burden.The regulations also permit the use of two optional elective accounting methods for computing gains and losses realized on sales of shares of stock in regulated investment companies such as Technology and Summit. Secs. 1.1012-1(e)(3) and 1.1012-1(e)(4), Income Tax Regs. Those two elective provisions permit basis averaging. The first is denominated the "double-category" method, which is set forth in section 1.1012-1(e)(3), Income Tax Regs.Section 1.1012-1(e)(4), Income Tax Regs., sets forth an alternative "single-category" method of accounting. These alternative methods of accounting79 may produce results which are more favorable to taxpayers than those generated by the FIFO method because of lower realized gains. Petitioner did not elect to use either of these elective methods.Under sections 1.1012-1(c)(3)(i) and (ii), Income Tax Regs., petitioner is required to "adequately identify" the stock sold to avoid using the FIFO method. In Helvering v. Rankin, 295 U.S. 123">295 U.S. 123, 129 (1935), the Supreme Court said "The required identification is satisfied, if the margin trader has, through his broker, designated the securities to be sold as those purchased on a particular date and at a particular price. It is only when such a designation was not made at the time of the sale, or is not shown, that the 'First-in, first-out' rule is to be applied." While certificated stock was involved in the Rankin case, it is all the more important with noncertificate stock that the stock being sold be identified and designated at the time of sale.In this case, there is no evidence that petitioner specifically designated to anyone, at the time of the sale, the shares of stock that he was selling. He usually told his 1035 agent-broker over the telephone80 the number of shares he wanted to sell and the dollar amount to be realized from the sale. He did not tell his agent-broker the date the shares were purchased or the price he paid for them; and consequently the agent-broker did not include such information in his confirmation notices to petitioner. Petitioner failed to adequately identify the stock being sold, and failed to comply with the requirements of the regulation and the case law. The regulation requires that the FIFO method be used in determining petitioners gain or loss in the transaction here involved. We cannot determine from the record in this case when or how petitioner designated in his records just what shares were being sold in a particular transaction.Petitioner argues that the adequate identification requirement does not apply to noncertificate shares of stock. Petitioner supports this argument by asserting that section 1.1012-1(c), Income Tax Regs., requires FIFO reporting only if certificate shares are involved. Specifically, petitioner notes that section 1.1012-1(c)(2), Income Tax Regs., references sales of certificates of stock in defining adequate identification. Petitioner also looks to section 1.1012-1(c)(3)(i), 81 Income Tax Regs., as applying only where certificates remain in the custody of a broker. Petitioner argues that such references to certificate shares in the regulations preclude the applicability of the adequate identification requirement to sales of noncertificate shares.We cannot agree with petitioner's reading of the applicable regulations. The adequate identification requirement is initially set forth in section 1.1012-1(c)(1), Income Tax Regs., which makes absolutely no reference to certificate or noncertificate shares of stock. Section 1.1012-1(c)(1), Income Tax Regs., only refers to stock generally. Section 1.1012-1(c)(3)(i), Income Tax Regs., initially refers to stock generally and notes that stock identified pursuant to this subdivision is the stock sold or transferred by the taxpayer, "even though stock certificates from a different lot are delivered to the taxpayer's transferee." Sec. 1.1012-1(c)(3)(i), Income Tax Regs. We do not agree that such a reference to certificate shares makes the adequate identification requirement inapplicable to noncertificate shares of stock. The reference to certificate shares in section 1.1012-1(c)(3)(i), 1036 Income Tax Regs., 82 does not preclude the applicability of the section. Moreover, petitioner has suggested no better or more equitable method for determining basis and holding period for noncertificate stock that cannot otherwise be identified. Petitioner has not suggested any provision in the law or regulations which authorize the use of the LIFO method of determining basis under these circumstances.We finally note that adequate identification has long been found possible in situations where specific references to share certificates are not possible. For example, in Helvering v. Rankin, supra, an opinion which was rendered long before the promulgation of these regulations in 1958, the Court was faced with shares which were impossible to identify because of complex trading activity. In that case, the Court disagreed with the Commissioner that adequate identification was impossible:from the very nature of these marginal operations, the shares were incapable of identification by the broker or anyone else. The basis for this contention is the facts that in such transactions no certificate is issued in the name of the customer, or earmarked for or otherwise allocated83 to him; that all certificates are in the name of the broker or street names; and that all certificates for stock of the same kind are commingled and held by the broker for the common benefit of all dealing in that particular stock. The fallacy of this argument lies in the assumption that shares of stock can be identified only through stock certificates. It is true that certificates provide the ordinary means of identification. But it is not true that they are the only possible means * * . Particularly is this so when, as here, the thing to be established is the allocation of lots sold to lots purchased at different dates and different prices. The required identification is satisfied if the margin trader has, through his broker, designated the securities to be sold as those purchased on a particular date and at a particular price. It is only when such a designation was not made at the time of the sale, or is not shown, that the "First-in, first-out" rule is to be applied. [Helvering v. Rankin, supra, at 128-129.]Rankin is typical of the long-held judicial approach to adequate identification, i.e., that adequate identification is feasible 84 in a wide variety of circumstances. Rankin also indicates that adequate identification can be accomplished where the trader, through his broker, designates the securities to be sold as those purchased on a particular date at a particular price. Accord Kluger Associates, Inc. v. Commissioner, supra;Beran v. Commissioner, supra.1037 Given our holding that adequate identification is required in this case, we must apply the applicable regulatory provision to determine whether adequate identification was in fact accomplished. Even though the shares of Technology and Summit involved in this case were not represented by certificates, the applicable regulatory provision is still sections 1.1012-1(c)(2) and 1.1012-1(c)(3), Income Tax Regs., which require adequate identification of the shares sold. Pursuant to the two-prong test set forth in that section 1.1012-1(c)(3)(b), Income Tax Regs., adequate identification is accomplished if the taxpayer specifies to the broker or transfer agent the particular stock to be transferred and written confirmation of such specification is forwarded to the taxpayer within a reasonable85 time. Petitioner did not specify the particular shares or blocks of stock to be transferred. In addition, the written confirmation supplied by the broker did not refer to such a specification. None of the information in the confirmation of transactions indicates how the shares transferred were selected. Therefore, petitioner has not satisfied either prong of section 1.1012-1(c)(3)(i), Income Tax Regs. Nor has he carried his burden of proving a basis in whatever asset he sold if the regulation is not applicable.The parties stipulated that sale transactions with respect to Technology and Summit were initiated by petitioner by a telephone call to DST. The agent-broker of petitioner then confirmed such sale orders in writing shortly after the trade transaction was complete. The agent-broker subsequently mailed petitioner an annual confirmation of transactions. Each such confirmation indicated the confirmation date, trade date, transaction, dollar amount of transaction, share price, number of shares sold, and the balance of shares owned by petitioner. The confirmations did not specifically identify the noncertificate shares sold by their respective acquisition date or cost, or86 by any other reasonable means. Finally, the parties also stipulated that no specific shares were designated by the agent. Only the dollar amount of proceeds required or the number of shares sold were specified. Thus, all of petitioner's subject noncertificate share sales were made without regard to acquisition date, purchase price, or any other share specification mechanism.1038 Petitioner argues alternatively that he specified the shares to be sold and thereby satisfied the adequate identification requirement. We see nothing in the stipulation of facts or the accompanying exhibits to support this assertion. We have not been presented with any evidence which proves that petitioner specified precisely which shares DST was to sell. Nor is there any evidence that petitioner ever told his agent-broker or anyone else that he was using a LIFO method for designating which shares of his stock he was selling. Compare Davidson v. Commissioner, 305 U.S. 44">305 U.S. 44 (1938); Curtis v. Helvering, 101 F.2d 40">101 F.2d 40 (2d Cir. 1939). Moreover, petitioner did not designate the securities to be sold as those purchased on a particular date 87 and a particular cost which Helvering v. Rankin, supra suggests is a suitable method of satisfying the adequate identification requirement. Petitioner has thus not satisfied the applicable regulation.Petitioner has the burden of proving how much gain or loss he realized on the sale of stock owned by him. This requires identification of the stock sold. Absent any directions in the law as to how this may be done, respondent has included in his regulations instructions on how this is to be accomplished. This he has a right to do, keeping in mind that the regulations must be reasonable and fair. In Joseph Gann, Inc. v. Commissioner, 701 F.2d 3 (1st Cir. 1983), affg. per curiam T.C. Memo. 1982-104, cert. denied 464 U.S. 821">464 U.S. 821 (1983), the Court of Appeals for the First Circuit reviewed the history and interpretation of section 1.1012-1(c)(1), Income Tax Regs. It stated that Treasury Regulations and interpretations long continued without substantial changes, applied to unamended or substantially reenacted statutes, are deemed to have congressional approval and have the 88 effect of law. The Court affirmed the findings of this Court that section 1.1012-1(c)(1) Income Tax Regs., is a valid regulation and has the effect of law. The regulation involved in this case appears to be eminently fair and reasonable. It does not prevent the taxpayer from designating the specific share of stock he is selling if he does it at the time of the sale. The seller-taxpayer should have access to the information required to identify the shares being sold. If he does not have access to the information or does not present it, 1039 the regulation simply provides a method for determining the necessary facts. The FIFO method does not necessarily work to the disadvantage, taxwise, of the seller. If he keeps adequate records and uses them he should normally be able to select which method he chooses to support his position. But we see no valid reason, and petitioner has advanced none, to permit a stock trader to wait until the end of a year to allot specific sales to his general inventory of stocks in such a manner as to be most beneficial to him taxwise. We find section 1.1012-1(c), Income Tax Regs., to be valid and controlling in this case, and that respondent has89 correctly applied it. That regulation provides a means by which petitioner's basis in the stock sold can be determined; without the regulation petitioner has failed to carry his burden of proving his basis, and hence the amount of his gain or loss, in the stocks he sold in 1982.We recognize that the hurly-burly activity on the national stock exchange in this day and age may make the stocktraders' accounting rather difficult but that is the taxpayer's risk.Decision will be entered under Rule 155. Footnotes1. All Rule references are to the Tax Court Rules of Practice and Procedure. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the years at issue.↩2. (c) Sale of stock (1) In general. If shares of stock in a corporation are sold or transferred by a taxpayer who purchased or acquired lots of stock on different dates or at different prices, and the lot from which the stock was sold or transferred cannot be adequately identified, the stock sold or transferred shall be charged against the earliest of such lots purchased or acquired in order to determine the cost or other basis of such stock and in order to determine the holding period of such stock for purposes of subchapter P chapter 1 of the Code. If, on the other hand, the lot from which the stock is sold or transferred can be adequately identified, the rule stated in the preceding sentence is not applicable. As to what constitutes "adequate identification," see subparagraphs (2), (3), and (4) of this paragraph.(2) Identification of stock. An adequate identification is made if it is shown that certificates representing shares of stock from a lot which was purchased or acquired on a certain date or for a certain price were delivered to the taxpayer's transferee. Except as otherwise provided in subparagraph (3) or (4) of this paragraph, such stock certificates delivered to the transferee constitute the stock sold or transferred by the taxpayer. Thus, unless the requirements of subparagraph (3) or (4) of this paragraph are met, the stock sold or transferred is charged to the lot to which the certificates delivered to the transferee belong, whether or not the taxpayer intends, or instructs his broker or other agent, to sell or transfer stock from a lot purchased or acquired on a different date or for a different price.(3) Identification on confirmation document. (i) Where the stock is left in the custody of a broker or other agent, an adequate identification is made if --(a) At the time of the sale or transfer, the taxpayer specifies to such broker or other agent having custody of the stock the particular stock to be sold or transferred, and(b) Within a reasonable time thereafter, confirmation of such specification is set forth in a written document from such broker or other agent.Stock identified pursuant to this subdivision is the stock sold or transferred by the taxpayer, even though stock certificates from a different lot are delivered to the taxpayer's transferee.(ii) Where a single stock certificate represents stock from different lots, where such certificate is held by the taxpayer rather than his broker or other agent, and where the taxpayer sells a part of the stock represented by such certificate through a broker or other agent, an adequate identification is made if --(a) At the time of the delivery of the certificate to the broker or other agent, the taxpayer specifies to such broker or other agent the particular stock to be sold or transferred, and(b) Within a reasonable time thereafter, confirmation of such specification is set forth in a written document from such broker or agent.Where part of stock represented by a single certificate is sold or transferred directly by the taxpayer to the purchaser or transferee instead of through a broker or other agent, an adequate identification is made if the taxpayer maintains a written record of the particular stock which he intended to sell or transfer.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622084/	John Albert Gilday, Petitioner v. Commissioner of Internal Revenue, RespondentGilday v. CommissionerDocket No. 1608-73United States Tax Court62 T.C. 260; 1974 U.S. Tax Ct. LEXIS 102; 62 T.C. No. 30; May 29, 1974, Filed 102 Decision will be entered for the respondent. Upon petitioner's failure to reply, the Court granted respondent's motion under then Rule 18(c) (now Rule 37(c)), Tax Court Rules of Practice, that the affirmative allegations in respondent's answer relative to fraud be deemed admitted. Petitioner failed to appear when the case was called for trial. Respondent moved to dismiss for failure to prosecute with regard to the deficiency in tax, and moved for judgment on the facts deemed admitted with regard to the addition to tax for fraud. Held: Petitioner's return for 1969 was false and fraudulent with intent to evade tax. Decision entered for respondent in the amounts of the deficiency in tax and addition to tax determined in the notice of deficiency. Procedure under new rules of Tax Court in such circumstances discussed. William H. Newton III, for the respondent. Drennen, Judge. DRENNEN261 OPINIONRespondent determined a deficiency in income tax and addition to tax under section 6653(b), I.R.C. 1954, against petitioner as follows:Addition to taxYearDeficiencysec. 6653(b)1969$ 818.01$ 409.01Petitioner filed an individual income tax return for the year 1969 with the office of Internal Revenue Service, Jacksonville, Fla. Petitioner resided in Miami, Fla., at the time the petition herein was filed.Respondent filed his answer to the petition filed herein on May 7, 1973. The answer affirmatively alleged specific facts upon which respondent relied to sustain fraud, the burden of proof of which is placed on respondent by statute. Sec. 7454(a), I.R.C. 1954. Petitioner did not file a reply to respondent's answer, and on August 2, 1973, respondent filed a Motion for Entry of Order that Undenied Allegations in104 Answer be Deemed Admitted, under then Rule 18(c), 1 Tax Court Rules of Practice. Upon due notice of hearing, this Court, on October 3, 1973, entered an order granting respondent's motion.This case was called for trial from the trial calendar of this Court in Miami, Fla., on May 13, 1974. There was no appearance by or in behalf of petitioner. Respondent thereupon moved that the case be dismissed for lack of prosecution insofar as the deficiency is concerned and that the Court enter decision for respondent in the amount of the deficiency determined in the notice of deficiency. This motion was granted, and decision will be entered for respondent that there is a deficiency in petitioner's income tax for the year 1969 in the amount of $ 818.01. See sec. 7459(d), I.R.C. 1954.Respondent also moved for judgment on the fraud issue based on the affirmative allegations of fact contained in respondent's answer, which were deemed admitted by the order of this Court above mentioned 262 pursuant105 to Rule 37(c). The facts so deemed admitted establish that petitioner claimed dependency exemptions for four children who were living with petitioner's estranged wife and for whom petitioner did not supply more than 50-percent support in 1969; that petitioner gave a false address on his income tax return for 1969; that petitioner erroneously claimed an exemption for his estranged wife, Alice Gilday, on his 1969 return, by filing what purported to be a joint return; and that petitioner forged the signature of his wife on his 1969 return. Alice Gilday filed a separate individual income tax return for the year 1969, claiming a dependency credit for all four children as well as a personal exemption for herself.Respondent has the burden of proving fraud by clear and convincing evidence. Zelma Curet Miller, 51 T.C. 915 (1969); M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518 (1930). We find that the facts deemed admitted satisfy respondent's burden of proving fraud. We find as a fact that the return filed by petitioner was false and fraudulent with intent to evade tax, and that the deficiency was due to fraud. Accordingly, there is an addition106 to tax owing by petitioner for the year 1969 in the amount of $ 409.01.The motion procedure followed by respondent as outlined above has been used in the past, see Louis Morris, 30 T.C. 928 (1958); Robert Kenneth Black, 19 T.C. 474">19 T.C. 474 (1952); Earnest B. Watson, T.C. Memo. 1964-155, and is probably satisfactory under the new Rules of Practice and Procedure, United States Tax Court, which became effective January 1, 1974. However, in a case in which the respondent has the burden of proving fraud, and the Court must determine whether the facts, either deemed admitted under Rule 37(c) or proven at the trial, prove fraud, a motion to dismiss seems inappropriate, if a more consistent procedure is available. Rule 123 of the new rules provides that when any party has failed to plead or otherwise proceed as provided in the rules, he may be held in default by the Court on motion of another party, and the Court may enter decision against the defaulting party. New Rule 122 provides that any case not requiring a trial for submission of evidence (as, for example, where sufficient facts have been admitted) 107 may be submitted to the Court on the facts so established without trial. In a case such as this where respondent is willing to submit the fraud issue to the Court on the facts deemed admitted under Rule 37(c), a more appropriate procedure would be for respondent to move, when the case is called from the trial calendar and petitioner fails to appear, for judgment by default for the deficiency in tax as determined in the notice of deficiency, and for judgment on the fraud issue on the facts deemed admitted without trial. The Court can then grant respondent's motion for judgment by default with respect to the deficiency in tax and enter such decision as it finds justified 263 from the admitted facts with respect to the addition to tax fraud under section 6653(b).In this case, for reasons above stated, decision will be entered for respondent with respect to both the deficiency in tax and the addition to tax for fraud.Decision will be entered for the respondent. Footnotes1. Present Rule 37(c)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622085/	Harry H. and Gloria J. Takahashi, Petitioners v. Commissioner of Internal Revenue, RespondentTakahashi v. CommissionerDocket No. 10640-83United States Tax Court87 T.C. 126; 1986 U.S. Tax Ct. LEXIS 77; 87 T.C. No. 8; July 21, 1986, Filed 77 Decision will be entered under Rule 155. On their 1981 Federal income tax return Ps, high school science teachers, claimed, as education expenses under sec. 162(a), I.R.C. 1954, certain expenses which they incurred to attend a cultural seminar in Hawaii. Also, on their 1979, 1980, and 1981 returns, Ps claimed losses in connection with the operation of a farm. Held, a course providing general cultural enrichment is not sufficiently germane to the teaching of science to bring the course within the category of a "refresher," "current developments," or "academic or vocational" course as required by regulations to qualify the course for deductible education expenses. Sec. 1.162-5(c)(1), Income Tax Regs.Held, further, because Ps did not engage in the operation of the farm for profit within the meaning of sec. 183, I.R.C. 1954, they may not claim farm expenses in excess of farm income. Terence Nunan and Jeffrey K. Riffer, for the petitioners.Marilyn Devin and J. Robert Cuatto, for the respondent. Nims, Judge. NIMS127 Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows:Additions to taxYearDeficiencysec. 6653(a) 11979$ 1,53619801,389$ 69.4519812,686134.3079 After concessions, the issues for decision are: (1) Whether petitioners are entitled to deduct certain expenses which they incurred to attend a seminar in Hawaii as education expenses under section 162(a); (2) whether the operation of petitioner's farm was an activity "not engaged in for profit" within the meaning of section 183; and (3) whether petitioners are liable for additions to tax for negligence or intentional disregard of rules and regulations under section 6653(a). For reasons of convenience, we have combined our findings of fact and opinion with respect to each 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.Petitioners Harry H. Takahashi and Gloria J. Takahashi husband and wife, resided80 in Hacienda Heights, California, at the time they filed the petition herein.128 Issue 1. Education ExpensesDuring the years in issue, petitioners were employed as science teachers by the Los Angeles Unified School District. Approximately 25 percent of Mrs. Takahashi's students were minorities while almost all of Mr. Takahashi's students were minorities. Most of the minority students taught by petitioners were Hispanic.Pursuant to article 3.3 of the California State Education Code, a teacher employed by the Los Angeles Unified School District must complete a minimum of two semester units in a course of study dealing with multicultural societies to receive promotions and salary increases. During 1981, petitioners attended a seminar held in Hawaii entitled "The Hawaiian Cultural Transition in a Diverse Society" which satisfied the requirements of article 3.3.Petitioners, together with their 2 1/2-year-old son, spent 10 days in Hawaii. Petitioners attended the seminar on 9 out of the 10 days during which they were in Hawaii. The seminar program lasted from 1 to 6 hours each day and consisted of classroom instruction as well as tours of Polynesian cultural attractions81 and visits to the homes of local natives. When petitioners were not participating in the seminar they would take their son sightseeing or spend time relaxing at the beach.Petitioners incurred expenses totaling $ 2,373 in connection with their trip to Hawaii. A portion of these expenses were incurred for their son's travel and meals as well as for personal activities engaged in by petitioners which were unrelated to the seminar.On Form 2106 (Employee Business Expenses) attached to their 1981 Form 1040, petitioners claimed the expenses they incurred in connection with their Hawaiian trip as an education expense under section 162(a). In the notice of deficiency, respondent disallowed this deduction in full with the explanation that petitioners had not established that the expenses were paid or incurred during the taxable year or that the expenses were ordinary and necessary to their business.Under section 1.162-5(a), Income Tax Regs., education expenses are deductible as ordinary and necessary business 129 expenses 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 requirements82 of the individual's employer. If a taxpayer incurs education expenses while traveling away from home which satisfy one or both of these tests, his expenditures for travel, meals, and lodging incurred while away from home are deductible only if the individual travels away from home primarily to obtain education. Sec. 1.162-5(e)(1), Income Tax Regs. If the taxpayer travels away from home primarily for personal reasons, only expenditures incurred for meals and lodging during the time actually spent participating in deductible education pursuits are allowable. Sec. 1.162-5(e)(1), Income Tax Regs.Petitioners do not contend nor does the record contain any evidence that petitioners' attendance at the seminar was required by their employer. 2 Rather, petitioners contend that because the seminar on "Hawaiian Cultural Transition in a Diverse Society" enabled them to better understand their minority students, the seminar maintained or improved skills required by them to teach science to minority students. Petitioners further contend that they traveled to Hawaii primarily to attend the seminar. Petitioners therefore conclude that the expenses they incurred in connection with the seminar, 83 including travel, meals, and lodging, are fully deductible as education expenses under section 162(a).Respondent contends that petitioners have not established that the seminar maintained or improved skills required by them to perform their jobs as science teachers, and, therefore, that none of the expenses petitioners incurred in connection with their trip to Hawaii are84 deductible. Respondent further contends that even if the seminar maintained or improved petitioners' teaching skills, petitioners' education expense deduction should not be allowed because petitioners traveled to Hawaii primarily for a 130 vacation rather than to obtain education. Finally, respondent contends that even if petitioners traveled to Hawaii primarily to obtain education, they have provided no records or credible testimony upon which to allocate the cost of their Hawaiian trip between deductible business expenses and nondeductible personal expenses.On the record before us, we do not think that petitioners' participation in the seminar maintained or improved skills required by them to perform their jobs as science teachers, and petitioners have conceded that their attendance was not required by their employer. Consequently, since petitioners fail to satisfy the threshold tests of section 1.162-5(a) of the regulations, we need not consider whether petitioners have satisfied the travel provisions of section 1.162-5(e) of the regulations.When a taxpayer claims, pursuant to the first of the tests contained in section 1.162-5(a) of the regulations, that an education85 expense was incurred in order to maintain or improve his existing skills, he must demonstrate a connection between the course of the study and his particular job skills. Schwartz v. Commissioner, 69 T.C. 877">69 T.C. 877, 889 (1978), citing Baker v. Commissioner, 51 T.C. 243">51 T.C. 243 (1968). We do not think petitioners have demonstrated this connection. Although Mrs. Takahashi cited "greater rapport" and "better understanding of people," she could point to "no real tangible thing" to connect the Hawaiian multicultural course which she took with the skills required of a science teacher. Similarly, with respect to Mr. Takahashi, the record shows no evidence that the course which he attended in Hawaii had any nexus with his teaching of science. Mr. Takahashi did not testify at the trial.Petitioners cite Hilt v. Commissioner, T.C. Memo 1981-672">T.C. Memo. 1981-672, as illustrating a situation where the education-travel deduction was disallowed only because the taxpayers "did not engage in any specific course of study or spend any time acquiring information from individuals specifically knowledgeable in the areas of Hawaiian culture86 or history." 42 T.C.M. (CCH) 1718">42 T.C.M. 1718, at 1721-1722, 50 P-H Memo T.C. par. 81,672, at 81-2613. As in the case before us, Hilt involved California teachers who traveled to Hawaii with a child and claimed section 162(a) education expense deductions. The 131 deductions claimed in Hilt were based in some part at least upon taxpayers' obtaining "professional growth units" under California law which, when obtained, would have increased taxpayers' salary levels. 3Petitioners apparently wish us to infer from the above-quoted language in Hilt that any expenditures incurred for general cultural enrichment, if duly substantiated, will be allowable as education expense deductions. However, in the context of petitioners' professional duties as87 science teachers, the Hawaiian Cultural Transition course does not in our judgment fall within the category of a "refresher," "current developments," or "academic or vocational" course required by the regulations. Sec. 1.162-5(c)(1), Income Tax Regs. The Hawaiian Cultural Transition course is simply not sufficiently germane to the teaching of science to bring the course within the category of expenditures for education which maintains or improves skills required by the individual in his employment. Sec. 1.162-5(a)(1), Income Tax Regs. We accordingly hold for respondent on this issue.Issue 2. Farm LossesOn their Federal income tax returns for the years in issue, petitioners claimed losses from the operation of a 40-acre grape farm (the farm) which Mrs. Takahashi (petitioner) owned in Fresno County, California. The farm had originally been owned by petitioner's grandfather and had been petitioner's family home during her childhood. Petitioner had purchased the farm in January 1972, from her uncle for approximately $ 120,000, the consideration consisting of a cash downpayment and an interest-bearing note.At the time petitioner purchased the farm, her father was farming 88 the property. In order to provide her father with steady employment and old-age security, petitioner and her father entered into an oral agreement whereby her father would operate, manage, and work the farm in exchange for net profits, if any. Petitioner's father agreed to pay all expenses which were incurred for labor, transportation, and equipment while petitioner agreed to pay all other expenses 132 which were incurred in connection with the operation of the farm. Pursuant to this agreement, petitioner would receive farm income to the extent of the farm expenses which she incurred during the year, while her father would receive any remaining income. They further agreed, however, that regardless of the profitability of the farm, petitioner's father would receive income sufficient to support himself and his wife. In the event the farm operations resulted in a net loss, all losses would be allocated to petitioner.On Schedule F (Farm Income and Expenses) attached to their Forms 1040 for 1979, 1980, and 1981, petitioners reported the following income, expenses, and losses with respect to the operation of the farm:197919801981Income$ 10,000 $ 10,000 $ 10,000 Expenses14,494 14,281 12,048 Profit (loss)(4,494)(4,281)(2,048)89 In the notice of deficiency, respondent determined that petitioner's farming activities were "not engaged in for profit" within the meaning of section 183 and, therefore, he disallowed all farm expenses in excess of farm income. The issue we must decide is whether petitioner engaged in the operation of the farm for profit. 4 It seems self-evident that she did not, since under the agreement with her father, any net profit would have inured to him.90 A taxpayer must engage in an activity with the primary purpose and objective of making a profit in order to fully deduct expenses under either section 162 or section 212. 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). "While a reasonable expectation of profit is not required, the taxpayer's profit objective must be bona fide." Fox v. Commissioner, 80 T.C. 972">80 T.C. 972, 1006 (1983), affd. without published opinion 742 F.2d 1441">742 F.2d 1441 (2d Cir. 1984), affd. without published opinion sub nom. Hook v. Commissioner, 133 Kratsa v. Commissioner, Leffel v. Commissioner, Rosenblatt v. Commissioner, Zemel v. Commissioner, 734 F.2d 5">734 F.2d 5-7, 9 (3d Cir. 1984), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230">731 F.2d 230 (4th Cir. 1984); Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 644-645 (1982), affd. without opinion (D.C. Cir. 1983).The issue of whether a taxpayer engaged in an activity with the requisite objective of making a profit is one of fact 91 to be resolved on the basis of all the facts and circumstances. Lemmen v. Commissioner, 77 T.C. 1326">77 T.C. 1326, 1340 (1981). The burden of proving the requisite intention is on petitioners. Sabelis v. Commissioner, 37 T.C. 1058">37 T.C. 1058, 1062 (1962); Rule 142(a).Section 183 allows deductions for ordinary and necessary expenses arising from an activity not engaged in for profit only to the extent of gross income derived from such activity, less the amount of those deductions which are allowable regardless of whether or not the activity is engaged in for profit. 592 By letter dated June 24, 1982, petitioner informed an agent for the Internal Revenue Service that her objective with respect to the operation of the farm was as follows:My share of the income? I receive only what is needed to meet my financial obligations. My intent is not to make money but to have a tax 134 shelter and mostly to help my folks, whose income is solely from this small farm. The costs of operating a raisin farm [have] increased steadily if not rapidly these years, perhaps more significantly with small farms such as this one (40 acres), however the income has fluctuated and continues to do so. Their income is adversely affected by many negative environmental factors, increasing inflation and a declining economy. Since I have a set income, and they have difficult times (i.e. inopportune excessive rain, frost, hail, mold & insect damage, etc.) I ask them only for the amount needed to pay my financial obligations as previously mentioned. In 1978, less money was requested due to severe crop damage from hail.Petitioner testified at trial and did not dispute the authenticity of this letter. We therefore find this letter, standing alone, to be an admission by93 petitioner that she engaged in the operation of the farm primarily to provide her parents with a steady income and to obtain tax deductions rather than to make an economic profit. We also emphasize that petitioners state in their brief that petitioner's "primary motive was to provide a farm for her father and mother to enable them to become self-sufficient."The terms of the oral agreement between petitioner and her father confirm petitioner's admission that she did not engage in the operation of her farm with the primary objective of making a profit. Pursuant to this agreement, petitioner was to receive farm income only to the extent of her farm expenses. Thus, regardless of the farm's profitability, petitioner would never realize a profit from the farm's operation. We also observe that during the years in issue, even though the farm produced sufficient income to cover petitioner's share of the farm expenses, she did not even receive all of the income to which she was entitled, but rather ceded some of her share to her father.Petitioners argue that the farm was operated in a businesslike manner, that the farm was not used for personal pleasure or recreation, and that the farm94 losses were attributable to factors beyond petitioner's control. While under the regulations these are relevant factors to be considered in determining profit motive, they are rendered immaterial in this case in light of petitioner's admission that she did not have a profit objective. See sec. 1.183-2(b), Income Tax Regs. (some of the relevant factors listed which 135 are to be considered in determining whether an activity is engaged in for profit).Frazier v. Commissioner, T.C. Memo 1985-61">T.C. Memo. 1985-61, does not require a different result. There, although the taxpayer's mother resided on the farm, the taxpayer, himself, nevertheless had a profit objective in operating the farm, which is not the case here.There remains the question of interest and property taxes on the farm, allegedly paid by petitioners, which if substantiated would be deductible personal expenses even if petitioner's farm activity were not engaged in for profit. Sec. 183(b)(1). Respondent at trial challenged these deductions based on lack of substantiation. The expenses in question were not disallowed in the deficiency notice and disallowance has not been affirmatively pleaded by*95 respondent in his answer or by an amended answer. Interest and property taxes on the farm will therefore be allowed to the extent claimed on petitioners' returns.The deficiency notice determines an addition to tax for negligence under section 6653(a). Respondent has not pursued the matter in this proceeding and we presume that it has been abandoned. The additions to tax for negligence will not be imposed.To reflect the foregoing,Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to sections of the Internal Revenue Code of 1954 in effect for the years in question. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Sec. 1.162-5(c)(2), Income Tax Regs.↩, provides in pertinent part that "Only the minimum education necessary to the retention by the individual of his established employment relationship, status, or rate of compensation may be considered as undertaken to meet the express requirements of the taxpayer's employer." The seminar attended by petitioners satisfied the requirements of art. 3.3 of the California State Education Code and therefore made petitioners eligible for promotions and salary increases. Petitioners' participation in this seminar in no way affected the retention of their current employment relationship, status, or rate of compensation.3. Mrs. Takahashi testified as to her belief that her husband did, in fact, receive a raise as a result of his art. 3.3 credits. As for herself, there was no advancement possible since she was already "at the end of the salary scale."↩4. In an amended answer filed on Aug. 27, 1985, respondent alternatively alleged that: (1) Gloria and her father operated the farm as a partnership; (2) during the years in issue, Gloria reported a loss in connection with the partnership's farming activities while her father reported income from the partnership's farming activities; (3) the allocation of farm losses to Gloria and farm income to her father constitutes an improper special allocation under sec. 704(b); and (4) therefore, Gloria is not entitled to claim the partnership losses during the years in issue. On brief, respondent informed the Court that he had decided to abandon this argument.↩5. Sec. 183 reads, in relevant part, as follows:SEC. 183(a). General Rule. -- In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.(b) Deductions Allowable. -- In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed -- (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and(2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).(c) Activity Not Engaged in for Profit Defined. -- For purposes of this section, the term "activity not engaged in for profit" means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.(d) Presumption. -- If the gross income derived from an activity for 2 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting the period of 7 consecutive taxable years for the period of 5 consecutive taxable years.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622086/	PETE JAMES ENTERPRISES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPete James Enterprises, Inc. v. CommissionerDocket No. 10895-77.United States Tax CourtT.C. Memo 1978-243; 1978 Tax Ct. Memo LEXIS 272; 37 T.C.M. (CCH) 1045; T.C.M. (RIA) 78243; June 29, 1978, Filed 272 Held: Respondent's motion to dismiss for lack of jurisdiction because petition not timely filed granted. Petition received by Court 7 days late. Envelope in which petition was mailed bore a timely private postage meter date but it also bore a United States Postal Service postmark that was 1 day late. The United States postmark date is controlling.Sec. 301.7502-1(c)(iii)(b), Proced. & Admin. Regs. Louis M. Lookofsky, for the petitioner. Kenneth G. Gordon, for the respondent. DRENNENMEMORANDUM OPINION DRENNEN, Judge: This case is before the Court on respondent's motion to dismiss for273 lack of jurisdiction because the petition was not timely filed. At the hearing evidence was received in the form of testimony from counsel for petitioner who prepared and mailed the petition, and the parties were given the opportunity to file briefs. The statutory notice of deficiency was mailed to petitioner on July 25, 1977. The 90-day period during which a petition to this Court must be filed expired on Sunday, October 23, 1977. The following Monday, October 24, 1977, was a legal holiday in the District of Columbia. Consequently, the period during which the petition had to be filed in order to be timely was extended until Tuesday, October 25, 1977. Sec. 6213(a), I.R.C. 1954. According to the testimony received, counsel for petitioner completed preparation of the petition to this Court around 9:30 or 10:00 p.m. on October 25, 1977, in his Beverly Hills, Calif., office. Counsel stamped the properly addressed envelope containing the petition with a private postage meter located in his offices with the postmark date October 25, 1977. Counsel then left his offices and placed the envelope in the mail box located in the same building prior to midnight. Counsel did not know274 the time of the last mail pickup in the building. The envelope was postmarked by the United States Postal Service in the p.m. of October 26, 1977. The petition was received by this Court at its Washington, D.C., address at 9:04 a.m. on October 31, 1977--seven days after the last date prescribed for timely filing of taxpayer's petition. Petitioner believes that the issue to be resolved is whether the 7-day interval between deposit in the mailbox and receipt by the Tax Court precludes timely filing of the petition. However, this argument assumes that the controlling postmark is the one made by the private postage meter and not the postmark made by the United States Postal Service. Respondent argues that the petition was not timely filed because the petition was not mailed until the day after the last date prescribed for timely filing of this petition. With some reluctance we must agree with respondent's contention. 1275 Section 7502, I.R. C. 1954, provides in pertient part that: (a) General Rule.-- (1) Date of delivery.--If any* * * document required to be filed * * * within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by the United States mail to the * * * office with which such * * * document is required to be filed, * * * the date of the Unted States postmark stamped on the cover in which such * * * document * * * is mailed shall be deemed to be the date of delivery* * . (2) Mailing requirements.--This subsection shall apply only if-- (A) the postmark date falls within the prescribed period or on or before the prescribed date-- (i) for the filing (including any extension granted for such filing) of the * * other document * * * (B) the return * * * document * * * was, within the time prescribed in subparagraph (A), deposited in the mail in the United States in an envelope or other appropriate wrapper, postage prepaid, properly addressed to the * * * office with which the * * * document is required to be filed * * . (b) Postmarks.--This section shall apply in276 the case of postmarks not made by the United States Postal Service only if and to the extent provided by regulations prescribed by the Secretary. Section 301.7502-1(c)(1)(iii)(b), Proced. & Admin. Regs., states that "[if] the envelope [containing the petition] has a postmark made by the United States [Postal Service] in addition to the postmark not so made, the postmark which was not made by the United States [Postal Service] shall be disregarded, and whether the envelope was mailed in accordance with this subdivision shall be determined solely by applying the rule of (a) of this subdivision." Section 301.7502-1(c)(1)(iii)(a), Proced. & Admin. Regs., states that: If the postmark on the envelope * * * is made by the United States [Postal Service], such postmark must bear a date on or before the last date, or the last day of the period, prescribed for filing the document. If the postmark does not bear a date on or before the last date, or the last day of the period, prescribed for filing the document, the document will be considered not to be filed timely, regardless of when the document was deposited in the mail. * * * The regulations promulgated by the277 Commissioner pertaining to privately-metered mail are legislative in nature and they must be given effect unless they are inconsistent with the statute or unless they adopt arbitrary or unreasonable means of carrying out the legislative purpose. Fishman v. Commissioner,51 T.C. 869">51 T.C. 869, 872 (1969), affd. per curiam 420 F. 2d 491 (2d Cir. 1970). As noted in Fishman, the regulations do not conflict with the statute since the delegation of rule-making power in section 7502(b), I.R.C. 1954, is both broad and unequivocal. And because of the unreliability of the postmark date on metered mail, the requirement in the case of conflicting postmarks that the postmark of the United States Postal Service controls cannot be said to be an arbitrary and unreasonable means of ascertaining the date of delivery. While it may have been a hardship for petitioner's counsel to take the envelope containing the petition to the post office at that time of night to make certain that a United States Postal Service postmark dated October 25 was stamped on the envelope, or a registered or certified mail receipt, the possibility of untimely filing is a risk the sender takes if he278 fails to do so. Sec. 301.7502-1(c)(1)(iii)(a), Proced. & Admin. Regs. The requirement that a petition must be timely filed in this Court is a jurisdictional requirement that cannot be extended, Healy v. Commissioner,351 F. 2d 602 (9th Cir. 1965); Rich v. Commissioner,250 F. 2d 170 (5th Cir. 1957); Perkins v. Commissioner,T.C. Memo 1977-158">T.C. Memo. 1977-158, and we find no way to circumvent it in this instance. Under the regulations above quoted the United States Postal Service postmark on the envelope in which this petition was mailed is controlling, and that postmark clearly bore a date (October 26, 1977) 1 day after the last day for filing a timely petition. Consequently, the petition in this case was not timely filed as required by section 6213(a), I.R.C. 1954. As a result, the Tax Court does not have jurisdiction, and respondent's motion must be granted. An appropriate order will be entered. Footnotes1. Hopefully petitioner will be able to pay the deficiency determined by respondent and file an action for refund of the amount so paid in the United States District Court or the United States Court of Claims in order to obtain a judicial determination on the merits of the rather unusual issue involved.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622088/	LILLIE C. POMEROY, GEORGE S. POMEROY, JR., AND ROBERT G. BUSHONG, EXECUTORS OF THE ESTATE OF GEORGE S. POMEROY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Pomeroy v. CommissionerDocket No. 29664.United States Board of Tax Appeals24 B.T.A. 488; 1931 BTA LEXIS 1632; October 27, 1931, Promulgated 1632 Earnings of partnership business accumulated from date of death of one partner to date of settlement of his interest in partnership, divided and included in income of surviving partner on basis of agreement subsequently made between surviving partner and representatives of deceased partner's estate. R. M. Heth, Esq., for the petitioners. John D. Foley, Esq., for the respondent. GOODRICH 488 This proceeding relates to the income-tax liability of the petitioners, as executors of the estate of George S. Pomeroy, deceased, upon income received by said Pomeroy during his lifetime. Deficiencies are asserted as follows: 1922$106,234.9219239,908.39192425.61Petitioners admit as correct the deficiency asserted for the year 1924. 489 The sole issue is as to the correct allocation between Pomeroy and the estate of Josiah Dives of the net profits derived from the operation of a business conducted under the name of Dives, Pomeroy & Stewart for the periods September 21 to December 31, 1922, and January 1 to June 30, 1923. The case was submitted upon a long stipulation of facts, containing various exhibits, from1633 which we make the following findings of fact. FINDINGS OF FACT. For many years prior to September 21, 1922, there existed a partnership composed of Josiah Dives and George S. Pomeroy, which, under the name of Dives, Pomeroy & Stewart, conducted department stores in Reading, Harrisburg, Pottsville and Pottstown, Pa. The partners shared equally in the profits of the partnership. For the purposes of this case, the accounting period for the partnership and for each of said partners individually was on the cash and calendar year basis. On September 21, 1922, said Josiah Dives died, testate. By his will, after various specific bequests, he left one-third of his estate to his wife for life and two-thirds in equal shares to his sons, Edward J. and Arthur M. Dives, together with the reversionary interest in the one-third bequeathed to their mother. Clause 8 of said will read as follows: Eighth While my interest in the business of Dives Pomeroy & Stewart will upon my death be subject to settlement and adjustment under the terms of the partnership agreement existing between my partner and myself, yet in order to enable my executors to take all necessary action and to secure1634 a satisfactory administration of my estate, I authorize and empower my executors to sell transfer & convey any personal, mixed or real property and estate which they may find it necessary or prudent to convey for payments of debts or legacies or the proper settlement & distribution of my estate. Thereafter, said Edward and Arthur Dives duly qualified as executors of the will of their father. On September 13, 1925, said George S. Pomeroy died, whereupon Lillie C. Pomeroy, George S. Pomeroy, Jr., and Robert G. Bushong, the petitioners herein, duly qualified as the executors of his estate. The agreement of partnership referred to in clause 8 of Dives' will was a contract of March 30, 1903, between himself and Pomeroy, which was intended to provide for the continuation and operation of the business of the partnership in the event either of the partners should die, and for the settlement of the interest of the deceased partner. As recited, its primary object was to give the survivor "a controlling interest in the business," but at the same time to "preserve the equities of the decedent so far as the same can be provided 490 for without in any way hampering the survivor. 1635 " The partners agreed: 1st. That should the decedent's representatives be willing to sell, the survivor should pay for the business, exclusive of the real-estate, an amount not less than that of which 12 1/2 per cent should be equal to the annual net profit of the business for the past five years, as shown by the semi-annual inventories for that period. 2nd. That the amount each had in the business should be ascertained by crediting to the account of each a prorata share of the profits earned from the date of the last preceding inventory to the death of either partner. 3rd. That if no agreement to purchase by the survivor could be reached between him and representatives of the decedent, and if no agreement for the joint ownership and continuation of the business could be reached by the parties, then the survivor should have the right to incorporate the business and issue stock to its value, ascertained by the method above provided. 4th. That if the business were incorporated, the survivor might buy preferred or common stock or both to the value of $30,000, the remainder of the stock to be divided equally for sale to the survivor and to decedent's representatives; that1636 the stock of the corporation should consist of an issue of 5 per cent cumulative preferred and an equal amount of common, both classes to have equal voting power; that decedent's representatives might take all their interest in preferred stock if they so desired but should not be required to take more than half their interest in such stock if they desired to hold common stock also. 5th. That whoever succeeded to the business should be entitled to occupy all real estate for a period of 10 years at an annual rental of 8 per cent of the cost value thereof as shown by the books, either party having the right in the meantime to buy the other's interest in the real estate, or to sell his own interest therein to any one else, subject to said occupancy. 6th. That the agreement "shall be binding upon both or either of us, our heirs, executors and administrators, any will, agreement or contract either of us may have or make to the contrary notwithstanding." Under date of April 7, 1903, a supplemental agreement was entered into by Dives and Pomeroy, which set out various computations in explanation and illustration of the terms of the original contract. Except as showing what the parties1637 had in mind as to the method of computing the value of the business and their respective shares thereof, this supplemental agreement is here immaterial. A second supplemental agreement was entered into on September 13, 1911, effecting some minor changes in the original agreement of March 30, 1903 (which was otherwise fully reaffirmed), of which the most important provided for a change in the classes and privileges of the stock of the prospective corporation. As of December 30, 1911, adjusting entries were made on the partnership books to further explain the desires of the partners as to the methods of making computations under their original agreement, particularly as to the values of the several parcels of real estate owned and used by the partnership. 491 Following Dives' death, his sons, as executors of his will, entered into a contract with Pomeroy under date of April 23, 1923, the terms of which were consummated and became operative with full force and effect on July 2, 1923. This agreement recited that Pomeroy was the surviving member of the partnership which was terminated by Dives' death; that Edward and Arthur Dives were empowered by clause 8 of Dives' will, 1638 and by the fact that individually they were the residuary legatees thereunder, to enter into the same; and that all prior contracts, expressly mentioning that of March 30, 1903, and the supplements thereto, should be superseded and become null and void upon the execution hereof. It set out further: 1. That Pomeroy should cause to be organized a corporation, duly empowered to engage in the business conducted by the partnership with a capitalization of $6,000,000, divided into shares having a par value of $100 each, of which $3,750,000 or 37,500 shares should be 6 per cent cumulative first preferred stock, to be redeemed over a period of 25 years, or earlier at the option of the company, from a sinking fund provided for that purpose. Full provision was made against all possible contingencies to secure the payment of the dividends on and the redemption of this stock, and upon default thereof said stock would become entitled to vote and the owners thereof could take over the company. The balance of the authorized capital was to be issued as junior preferred or common stock. 2. That the executors grant, bargain and sell, etc., to Pomeroy "all the right, title and interest of Josiah1639 Dives in the partnership between himself and Pomeroy" including all assets, real and personal, of every description and wheresoever located, exceptinga. Land & buildings located at Millmont and used in connection with the operation of the Chantrell Hardware & Tool Co. b. All indebtedness owed by Chantrell Hdw. & Tool Co. to the partnership. c. All stock held by the partnership of the Chantrell Hdw. & Tool Co. d. (Clause 8.) An amount of money which shall be paid to the executors, said amount to be ascertained by taking six per cent. (6%) of $3,750,000 from the date of the death of Josiah Dives on September 21, 1922, to the date of settlement, less the sum of $40,000.00 which the executors agree to pay the survivor as compensation as liquidating trustee and as salary for conducting the partnership business from September 21, 1922, to the date of settlement, which said amount shall be paid to the executors in full settlement of any claim they may have for profits accrued on the partnership business from the date of death of said Josiah Dives. 3. That as payment for the transfer of Dives' interest in the partnership as above set out, Pomeroy should cause the1640 corporation to issue to the executors the 37,500 shares to 1st preferred stock above described; should join in conveying to the Chantrell Hardware & Tool Company the land and buildings at Millmont used in connection with its buildings; should join in forgiving to said company the indebtedness against it held by the partnership; and should transfer to the executors the capital stock of said company held by the partnership. 4. That Pomeroy should bear all expenses in connection with the organization of the corporation and transfer to it of the partnership assets; that he should transfer to the corporation all his own interest in the partnership and accept as payment therefor junior preferred or common stock of the corporation. 492 5. That the corporation assume all liabilities of the partnership, including its Federal tax liabilities. This, in effect, was the settlement between Pomeroy and the Dives estate, whereby the claims of both parties to the partnership assets were terminated. It was not in accord with the contract of March 30, 1903, existing at the time of Dives' death. Following Dives' death, Pomeroy filed timely income-tax returns in the name of the partnership, 1641 one showing the income of the partnership from January 1 to September 20, 1922, another covering the period from September 20 to December 31, 1922, and a third covering the period from January 1 to June 30, 1923. These returns divided the income of the business equally between Pomeroy and the Dives estate. The correct net income of the business carried on in the partnership name for these periods is as follows: Jan. 1 to Sept. 20, 1922(Loss)$5,287.69Sept. 20 to Dec. 31, 1922361,447.54Jan. 1 to June 30, 1923191,223.93No part of this income of the business was paid as income to the Dives estate, but the executors were permitted to make certain withdrawals and were credited with certain amounts as reflected in the book account of the estate as follows: ESTATE OF J. DIVES, DECEASED, IN ACCOUNT WITH DIVES, POMEROY & STEWART.By interest Sept. 21, 1922, to July 2,$176,250.001923, per agreementTo withdrawals:1922, Sept. 21st to 30th$651.25October7,426.43November5,853.55December27,970.411923 January13,744.27February21,731.36March2,411.68April 26th10,317.0090,105.95Account of Edward J. Dives12,893.88Account of Arthur M. Dives85.70One half share of compensation to George40,000.00S. Pomeroy143,085.5333,164.471642 These advances and credits were taken into account in the final settlement between the parties under this contract. Respondent has allocated net income of the business to Pomeroy as follows: Jan. 1 to Sept. 20, 1922(Loss)$3,875.06Sept. 20 to Dec. 31, 1922309,490.66Jan. 1 to June 30, 1923105,302.37493 The net worth of the Chantrell Hardware & Tool Company on December 31, 1922, was $296,038.49. The amount of indebtedness due by this company to Dives, Pomeroy & Stewart is not disclosed. The entire stipulation of facts agreed to by the parties, together with the various exhibits thereto attached, is made a part of our findings by reference. OPINION. GOODRICH: The net income of the business conducted under the name of Dives, Pomeroy & Stewart for the period from September 21, 1922, the date of Dives' death, to June 30, 1923, the closing business day before the agreement between Pomeroy and the executors of Dives' estate became effective, was $552,671.47. We are asked to make an allocation of these earnings between the estate of the deceased partner and the survivor, not for the purpose of distributing the money, but to fix1643 the basis upon which the tax liability resulting from the receipt of or the right to receive the money may be determined. Petitioners contend that these earnings should be divided equally between these parties, for the reason that a partnership, with division of the earnings thereof upon an equal basis, existed between them during this period. In support of this contention it is urged that the agreement of March 30, 1903, discloses an intention that the business should be continued as an equal partnership until a settlement of the interest of the deceased partner could be effected by one of the methods set forth therein; that respondent is bound by statements made in the reports of his revenue agents treating the business as a partnership during this period and stating that it terminated upon the operation of the agreement of April 23, 1923; and that Hellman v. United States,70 Ct.Cls. 498, is controlling of the case at bar and requires that the tax returns filed by Pomeroy reporting the business during this period upon the basis of an equal partnership must be accepted as correct. With this contention we can not agree. The partnership between Dives and1644 Pomeroy was terminated by Dives' death. The contract of March 30, 1903, provided various methods by which a settlement of his interest in the partnership might be effected, but as to the division of earnings between the date of death and the date of settlement it was silent. While the agreement contained no express provision permitting the survivor to continue the business after the death of his partner, the implication was that the business should be continued until the deceased's interest could be settled, since it was stated that one of the purposes of the contract was to obviate "interruption to business." But the fact that the operation was to be continued does not mean that the division of earnings should continue 494 on the same basis as before. The agreement contains no provision entitling the estate of the decedent to a portion of the profits during the period from his death to the settlement of his interest. At the time the agreement was reached, the partners easily could have provided for the distribution of profits during this period, but they did not do so. We can not now write into the contract such a provision for them, nor can we, by inference, set up a1645 partnership between the survivor and the estate of the deceased partner when the contract failed expressly so to do. As we read that agreement, it is purely a contract for the acquisition by the survivor of the interest of his deceased partner, giving a choice of terms, conditions and methods of acquisition, and we find therein nothing to show that the parties intended that earnings subsequent to the death of one partner should be divided upon an equal basis, as petitioners contend. Moreover, that contract was expressly nullified by the agreement of April 23, 1923. We attach no importance to petitioner's argument that the statements made in the revenue agent's report relative to the termination of the partnership are controlling of this case. The rule that the conclusions of law of the revenue agent are in nowise binding upon respondent or upon this Board is too well established to merit citation or further discussion. Petitioners' position is not sustained by the opinion of Hallman v. United States, supra. In that case the Commissioner of Internal Revenue sought to change the amounts chargeable as distributable income to the various members of a partnership from that1646 disclosed by the partnership books and the tax returns on the ground that, in the case of one partner, the amount so disclosed was in excess of the percentage to which that partner was entitled under the partnership agreement. The discrepancy not being explained by the evidence, the court held that his distributable share had been shown by the best evidence available and refused to deviate from the amounts reflected by the books and tax returns of the partnership. We have no such question in the case at bar. There is no question but that the Dives estate had the right to some share of these earnings. It was entitled to an accounting, and a distribution of the partnership assets and earnings, and could have obtained the same in a court of equity had the parties been unable to agree upon a reasonable basis of division. But here the parties did agree upon such a division. We have no doubt that the court would be guided by an agreement between the parties and that, if the parties themselves were satisfied therewith, equity would be satisfied. We ask no better guide for ourselves in the solution of the problem before us. The contract of April 23, 1923, clearly provides, 495 1647 inter alia, (1) that Pomeroy is to be paid $40,000 as compensation for his services as liquidating trustee and for conducting the business from the date of Dives' death to the date of settlement, and (2) that $176,250 is to be paid to the Dives estate "in full settlement of any claim * * * for profits accrued on the partnership business from the date of the death of said Josiah Dives." These items we regard as separate and distinct, believing that the language used indicates merely the method of payment and not that the former serves to reduce the amount of the latter. We see no reason for disturbing the division of profits which the parties themselves have made and carried out. Except for this $176,250, the profits accruing to the business during the period intervening between Dives' death and the settlement under the contract remained in the business, which was taken over by the corporation, controlled by Pomeroy. The transfer to the Dives estate of the stock of the Chantrell Hardware & Tool Company, the real estate used by that company, and the indebtedness of that company to the partnership, was a partial payment of the purchase price of the Dives interest. We are not here1648 concerned with the price paid for Dives' interest in the business. In accordance with our conclusions, the profits earned by the business during the periods September 20 to December 31, 1922, and January 1 to June 30, 1923, should be taxed to Pomeroy, except $176,250 thereof, which should be allocated to and deducted from the earnings during each of said periods in accordance with the ratio of earnings of said periods. Respondent, in his brief, urges that Pomeroy's taxable income be increased in the amounts of $51,316.88 for the period September 20 to December 31, 1922, and $84,933.12 for the period January 1 to June 30, 1923, on the ground that these amounts are interest, determined under clause 8 of the contract of April 23, 1923, and represented, not Dives' share of the profits of the business, but a part of the purchase price of the Dives interest therein, and are therefore not deductible from Pomeroy's income, under the authority of Willard C. Hill et al.,14 B.T.A. 572">14 B.T.A. 572. While we fully recognize the principle of that case, we think it is not here applicable. In the case at bar the computation of interest on the sum of $3,750,000 served merely as a method1649 of determining the portion of accumulated earnings to be paid the Dives estate. The amount of $176,250 was not interest, nor a part of the purchase price of Dives' share of the partnership assets, but it was that portion of the accumulated earnings to which the parties agreed the estate was entitled. Petitioners point out that by the deficiency notice Pomeroy is twice taxed upon the item of $40,000 paid him as compensation for his services as liquidating trustee and as salary for conducting the 496 business during the period intervening between Dives' death and the settlement of his interest, since it is included in the profits of the business allocated to him and again included in his "salaries, wages, etc.," which are a part of his gross income. This error should be corrected. Reviewed by the Board. Judgment will be entered pursuant to Rule 50.MURDOCK MURDOCK, dissenting: The prevailing opinion holds that the Pomeroy estate is liable for tax on some income, but it does not disclose whether it holds that that income represents Pomeroy's distributive share of the income of a partnership, or his share of the income of a joint venture. The opinion1650 permits the amount of taxable income for each year to be fixed retroactively by an agreement of the parties. This agreement was not intended to settle the rights of the parties to income as of the end of each year in question, but was a complete adjustment of their rights in the business. In my judgment, Pomeroy's tax liability for each year should be determined on the basis of and is fixed by his rights at the end of that year, and does not depend upon any subsequent agreement of the parties. The parties may give up certain rights under a subsequent agreement, but they can not retroactively change their tax liability. MARQUETTE, SMITH, and STERNHAGEN agree with this dissent. MATTHEWS, dissenting: The partners shared equally in the partnership profits, notwithstanding the fact that Dives' interest in the business was greater than Pomeroy's. In 1903, Dives' interest was $522,046.94 and Pomeroy's interest $444,552.99. At the death of Dives, his interest (net worth) in the business, as reflected on the books, was $2,697,499.47, while Pomeroy's interest (net worth) was $2,176,511.07, a difference of more than $500,000. These figures are taken from the exhibits which were attached1651 to the stipulation and made a part of the findings of fact by reference. Dives' interest passed to his estate on his death, and from that date until the settlement on June 30, 1923, the estate was entitled at least to the same proportion of profits of the business as Dives would have been entitled to had he lived, namely, one-half of the income arising from the business. The fact that the executors did not withdraw one-half of the profits or that one-half was not actually distributed to such executors, does not alter the situation. The earnings of the estate's share were constructively received by the executors. 497 Pomeroy had also constructively received his share, although we do not know whether he drew it out of the business or not. That Pomeroy and the Dives estate were each entitled to one-half the profits in the business is evidenced by the fact that Pomeroy so treated the income in partnership returns filed for the periods involved between the death of Dives and the settlement of the estate. I do not think it necessary to determine the legal term to apply to the relation between Pomeroy and the Dives estate during the period subsequent to Dives' death. Neither1652 is it necessary to determine whether Pomeroy was required to file a return of the income of the business on a partnership form or on a fiduciary form in order to determine the issue in this case, which is, how much of the earnings of the business subsequent to Dives' death and prior to the transfer of the business to the corporation are taxable to Pomeroy. The earnings of the business during this period belonged to the owners, Pomeroy and the Dives estate, and I think that a division of the earnings in the same proportion that they were distributed prior to the death of Dives is all that the executors of Dives could have demanded, notwithstanding the fact that Dives' interest was greater than Pomeroy's. Pomeroy could certainly have demanded no more than one-half the earnings. At the time of the settlement effected on July 2, 1923, the Dives estate had the right to a certain portion of the assets and also a claim for the profits earned on that interest subsequent to Dives' death. The claim of the estate for the profits accrued on the estate's interest was settled for $176,250, an amount of money equal to 6 per cent of $3,750,000 from the date of death of Dives to the date of settlement, 1653 and this amount of money was excluded from the assets of the partnership which both the Dives estate and Pomeroy joined in conveying to the corporation. I see nothing in the fact that the estate's claim for its share of the profits earned between the date of death of Dives and the date of settlement was, under the circumstances, settled for a less amount than one-half the actual earnings of the period, to justify the conclusion that at the time the income accrued the Dives estate had no claim to more than the amount subsequently agreed upon in settlement. The very language used in the agreement of settlement justifies the inference that the Dives estate had a claim for more than the amount agreed upon in settlement of the claim - "which said amount shall be paid to the executors in full settlement of any claim they may have for profits accrued on the partnership business from the date of death of Josiah Dives." In my opinion, therefore, Pomeroy should not be taxed on more than one-half the earnings of the business during the period involved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622090/	JOHN PEEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Peel v. CommissionerDocket No. 7912-77.United States Tax CourtT.C. Memo 1979-257; 1979 Tax Ct. Memo LEXIS 268; 38 T.C.M. (CCH) 1025; T.C.M. (RIA) 79257; July 10, 1979, Filed Robert M. Tyle, for the petitioner. Edward D. Fickess, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the 1975 taxable year in269 the amount of $697.35. The issue for our decision is whether petitioner suffered a casualty loss of $1,686 to his Corvette automobile in that year. FINDINGS OF FACT John Peel (petitioner) was a legal resident of Elmira, New York, at the time he filed his petition in this case. He filed his 1975 Federal income tax return with the Internal Revenue Service Center at Andover, Massachusetts. Petitioner purchased a 1973 Corvette automobile in 1974 for $6,206. It was a two door coupe model with a gold exterior and black interior. It was equipped with power steering and an AM-FM radio but it did not have either air conditioning or an automatic transmission. When purchased, the Corvette had 12,000 miles on its odometer. During his first year of ownership petitioner drove his Corvette 10,000 miles. In 1975, petitioner's Corvette was involved in two automobile accidents. The first accident occurred on May 8, 1975, when he apparently rear-ended another car. Extensive damage was done to the Corvette's headlamp system. The headlamps were promptly repaired by petitioner's insurance company. The second accident occurred on July 15, 1975 when the Corvette was struck on its front270 left side by another car. This accident shattered the front left fiberglass body of the Corvette and twisted the front suspension frame out of its normal shape. Again the petitioner received insurance reimbursement for actual repairs for all but $100 of the cost of such repairs. The reimbursement by the insurance company for each of the two accidents can be summarized as follows: May 8, 1975July 15, 1975AccidentAccidentTotal Repair Cost $470 $894(Less) InsuranceReimbursement370794Petitioner's Costof Repairs $100 $100On his 1975 Federal income tax return, the petitioner claimed casualty losses attributable to the two accidents in the amounts of $830 and $856, respectively, determined as follows: May 8, 1975July 15, 1975AccidentAccidentFair Market Value (FMV)before accident$6,125$6,550(Less) FMV after accident4,8254,800$1,300$1,750(Less) InsuranceReimbursement370794Total Loss $ 930956(Less) § 165(c)(3)limitation100100Loss Claimed $ 830 $ 856Total Loss Per Return$1,686On or about February 9, 1976, petitioner disposed of his Corvette by trading271 it in for a new 1976 Triumph TR-7 Coupe. He received a trade-in allowance of $5,425. According to the National Automobile Dealers Association (NADA), petitioner's 1973 Corvette had the following trade in and average retail values during 1975: 1April 1975August 1975December 1975Trade-In$5,000$5,375$5,225Average Retail (FMV)5,9756,3506,200The parties have stipulated that the NADA figures constitute a fair and unbiased opinion of the average retail and trade-in values of a 1973 Corvette. OPINION Section 165 2 provides in pertinent part that: (a) GENERAL RULE. -- There shall be allowed as a deduction any loss sustained in the taxable year and not compensated for by insurance or otherwise. (b) AMOUNT OF DEDUCTION. -- For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section272 1011 for determining the loss from the sale or other disposition of property. (c) LIMITATION ON LOSSES OF INDIVIDUALS. -- In the case of an individual, the deduction under subsection (a) shall be limited to -- * * (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. A loss described in this paragraph shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100. * * With respect to casualty losses, the regulations are quite detailed and extensive. See section 1.165-7, Income Tax Regs. Basically they provide that a casualty loss is allowable only in the year in which it is sustained and the amount of loss is limited to the lesser of the difference in fair market value before and immediately after the casualty or the adjusted basis of the property. 3 This amount must be reduced by any insurance recovered and the $100 limitation on individual losses. Section 165(c)(3); section 1.165-7(b)(3), Income Tax Regs.273 Petitioner contends that in each accident, the subsequent repairs, reimbursed by insurance except for the deductible, did not result in a complete restoration of the value of the Corvette. This is due, petitioner maintains, to the unique construction nd status of the Corvette. According to petitioner, any aficionado of a Corvette would not be willing to pay the same price for a Corvette that had been in an accident as one that had not. In this regard petitioner asserts that a true aficionado of the car could detect under close examination that his car had been damaged and repaired. Respondent, on the other hand, contends that petitioner did not suffer any deductible loss because the repair work, reimbursed by insurance, 4 fully restored the car to its pre-accident value. In view of the documentary evidence submitted and the testimony given at the trial, we agree with respondent that petitioner did not suffer any deductible casualty loss. We reject petitioner's bare and unsupported statements that the value of his Corvette after274 repairs was any less than its pre-accident value. In fact, for purposes of determining the second casualty loss deduction the petitioner used a fair market value ($6,550) which was higher than the fair market value assigned to the car prior to the first accident ($6,125). The second accident occurred a little over two months after the first. It is inconceivable that petitioner, having suffered such an alleged decline in value after the first accident, could regain and surpass the original fair market value by the second accident. In addition, petitioner's subsequent trade-in of his Corvette and the allowance received on the trade-in do not support his claim for deduction. According to NADA, the average trade-in value of a 1973 Corvette in December, 1975 was $5,225. In February, 1976, petitioner was given a trade-in allowance of $5,425. The NADA valuations constitute a fair and unbiased opinion of the value of a 1973 Corvette.If petitioner's car was worth less because of its prior accident history, we doubt whether any car dealer would have offered a trade-in allowance so approximating the average trade-in amount for a 1973 Corvette. In this regard, we note that the petitioner275 indicated that car dealers generally examine a trade-in thoroughly before offering any allowance. Accordingly, we hold that the petitioner is not entitled to any casualty loss deduction in 1975. To reflect the concessions of the parties on other issues and our conclusion with respect to the disputed issue, Decision will be entered under Rule 155. Footnotes1. The figures shown include the value of the options (AM-FM radio, power steering) petitioner had on his Corvette.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue.↩3. Section 1.165-7(a), (b), Income Tax Regs. provides: * (2) METHOD OF VALUATION. (i) In determining the amount of loss deductible under this section, the fair market value of the property immediately before and immediately after the casualty shall generally be ascertained by competent appraisal. This appraisal must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty, in order that any deduction under this section shall be limited to the actual loss resulting from damage to the property. (ii) The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty. (3) DAMAGE TO AUTOMOBILES. An automobile owned by the taxpayer, whether used for business purposes or maintained for recreation or pleasure, may be the subject of a casualty loss, including those losses specifically referred to in subparagraph (1) of this paragraph. * * (b) AMOUNT DEDUCTIBLE. -- (1) GENERAL RULE. In the case of any casualty loss whether or not incurred in a trade or business or in any transaction entered into for profit, the amount of loss to be taken into account for purposes of section 165(a) shall be the lesser of either -- (i) The amount which is equal to the fair market value of the property immediately before the casualty reduced by the fair market value of the property immediately after the casualty; or (ii) The amount of the adjusted basis prescribed in § 1.1011-1 for determining the loss from the sale or other disposition of the property involved. * * *↩4. The $100 of unreimbursed repair bills is not permitted as a deduction under section 165(c)(3) because of that provision's $100 limitation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622092/	ANTHONY FORZANO, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentForzano v. CommissionerDocket No. 33170-85.United States Tax CourtT.C. Memo 1986-259; 1986 Tax Ct. Memo LEXIS 353; 51 T.C.M. (CCH) 1266; T.C.M. (RIA) 86259; June 23, 1986. Anthony Forzano, Jr., pro se. Terence D. Woolston, for the respondent. HAMBLENMEMORANDUM OPINION HAMBLEN, Judge: Respondent's "Motion to Dismiss for Lack of Jurisdiction and to Strike as to Taxable Years 1978, 1979, 1981 and 1982" was filed on November 8, 1985. In his motion respondent claims that petitioner failed to file his petition354 within the statutory period prescribed by sections 6213(a) and 7502. 1 A hearing was held on respondent's motion at Phoenix, Arizona, on May 12, 1986. At the conclusion of the hearing, respondent's motion was taken under advisement. On April 2, 1985, respondent mailed a notice of deficiency to petitioner at "Box 221, Yarnell, Arizona" in which he determined the following deficiencies and additions to tax. AdditionsYearDeficiency6653(a)6653(a)(1)6653(a)(2)665966611978$1,510.56$75.53$453.161979392.0019.6019816,147.00$307.3550% of in-terest dueon $6,147.0019828,322.00416.1050% of in-$832.20terest due on$8,322.00Petitioner received the notice of deficiency mailed on April 2, 1985. A separate notice of deficiency for the taxable year 1983 was mailed to petitioner on June 3, 1985. A petition alleging error with respect to each of these taxble355 years was received by the Court on August 29, 1985. The petition was mailed by certified mail on August 26, 1985. Our jurisdiction in this matter depends upon petitioner's filing a timely petition with this Court. ; . Unless the notice of deficiency is addressed to a person outside the United States, section 6213(a) requires that a petition be filed within 90 days after the notice of deficiency is mailed. Here, the address of the notice of deficiency was within the United States, and the petition was filed, more than 90 days after the mailing of the April 2, 1985, notice of deficiency. Consequently, the petition as it relates to the notice of deficiency mailed on April 2, 1985, is untimely. Petitioner argues that he received a second notice of deficiency for the taxable years 1978, 1979, 1981 and 1982 mailed on May 29, 1985, and that his petition was timely from that notice of deficiency. 2 The second notice of deficiency was purportedly mailed to Phillip Hurlbut ("Hurlbut"), petitioner's accountant. 3 For the reasons discussed below, we reject356 petitioner's contention. 357 Hurlbut, who testified at the hearing on respondent's motion, could not specifically remember receiving the notice of deficiency dated May 29, 1985. Neither Hurlbut nor petitioner could produce the original copy of this notice of deficiency or adequately account for its disappearance. Respondent's agent, Gary A. Heitman, searched for a record of mailing the alleged second notice of deficiency and found no evidence that this notice was mailed. On the basis of this record we conclude that a second notice of deficiency was not mailed to Hurlbut on May 29, 1985, and that the petition as it relates to the taxable years subject to the April 2, 1985, notice of deficiency was untimely under section 6213(a). Accordingly, we grant respondent's motion to dismiss for lack of jurisdiction as to the taxable years 1978, 1979, 1981 and 1982. 4To reflect the foregoing, An appropriate order will be issued.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years at issue. All rules references are to the Tax Court Rules of Practice and Procedure.↩2. We do not make any determination as to the validity of a second notice of deficiency mailed prior to the expiration of the statutory period for filing a petition with this Court where a timely petition is not filed relating to the first notice of deficiency. At least one commentator has suggested that such a second notice would be invalid. 1 Casey, Federal Tax Practice, sec. 6.22, p. 504 (1982). ↩3. Petitioner had executed two Forms 2848, Powers of Attorney and Declarations of Representative, naming Hurlbut as his representative to receive copies of notices and other written communications from the Internal Revenue Service. The Form 2848 relating to taxable years 1981 and 1982 also provided that "[t]he IRS is advised to contact the taxpayer only through the above-noted attorney-in-fact." The Form 2848 were not properly executed. Under these circumstances the information purportedly mailed to Hurlbut would have resulted in unauthorized disclosure of return information. Secs. 6103(a), 6103(c). There is a rebuttable presumption that when an official acts he has performed any underlying duties necessary to validate the action. . In the absence of evidence to the contrary, we will not presume that respondent's officials mailed return information to Hurlbut in violation of sec. 6103(a).↩4. The petition was timely filed for the notice of deficiency mailed on June 3, 1985, reflecting a deficiency and additions to the tax for taxable year 1983, and we do have jurisdiction to make a determination as to that year.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622093/	Smith-Bridgman & Company, Petitioner, v. Commissioner of Internal Revenue, RespondentSmith-Bridgman & Co. v. CommissionerDocket No. 21357United States Tax Court16 T.C. 287; 1951 U.S. Tax Ct. LEXIS 284; February 5, 1951, Promulgated 284 Decision will be entered under Rule 50. Held:1. The respondent's action in including in petitioner's gross income in the taxable year involved the amount of $ 5,865.50, allegedly representing 4 per cent interest on sums borrowed by its parent corporation on non-interest-bearing demand notes, was an improper exercise of the authority conferred by section 45 of the Internal Revenue Code.2. The amount of $ 3,000, paid by petitioner to its parent corporation for management services and advice actually rendered to petitioner in the taxable year involved, constituted an ordinary and necessary business expense deductible under section 23 (a) (1) (A) of the Internal Revenue Code.3. Under the facts shown, petitioner is entitled to deduct the respective amounts of $ 900 and $ 100, paid to the Chamber of Commerce of Flint, Michigan, and the Chamber of Commerce of the United States in the taxable year involved, as ordinary and necessary business expenses. N. Barr Miller, Esq., for the petitioner.A. J. Friedman, Esq., for the respondent. Leech, Judge. LEECH287 This proceeding involves deficiencies in income and excess profits taxes for the taxable year ended January 31, 1944, in the respective amounts of $ 33.12 and $ 18,185.The issues are:1. Whether the respondent erred in adding the amount of $ 5,865.50 to the taxable income of petitioner, as allegedly constituting interest which respondent asserts should have been charged by petitioner on non-interest-bearing loans to its parent corporation, pursuant to the provisions of section 45 of the Internal Revenue Code.2. Whether petitioner is entitled to a deduction of the sum of $ 3,000, paid in the taxable year to its parent corporation for management services actually rendered to petitioner in such year, as ordinary and necessary expenses of its business.3. Whether the respondent erred in disallowing to petitioner a deduction of the amount of $ 900 paid to the Chamber of Commerce 288 of Flint, 286 Michigan, and the amount of $ 100 paid to the Chamber of Commerce of the United States in the taxable year, as ordinary and necessary expenses of its business.Certain facts were stipulated and are so found.FINDINGS OF FACT.Petitioner was incorporated on January 12, 1907, under the laws of the State of Michigan. Its principal office and place of business are at Flint, Michigan, where it has been continuously engaged in the operation of a retail department store.Petitioner's tax returns for the period involved were filed with the collector of internal revenue for the district of Michigan.On January 15, 1929, Continental Department Stores, Inc. (hereinafter referred to as Continental), a Delaware corporation, acquired ownership of all the capital stock of petitioner and was the owner of all such stock during the taxable year ended January 31, 1944.During the taxable year ended January 31, 1944, and at all other relevant times, the books of account of both petitioner and Continental were kept on the accrual method of accounting and the tax returns of both corporations were filed on that basis.On November 5, 1942, Continental had outstanding debentures having a par value of $ 238,100287 which were redeemable at 102 per cent of par value plus accrued interest at the rate of 5 per cent to the date of redemption.On November 5, 1942, Continental's board of directors adopted the following resolution:Resolved:1. That on December 31, 1942, this corporation redeem $ 100,000of its outstanding debentures at the redemption price of 102%of the par value of said debentures, plus accrued interest todate of redemption.2. That this corporation borrow the funds necessary to effectsaid redemption from Smith-Bridgman & Company.Pursuant to such resolution Continental borrowed $ 104,500 from petitioner. On November 10, 1942, Continental delivered to petitioner a non-interest-bearing demand note for $ 104,500. On December 31, 1942, Continental retired $ 100,000 of its outstanding debentures at 102 per cent of par value plus interest. On November 19, 1943, Continental's board of directors adopted the following resolution:Resolved:1. That on January 1, 1944, this corporation redeem all of itsoutstanding debentures at the redemption price of 102% of thepar value of such debentures plus accrued interest to date ofredemption.2. That this corporation borrow the funds necessary to effectsaid redemption from Smith-Bridgman & Company.288 289 Pursuant to such resolution Continental borrowed from petitioner on November 24, 1943, the sum of $ 143,274.50, delivering to petitioner its non-interest-bearing demand note in such amount. On January 1, 1944, Continental retired the remainder of the outstanding debentures of the par value of $ 138,000 at the redemption price of 102 per cent plus accrued interest. Included in the debentures redeemed were debentures in the par amount of $ 22,500 owned by petitioner, which were redeemed at their cost to petitioner in the amount of $ 21,910.Petitioner did not receive from Continental or accrue on its books of account or report as income on its tax returns for the taxable years ended January 31, 1943 or 1944, any amount as interest on account of the non-interest-bearing demand loans made by it to Continental.Continental did not pay to petitioner or accrue on its books of account or claim as a deduction on its tax returns for the years ended January 31, 1943 and 1944, any interest expense on account of the non-interest-bearing demand notes representing money borrowed by it from petitioner. The respondent made no adjustment of the items shown on the tax returns of Continental. 289 J. W. Knapp Co. is a Michigan corporation and operates a retail department store in Lansing, Michigan. All of its issued and outstanding capital stock during the taxable period involved was owned by Continental. During the taxable year ended January 31, 1944, J. W. Knapp Co. was indebted to Continental in the amount of $ 120,754.10, represented by six promissory notes bearing interest at the rate of 4 per cent per annum. During the taxable year ended January 31, 1944, Continental received from J. W. Knapp Co. the sum of $ 4,830.16 as interest on the aforementioned loan, which amount Continental reported in its gross income on its income and excess profits tax returns for the taxable year ended January 31, 1944.Continental's tax returns for the year ended January 31, 1944, disclose a net loss of $ 2,302.42 after carrying over and using as a deduction a prior net operating loss in the amount of $ 1,780.07. On its tax returns for the taxable year ended January 31, 1945, Continental reported a net income of $ 733.78 and an income tax liability of $ 183.45, after carrying over a net operating loss deduction in the amount of $ 522.35 from its taxable year ended January 31, 1944. Continental290 filed its tax returns for the year ended January 31, 1944, on April 15, 1945. The deficiency notice involved in the instant proceeding was mailed to petitioner on October 5, 1948.In his deficiency notice to petitioner the respondent added to petitioner's net income the amount of $ 5,865.50, identified and explained as follows:(a) Interest income $ 5,865.50 * * *290 The net income reported by you has been increased in the amount of $ 5,865.50 which represents interest income to you as explained in the forepart of this statement.The explanation referred to is as follows:Interest income, in the amount of $ 5,865.50 for your taxable year ended January 31, 1944, has been allocated to you from your parent company, Continental Department Stores, Incorporated, under the provisions of Section 45 of the Internal Revenue Code.A more complete explanation of the nature of the adjustment and the manner in which the amount is computed is contained in the Revenue Agent's report covering his examination of the returns for petitioner's taxable year ended January 31, 1944, which reads in part as follows:The adjustment proposed is to accrue interest on loans (non-interest bearing notes) 291 made to the parent company (Continental Department Stores, Incorporated) by this subsidiary. See Section 45 of the Internal Revenue Code and the decision of the Board of Tax Appeals (now Tax Court of the United States) in 40 B. T. A. 97.The entire stock of this taxpaper is held by Continental Department Stores, Incorporated, whose offices are with those of this taxpayer.It is significant that the parent company's loans of $ 120,754.10 to J. W. Knapp at 4% yielded $ 4,834.16 interest during fiscal year ending January 31, 1944.As of January 31, 1943 the parent company owed taxpayer $ 126,410.00 on demand non-interest bearing notes. On November 30, 1943 an additional $ 121,364.50 was loaned the parent company. The loans were made to retire some of the interest-bearing obligations of the parent company. Interest has been accrued at a rate commensurate with what taxpayer is receiving on loans from affiliate companies.4% of $ 126,410.00 for twelve months$ 5,056.404% of $ 121,364.50 for twelve * months809.10Total$ 5,865.50292 During the taxable year ended January 31, 1944, Continental furnished to petitioner valuable management services and advice in connection with the operation of petitioner's business. Continental also furnished similar services to J. W. Knapp Co., its other subsidiary, during the same taxable period. In the course of furnishing such service, Continental incurred expenses as follows:Executives's salary$ 5,500.00Other salaries645.85Traveling832.27Telephone and telegraph43.10Postage33.18Stationery and supplies95.29Total$ 7,149.69Continental determined that approximately 65 per cent of the salary expenses, substantially all the traveling expenses, and the 291 material part of the other expenses above enumerated were incurred in furnishing the management services and advice rendered to its two subsidiaries. It charged a total of $ 5,000.04 to its two subsidiaries. Continental estimated three-fifths of the cost was for services and advice rendered to petitioner, and accordingly charged petitioner $ 3,000, which petitioner paid, and claimed such amount as a deduction on its tax return for the taxable year ended January 31, 1944, as an ordinary293 and necessary business expense. The respondent, in determining the contested deficiency, disallowed the claimed deduction in full for lack of substantiation.The amount of $ 3,000 was paid by petitioner to Continental for management services and advice rendered by Continental to petitioner during the taxable year ended January 31, 1944, and constitutes an ordinary and necessary business expense of petitioner.During the taxable year ended January 31, 1944, petitioner paid $ 900 to the Chamber of Commerce of Flint, Michigan, and $ 100 to the Chamber of Commerce of the United States, and claimed a deduction of $ 1,000 on its tax return for that year.The amount paid to the Flint Chamber of Commerce was for the following purposes and activities:(1) Current annual membership dues paid for the account of 16 namedemployees of petitioner at $ 25 per member, for which petitionerwas not reimbursed by said employees$ 400(2) Four current annual membership dues, no individual namesdesignated100(3) Retail Promotion Fund400The Retail Promotion Fund was maintained by the Flint Chamber of Commerce during the taxable year ended January 31, 1944, and expenditures were made294 therefrom for Christmas street decorations, conventions, retail sales promotions, advertising the operating hours of retail store members, war bond promotions, and the operation of classes in retail distribution and sales training clinics. All of such activities were designed to promote the business interests of the member retail stores in the City of Flint, Michigan.The Flint Chamber of Commerce is an association of business and professional men and women, corporations and business and civic associations of Flint, Michigan, organized, among others, for the following objectives:By proper co-operative measures --1. To advance, develop and foster the commercial, financial, industrial and civic interests of Flint and the surrounding area;2. To extend the trade of its business enterprises, increase business, and preserve and strengthen business institutions throughout the community;3. To encourage the development of its natural resources, means of transportation and communication;292 4. To support all appropriate steps looking to a sound growth of the city and the proper utilization of its resources.During the period involved herein the Flint Chamber of Commerce carried295 on an active program in furtherance of the above aims and objectives. Among its activities during the taxable year was the conduct of an "aggressive wholesale and retail trade expansion program" and the seeking of new and wider outlets for the goods and services of Flint business enterprises.The Chamber of Commerce of the United States is an organization whose members consist of local chambers of commerce, business organizations and individuals. During the years 1943 and 1944 it carried on activities designed to improve business, commerce and industry. It undertook to bring about cooperation between domestic business organizations and Governmental agencies in the effective prosecution of the war. It maintained a war service division to assist members in communicating with appropriate Governmental agencies with respect to war time business regulations. It published fortnightly a "War Service Bulletin" summarizing all important Government war-related orders and rulings affecting business, particularly those relating to production and price control. It rendered other assistance and services of similar nature.In determining the contested deficiency, the respondent disallowed $ 296 875 of the payment to the Flint Chamber of Commerce and $ 75 of the payment to the United States Chamber of Commerce, on the ground that "it has not been established that such expenditures were ordinary and necessary business expenses incurred in the operation of your business for that taxable year."The payments made in the taxable year to the respective chambers of commerce were reasonably motivated by and with reasonable expectations that the business of petitioner would be advanced and constitute ordinary and necessary expenses of its business.OPINION.The first issue involves the propriety of respondent's action in adding to the income of petitioner in the taxable year the amount of $ 5,865.50, as interest income.It is the respondent's position that in order to reflect clearly the income of petitioner pursuant to section 45 of the Internal Revenue Code1 he has allocated to petitioner the amount of $ 5,865.50 of 293 the income of Continental Department Stores, Inc., the parent corporation.297 It is the contention of petitioner that the respondent has merely created fictitious interest income where none in fact existed, that section 45 confers no such authority, and the action of the respondent is arbitrary and capricious.Petitioner is the wholly owned subsidiary of Continental, which had outstanding debenture bonds in the face amount of $ 238,000. In 1942 Continental borrowed from petitioner the sum of $ 104,500, for which amount it delivered to petitioner its non-interest-bearing demand note. Continental thereupon redeemed $ 100,000 face value of its debentures. Similarly, in the taxable year ended January 31, 1944, here involved, Continental borrowed from petitioner the further sum of $ 143,274.50, for which amount Continental delivered to petitioner its non-interest-bearing demand note. Continental thereupon retired the remaining outstanding debenture bonds in the face amount of $ 138,000. The debenture bonds were all redeemable at 102 per cent of par value plus interest accrued to date of redemption.Purporting to act under the authority of section 45 of the Internal Revenue Code, the respondent, in the taxable year involved, has added the sum of $ 5,865.50 to298 petitioner's income, repesenting a 4 per cent charge against Continental on the aforementioned non-interest-bearing demand loans.In support of his action the respondent argues that Continental, in securing these non-interest-bearing loans from petitioner, was enabled to relieve itself from paying interest on its outstanding debentures; and, furthermore, he argues, petitioner could have loaned the funds which Continental borrowed without interest to third parties at 4 per cent interest. Therefore, in order to prevent evasion of taxes and to clearly reflect the income of such related businesses, he has "allocated" to petitioner part of the income of its parent, in the exercise of the discretion conferred by section 45 of the code. The decisions involving section 45 make it clear that its principal purpose is to prevent the manipulation of or improper shifting of gross income and deductions between two or more organizations, trades, or businesses. Its application is predicated on the existence of income. The courts have consistently refused to interpret section 45 as authorizing the creation of income out of a transaction where no income was realized by any of the commonly controlled299 businesses. Tennessee- Arkansas Gravel Co. v. Commissioner, 112 Fed. (2d) 508; E. C. Laster, 43 B. T. A. 159, modified on other issues, 128 Fed. (2d) 4; Epsen-Lithographers, Inc. v. O'Malley, 67 Fed. Supp. 181; cf. Hugh Smith, Inc., 8 T. C. 660, affd., 173 Fed. (2d) 224, certiorari denied, 337 U.S. 918">337 U.S. 918.We regard these authorities apposite and controlling here. We think this record clearly establishes that the respondent has not distributed, 294 apportioned, or allocated gross income, but has created or attributed income where none in fact existed.That the respondent did not "allocate" gross income of Continental to petitioner is apparent, since the record shows that he made no adjustment to the income or deductions of Continental. He argues that no such adjustment was required, since Continental in its taxable year ended January 31, 1944, had no net income. Such argument overlooks the established fact that Continental in the taxable year 1945 did have net income300 against which it could have applied the additional net operating loss carry-over. While we do not have the tax liability of Continental before us, we think the above facts support the petitioner's contention that the respondent has created rather than allocated gross income.The respondent contends that his action finds support in such authorities as Asiatic Petroleum Co., Ltd., 13 B. T. A. 1152, affd., 79 Fed. (2d) 234, certiorari denied, 296 U.S. 645">296 U.S. 645; G. U. R. Co. v. Commissioner, 117 Fed. (2d) 187, affirming 41 B. T. A. 223; National Securities Corp., 137 Fed. (2d) 600, affirming 46 B. T. A. 562; Welworth Realty Co., 40 B. T. A. 97. An examination of these cases discloses that each involved either the distribution, apportionment, or allocation of income or actual deductions of related businesses, thus distinguishing them from the instant case.We, therefore, hold that the respondent's action in adding the sum of $ 5,865.50 to the income of petitioner301 in the taxable year involved, not being authorized by section 45 of the code, is arbitrary and unwarranted.The second issue involves the question whether petitioner is entitled to a deduction of the sum of $ 3,000 paid in the taxable year to Continental for management services actually rendered to petitioner in such year.The respondent disallowed the claimed deduction on the ground that it had not been established that the amount was a proper expense of operation for such taxable year.The record shows that petitioner sought and secured almost daily advice on various management and policy matters affecting the operations of its business from certain executive officers of Continental. Similar services were rendered to Continental's other subsidiary, J. W. Knapp Co. The evidence shows that Continental incurred expenses in connection with the furnishing of such services and advice in an amount in excess of $ 7,000. Continental charged its two subsidiaries a total of $ 5,000 of such expenses, allocating $ 2,000 to J. W. Knapp Co. and the sum of $ 3,000 to petitioner. This latter amount was paid by petitioner in the taxable year, which amount it claimed as a deduction as an ordinary302 and necessary business expense. The record satisfies us that petitioner availed itself of such services and that they were directly 295 related to the operation of its business. The respondent makes no argument that the method of allocating the expenses incurred by Continental or that the amount charged petitioner by Continental was unreasonable. His position is that since Mr. Krave, whose duties for Continental included the management services to petitioner, received $ 1,100 directly from petitioner and $ 900 from the J. W. Knapp Co. for services as vice-president and director of those respective companies, no part of the $ 5,500 paid him by Continental should be charged against the subsidiaries. We think the small amount paid directly to Krave by petitioner was not paid for the services rendered petitioner by Krave as an officer of Continental, but rather for his services as vice-president and director of petitioner. Therefore we conclude that the sum of $ 3,000 paid to Continental by petitioner in the taxable year involved for management services and advice constituted an ordinary and necessary expense of petitioner's business and is an allowable deduction under section303 23 (a) (1) (A) of the Internal Revenue Code.The final issue involves the propriety of respondent's action in disallowing as deductions in the taxable year involved a part of the payments made by petitioner to the Chamber of Commerce of Flint, Michigan, and the United States Chamber of Commerce, as ordinary and necessary expenses.In our findings of fact we have set forth in some detail the purposes and aims of these respective organizations receiving the payments. We have found that the payments were motivated by and with reasonable expectations that the business of petitioner would be advanced. Hence they constitute ordinary and necessary expenses of its business. Hirsch-Weis Mfg. Co., 14 B. T. A. 796; Emery, Bird, Thayer Dry Goods Co., 20 B. T. A. 796; A. L. Killian Co., 44 B. T. A. 169, affd., 128 Fed. (2d) 433, on other issues. The respondent relies wholly on I. T. 2375, which we think is clearly inapplicable.Other adjustments made by respondent are not contested; thereforeDecision will be entered under Rule 50. Footnotes. A longhand notation indicates that this should be 2 months.↩1. SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS.In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades, or businesses.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622097/	FANNIE W. JOHNSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Johnson v. CommissionerDocket No. 15301.United States Board of Tax Appeals8 B.T.A. 108; 1927 BTA LEXIS 2940; September 19, 1927, Promulgated 2940 Value of plantation at March 1, 1913, determined. L. L. Hamby, Esq., C. W. Dudley, Esq., and M. O. Carter, C.P.A., for the petitioner. W. F. Gibbs, Esq., W. H. Lawder, Esq., and Brice Toole, Esq., for the respondent. LANSDON 108 In this proceeding petitioner seeks a redetermination of her income tax for the year 1919, for which the respondent has determined a deficiency of $125,033.47. The petitioner alleges error on the part of the Commissioner in his determination of the value of the Panther Burn Plantation at March 1, 1913, as a basis for determining the gain or loss upon the sale of that plantation by the petitioner in 1919. The specific errors alleged are in respect to the value of 109 cultivated land, land under hardwood timber, land under cypress timber, hardwood-timber values, and cypress-timber values. The value of the improvements, equipment, and personal property has been agreed by the parties at interest to be $168,940.32. FINDINGS OF FACT. Petitioner is an individual and a resident of Vicksburg, Miss. She inherited from her father at the time of his death in 1906, the plantation known as "Panther Burn, 2941 " containing 12,357 acres, and situated in Washington and Sharkey Counties, Miss. She was the owner of this plantation on March 1, 1913, and continued to be the owner thereof, until May 1, 1919, when she sold it for $1,200,000, upon the following terms: $400,000 was paid in cash on the date of the sale, and the remainder was represented by 10 promissory notes of the vendees in the amount of $80,000, each, payable on the 1st day of May of each successive year, with interest at the rate of 6 per cent per annum from the date until paid, the first note being payable on May 1, 1920, and the last note payable on May 1, 1929. Subsequent to the sale the petitioner, during the calendar year 1919, received from the vendees, in addition to the foregoing, $16,485.72, as reimbursement to her of certain expenses incurred by her in connection with the operation of the plantation. She also incurred $5,114.75 legal expenses which she paid out in connection with the sale of the plantation. This plantation, on March 1, 1913, contained 6,767 acres of cultivated land; 4,285 acres of land covered by hardwood timber, and 1,305 acres of land covered by cypress timber. The plantation, which was divided2942 into three parts, having a manager in supervision of each part in respect of the cultivated area, was divided into lots of from 10 to 40 acres each, each lot being rented out to tenants, together with the tenant houses and all improvements contained on each lot. There were several hundred tenant houses, three managers' houses, a mansion for occupancy by the owner of the plantation, and several auxiliary buildings, such as servants' quarters, barn and garage, all built of sound cypress timber. There were also numerous corncribs, cotton houses, seed houses, three cotton gins, blacksmith shop, two schoolhouses, one for white and one for colored people, two churches, one for white and one for colored people, and a large, well-stocked plantation store, all of which belonged to and formed a part of the plantation, and all of which was in full operation. There was one main road or highway going through the center of the plantation and separate roads leading from each of the three parts of the plantation to the owner's mansion, to the churches, schoolhouses, blacksmith's shop, and the store. All of the tenant 110 houses were accessible to the roads leading to all parts of the2943 plantation. There were three bridges across a stream, known as "Deer Creek," which runs through the plantation. The main line of the Yazoo & Mississippi Valley R.R. runs through the property, and a railroad station, known as "Panther Burn" was located thereon. The entire plantation was completely fenced and its population, including the tenants and their families, was about 1,500 people. There were four deep artesian wells on the place and a water service pump at each tenant house. The improvements and personal property on the plantation, consisting of various buildings, machinery, bridges, delco plant, farming implements, seed inventory, accounts receivable, stock in the store, and mules, were stipulated to have been of the value on March 1, 1913, of $168,940.32. The property was regarded as the best plantation in that section of Mississippi, was well organized, and enjoyed the highest reputation. The principal crop grown was long-staple cotton, which was sold under the trade name of "Panther Burn" and had an established reputation for its high quality. The land covered in hardwood timber, which was adjacent to the cultivated land, contained the same character of soil2944 as the cultivated land and, when cleared, was equally, if not more, productive. The land covered by cypress timber was of a very rich character and quite susceptible of cultivation when cleared and drained. There were the following quantities of various kinds of growing timber on the plantation: 27,351,000 feet of high-grade cypress, including only trees 12 inches in diameter and upwards to 30 inches in diameter; 20,885,000 feet of hardwood timber, of which 11,857,000 feet were gum of 12 inches and upwards in diameter; 1,235,000 feet of overcup oak 14 inches and up in diameter; 729,000 feet of red oak 14 inches and up in diameter; 1,086,000 feet of elm 14 inches and up in diameter; 223,000 feet of ash 10 inches and up in diameter; 136,000 feet of cottonwood 12 inches and up in diameter; 494,000 feet of miscellaneous hardwoods and 5,125,000 feet of small timber, being less than the foregoing diameters in respect of the various kinds. All of the timber was close to and easily accessible to the Yazoo & Mississippi Valley R.R., which ran through the plantation. All of the tenant houses were occupied and the plantation enjoyed the reputation of having thoroughly contented tenants. 2945 On March 16, 1919, about six weeks before the sale in question, a cyclone struck the plantation and made a path approximately 400 yards wide and extending throughout the main body of the hardwood timber, a distance of several miles, blowing down all the trees in its path and seriously damaging 3,000,000 feet of the timber thereon. This cyclone also blew down the mansion and killed the petitioner's husband, who, ever since the petitioner had owned the 111 plantation, had been in sole and complete charge of it. This cyclone also destroyed several tenant houses. Petitioner was 63 years of age, and she had never had any experience in managing or running a plantation of this sort, or any other kind, and, upon the death of her husband, was advised by her closest friends to make a quick sale of the entire plantation, and was told that if it remained unsold and without any competent head or management, demoralization would result and heavy losses would follow. Petitioner, thereupon, immediately placed the matter in the hands of her friend and advisor, former Governor John M. Parker, of Louisiana, who, within the course of a few days, made arrangements to effect a walk-out2946 sale of the entire plantation to four individuals, Senator Percy, B. O. McGee, a Mr. Dean, and a Mr. Wood, for $1,200,000, upon the terms hereinbefore stated. The plantation was never advertised for sale. The four men to whom it was sold were individuals who were well known in the community, financially responsible, thoroughly familiar with the territory and willing to pledge themselves to carry out every contract made with every tenant on the property and generally to see that the place was conducted as it had always been conducted. An offer of $100,000 more in this brief time was made for the place; but it was not accepted. In October, 1919, five months after the sale of the plantation, the purchasers sold the timber on it for $500,000. The value of petitioner's plantation at March 1, 1913, was as follows: Cultivated land, 6,767 acres, at $80.00$541,360.00Land under hardwoods, 4,285 acres, at $22.5096,412.50Land under cypress, 1,305 acres, at $3.003,915.00Gum, 11,520,000 feet, at $3.41 per M39,283.20Overcup oak, 1,200,000 feet, at $6.50 per M7,800.00Red oak, 708,000 feet, at $5.20 per M3,681.60Ash, 1,056,000 feet, at $8.77 per M9,261.12Mixed cypress, 2,688,000 feet, at $6.66 per M17,902.08Cottonwood, 132,000 feet, at $4,88 per M644.16Miscellaneous, 480,000 feet, at $1.95 per M936.00Cypress, 27,551,000 feet, at $6.66 per M183,489.66904,685.32Plus agreed value of personal property and improvements168,940.32Total value1,073,625.642947 The profit arising from the sale in 1919 is the difference between $1,211,370.97 and $1,073,625.64, or $137,745.33. OPINION. LANSDON: The plantation here in question was sold early in the year 1919 for a total consideration of $1,211,370.97. The respondent asserts that a substantial profit, based on the fair market value or *112 price of the property at March 1, 1913, was realized. The only question before us is the fair market value or price of the property at the basic date. Each party called numerous witnesses, and the evidence is the voluminous opinion and expert testimony of such witnesses. After careful study and analysis of the entire record of the proceeding, we have determined the values of the various categories of which the property consisted at March 1, 1913, as set forth supra in our findings of fact. Judgment will be entered on 15 days' notice, under Rule 50.Considered by STERNHAGEN and ARUNDELL.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622099/	Harry B. Atlee and Colleen Atlee, Petitioners v. Commissioner of Internal Revenue, RespondentAtlee v. CommissionerDocket No. 4222-73United States Tax Court67 T.C. 395; 1976 U.S. Tax Ct. LEXIS 12; December 8, 1976, Filed 12 Decision will be entered under Rule 155. Petitioners and the Hansens each owned 50 percent of the stock of Hansen-Atlee, a corporation engaged primarily in the development and rental of commercial and residential properties. In 1969, petitioners and the Hansens devised a plan to divide the corporate business between them. Pursuant to a plan of reorganization, dated Dec. 31, 1969, Atlee Enterprises, Inc., was formed and in return for all of its stock, Hansen-Atlee transferred to the new corporation: three pieces of undeveloped property, three notes, a leasehold interest, a car, a house trailer, and $ 500 cash. All three properties, the leasehold, and one of the notes had been previously transferred to Hansen-Atlee only a few days before the plan of reorganization was adopted. For the most part, these assets were held individually by the Hansens and the Atlees outside the corporate business. On Jan. 2, 1970, petitioners transferred all of their stock in Hansen-Atlee to Hansen-Atlee in exchange for all of the shares of Atlee Enterprises, Inc. Hansen-Atlee retained virtually all of the operating assets the corporation used in its business. Held: The reorganization did not qualify 13 as a tax-free division under sec. 355. Hansen-Atlee represented a mere conduit through which payment was made by the Hansens for the value of the Atlees' interest in the operating assets of Hansen-Atlee in excess of the few liquid assets of Hansen-Atlee which were transferred to Atlee Enterprises, Inc. Held, further, the fair market value of the stock of Atlee Enterprises, Inc., on the date of its distribution to petitioners, determined. James F. Davis and Keith T. Childers, for the petitioners.Robert E. Glanville, for the respondent. Wilbur, Judge. WILBUR396 Respondent has determined deficiencies in petitioners' Federal income taxes for the years 1969 and 1970 in the amounts of $ 1,371.45 and $ 31,107.51, respectively. The issues presented for decision are: (1) Whether petitioners effected a tax-free corporate division under section 355, 1 and (2) the fair market value of the stock of Atlee Enterprises, Inc., on the date such stock was distributed to petitioners. 214 FINDINGS OF FACTMost of the facts have been stipulated and are found accordingly.Petitioners Harry B. and Colleen Atlee, husband and wife, filed joint Federal income tax returns for the years in issue with the Internal Revenue Service Center at Austin, Tex. They were residents of Oklahoma City, Okla., at the time their petition was filed with this Court.Prior to July of 1952, petitioners owned and operated a milk purchasing, processing, and distributing business in Oklahoma City, which was incorporated as Hansen & Atlee Dairy, Inc., on July 2, 1952. From the time of its incorporation until December 31, 1969, Hansen & Atlee Dairy, Inc., later known as Hansen-Atlee Co., had authorized and outstanding 320 shares of its only class of capital stock, held as follows:SharesColleen Atlee159Harry B. Atlee1Evelyn S. Hansen159Leonard M. Hansen1Total320On or about April 1, 1959, Hansen & Atlee Dairy, Inc., sold the milk purchasing, processing, and distributing 15 business it had previously operated to Gold Spot Dairy, Inc. Subsequent to this sale, Hansen & Atlee Dairy, Inc., began to acquire 397 certain undeveloped land in the Oklahoma City area. 3 On October 8, 1959, the corporate charter of Hansen & Atlee Dairy, Inc., was amended to change the name to Hansen-Atlee Co. (Hansen-Atlee), reflecting the fact that the corporation was no longer engaged in the dairy business, and to add the following corporate purposes and powers;"to buy, acquire, trade, sub-divide or deal in real estate located in incorporated cities and towns and in additions thereto"; -- "to construct, repair and maintain buildings and other improvements thereon and to rent the same and collect and invest the income therefrom"; and -- "to acquire, own, hold, sell and dispose of notes and mortgages and other securities and evidences of debts."Hansen-Atlee continued to purchase land with a view to 16 erecting thereon commercial or residential developments that would be held for use in the business of renting. The general pattern of development for these properties was to have Hansen-Atlee act as its own general contractor, and subcontract certain special tasks, such as electrical work, plumbing, and bricklaying. The properties purchased and developed by Hansen-Atlee, however, were relatively few in number.The major asset of Hansen-Atlee was two apartment complexes, known collectively as the "Country Club Apartments." 4 In 17 March of 1962, Hansen-Atlee acquired the three tracts of land at 5700 South Agnew in Oklahoma City on which these apartments were built. The complex consisted of 144 apartment units, and was constructed by Hansen-Atlee acting as its own general contractor and planner. The total construction cost of these apartments was $ 847,811.79, as reported on the tax return filed by Hansen-Atlee Co. for its fiscal year ended June 30, 1965. From the time the apartments were built, Hansen-Atlee Co. actively managed the complexes, doing its own painting, recarpeting, and redecorating work, as well as making major changes in the original air-conditioning and plumbing systems.398 In midsummer of 1969, petitioners and Leonard M. and Evelyn S. Hansen began to formulate a plan to divide the corporate business between the Atlee shareholders and the Hansen shareholders, at the urging of petitioners. Harry B. Atlee desired to divide the corporate business so that his son, who was about to become available after service in the Navy, could join him in the business. There had previously been a longstanding 18 agreement against the corporation's hiring relatives of the four shareholders. Furthermore, Leonard M. Hansen's involvement in motel operations outside Hansen-Atlee Co. had destroyed the earlier close business and personal relationship between Mr. Hansen and Mr. Atlee, and had left the primary burden of management of Hansen-Atlee Co. on petitioner Harry B. Atlee.On December 31, 1969, a document entitled "Plan of Reorganization of Hansen-Atlee Company" (hereinafter the plan) was executed by petitioners and the Hansens. Pursuant to the plan Atlee Enterprises, Inc., was formed on December 31, 1969. In exchange for all of the capital stock of Atlee Enterprises, Inc., Hansen-Atlee Co. transferred $ 500 in cash plus the following property to the new corporation: the Choctaw property, the Eufaula property, the South Youngs property, the Gentry-Rogers note, the first Burke note, the second Burke note, the Dairy Boy leasehold interest, one 1968 Chevrolet Caprice, one 1961 Airstream House Trailer. 5 Atlee Enterprises, Inc., also assumed liability to pay a $ 21,865.26 note made by Hansen-Atlee Co. All 160 shares of stock of Hansen-Atlee Co. owned by petitioners were transferred to Hansen-Atlee 19 in exchange for all the stock of Atlee Enterprises, Inc., on or about January 2, 1970.The Choctaw property consisted of 80 acres of unimproved land on Northeast 10th Street in Oklahoma County. Sometime after acquisition, preliminary plans were drawn by a surveying company to cut the property into lots, but except for the clearing of underbrush on about 10 acres, no development had occurred prior to the end of 1969. This property had been acquired by Evelyn S. Hansen and Harry 399 B. Atlee in their individual capacities on September 22, 1960. The property was subsequently conveyed to Hansen-Atlee by warranty deed, dated December 23, 1969.The Eufaula property consisted of 63.21 unimproved acres. The property had been purchased for $ 14,000 in February 1969 at an auction sponsored by the Bureau of Indian Affairs. The title to the Eufaula property had originally been 20 taken by Leonard M. Hansen and Harry B. Atlee, individually, although most of the purchase price had been paid by Hansen-Atlee Corp. The property was transferred to the Hansen-Atlee Corp. on December 23, 1969.The South Youngs property was a 260- x 260-foot lot in Oklahoma City. When purchased in 1962 (either by the petitioners and the Hansens or the Hansen-Atlee Corp.), the lot contained a three-bedroom frame house which burned sometime before December 31, 1969, at which time it was unimproved. There were architectural plans, however, for a 46-unit apartment complex to be built on the property.The Gentry-Rogers note was initially payable to and held by Colleen Atlee and Evelyn S. Hansen. On December 23, 1969, they negotiated this note to Hansen-Atlee Co. The note arose as the result of a sale in October 1969 of the Rockwell-Gault property. The Rockwell-Gault property had been previously acquired by petitioners and the Hansens in late 1968 for $ 50,000. The property was then sold by them in October 1969 for $ 100,000. There was a $ 10,000 downpayment and the Gentry-Rogers note represented the $ 90,000 balance. The principal balance of this note to Hansen-Atlee Co. was $ 88,898.85 21 on December 31, 1969, subject to a first mortgage on the property having a principal balance of $ 39,263.13, 6 leaving a net principal receivable under this note of $ 49,635.72 on December 31, 1969. The first Burke note was the result of a sale by Hansen & Atlee Co. of its properties located at 7610 and 7612 North Western in Oklahoma City. The properties had been acquired by Hansen & Atlee Co. in 1959 as vacant land. During 1961, Hansen-Atlee, acting as its own general contractor, constructed 400 a shopping center consisting of a 7-Eleven grocery store as its major tenant and five other shop or office spaces. The construction cost Hansen-Atlee $ 102,951.05. On October 1, 1968, Hansen-Atlee sold its shopping center to Bennet A. and Jacquelyn F. Burke for the sum of $ 135,000, $ 17,122.64 of which was received 22 in the taxable year of sale and the balance payable pursuant to an installment note. The principal balance on this note on December 31, 1969, was $ 116,399.25, but was subject to a first mortgage note having a principal balance of $ 34,559.53 7 on that date, leaving a net principal receivable under the note of $ 81,839.72. 8 From its construction until its sale, the shopping center at 7610 and 7612 North Western was actively managed by Hansen-Atlee, and required frequent remodeling to suit the varying needs of its changing tenants.In December of 1969, Hansen-Atlee 23 sold its remaining land at the 7600 block of North Western to the Burker. Hansen-Atlee received $ 85,041.04 for the property of which $ 920.62 was received in the taxable year of sale, with the remainder to be paid pursuant to the second Burke note. The second Burke note was subject to a first mortgage note 9 on the property having a principal balance of $ 15,041.04 leaving a net principal balance renewable under this note of $ 70,000 on December 31, 1969. 10The Dairy Boy leasehold interest was the interest of Hansen-Atlee with respect to a lease dated December 27, 1958, from Helen E. Morgan and Cora May L. Marshall as lessors to Dairy Boy, Inc., a corporation controlled by the Hansens and the Atlees, as lessees. The lease was for a period 401 of 5 years with options to renew for two additional 5-year periods. The second of these renewal periods ran from April 1, 1969, to March 31, 1974. 24 The monthly rental due Mrs. Morgan and Mrs. Marshall during this time was $ 110. The property was subleased to a third party for $ 250 per month, as of January 2, 1970. Dairy Boy, Inc., had assigned its interest under the lease to H.A.S., Inc., another corporation controlled by the Atlees and the Hansens, on March 12, 1959. Finally, on December 23, 1969, H.A.S., Inc., assigned the lease to Hansen-Atlee.The 1961 Airstream mobile home trailer and the 1968 Chevrolet Caprice automobile transferred to Atlee Enterprises, Inc., together had a fair market value of $ 4,034 on December 31, 1969.After the corporate division, Atlee Enterprises, Inc., proceeded with the development of the properties received in the division, as well as other properties subsequently acquired.In January 1970 Atlee Enterprises acquired land at Northwest 10th and Peniel in Oklahoma City. 11 During the next few months, Atlee Enterprises, acting as its own general contractor, began construction of a 7-Eleven store and four other spaces for commercial rental. The construction was completed in time to receive rental in July of 1970. Atlee Enterprises also constructed 36 Tiny Warehouse (small individual storage) spaces 25 on the property in 1972. By late 1970, Atlee 26 Enterprises had also begun work on the Choctaw property. The corporation purchased a bulldozer motor grader and tractor and proceeded to divide the property 402 into 5-acre tracts by clearing and moving timber and graveling roads. Outside contractors with heavier equipment had to be hired to build the ditches, set three 40-foot tinhorns, and haul in gravel for the roads. Work on the Choctaw property was completed in July or August of 1971. The sixteen 5-acre tracts comprising this property were eventually sold in 1971 and 1972 for approximately $ 6,000 to $ 6,500 apiece.After completion of work on the Choctaw property in late 1971, Atlee Enterprises moved its house trailer and earthmoving equipment to the Eufaula property, to begin development of this property into individual tracts. By the time of the trial, Atlee Enterprises had approximately 39 lot sites developed, some of which have been sold. A substantial amount of the original acreage remains for further development.In 1973, Atlee Enterprises, Inc., acquired real estate in the 7200 block of West Reno in Oklahoma City, on which, acting as its own general contractor, it built 542 Tiny Warehouse rental units, 16 offices, and 27 2 apartments above the offices for its employees who manage and maintain the rental units and offices.In addition to Atlee Enterprises' acquisition and construction activities, petitioners transferred to the corporation a number of developed properties which had previously been held in their individual names. 12From January 1, 1970, to the date of the trial, Hansen-Atlee Co., now Hansen & Co., has continued in the rental and development business. Shortly after the corporate division, the Country Club Apartments were divided into separate complexes, one of 53 units and one of 91 units, by rerunning the utility lines into each complex. There are now separate mortgages on each property. In addition to operating the Country Club Apartments, Hansen & Co. has been developing its property at Park and Western and performing extensive remodeling upon its property at 1601 Exchange Avenue.OPINIONPetitioners and the Hansens each owned 50 percent of the stock of Hansen-Atlee Corp. on December 31, 1969. On that 403 date Hansen-Atlee Corp. adopted a plan of reorganization. Pursuant to the plan, Atlee Enterprises, Inc., was formed on December 28 31, 1969, and some of the assets of Hansen-Atlee (along with $ 500 in cash) were transferred to Atlee Enterprises, Inc., in return for all of its stock. On January 2, 1970, petitioners transferred all of their stock in Hansen-Atlee Corp. to Hansen-Atlee in exchange for all the shares of Atlee Enterprises, Inc.The primary issue presented for our decision is whether the distribution by Hansen-Atlee of all of the stock of its wholly owned subsidiary, Atlee Enterprises, Inc., and the surrender by petitioners of all of their stock in Hansen-Atlee qualified as a nontaxable corporate division under section 355. If we find that the distribution is taxable, then we must also determine the fair market value of the Atlee Enterprises' stock on the date of distribution in order to establish the gain properly recognizable on the transaction.Section 355(b)(1) requires, inter alia, that the distributing corporation and the controlled corporation be engaged in the active conduct of a trade or business immediately after the distribution. 1330 Furthermore, section 355(b)(2) provides that each corporation is regarded as being engaged in a trade or business only if "such trade or business was actively 29 conducted throughout the 5-year period ending on the date of the distribution." 1431 404 Thus section 355 is applicable to this case if and only if the Hansen-Atlee Corp. transferred a trade or business to Atlee Enterprises, Inc., that Hansen-Atlee actively conducted throughout the 5-year period ending on January 2, 1970. As the parties recognize, this requires us, on the facts of this case, to focus on the assets transferred to Atlee Enterprises, Inc., and their functional relationship to the assets retained by Hansen-Atlee, Inc.Petitioners contend that the business of Hansen-Atlee was at all times a single business, which was divided vertically into mirror images by the corporate division, citing Edmund P. Coady, 33 T.C. 771">33 T.C. 771 (1960), affd. 289 F.2d 490">289 F.2d 490 (6th Cir. 1961). 15 Petitioners allege that the components of this single business -- property development and property management -- both generated the income realized. They conclude that each of the divided parts was a functional component of the entire business as conducted during the 5 years 32 prior to the division, and that the parts in themselves each constituted a trade or business after the division. 1633 405 Respondent does not deny that Hansen-Atlee conducted a single trade or business, but contends that this unitary business remained with Hansen-Atlee after the "division," minus a couple of nonessential liquid assets. He contends that the additional assets transferred were passed from the Hansens and Atlees individually to Atlee Enterprises, Inc., with Hansen-Atlee serving as a mere conduit, and that in substance the transaction involved an exchange of the Atlees' stock interest in Hansen-Atlee Co. for property interests owned by the Hansens. Moreover, respondent contends that even if Hansen-Atlee is not treated as a mere conduit, the record fails to show that petitioners and the Hansens (or H.A.S., Inc., in the case of the Dairy Boy lease) held the assets in an active trade or business for a period of time which, when coupled with the period the assets were held by Hansen-Atlee Co., totaled the 5-year period contemplated by section 355. 1734 We agree with respondent. The only Hansen-Atlee assets the corporation owned on December 22, a few days before the plan of reorganization was adopted, that ended up in Atlee Enterprises, Inc., were two notes receivable (the two Burke notes), and a used car and travel trailer. Thus, focusing on the two corporations specified in the language of section 355, we see that Hansen-Atlee retained virtually all of the operating assets the corporation used in its business.To compensate for this large disparity, the Hansens relinquished their interest in the assets held individually with the Atlees or owned with them through another corporation. On December 23, 1970, the Choctaw and Eufaula properties, along with the Gentry-Rogers note, were transferred to Hansen-Atlee by petitioners and the Atlees, along with some additional real estate bearing some relationship to the South Youngs property. 18 Also 35 on December 23, 1969, the Dairy Boy 406 lease was transferred to Hansen-Atlee by H.A.S., Inc., a corporation apparently controlled by petitioners and the Hansens. A little over a week later, these assets were transferred pursuant to the reorganization plan to Atlee Enterprises, Inc. The only assets that we can clearly identify as emerging from the assets constituting the "unitary trade 36 or business" of Hansen-Atlee are the two Burke notes, the used Airstream travel trailer, and the used car. As the Ninth Circuit stated in similar circumstances, "without lawyers and tax laws, we believe it fair to say" that the Hansens would simply have signed over their interest in the property individually owned in exchange for acquiring the lion's share (or all of the operating assets) of the Hansen-Atlee Corp. Portland Mfg. Co. v. Commissioner, 35 AFTR 75-1439, 75-1 USTC par. 9449 (9th Cir. 1975), affg. without published opinion 56 T.C. 58">56 T.C. 58 (1971). Instead these assets were run quickly through the corporation "in a matter of days, never pausing long enough to serve any business purpose, until they reached their ultimate destination." Portland Manufacturing Co., 56 T.C. 58">56 T.C. 58, 77 (1971). This transitory step was wholly unrelated to the business of the Hansen-Atlee Corp.; the corporation was merely the medium or broker through which payment was made by the Hansens for the value of the Atlees' interest in the operating assets of the Hansen-Atlee Corp. in excess of the two Burke notes (and the trailer and car).We are not here confronted with asset acquisitions within the critical 5-year 37 period that raise issues of horizontal or vertical expansion of the divided corporation's business or the problem of whether one or more trades or businesses were conducted. See Conf. Rept. No. 2543, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess. 38 (1954); Riener C. Nielsen, 61 T.C. 311">61 T.C. 311 (1973); Patricia W. Burke, 42 T.C. 1021">42 T.C. 1021 (1964); Lockwood's Estate v. Commissioner, 350 F.2d 712">350 F.2d 712 (8th 407 Cir. 1965). Neither is this situation where the same trade or business was actively conducted by the distributing corporation after acquisition from a related entity or individual(s), who also actively conducted the trade or business for a period of time, the two periods totaling 5 years or more. See sec. 355(b)(2)(C). Rather we have here simply a collection of unrelated assets never functionally integrated in any business activity, having nothing particular in common save their ownership by the same parties who owned the corporate conduit.Section 355 provides a set of quite specific rules. They are designed to defer taxation of gain on stock exchanges shifting ownership from one-half of all to all of one-half of an active corporate business enterprise. The section was not designed 38 to encompass the division of all property individuals may own in any form, corporate or individual. See sec. 1.355-3(a), Income Tax Regs. It may be argued that equity requires the situations to be treated similarly. But in this instance Congress has carefully worked out detailed rules on the basis of trial and error for four decades. 19 The statute is tightly drawn to avoid abuses that experience produced. We have no difficulty perceiving that it may not be stretched, no matter how much we abhor legalistic interpretations, to encompass the circumstances before us. Having concluded that the surrender by petitioners of their Hansen-Atlee stock in return for all 39 of the stock in Atlee Enterprises constituted a taxable event, we must now determine the fair market value of the Atlee Enterprises stock on the date of distribution in order to establish petitioners' gain on the transaction.In determining the value of this particular stock, the parties have agreed it is appropriate to value and total the underlying assets of the corporation. Using this approach, respondent has valued the Atlee Enterprises stock on the date 408 of distribution at $ 208,009.92. Petitioners, while not suggesting a specific figure, argue that the value of the Atlee Enterprises stock was substantially less than that determined by respondent. The values placed on specific assets by the two parties may be summarized as follows:Respondent'sPetitioners'AssetvaluevalueMobile trailer and automobile$ 4,034.00$ 4,034Leasehold interest6,000.00No value givenEufaula property1 15,000.0015,000Choctaw property1 11,000.0011,000South Youngs property1 15,000.0015,000Gentry-Rogers note2 49,635.7225,000 to 35,000Burke note No. 23 70,000.0035,000Burke note No. 13 75,173.1610,000 to 15,000The parties agree that the value of the 40 mobile trailer and used automobile is $ 4,034 and we so find. Respondent determined the value of the leasehold by reasoning that on the date of the corporate division, the leasehold interest had a remaining term of approximately 50 months at $ 110 per month, and that Atlee Enterprises, Inc., sublet the property for $ 250 per month, resulting in a net gain each month of $ 140. Projected out over the term of the lease, the resulting total gain would be $ 7,000. After discounting this amount, the fair market value of the leasehold reached by respondent was $ 6,000. We believe that respondent's figure was insufficiently discounted with respect to time, and did not take into account any risk element. Accordingly, we find the value of the leasehold to be $ 5,500.Respondent does not seriously contest petitioners' valuation of the Eufaula, Choctaw, and South Youngs properties except to argue that 15 acres of Choctaw property was sold for $ 24,000 during the fiscal year ending September 30, 1971, and that sixteen 5-acre tracts of Choctaw property were sold in later years for $ 96,000. 20 We note, however, that substantial development activity took place with respect to the Choctaw 409 property 41 after its transfer to Atlee Enterprises, and that the later sales price of the property does not reflect significantly on its value at the distribution date. We therefore find that the values of the Eufaula, Choctaw, and South Youngs properties are $ 15,000, $ 11,000, and $ 15,000 respectively.The heart of the stock valuation controversy is the valuation of the three second mortgage notes. Respondent valued the Gentry-Rogers note and the second Burke note at their net principal balances. The first Burke note was discounted to a factor of 86.735 of the net principal balance, resulting in a valuation of $ 75,173.16 for the note. At trial, petitioner called an expert witness, Jim L. Hurley, 2142 who testified that the second mortgage notes, against the general factual backgrounds present here, should be given values substantially less than their face values. Respondent did not call any expert witnesses, nor did he present any alternative valuation for the notes beyond the discount given to the second Burke note.We note at the outset that second mortgage notes represent, in the absence of high rates of return, an unattractive investment for a potential purchaser. Because of their inherent risk, they are highly speculative and not readily salable on the open market. If the promisor defaults on the note, not only does the holder have to make the first mortgage payments to protect his investment, but he may frequently have to invest additional sums to develop or improve the underlying property in order to attract buyers.Two of the three notes in issue carry an interest rate of only 6 percent, and the third only 7 percent, rates far below the substantial returns that could be expected for this type of investment. We believe that the lack of liquidity of these notes, their substantial risk, and their low rate of interest all act to substantially depress their fair market value.An especially important element in valuing these notes is an appraisal of the property that 43 secured them. The Gentry-Rogers note arose as the result of a sale of the Rockwell-Gault property in October 1969 for $ 100,000, of which $ 10,000 was 410 in cash, and a wraparoud mortgage and note 22 for $ 90,000. Hansen-Atlee had purchased this property less than a year earlier for $ 50,000. We note that even at $ 100,000 the loan-to-value ratio is very high. This 90-percent loan-to-value ratio further operates to increase the risk to the holder of the second mortgage. Taking into account all of these circumstances surrounding the Gentry-Rogers note, we find its value at the date of distribution to be $ 35,000. An examination of the property securing the second Burke note likewise suggests a lower value for the second mortgage note. Hansen-Atlee received $ 85,041.04 for this property, all of which sum is reflected in the second Burke note. Mr. Hurley's testimony established that the property in question was poorly located for potential development. Moreover, 44 he noted the topography of the land is such that it would likely require substantial preliminary development before anything could be constructed on the property. These negative factors have an adverse impact on the value of the second mortgage note. Taking into account the additional factors affecting the value of second mortgage notes previously discussed, we find that the value of the second Burke note on the date of distribution was also $ 35,000.The first Burke note was secured by improved property on which there was a small shopping center. This shopping center had been constructed by Hansen-Atlee in 1961 and consisted of a 7-Eleven grocery store as its major tenant and five other shop or office spaces. The property was sold for $ 135,000 with $ 15,000 in cash, and a second mortgage for $ 120,000 which was wrapped around the first mortgage. Petitioners attempted to show a minimal value for the second mortgage note by arguing that the rent after expenses barely covered debt service on the first mortgage, and left little to pay the second mortgage. Unfortunately, none of the figures which might establish petitioners' position were submitted into evidence, and therefore cannot 45 be considered. After carefully reviewing all of the evidence in the record with respect to the first Burke note, we find that its value at the date of distribution was $ 40,000.411 In establishing a value for the notes in issue, we have taken into account the fact that the second note and mortgage were, by virtue of an assignment, with full recourse against a solvent corporation. We also note in this connection, however, that this recourse is not a complete guarantee against loss. While the corporation may be solvent at the time of its guarantee, a number of unexpected financial reverses could occur in the 10- or 20-year term of the note. This is especially true in such a high risk business like real estate. Moreover, the holder of a defaulted second mortgage note may have some litigation risks to insure his guarantee. In sum, we find that the value of Atlee Enterprises, Inc., stock (after also accounting for the $ 21,865.26 note assumed by Atlee Enterprises, Inc.), on the date of distribution was $ 139,168.74.Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.↩2. Respondent has determined that petitioners realized gain on the sale of certain real property in 1969 in the amount of $ 2,738.21 rather than $ 2,500 as reported on petitioners' 1969 Federal income tax return. Petitioners have offered no evidence on this issue, nor have they argued it on brief. We have therefore concluded that petitioners have conceded the issue.3. On Sept. 23, 1959, Hansen & Atlee Dairy, Inc., acquired two undeveloped parcels of land at 7610 and 7612 North Western in Oklahoma City, at a total cost of $ 42,270.42. Three days later the company acquired an option to purchase undeveloped land on South Pennsylvania in Oklahoma City.↩4. The Country Club Apartments were operated as a single unit and the utility lines were hooked together.↩5. The principal assets remaining in Hansen-Atlee Co. were the Country Club Apartments, the buildings at 1601 Exchange acquired in 1954 with subsequent improvements, and property at Park and Western in Oklahoma City. The land at Park and Western along with three houses on the property was acquired in May of 1962 for $ 23,000.↩6. The first mortgage note represented the remaining debt owed by the Hansens and the Atlees when they originally purchased the property. The face amount of this note was $ 40,000 and it bore a 6-percent interest rate. The interest rate on the Gentry-Rogers note was also 6 percent per annum. The principal and interest on the Gentry-Rogers note were amortized over a 10-year period.↩7. The first mortgage note was payable to the Local Federal Savings & Loan of Oklahoma City, and carried with it an interest rate of 6 percent per annum. The interest rate on the first Burke note was 7 percent per annum. Principal and interest were amortized over a 20-year period.↩8. Payments on the first Burke note became increasingly delinquent after 1970, sometimes being as much as 11 months overdue. At one point, the third mortgagee began foreclosure proceedings and petitioner had the tenants make their rental payments directly to petitioners, who first applied these sums to the first mortgage to protect their equity interest.↩9. The first mortgage note was payable to one Wilma Barney and had a 6-percent interest rate. The second Burke note was a 20-year note carrying an interest rate of 6 percent.↩10. The second Burke note was consistently delinquent and the property was in the process of being foreclosed at the time of trial.↩11. Prior to Dec. 31, 1969, petitioners had sold this real estate to one Mr. Miller under contract for deed, so that title of record to the property remained in the names of petitioners. In the fall of 1969 a representative of 7-Eleven Stores approached petitioner Harry B. Atlee offering to lease from him a store building on the Northwest 10th and Peniel property, to be built by petitioners. Verbal agreements were made before the end of 1969 to reacquire the Northwest 10th and Peniel property from Mr. Miller, and subject to demands on petitioner Harry B. Atlee's time caused by the terminal illness of his brother, to build the desired store and lease it to 7-Eleven. On Jan. 15, 1970, petitioners conferred with their attorney with regard to acquiring the Northwest 10th and Peniel property in the corporate entity Atlee Enterprises, Inc. However, since title of record to the property was then in the names of the petitioners individually, the contract for deed was canceled and the title of record to the Northwest 10th and Peniel property was conveyed from petitioners as individuals to Atlee Enterprises, Inc., by warranty deed dated Jan. 28, 1970.↩12. The bulk of these transfers took place in 1970 and 1971.↩13. SEC. 355. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED CORPORATION.(b) Requirements as to Active Business. -- (1) In general. -- Subsection (a) shall apply only if either -- (A) the distributing corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, * * ** * * (2) Definition. -- For purposes of paragraph (1), a corporation shall be treated as engaged in the active conduct of a trade or business if and only if -- (A) it is engaged in the active conduct of a trade or business, or substantially all of its assets consist of stock and securities of a corporation controlled by it (immediately after the distribution) which is so engaged,(B) such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution,(C) such trade or business was not acquired within the period described in subparagraph (B) in a transaction in which gain or loss was recognized in whole or in part * * *14. Sec. 355(b)(2).The 5-year aging requirement was added in 1954. The report of the Senate Finance Committee noted then:"Present law contemplates that a tax-free separation shall involve only the separation of assets attributable to the carrying on of an active business. Under the House bill, it is immaterial whether the assets are those used in an active business but if investment assets, for example, are separated into a new corporation, any amount received in respect of such an inactive corporation, whether by a distribution from it or by a sale of its stock, would be treated as ordinary income for a period of 10 years from the date of its creation. Your committee returns to existing law in not permitting the tax free separation of an existing corporation into active and inactive entities. It is not believed that the business need for this kind of transaction is sufficiently great to permit a person in a position to afford a 10-year delay in receiving income to do so at capital gain rather than dividend rates. Your committee requires that both the business retained by the distributing company and the business of the corporation the stock of which is distributed must have been actively conducted for the 5 years preceding the distribution, a safeguard against avoidance not contained in existing law. [S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess. 50-51 (1954).]"15. The Service originally took the position that sec. 355 did not apply to the division of a single business. We rejected this view in Edmund P. Coady, 33 T.C. 771 (1960), affd. 289 F.2d 490">289 F.2d 490 (6th Cir. 1961). Two years after Coady, was affirmed, the Fifth Circuit also held that a single business could be divided under sec. 355. United States v. Marett, 325 F.2d 28">325 F.2d 28 (5th Cir. 1963). The Service subsequently conceded the issue in Rev. Rul. 64-147↩, 1964-1 C.B. (Part 1) 136.16. If a single business is divided, then the two resulting corporations share the business history of the original corporation for purposes of the 5-year rule. Prior to Coady, the Service took the position that a single business could not be divided under sec. 355, and the taxpayer generally argued that there were two separately identifiable businesses. After Coady, the positions of the parties were often reversed; the taxpayer arguing for a single business with a shared business history, and the Service attacking the division on the grounds there were two businesses, one of which was not sufficiently aged. For a discussion on some of the litigation on this issue, see Emory, "Tax Court Further Narrows Tax-Free Corporate Separations," 47 Taxes 219">47 Taxes 219↩ (1969).17. If the distributing corporation acquires a business in a tax-free acquisition, the period during which this business was actively conducted by the predecessor may generally be used in determining whether the 5-year requirement has been met. W.E. Gabriel Fabrication Co., 42 T.C. 545↩ (1964); S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess. 50-51 (1954).18. The parties left the record in a state of confusion as to how Hansen-Atlee acquired the South Youngs property. They stipulated a deed transferring property to Hansen-Atlee on Dec. 23, 1969. The stipulation does not specifically identify the deed with the South Youngs property. Nevertheless, respondent understood the deed to involve the South Youngs property. The legal description of the deed in issue appears to identify property very close to (possibly contiguous to), but different from the South Youngs property described in the plan of reorganization. In view of the status of the record that the briefs (particularly the requested findings) do nothing to clarify, we can conclude only that the deed involved property that was part of the overall property settlement between the Hansens and the Atlees.↩19. The spinoff provision provided for in the Revenue Act of 1924, sec. 203(c), 43 Stat. 256 (1924), was repealed by the Revenue Act of 1934. Tax-free spinoffs were reinstated in 1951, with some statutory restrictions. Sec. 112(b)(11), I.R.C. 1939↩. The provisions relating to the tax treatment of corporate divisions were substantially revised when reenacted into the Internal Revenue Code of 1954, sec. 355. See discussion in Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 13.02 (3d ed. 1971).1. At least.↩2. Principal balance.↩3. Principal balance was $ 81,839.72.↩20. These two events assume that 96 acres in all were sold. Curiously, both parties have stipulated that the Choctaw property only consisted of 80 acres.↩21. At the time of trial Mr. Hurley was president of a real estate investment trust in Oklahoma City. He had previously been self-employed as a real estate developer and builder, and had also been a bank vice president in its real estate loan department.22. All three of the notes in question are wraparound notes. The wraparound note includes the amount owing on the first mortgage, but they are essentially second mortgage notes and may from time to time be referred to as such.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622100/	Borall Corporation et al. * v. Commissioner. Borall Corp. v. CommissionerDocket Nos. 2841, 2890, 2895.United States Tax Court1946 Tax Ct. Memo LEXIS 45; 5 T.C.M. (CCH) 933; T.C.M. (RIA) 46256; October 30, 194645 In pursuance of a plan of liquidation of the petitioner, Borall Corporation, the directors passed a resolution reciting that the corporation declare a "liquidating dividend of $8.00 per share payable in cash or in two (2) shares of Thompson Automatic Arms Corporation stock at the valuation of $4.00 per share * ." In accordance therewith, some stockholders received stock and the corporation sold the remaining shares and paid the remaining stockholders their liquidating dividend in cash. Upon the evidence, held: (1) That the sale was for and on behalf of the corporation and it is taxable on the profits derived therefrom; (2) that the individual petitioners are liable as transferees of the corporation. Leo Brady, Esq., for the petitioners. William A. Schmidt, Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion These consolidated proceedings involve deficiencies in income tax and declared value excess-profits tax liability determined by respondent against petitioner, Borall Corporation, Docket No. 2841 for the taxable year ended March 31, 1940 in the respective amounts of $3,255 and $2,797.50 and the liability of the two individual petitioners46 as transferees of the Borall Corporation for the same period as follows: MatthewSamuelJ. HallUngerleiderIncome tax$3,255.00$3,255.00Declared value excess-profits tax2,797.502,797.50Total$6,052.50$6,052.50 The two individuals deny that they are liable. The deficiency determined against the Borall Corporation is due to an adjustment to net income which, in the statement attached to the deficiency notice, was explained by the respondent as follows: Adjustments to Net IncomeNet income for declared value ex-cess-profits tax computation asdisclosed by return[1,524.47)Unallowable deductions and addi-tional income: (a) Capital gain24,837.00Net income for declared value ex-cess-profits tax computation as ad-justed$23,312.53Explanation of Adjustment (a) It is held that you realized a taxable gain of $24,837.00 during the taxable year ended March 31, 1940 as a result of the sale of 11,200 shares of Thompson Automatic Arms Corporation common stock. The gain is determined as follows: Shares Sold5,000 shares at $4.00 per share$20,000.00500 shares at $3.25 per share1,625.005,700 shares at $3.00 per share17,100.00Total receipts on sale of 11,200 shares$38,725.00Basis of shares sold (acquired on orabout April 1, 1939) 11,200 at $1.24per share13,888.00Gain realized$24,837.0047 By appropriate assignments of error the petitioner Borall Corporation, and the individual petitioners as transferees, contest this adjustment. At the hearing of these proceedings in New York City there was consolidated with them the proceeding of Matthew J. Hall, Docket No. 45. This latter proceeding involves the individual income tax liability of Matthew J. Hall for the calendar year 1939. Originally the petition therein raised several issues but all of them have been settled by agreement, except one. That one not definitely settled by agreement involves the tax consequences of the sale of certain of the same shares of the Thompson Automatic Arms stock as are involved in these proceedings. As to that issue the parties have stipulated in Docket No. 45 as follows: 8. Petitioner agrees to be bound by the decision of this Court after it has become final in the appeal of the Borall Corporation, Docket No. 2841, now pending in this Court, as to whether the sale of 11,200 shares of the Thompson Automatic Arms Corporation common stock which the Commissioner has determined resulted in a taxable gain of $24,837 to the Borall Corporation during its taxable year ended March 31, 1940, was48 a sale by the Borall Corporation of its own property, or whether 9,460 of said shares of the Thompson Automatic Arms Corporation stock were sold for the account of Matthew J. Hall, petitioner herein. Inasmuch as the agreement above referred to is to be operative only when our decision herein become final and our decision will not become final if appeal is taken to the Second Circuit until after that court shall have decided the appeal, it is thought that the proceeding of Matthew J. Hall in Docket No. 45 can best be handled by not including it in this decision but holding it in our files until our decision herein shall have become final. When our decision in these instant proceedings shall have become final then the proceeding of Matthew J. Hall in Docket No. 45 will be taken up and decided in accordance with the agreement of the parties now on file. Findings of Fact The Borall Corporation, hereafter referred to as "Borall" was duly organized under the laws of the State of Delaware for the purpose of engaging in the general investment business. Its principal office was located in New York City. The return for the period here involved was filed with the Collector for the Second49 District of New York. Borall had an authorized capital stock of 8,000 shares of $10 par value preferred and 5,800 shares of $1.00 par value common. On or about April 1, 1939, Borall issued to Matthew J. Hall 7,700 shares of preferred stock of $10 par value and 4,640 shares of common stock of $1.00 par value exchanged for the following: (1) 16,500 shares of common stock of the Thompson Automatic Arms Corporation, hereafter referred to as "Thompson"; (These shares had a value of $1.24 per share at the date of receipt by Hall in 1939.) (2) a contract between Matthew J. Hall and Federal Screw Works allowing Hall certain commissions on orders placed through his efforts; (3) 3,500 shares of common stock of M. J. Hall & Co., Inc. having a par value of $1.00 per share. On or about the same time it issued additional shares as follows: Pre-ferredCommonLowell A. Mayberry, for cashpayment of $75075290Samuel Ungerleider, for cashpayment of $75075290Mortimer S. Gordon, for legalservices rendered580Out of the 7,700 shares of preferred stock received by Hall, he transferred in April 1939, 350 shares to Gordon and 2,500 shares to Ungerleider in50 payment of personal obligations to them. As of this date Hall owned 4,850 shares of Borall's preferred stock. Hall thereafter transferred 120 shares of his Borall preferred stock to Aaron Sapier and/or L. S. Sapier & Co. After this transfer, Hall remained the owner of 4,730 shares of the preferred stock of Borall. The board of directors of Borall, from its organization to its dissolution, was as follows: Matthew J. HallSamuel UngerleiderLowell A. MayberryMortimer S. Gordon The officers of Borall, from its organization to its dissolution, were as follows: Matthew J. Hall, president Lowell A. Mayberry, treasurer Mortimer S. Gordon, secretary During April and May 1939, Borall maintained an office and paid Hall a salary. In June 1939, the original cash capital was virtually exhausted and, at a meeting of the board of directors held on June 28, 1939, it was decided to discontinue the salary of Hall and discontinue the corporate office. These minutes provided in part as follows: Upon motion duly made and seconded, it was unanimously RESOLVED that from and after June 30, 1939 the salary of Mr. Hall be discontinued. FURTHER RESOLVED that from and after51 June 30, 1939, the rental to Mortimer S. Gordon of $75.00 a month be discontinued. After some further discussion it was the consensus of opinion that unless satisfactory arrangements could be worked out, the corporation be liquidated and dissolved. Borall was inactive after this meeting and Hall drew no salary and the corporate office was discontinued. Hall thereafter endeavored to negotiate a sale of the Thompson stock owned by Borall to provide the corporation with working capital and took up the matter with Clokey & Miller, a brokerage firm, who agreed to purchase the 16,500 shares of Thompson stock for marketing purposes. Hall reported the result of his negotiations with Clokey & Miller to Borall's board of directors but they believed the stock would be worth a great deal more and refused to allow the corporation to sell this stock. As a result it was decided to dissolve Borall and distribute the assets. At a special meeting of the board of directors held September 9, 1939, in order to accomplish these purposes, the corporate minutes reflect the following action as having been taken: After considerable discussion and due to the uncertainty of market conditions, it was determined52 in order to permit individual shareholders to act in accordance with their individual views, to declare a liquidating dividend on the outstanding preferred shares of this corporation payable to holders of record as of September 11, 1939, of $8.00 a share payable in cash or in two (2) shares at the valuation of $4.00 per share of Thompson Automatic Arms Corporation Stock. Upon motion duly made and seconded, it was unanimously RESOLVED that this corporation distribute 16,500 shares of the common stock of Thompson Automatic Arms Corporation as a liquidating dividend to the holders of the issued and outstanding preferred stock of this corporation, and FURTHER RESOLVED that such shares be delivered to or sold for the account of said shareholders as full and final payment of such dividend and as set forth in these resolutions. FURTHER RESOLVED that this corporation declare and pay out to shareholders of this corporation's preferred stock as of record of the close of business September 11, 1939, a liquidating dividend of $8.00 per share payable in cash or in two (2) shares of Thompson Automatic Arms Corp. stock at the valuation of $4.00 per share, free of tax and delivery charges53 at the election of such shareholder, such election to be designated in writing by letter addressed to this corporation on or before September 11th, 1939. FURTHER RESOLVED that this dividend is payable on or before October 6, 1939. * FURTHER RESOLVED that this corporation enter into an agreement with Messrs. Clokey & Miller to sell to said Clokey & Miller upon the undertaking of said Clokey & Miller to buy so many of the shares of this corporation as shall be required to satisfy the election of preferred shareholders in accordance with the above resolution. FURTHER RESOLVED that said contract with Messrs. Clokey & Miller specify a price of $4.00 per share and undertake to make delivery to Clokey & Miller in Jersey City, New Jersey free of taxes and delivery charges and that said contract contain such other terms, provisions and covenants as in the opinion of Matthew J. Hall, president of this corporation shall be appropriate, necessary or desirable to effectuate the spirit of the foregoing. * On September 11, 1939, Ungerleider and Mayberry elected in a letter to Borall to receive 150 and 5,150 shares, respectively, of Thompson stock, and Hall and Gordon, as54 owners of 4,850 and 350 shares, respectively, elected to receive their liquidating dividend in cash at the rate of $8.00 per share. These letters provided as follows: September 11, 1939 Borall Corporation 80 Broad Street New York, N. Y. Gentlemen: Please be advised that the undersigned, owner and holder of Seventy-five (75) shares of your Ten Dollar ( $10.) par value preferred stock, does hereby elect to receive One Hundred Fifty (150) shares of Thompson Automatic Arms One Dollar ( $1.) par value stock in full payment, discharge and satisfaction of the Eight Dollar ( $8.) liquidating dividend declared by this corporation to holders of its Ten Dollar ( $10.) par value preferred stock of record as of September 11th, 1939. Very truly yours, (Signed) Lowell A. Mayberry September 11, 1939 Borall Corporation 80 Broad Street New York, N. Y. Gentlemen: Please be advised that the undersigned, owner and holder of Two Thousand Five Hundred Seventy-five (2575) shares of your Ten Dollar ( $10.) par value preferred stock, does hereby elect to receive Five Thousand One Hundred Fifty (5150) shares of Thompson Automatic Arms One Dollar ( $1.) par value stock in full payment, discharge55 and satisfaction of the Eight Dollar ( $8.) liquidating dividend declared by this corporation to holders of its Ten Dollar ( $10.) par value preferred stock of record as of September 11th, 1939. Very truly yours, (Signed) Samuel Ungerleider September 11, 1939 Borall Corporation 80 Broad Street New York, New York Gentlemen: Please be advised that the undersigned, owner and holder of four thousand eight hundred fifty shares (4,850) of your Ten Dollar ( $10.) par value preferred stock, does hereby elect to receive the liquidating dividend in cash at the rate of Eight Dollars ($8.00) per share. Very truly yours, (Signed) Matthew J. Hall September 11, 1939 Borall Corporation 80 Broad Street New York, N. Y.Gentlemen: Please be advised that the undersigned, owner and holder of Three Hundred Fifty (350) shares of your Ten Dollar ( $10.) par value preferred stock, does hereby elect to receive the liquidating dividend in cash at the rate of Eight Dollars ( $8.) per share. Very truly yours, (Signed) Mortimer S. Gordon A meeting of the board of directors of Borall was held on September 14, 1939 approving the minutes of the meeting of September 9, 1939, and providing56 in part as follows: The chairman then requested the Secretary to read to the meeting the minutes of the meetings of August 23rd, 1939 and September 9th, 1939 which the secretary proceeded to do. Upon motion duly made and seconded, it was unanimously RESOLVED that the minutes of August 23rd and September 9th, of the Board of Directors be and they hereby are adopted as read. FURTHER RESOLVED that the acts of the officers and directors as outlined in the said meetings, be and they hereby approved, ratified and confirmed in all respects. Mr. Hall then reported that the corporation had been notified that the holders of the preferred stock had exercised the elections in respect of the liquidating dividend declared on September 9th, 1939 and that certain shareholders elected to exchange 5300 shares of Thompson Automatic Arms Corporation stock in lieu of the cash dividend and that he had consummated arrangements with Messrs. Clokey & Miller for the sale by the Borall Corporation of 11,200 shares of the Thompson Automatic Arms Corporation stock owned by this company. Mr. Hall then submitted a form contract which was to be executed on the following day with Messrs. Clokey & Miller, 57 copy of which contract was directed to be filed with these minutes. Upon motion duly made and seconded, it was unanimously RESOLVED that the proposed contract with Messrs. Clokey & Miller, which was deemed for the best interests of this corporation, be executed forthwith and Mr. Hall be and he hereby is authorized, directed and empowered to execute such contract and affix the corporate seal thereto, as well as any and all other documents. FURTHER RESOLVED that this corporation sell, assign, set over and transfer to Messrs. Clokey & Miller, or their nominee, all or any part of 11,200 shares of Thompson Automatic Arms Corporation $1.00 par value stock now owned by this corporation free and clear of taxes and delivery charges at Jersey City, New Jersey, upon receipt by this corporation in current New York funds, of $4.00 per share. FURTHER RESOLVED that Lowell A. Mayberry, treasurer of this corporation, or Matthew J. Hall, president, each individually and without the other, are hereby authorized, empowered and directed to execute in behalf of this corporation assignments, powers of attorney, or any other document of any kind, nature or description and to affix the corporate seal58 thereto, and to do any and all acts of any kind, nature or description necessary, incident or desirable to effectuate the intent and spirit of the foregoing resolution. Mr. Hall then advised the corporation that the First National Bank of Jersey City, was willing to act as custodian to effectuate the foregoing transfer upon condition that a base charge of $75. for its services was paid and $1.50 per transaction. The following resolution was then presented: WHEREAS this corporation desires to deposit with the First National Bank of Jersey City, as Custodian, securities and other property of this corporation and a form of agreement setting forth the erms and conditions under which such custody accounts would be maintained with said Bank has been submitted to this meeting. NOW THEREFORE BE IT RESOLVED, that the form of such agreement be and it is hereby in all respects approved, and that Matthew J. Hall, President, or Lowell A. Mayberry, Treasurer of this Corporation be and either hereby is authorized and directed in name and on behalf of this corporation to execute and deliver such agreement to said The First National Bank of Jersey City. FURTHER RESOLVED that the authority59 be, and hereby is, given to said two of the following officers of this corporation, to wit: Lowell A. Mayberry, Treasurer, Matthew J. Hall, President, from time to time in the name and on behalf of this corporation to deposit with said the First National Bank of Jersey City any securities or property of this Corporation to be held under the terms of said custody agreement; to withdraw any securities or other property from the custody of said Bank; to give directions to said Bank to purchase additional securities for the account of this corporation, or to deliver any securities or other property in said custody account to other persons, firms or corporations, or to sell or otherwise dispose of said securities or other property, and to reinvest the proceeds of any such sales in such manner as may seem to said officers advisable, and in connection with any of the foregoing powers to execute and deliver such receipts, assignments, deeds, bills of sale or other instruments as may be required or as they deem advisable and to affix the corporate seal thereto. * FURTHER RESOLVED that this corporation cause 12,500 shares of Thompson Automatic Arms Corporation $1.00 par value stock60 now owned by this corporation to be transferred into the name of Dean & Co. as the nominee of this corporation for the purpose of effectuating and/or all of the foregoing transactions. FURTHER RESOLVED that Lowell A. Mayberry, treasurer of this corporation, or Matthew J. Hall, president, each individually and without the other, are hereby authorized, empowered and directed to execute in behalf of this corporation, assignments, powers of attorney, or any other documents of any kind, nature, or description and to affix the corporate seal thereto, and to do any and all acts of any kind, nature or description necessary, incident or desirable to effectuate the intent and spirit of the foregoing resolution. Borall addressed a letter dated September 6, 1939 to Clokey & Miller, in which it was agreed to sell 11,200 shares of Thompson to Clokey & Miller, which provided in part as follows: We do hereby agree to and by these presents do sell, and you do agree and by these presents do buy from us 11,200 of the common $1.00 par value stock of Thompson Automatic Arms Corporation at the price of $4.00 per share. * * All of the stock being sold herein is owned by us. This corporation61 is not in control of or in common control with others of Thompson Automatic Arms Corporation. * * If the foregoing is in accordance with your understanding of our agreement, will you kindly so acknowledge by executing the duplicate original attached hereto. Very truly yours, BORALL CORPORATION (Signed) By Lowell A. Mayberry Treas. ACCEPTED: CLOKEY & MILLER(Signed) Gerald Clokey General Partner signed at Jersey City, N.J. Sept. 15, 1939. On September 15, 1939, Borall delivered to the First National Bank of Jersey City, New Jersey, certificates for 12,500 shares of Thompson stock, and on November 15, 1939, Borall delivered additional certificates for 4,000 shares of Thompson stock. The receipt from the bank stated that these 4,000 shares were registered in the name of Hall and were received for the account of Borall. These certificates represented the entire holdings of Thompson stock. On or about September 22, 1939, the First National Bank of Jersey City, New Jersey, delivered 5,150 shares to Ungerleider and 150 shares to Mayberry, who elected to take the stock in lieu of cash. The remaining 11,200 shares of Thompson stock delivered to the First National Bank of62 Jersey City were sold as follows: DateNumberPer ShareTotalSeptember 16, 19391,250 $4$ 5,000September 19, 19391,25045,000September 22, 19391,25045,000October 20, 19391,25045,000October 21, 19395003.251,625December 23, 19392,00036,000January 12, 19401,00033,000February 5, 19402,70038,10011,200Total Amount Realized$38,725 Of the 11,200 shares, 9,200 were sold by Clokey & Miller and 2,000 by Harris, Upham and Company. The proceeds of the foregoing sales were remitted to Borall on various dates commencing on September 23, 1939, and Borall distributed the proceeds from the sale of 10,400 shares to the holders of its preferred stock as follows: Rate perDateShareHallGordonSaphierTotal9-23-39$2.75$13,007.50$ 962.50$330.00$14,300.0010-24-391.004,730.00350.00120.005,200.0012-21-39.351,655.50122.5042.001,820.0012-27-391.155,539.50402.50138.006,080.001-15-40.602,838.00210.5072.003,120.502- 6-401.155,439.50402.50139.005,981.00$33,210.00$2,450.50$841.00$36,501.50Borall, 63 subsequent to the receipt of the proceeds derived from the sale of the 800 shares of Thompson Automatic Arms Corporation stock which remained, distributed the same to all the preferred stockholders at the rate of 25 cents per share for each share of preferred stock, as follows: Rate perDateShareHallGordonSaphierUngerleiderMayberryTotal7-26-40.25$1,182.50$87.50$30.00$643.75$18.75$1,962.50The proceeds received by Hall and Gordon from Borall on account of their cash dividend equalled $7.00 for each share of Borall preferred stock owned by them. Neither Hall nor Gordon made any further demand upon Borall on account of this liquidating dividend. Borall was dissolved on July 8, 1940, and the certificate of dissolution was filed in the office of the Secretary of the State of Delaware on July 10, 1940. The remaining assets of Borall consisted of the proceeds from the sale of 800 shares of Thompson stock, the Federal Screw Works contract and the 3,500 shares of M. J. Hall & Co., Inc. The Federal Screw Works contract and the 3,500 shares of stock of M. J. Hall & Co., Inc. had no fair market value and on or about July 24, 1940 were64 transferred to Hall for a nominal consideration and on or about January 7, 1941 Hall conveyed a one-third interest in the Federal Screw contract to Ungerleider and Mayberry. As above set out, a final liquidating dividend was authorized and paid on or about July 26, 1940 from the proceeds of the sale of the remaining 800 shares of Thompson stock at the rate of 25 cents per share on the outstanding preferred stock of Borall or a total amount of $1,962.50. After this final liquidation there were no assets of Borall. The above distribution hereinabove set out was pursuant to a plan for complete liquidation of Borall. Borall filed its income tax return for the fiscal year beginning April 1, 1939 and ended March 30, 1940 indicating no income for the fiscal year. After an examination of the books and records of Borall by an internal revenue agent several years later, certain changes were made in the corporate minutes of the meetings held September 9 and September 14, 1939 by Gordon, the secretary. The changes made by Gordon from those as recorded in the original minutes are illustrated by the comparisons shown in the following two columns: Original September 9, 1939 Minutes (Resp. 65 Ex. F.) (4th Paragraph, p. 2.) * * share payable in cash, or in two (2) shares at the valuation of $4.00 per share of Thompson Automatic Arms Corporation Stock. (3d Paragraph of Resolution, p. 3.) The resolution passed at this meeting provided in part "* * * share payable in cash or in two (2) shares of Thompson Automatic Arms Corp. stock * * " (7th Paragraph of Resolution, p. 3.) FURTHER RESOLVED that this corporation enter into an agreement with Messrs. Clokey & Miller to sell to said Clokey & Miller upon the undertaking of said Clokey & Miller to buy so many of the shares of this corporation as shall be required to satisfy the election of preferred shareholders in accordance with the above resolution. Substitute September 9, 1939 Minutes (Pet. Ex. 5.) (4th Paragraph, p. 3.) * * share, payable in two (2) shares of Thompson Automatic Arms Corporation stock at the valuation of $4.00 per share. (3d Paragraph of Resolution, p. 4.) * * * share payable in two (2) shares of Thompson Automatic Arms Corp. Stock * * * (7th Paragraph of Resolution, p. 4.) FURTHER RESOLVED that this corporation enter into an agreement with Messrs. Clokey & Miller to sell to66 said Clokey & Miller for the account of its shareholders, upon the undertaking of said Clokey & Miller to buy so many of the shares of this corporation as shall be required to satisfy the election of preferred shareholders in accordance with the above resolution. Ungerleider received Thompson stock and cash from Borall in the liquidation of his preferred stock which had a value in excess of $18,000. Ungerleider, as a director of Borall, participated in the meeting and was aware that Borall was being liquidated. Hall received cash from Borall in the liquidation of his preferred stock in an amount of $34,392.50. Borall was left without any assets when its liquidation was complete. The deficiency involved herein was duly assessed against Borall and a letter was mailed by the respondent to Ungerleider and Hall, as transferees, and the deficiency in tax remains unpaid. Original September 14, 1939 Minutes (Resp. Ex. G., pp. 1 and 2.) Mr. Hall then reported that the corporation had been notified that the holders of the preferred stock had exercised the elections in respect of the liquidating dividend declared on September 9th, 1939 and that certain shareholders elected to exchange67 5300 shares of Thompson Automatic Arms Corporation stock in lieu of the cash dividend and that he had consummated arrangements with Messrs. Clokey & Miller for the sale by the Borall Corporation of 11,200 shares of the Thompson Automatic Arms Corporation stock owned by this company. (1st Paragraph of Resolution, p. 2.) RESOLVED that the proposed contract with Messrs. Clokey & Miller, which was deemed for the best interests of this corporation, be executed forthwith and Mr. Hall be and he hereby is authorized, directed and empowered to execute such contract and affix the corporate seal thereto, as well as any and all other documents. Substitute September 14, 1939 Minutes (Pet. Ex. 6, pp. 2 and 3.) Mr. Hall then reported that the corporation had been notified that the holders of the preferred stock had exercised their election in respect of the liquidating dividend declared September 9th, 1939 and that certain shareholders had elected to have the corporation sell for their account their shares of Thompson Automatic Arms Corporation stock, and that he had consummated arrangements with Messrs. Clokey & Miller for the sale by the Borall Corporation of 11,200 shares of Thompson68 Automatic Arms Corporation stock, 10,400 of which are owned by certain shareholders and 800 shares of which are owned by this company. (1st Paragraph of Resolution, p. 3.) RESOLVED that the proposed contract with Messrs. Clokey & Miller, which was deemed for the best interests of all interested parties, be executed forthwith and Mr. Hall be and he hereby is authorized, directed and empowered to execute such contract and affix the corporate seal thereto, as well as any and all other documents. [Italics supplied to identify changes.] Opinion BLACK, Judge: Petitioners contend that the sale of certain shares of Thompson stock by the Borall Corporation was a sale not by Borall for its own account, but as agent for Hall and Gordon individually and that Borall is not taxable on any gain resulting from the sale. Petitioners argue that in June 1939 it was recommended by the board of directors of Borall that unless satisfactory arrangements could be made for the continuance of Borall, that it be dissolved; that Hall wished to sell the Thompson stock in order to acquire operating funds for Borall but the board of directors refused to agree to the sale; that it was, therefore, decided69 to dissolve the corporation and distribute the assets; that it was intended to distribute the Thompson stock in kind so as to enable each of the shareholders to do with Thompson stock as he chose; that petitioner Hall, who had been closely associated with the reorganization of Thompson did not wish the securities trade to know that he was selling his Thompson stock as he thought it would have a depressing effect on the market, and conceived the idea of having Borall sell the Thompson stock for himself and some of the other stockholders, as his agent. Petitioners also contend that the respondent, having accepted the treatment accorded to the transactions by Hall and Gordon and collected taxes from Hall on that basis, should be estopped from asserting that the sale was a sale by Borall and that respondent has failed to sustain the burden of proof with respect to transferee liability of Hall and Ungerleider. Respondent contends that Hall and Gordon in accordance with the resolution of the board of directors on September 9, 1939 elected to take their liquidating dividends in cash and Borall, in selling certain shares of Thompson stock, realized a gain for which it is taxable and that70 Hall and Ungerleider are liable as transferees. The question herein of whether the sale was made by the corporation for itself or whether it was made by it as agent for Hall and Gordon is really one of fact rather than one of law. The record indicates that the corporation had been unsuccessful and at a special meeting of the board of directors on June 29, 1939, it was agreed that unless satisfactory arrangements could be made for its continuance that it should be dissolved. Thereafter at a special meeting of the board of directors held on September 9, 1939, it was resolved that the corporation distribute 16,500 shares of Thompson stock as a "liquidating dividend to the stockholders of the issued and outstanding preferred stock of this corporation," that the corporation declare and pay to the preferred stockholders as of record on September 11, 1939, a "liquidating dividend of $8.00 per share payable in cash or in two (2) shares of Thompson Automatic Arms Corporation stock at the valuation of $4.00 per share * * at the election of such shareholders, such election to be designated in writing by letter addressed to this corporation on or before September 11, 1939." In accordance71 with these resolutions, Ungerleider and Mayberry in a letter addressed to Borall dated September 11, 1939, elected to receive shares of Thompson stock "in full payment, discharge and satisfaction of the eight dollars ( $8) liquidating dividend declared by this corporation" and Hall and Gordon, in a letter dated the same day, elected "to receive the liquidating dividend in cash at the rate of eight dollars ( $8) per share." At a meeting of the board of directors held on September 14, 1939, the minutes of September 9, 1939, were approved and these minutes set out that the corporation had been notified that the preferred stockholders had "exercised the elections in respect of the liquidating dividend declared on September 9, 1939 and that certain shareholders elected to exchange 5,300 shares of Thompson Automatic Arms Corporation stock in lieu of the cash dividend and that he (Hall) had consummated arrangements with Messrs. Clokey & Miller for the sale by the Borall Corporation of 11,200 shares of the Thompson Automatic Arms Corporation stock owned by this corporation." Borall addressed a letter dated September 6, 1939, to Clokey & Miller in which it agreed to sell 11,200 shares of the72 Thompson stock which was signed by Mayberry on behalf of the Borall Corporation and accepted by Clokey & Miller on September 15, 1939. Thereafter 16,500 shares of Thompson stock were delivered to the First National Bank of Jersey City, New Jersey, which was acting as custodian. The Bank delivered 5,150 shares to Ungerleider and 150 shares to Mayberry and took their receipts. The remaining shares were sold and the proceeds paid to Borall who distributed to Hall and Gordon cash in accordance with their election to receive cash. A cash distribution was also made to the stockholder Sapier. The proceeds of the sale of 800 of these 11,200 shares were distributed ratably to all five of the stockholders of Borall as shown in our findings of fact. We think the corporate minutes and resolutions and subsequent sale and distribution in accordance therewith indicate that it was intended that Ungerleider and Mayberry were to receive Thompson stock in kind and Borall was to sell the remaining Thompson stock for itself and distribute the cash as had been agreed upon. No gain is here involved relating to the shares which were distributed in kind to Ungerleider and Mayberry. Petitioners argue that73 the minutes of September 9 and September 14, as originally written, did not express the true intent of the parties and that several years later, after an examination of the corporate records by an internal revenue agent, Gordon, the secretary, change the minutes "in order to avoid any seeming inconsistency and fully to express the clear intent of the directors and stockholders." However, the minutes as originally written were written by Gordon, who was an experienced lawyer and who was also a party in interest, and we assume expressed the intent of the parties at that time. Gordon testified at the hearing and stated that he disclosed to the technical staff in an affidavit the reasons why he made the changes in the minutes which have been referred to in our findings of fact. The reasons which he gave, he stated at the hearing as follows: * * to the best of my knowledge, I stated that the fundamental agreement of the parties was that there was to be a distribution of the Thompson stock in kind so that each shareholder could do with it as he saw fit; that thereafter, Mr. Hall, who was one of the principal organizers of the Thompson Company, felt it would be inadvisable for him to74 appear as the seller of the stock, and we decided, he and I, that the corporation would act as agent, and the nominal seller would be the corporation, although in fact it was for the account of the individuals, because we owned the shares; and that the original minutes, which had been prepared by me, were erroneous to the effect that it did not set forth those mechanics, and that the mechanical details of effectuating the details of the transaction had never been considered by the Board, because the agreement was on the distribution of the assets, and the other members of the corporation had no interest as to what we did with the stock. We have no disposition to question the honesty of Gordon's motives in making the changes in the minutes but taking the record as a whole, we think the changes made were unwarranted. It seems to us that it is clear that when liquidation of the preferred shares of Borall to the extent of $8.00 per share was decided upon at the meeting of the directors on September 9, 1939, it was determined to give the stockholders an election as to whether they would take $8.00 in cash or would take two shares of Thompson stock at $4.00 per share. The reason for that75 election was plain. Ungerleider and Mayberry felt that the Thompson stock would sell much higher and they wanted their distribution to be in actual shares of Thompson stock. Hall was in need of cash and Gordon also decided he would elect to take cash. The elections of the respective parties were duly filed with Borall on September 11, 1939. The elections are in writing, they are a part of the record in these proceedings and are unambiguous. We see no reason why we should disregard them. It is true, of course, that the only way that Borall had to get the cash to pay the $8.00 per share to those who elected to receive cash was to sell the Thompson stock. It is, of course, unfortunate to petitioners from a tax standpoint that Borall did not distribute to Hall and Gordon their ratable part of the Thompson stock and let them sell it. That was not done, however, and we must decide the case upon what was done rather than upon what might have been done. In General Securities Co., 42 B.T.A. 754">42 B.T.A. 754, affirmed 123 Fed. (2d) 192, the taxpayer distributed to its stockholders a property dividend consisting of shares of stock which it owned in another corporation. These shares76 had a fair market value at time of distribution of only a fraction of what they had cost the taxpayer. Taxpayer was contending for a dividends paid credit equal to the adjusted cost of the stock distributed. One of the arguments used by the taxpayer was that it could have sold the stock to outsiders for $1,068.33 and distributed that amount of cash to its stockholders and in that way could have realized a loss of the difference between its adjusted cost and the selling price and could have deducted this loss on its income tax return and the same tax result would have been attained as that for which it was then contending. In passing upon that argument, we said: * * Perhaps that is true, but it takes no argument to establish the proposition that tax consequences are frequently very different on one state of facts from what they are on another state of facts. So it is in the instant case. Congress has prescribed how a personal holding company shall be taxed and what deductions it shall receive in determining its "undistributed adjusted net income" and we must give effect to those provisions even though the taxpayer personal holding company might have avoided the surtax if it had77 handled its transactions in some other way. In the instant case, the only way we could decide in favor of petitioners would be to hold that the so-called corrected minutes written up by Gordon represented the transactions as they actually took place. For reasons we have already explained we are unable to reach such a conclusion. That the transactions might have been consummated in the manner indicated by the so-called corrected minutes does not help petitioners. Under the circumstances we must follow what was done rather than what the parties might have intended to do. Davidson v. Commissioner, 305 U.S. 44">305 U.S. 44; Curtis v. Commissioner, 89 Fed. (2d) 736. There is one more circumstance upon which petitioners lay a good deal of stress in their brief to which perhaps we should devote some attention and that is that although the dividend resolution of September 9th provided that the stockholders who elected to receive cash for their preferred stock in Borall should receive $8.00 per share, these stockholders only actually received $7.00 per share and made no claim on Borall for the remainder. We think a reasonable explanation of this is found in the fact that78 when the dividend resolution of September 9th was adopted it was confidently expected the Thompson stock would sell for $4.00 per share. In fact Borall contracted with Clokey & Miller on September 15, 1939 to sell them 11,200 shares at $4.00 per share. Clokey & Miller did, in fact, pay that amount for 5,000 of the shares as shown in our findings of fact. The remainder of the shares were sold at $3.25 and $3.00 per share on a lower market. The fact that Gordon and Hall made no claim on Borall for any difference seems to us without any important significance when all other circumstances are considered. We conclude that the sale of the Thompson stock was by the corporation and the profits from the sale inured [are taxable to the corporation. Cf. Fred A. Hellebush, et al., Trustees, 24 B.T.A. 660">24 B.T.A. 660, affirmed 65 Fed. (2d) 902; R. G. Trippett, 41 B.T.A. 1254">41 B.T.A. 1254, affirmed 118 Fed. (2d) 764; Nace Realty Co., 28 B.T.A. 467">28 B.T.A. 467; Liberty Service Corporation, 28 B.T.A. 1067">28 B.T.A. 1067; Interstate Realty Co., 25 B.T.A. 728">25 B.T.A. 728. One case strongly relied upon by the petitioners should be briefly commented upon. In Louisville Trust Co. v. Glenn, 65 Fed. Supp. 193,79 now on review by the Sixth Circuit, the question involved was whether or not the sale of whiskey warehouse receipts was made on behalf of the corporation or on behalf of the stockholders as individuals. In pursuance of a plan of liquidation, the board of directors of the distillery company adopted a resolution reciting that a dissolution in liquidation "is hereby declared to be now made to bona fide owners of the common stock of the company, as shown by the stock record book of the company, at the close of business on December 26, 1942 * * consisting of the net equity of the company in and to the whiskey warehouse receipts representing an aggregate of 51,694 barrels of whiskey owned by it * * ." The court held that the corporate resolutions and actions thereon "constituted a valid declaration of a liquidating dividend in kind to the stockholders, and actually passed to the stockholders at that time unconditional title to the corporation's net equity in the whiskey so represented by the warehouse receipts." The resolution in the cited case shows that it was the clear intent and purpose to make a distribution in kind at that time, whereas, in these proceedings the written record indicates80 that the stockholders had an election to receive the liquidating dividend in stock or in cash. Petitioners contend that respondent, having determined and collected taxes from petitioner Hall and treated the sale of Thompson stock as a sale by him, is now estopped from asserting that said sale was by the Borall Corporation. "The doctrine of election and estoppel must be applied with great caution to the government and its officials." Vestal v. Commissioner, 152 Fed. (2d) 132. The burden is upon the party asserting it to prove that all its essential elements are present. In support of his contention petitioner Hall cites U.S. v. Brown, 86 Fed. (2d) 798. We do not think this case is controlling. In that case a corporation was dissolved and its assets distributed. The Commissioner claimed that income taxes were owed by the stockholders upon the entire amount of the liquidating dividend, less the cost of the stock. The Commissioner disallowed the taxpayer's claim that the assessment in each case should be reduced by each taxpayer's proportionate share of the aggregate amount claimed by the government for the dissolved corporation's unpaid income and profits81 taxes. This disallowance was sustained by this Board and no appeal was taken. Prior to the Board's decision, however, the Commissioner brought a bill in equity claiming that the individual stockholders were transferees of the assets of the corporation and were, therefore, liable for its unpaid income and profits taxes due for prior years. The Circuit Court held that the Commissioner had made a binding election in pursuing to a conclusion his determination that the stockholders were liable upon the final amount of the liquidating dividend without reduction on account of the unpaid taxes of the corporation and could not pursue the inconsistent remedy of the equity action. The court said at page 799: "The Commissioner exercised a freedom of choice. He chose to press the tax appeal proceedings and this unequivocally constituted an election." In the instant case the respondent has taken only one position, namely, that Borall sold the Thompson stock here in question and the profits therefor are taxable to it and the stockholders are liable as transferees. It is true that petitioner Hall filed his return in which he reflected the sale of the Thompson stock and paid the tax thereon. However, 82 this was the result of his own judgment. The respondent has proceeded in a legal way to determine whether or not Borall sold the stock or whether Hall did as an individual stockholder. It does not appear that Hall was misled to his disadvantage or changed his position in reliance upon any of the respondent's actions. Moreover, it has been stipulated in Docket No. 45 heretofore referred to that both Hall and the Commissioner agree to be bound by the decision of this Court in the proceedings of Borall Corporation as to his tax liability from the sale of Thompson stock. Thus the revenue, as well as Hall, has been safeguarded by this action. We find nothing in the record, therefore, to support the claimed estoppel. Sugar Creek Coal & Mining Co., 31 B.T.A. 344">31 B.T.A. 344; Northport Shores, Inc., 31 B.T.A. 1013">31 B.T.A. 1013; Tide Water Oil Co., 29 B.T.A. 1208">29 B.T.A. 1208; Stein-Bloch Co., 23 B.T.A. 1162">23 B.T.A. 1162; United States Trust Co. of New York, 13 B.T.A. 1074">13 B.T.A. 1074; and Sweets Company of America, Inc., et al., 12 B.T.A. 1285">12 B.T.A. 1285. The decision as to whether or not the individual petitioners are liable as transferees depends, likewise, upon a question of fact83 rather than one of law. Petitioners contend that the respondent has failed to sustain the burden of proof with respect to the transferee liability of Hall and Ungerleider; that respondent has failed to show that Borall was rendered insolvent by the distribution; that Ungerleider received distribution of his Thompson stock on September 22, 1939, at which time Borall still owned several thousand shares of Thompson stock or the proceeds thereof, and that Borall retained two other assets, namely, the contract with the Federal Screw Works and 3,500 shares of stock of M. J. Hall & Co., Inc. until July 24, 1940, both of which are now shown by the respondent to have been without any fair market value. The burden of proof to establish transferee liability is upon the respondent.1 It is not disputed that Hall received cash from Borall in an amount in excess of the tax deficiency, and Ungerleider received stock and cash that had a value in excess of the tax deficiency. However, the mere fact that Borall transferred part of its assets to its stockholders does not establish transferee liability. A necessary item of proof is that the "taxpayer transferor was insolvent at the time of the transfer84 or that the transfer itself made the transferor insolvent, or that the transfer was one of a series of distributions in pursuance of complete liquidation which left the corporation insolvent." R. E. Wyche, 36 B.T.A. 414">36 B.T.A. 414, 418. In the instant case the evidence shows that the several distributions were in pursuance of a plan for the complete liquidation of Borall. The record indicates that Borall was unsuccessful and that at a special meeting of the board of directors held on July 28, 1939, it was agreed that unless satisfactory arrangements could be made for the continuance of Borall, it should be liquidated and dissolved. Thereafter, at a special meeting of the board of directors held on September 9, 1939, it was decided to declare a liquidating dividend payable in cash or in Thompson stock. It seems to be agreed that the principal asset of Borall was this Thompson stock. In pursuance of this plan there was distributed Thompson stock to Ungerleider and Mayberry, and successive payments of cash were made to the other stockholders, including Hall. The only remaining assets after February 6, 1940, were85 proceeds from the sale of 800 shares of Thompson stock, the Federal Screw Works contract, and 3,500 shares of M. J. Hall & Co., Inc. The 800 shares of Thompson stock were sold at approximately $3.00 a share. The evidence indicates that the Federal Screw Works contract and the stock of M. J. Hall & Co., Inc. had no marketable value. The Federal Screw Works contract was a sales commission contract on business to be done with the ordnance department. Such commission contracts were frowned upon and the Federal Screw Works never paid any commissions and Borall never asked the company to pay any. Moreover, on or about July 24, 1940, these assets were transferred to Hall for a nominal consideration. Borall's certificate of dissolution was filed in the office of the Secretary of State of Delaware on July 10, 1940 and on July 26, 1940, Borall paid a final liquidating dividend of 25 cents per share or a total of $1,962.50 and was left with no assets whatever. "Tax as subsequently and retroactively levied was a potential liability of the corporation of which the stockholders must take notice." U.S. v. Armstrong, 26 Fed. (2d) 227, 231. Under these circumstances we must treat Hall86 and Ungerleider as stockholders of an insolvent corporation who have received assets in excess of the deficiency, plus interest as provided by law. We, therefore, hold on these facts that petitioners Hall and Ungerleider are liable as transferees of Borall. Cf. Otto Botz, 45 B.T.A. 970">45 B.T.A. 970, affirmed 134 Fed. (2d) 538; Samuel Keller, 21 B.T.A. 84">21 B.T.A. 84, affirmed 59 Fed. (2d) 499; Benjamin E. May, 35 B.T.A. 84">35 B.T.A. 84; George M. Brady, et al., 22 B.T.A. 596">22 B.T.A. 596. Decisions will be entered for the respondent. Footnotes*. Proceedings of the following petitioners are consolidated herewith: Matthew J. Hall, Docket No. 2890; Samuel Ungerleider, Docket No. 2895.↩1. Sec. 1119 of the Internal Revenue Code↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622101/	Estate of John W. Mortimer, Alice H. Gotwald, Surviving Executrix, Petitioner, v. Commissioner of Internal Revenue, RespondentMortimer v. CommissionerDocket No. 30029United States Tax Court17 T.C. 579; 1951 U.S. Tax Ct. LEXIS 70; October 2, 1951, Promulgated 70 Decision will be entered for the respondent. By separate fee simple deeds, executed and recorded in 1938, decedent purported to convey certain improved properties to each of three grandchildren, as gifts. The deeds were not delivered to the donees, nor were they informed of the alleged transfers in 1938. Thereafter, decedent collected the rents and profits from the properties, paid the taxes thereon, made repairs thereto, and took the income and expenses into account in his income tax returns for each year until his death in 1946. Respondent included the value of these properties in decedent's gross estate. Held, the alleged transfers in 1938 did not divest decedent of his ownership of the properties, and respondent properly included the value thereof in decedent's gross estate under section 811 (a), I. R. C.Herman G. Greenberg, Esq., for the petitioner.Wm. H. Best, Jr., Esq., for the respondent. Rice, Judge. RICE579 This case involves a deficiency in estate tax in the amount of $ 17,112. The issue is whether the value of certain properties transferred by decedent to three grandchildren in 1938 are includible in the gross estate.Some of the facts are stipulated.FINDINGS OF72 FACT.The stipulated facts are so found and are incorporated herein.The petitioner is the surviving executrix of the estate of John W. Mortimer, deceased. The estate tax return was filed with the collector of internal revenue for the first district of Pennsylvania, at Philadelphia, Pennsylvania.The decedent, John W. Mortimer, died April 14, 1946, a resident of Philadelphia, Pennsylvania.During his lifetime, the decedent, by indenture dated April 12, 1938, and recorded in the Office of the Recorder of Deeds in and for the County of Philadelphia, on April 14, 1938, in Deed Book D. W. H. No. 332, page 253, &c., granted and conveyed premises 2129, 2131, 2133 Stenton Avenue, to John W. Mortimer, his grandson, in fee simple.580 The decedent, by indenture dated April 12, 1938, and recorded in the Office of the Recorder of Deeds in and for the County of Philadelphia, on April 14, 1938, in Deed Book D. W. H. No. 332, page 237 &c., granted and conveyed premises 2146, 2150, and 2152 Stenton Avenue, to Robert Mortimer, his grandson, in fee simple.The decedent, by indenture dated April 12, 1938, and recorded in the Office of Recorder of Deeds in and for the County of Philadelphia, 73 an April 14, 1938, in Deed Book D. W. H. No. 332, page 245 &c., granted and conveyed premises 2132 and 2144 Stenton Avenue and 5413 Rutland Street, to Edith Quimby, his granddaughter, in fee simple.The aforesaid grandchildren were children of a deceased son, Michael Mortimer.At the time of the aforesaid conveyances, the decedent was active in the control and management of his various business interests.The decedent filed a gift tax return for the calendar year 1938 with the collector of internal revenue for the first district of Pennsylvania, on March 15, 1939.In this return the decedent reported two gifts of real estate, the first being a gift of real estate to his son, John Mortimer, said realty being being valued in the return at $ 12,410. The second gift was to his daughter, Margaret Lillian Seifert and George Louis Seifert, her husband. This gift was valued in the return at $ 28,600.The gift tax return for the calendar year 1938 reported the amount of gifts for said year as being in the amount of $ 31,010. The specific exemption claimed in the return was $ 31,010. The amount of net gifts reported in the return was none. There was no gift tax reported on the return as74 being due.The conveyances to the decedent's grandchildren were not reported in said gift tax return for the calendar year 1938.On January 16, 1940, the decedent filed a gift tax return for the calendar year 1938, in which return he reported the aforesaid conveyances to his grandchildren, as gifts.The gift tax return of the decedent was investigated by a revenue agent, who made his report on his investigation on February 17, 1941. The revenue agent included in net gifts the conveyances by the decedent to his grandchildren and made other adjustments summarized as follows:In view of the foregoing facts disclosed during investigation, it is concluded there was no gift tax due as per summary of transfers made, outlined below: 581 DoneeSubject of gift3247-9 Kensington AveJohn Mortimer (son)Braddock St. property2129 Stenton AveJohn W. Mortimer (grandson)2131 Stenton Ave2133 Stenton Ave2146 Stenton AveRobert Mortimer (grandson)2150 Stenton Ave2152 Stenton Ave2132 Stenton AveEdith Quimby (nee Edith Mortimer)2144 Stenton Ave(granddaughter)5413 Rutland AveMargaret M. Seifert (granddaughter)and Dr. Geo. L. Seifert4126-8 Parkside AveEdith Hazel Holst (granddaughter)and Thomas C. Holst3024 "E" StTotal(Donor in gift tax return filed claimed$ 31,010 as applicable against thespecific exemption)Amount of net gifts for year 1938subject to tax75 IncludedDoneeValueExclusionamount ofgift$ 12,410$ 7,410John Mortimer (son)$ 5,0001,8001,8003,000John W. Mortimer (grandson)3,0005,0004,0003,0003,000Robert Mortimer (grandson)3,0005,0004,0003,0003,000Edith Quimby (nee Edith Mortimer)3,0005,0004,000(granddaughter)3,000Margaret M. Seifert (granddaughter)and Dr. Geo. L. Seifert(1)(1)(1)Edith Hazel Holst (granddaughter)and Thomas C. Holst(2)(2)(2)Total$ 41,210$ 20,000$ 21,210(Donor in gift tax return filed claimed$ 31,010 as applicable against thespecific exemption)21,210Amount of net gifts for year 1938subject to taxNoneOn February 3, 1941, the decedent executed an affidavit in connection with the revenue agent's examination of his gift tax return for 1938, which, after reciting the conveyances to his three grandchildren in 1938, stated in part as follows:That he did not file a Gift Tax Return 76 on the above three gifts [to the three grandchildren] for the reason that the information that the gifts had been made was not communicated to the said donees, nor are they aware up to the time of making this affidavit that they hold the record title to these properties and that the donor as beneficial owner of the said properties continued to collect the rents of same.The decedent continued, up until the time of his death, to collect the rents and profits from the afore-mentioned properties and reported as income the said rents and profits in his individual income tax returns for each taxable year, up until the time of his death. No accounting was ever made to the grandchildren, by either the decedent or the executors of his estate, for the said rents.On April 16, 1945, the decedent executed a new will, which was eventually probated, paragraph 4 of which reads as follows:4. I give and bequeath unto each of my three grandchildren, ROBERT, JOHN WILLIAM and EDITH, who are the children of my deceased son, MICHAEL H. MORTIMER, the sum of FIVE ($ 5.00) DOLLARS.I make no further provisions for these grandchildren for the reason that I have conveyed to them by way of gift during my lifetime77 each three clear properties in the City of Philadelphia, subject, though not expressed in said deeds, to my right to collect and enjoy the rents of these properties during the whole term of my natural life.582 Paragraph 4 was inserted in decedent's will in an effort to protect his estate from any claims by his grandchildren for the rents that decedent had collected from the properties from 1938 to the date of decedent's death.The decedent paid the local taxes on and made repairs to the nine pieces of property after 1938. He claimed the tax payments and the cost of repairs as deductions on his annual income tax returns.At the time the decedent conveyed the properties to his three grandchildren, he owned approximately sixty separate parcels of real estate in the city of Philadelphia, Pennsylvania.At the time the decedent died the value of the nine properties conveyed to his grandchildren was $ 62,000.Decedent made no valid gifts of the nine parcels of real estate to his three grandchildren in 1938. The value of the nine properties should be included in decedent's gross estate.OPINION.Petitioner seeks to turn the issue upon that portion of section 811 (c), I. R. C., 78 which deals with transfers of property, by trust or otherwise, where the decedent has retained (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom. Petitioner contends that the deeds in fee simple contained no such reservations in decedent's favor but operated absolutely to divest him of all of the incidents of ownership.The basic question goes much deeper than petitioner's arguments, which are bottomed upon an assumed transfer of the properties in fee in 1938. We think the facts establish that decedent never completed the inter vivos gifts. If the gifts were not completed, decedent remained the owner of the properties until his death, and the value thereof is includible in his gross estate under section 811 (a), I. R. C.In Edson v. Lucas (C. A. 8, 1930), 40 F. 2d 398, the requirements necessary to constitute a valid gift inter vivos were listed as follows: (1) a donor competent to make the gift; (2) a clear and unmistakable intention on his part to make it; (3) a donee capable of taking the gift; (4) a 79 conveyance, assignment, or transfer sufficient to vest the legal title in the donee, without power of revocation at the will of the donor; and (5) a relinquishment of dominion and control of the subject matter of the gift by delivery to the donee. See also, Visintainer v. Commissioner (C. A. 10, 1951), 187 F. 2d 519, 522-523; Linwood A. Gagne, 16 T. C. 498 (1951).In Henry F. Jaeger, Executor, 33 B. T. A. 989, affd. 88 F. 2d 1011 (1936), we considered whether decedent had made a completed gift inter vivos. After holding that decedent had no present intention 583 of making completed gifts effective at the time of delivery of the stock certificates to his son, we pointed out that it was not shown that there was any acceptance of the gifts by the donees, actual or constructive, at least until after decedent's death, that the daughters were not informed of the transfers, and that there was no showing of complete relinquishment by decedent of dominion and control of the property. On the contrary the decedent received and appropriated to his own use all dividends80 from the stock until his death, and exercised control over the voting of the stock by proxies given to his son. We held that the property was properly included in the decedent's gross estate.The decedent in this case had no clear and unmistakable intention to make completed gifts to his grandchildren in 1938. He did not relinquish dominion and control over the subject matter of the gifts to the donees at any time prior to his death. All that he did was to execute fee simple deeds in their favor and have the deeds recorded in their names. But there was no conveyance, assignment, or transfer of the real properties sufficient to vest legal title in the donees, for it is a fundamental principle of law that a deed to be operative must be delivered; it is delivery that gives the deed force and effect. 16 American Jurisprudence 499, section 111, and cases there cited. Furthermore, before there can be a completed delivery of a deed, which will become operative as a conveyance of title, the donee or grantee must accept. Id. p. 523, sec. 153. Here, the donees could not accept the gifts for they had no knowledge of the execution of the deeds, the recordation of the deeds, or that81 decedent had any intention of giving them the properties.Finally, petitioner has no basis in law for contending that decedent's deposit for recording of the deeds constituted delivery, for there can be no effectual delivery to the donees where the grantor expressly instructs the recorder to redeliver the deeds to him; and it is a fair assumption here that decedent in effect gave such instructions, for otherwise the donees would have acquired knowledge of the alleged gifts. Id. p. 513, sec. 135.In addition to the foregoing principles of law, it is undisputed that decedent exercised rights with respect to the nine parcels of realty which normally are associated with full and complete ownership. His attorney testified that he continued to collect the income from the properties, used the income for his own purposes, and reported it on his income tax returns as his income. He made repairs to the properties and took deductions therefor on his tax returns. He claimed depreciation on his other real estate properties, and presumably took depreciation on the properties in question. His treatment of the properties is completely inconsistent with the claimed and usual divestiture of all82 right, title and interest that accompanies a fee simple 584 conveyance. On the facts and on the law there can be but one conclusion -- decedent did not, nor did he intend to, transfer the properties to his grandchildren by way of gifts. The fee simple deeds retained by decedent effected no divestiture of decedent's rights of ownership in the properties and the value thereof was properly included in the decedent's gross estate.In this view of the question presented, it is unnecessary to discuss petitioner's interpretation of section 811 (c) of the Internal Revenue Code, as amended.Decision will be entered for the respondent. Footnotes1. This transfer returned as a gift. Not considered as a gift as same was immediately reconveyed to donor.↩2. Not considered as a gift as same was immediately reconveyed to donor.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622102/	Estate of Charles G. Whitehead, Deceased, Lawrence J. Stopper, Jr., Executor, and June S. Whitehead v. Commissioner.Estate of Whitehead v. CommissionerDocket No. 1261-66.United States Tax CourtT.C. Memo 1967-227; 1967 Tax Ct. Memo LEXIS 36; 26 T.C.M. (CCH) 1157; T.C.M. (RIA) 67227; November 9, 196736 B. David Freundlich, for the respondent. SCOTT Memorandum Opinion SCOTT, Judge: Respondent determined deficiencies in petitioners' income taxes and additions to tax under section 6653(b), I.R.C. 1954, for the calendar years 1961, 1962, 1963, and 1964 in the following amounts: Additionto tax under Sec.YearDeficiency6653(b), I.R.C. 19541961$ 6,050.55$3,025.28196218,657.319,328.6619636,031.863,015.931964580.20290.10This case was called from the trial calendar at Philadelphia, Pennsylvania, on October 2, 1967. There was no appearance by or on behalf of petitioners. On August 15, 1967, after the notice setting this case for trial on October 2, 1967 at Philadelphia, Pennsylvania had been served on petitioners, respondent filed a Motion for Judgment on the Pleadings and for Entry of Decision, which motion was set for hearing at Philadelphia, Pennsylvania on October 2, 1967, and the notice setting the motion for such hearing with a copy of the motion attached was served on petitioners on August 17, 1967. Respondent, in his motion, recites that on July 14, 1966, this Court entered an37 order striking the portions of the petition relative to all assignments of error except the assignment pertaining to the issue of fraud in which the burden of proof is upon respondent, having prior to that date entered an order granting a motion by respondent for a further and better statement in the petition and directing petitioners to file an amended petition on or before July 13, 1966. This statement is in accordance with the facts appearing of record in this case. Therefore, in accordance with the order of the Court striking the portions of the petition relating to the assignments of error other than the assignment pertaining to the issue of fraud, and the failure otherwise to properly prosecute, the case insofar as it relates to the deficiencies in income taxes is dismissed for lack of prosecution and decision will be entered for deficiencies in income taxes for the calendar years 1961, 1962, 1963, and 1964 as determined by respondent. On September 8, 1966, respondent filed his answer to the petition in this case. The answer contained allegations of specific fact upon which respondent relies to sustain the issue of fraud with respect to which the burden of proof is placed38 on him by statute. On November 16, 1966, pursuant to Rule 18 of the Rules of Practice of this Court, respondent filed a Motion for Entry of Order That Allegations of Fact Be Deemed Admitted. After due notice the motion came on for hearing by this Court on January 11, 1967, at which time there was no appearance by or on behalf of petitioners. This Court, by order entered January 11, 1967, in which it was stated that petitioners had not appeared at the hearing on respondent's motion, had filed no response to the motion, and had filed no reply to respondent's answer, granted respondent's motion that all the allegations of fact in respondent's answer be deemed admitted. The facts taken as admitted under the order of this Court on January 11, 1967, show that Charles G. Whitehead died on November 23, 1965, and that the petition in this case was filed in the name of his estate by his executor, Lawrence J. Stopper, Jr., and by June S. Whitehead. Numerous other facts are alleged in this answer which by the order of this Court are deemed admitted, which undisputed facts present clear and convincing evidence of fraud and satisfy respondent's burden of proof. Louis Morris, 30 T.C. 928">30 T.C. 928 (1958).39 The undisputed facts show that Charles G. Whitehead and June S. Whitehead reported taxable income or loss for the years in question as follows: YearIncome or loss1958$3,592.981961(1,103.27)1962( 257.70)19632,431.8119641,695.40The undisputed facts further show that Charles G. Whitehead and June S. Whitehead had taxable income for these years as follows: YearIncome1958$ 861.66196121,459.35196246,833.40196321,368.7219642,269.61We find that a part of the deficiency in income tax for each of the years 1961, 1962, 1963, and 1964 was due to fraud with intent to evade tax. Accordingly decision will be entered for respondent for additions to tax under section 6653(b), I.R.C. 1954, for the years 1961, 1962, 1963, and 1964 in the amounts as determined by respondent. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/6113490/	IN THE TENTH COURT OF APPEALS No. 10-21-00209-CR TODD ORLANDO MIDDLETON, Appellant v. THE STATE OF TEXAS, Appellee From the 77th District Court Limestone County, Texas Trial Court No. 14554-A ABATEMENT ORDER On August 23, 2021, attorney Justin Reed, on behalf of Appellant Todd Orlando Middleton, filed with the trial court clerk a notice of appeal from the judgment of conviction and sentence rendered against Middleton in the underlying case. We subsequently received a copy of the notice of appeal and filed it in the appeal bearing the number and style shown above. We were then notified that on September 21, 2021, attorney Logan Sawyer, on behalf of Middleton, filed with the trial court clerk an “Appearance of Counsel for Limited Purpose and Defendant’s Withdrawal of Appeal.” On November 10, 2021, the Clerk of this Court sent a letter to both Reed and Sawyer, informing them that the Court had been notified about the filing with the trial court clerk of the “Appearance of Counsel for Limited Purpose and Defendant’s Withdrawal of Appeal.” The November 10 letter pointed out that Sawyer had not filed a notice of appearance of counsel with this Court and that no motion to dismiss this appeal had been filed with this Court. See TEX. R. APP. P. 6.2, 42.2(a). The November 10 letter further stated: “If Middleton no longer wants to continue with this appeal, Middleton’s counsel should file with this Court a motion to dismiss complying with Rule 42.2(a).” On November 22, 2021, Sawyer filed with the Clerk of this Court “Defendant’s Motion to Dismiss Appeal,” which stated that Sawyer had spoken with Middleton and that Middleton had instructed Sawyer that Middleton no longer desires to pursue this appeal. Middleton, however, had not personally signed the motion. See id. R. 42.2(a). We therefore issued an order on November 30, 2021, denying Middleton’s motion to dismiss this appeal because the motion did not comply with Rule of Appellate Procedure 42.2(a). The order nevertheless stated: “If, however, Appellant files a motion to dismiss this appeal that complies with Rule of Appellate Procedure 42.2(a), specifically including Appellant’s signature in addition to his counsel’s, the Court will rule on the motion as appropriate.” Middleton v. State Page 2 To date, we have received no further correspondence from Middleton or his counsel. Accordingly, we abate this cause to the trial court for a hearing to determine whether Middleton wants to continue with this appeal. The trial court shall conduct the hearing within 21 days from the date of this Order. The trial court clerk and court reporter shall file supplemental records within 35 days after the date of this Order. In the meantime, if Middleton files a motion to dismiss this appeal that complies with Rule of Appellate Procedure 42.2(a), specifically including Middleton’s signature in addition to his counsel’s, we will reinstate this appeal and rule on the motion as appropriate. PER CURIAM Before Chief Justice Gray, Justice Johnson, and Justice Smith Order issued and filed January 24, 2022 RWR Middleton v. State Page 3	01-04-2023	01-28-2022
https://www.courtlistener.com/api/rest/v3/opinions/4537614/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 09:07 AM CDT - 932 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 State of Nebraska, appellee, v. Tracy N. Parnell, appellant. ___ N.W.2d ___ Filed May 29, 2020. No. S-19-425. 1. Postconviction: Constitutional Law: Appeal and Error. In appeals from postconviction proceedings, an appellate court reviews de novo a determination that the defendant failed to allege sufficient facts to demonstrate a violation of his or her constitutional rights or that the record and files affirmatively show that the defendant is entitled to no relief. 2. Postconviction: Judgments: Appeal and Error. Whether a claim raised in a postconviction proceeding is procedurally barred is a question of law which is reviewed independently of the lower court’s ruling. 3. Postconviction. Postconviction relief is a very narrow category of relief. 4. Postconviction: Appeal and Error. A motion for postconviction relief cannot be used to secure review of issues which were or could have been litigated on direct appeal. 5. Postconviction: Proof. In a postconviction proceeding, an evidentiary hearing is not required (1) when the motion does not contain factual allegations which, if proved, constitute an infringement of the movant’s constitutional rights; (2) when the motion alleges only conclusions of fact or law; or (3) when the records and files affirmatively show that the defendant is entitled to no relief. 6. ____: ____. In the absence of alleged facts that would render the judg- ment void or voidable, the proper course is to overrule a motion for postconviction relief without an evidentiary hearing. 7. Postconviction: Effectiveness of Counsel: Appeal and Error. A claim of ineffective assistance of appellate counsel which could not have been raised on direct appeal may be raised on postconviction review. 8. ____: ____: ____. When a person seeking postconviction relief has different counsel on appeal than at trial, the motion for postconviction - 933 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 relief is procedurally barred if the person seeking relief (1) knew of the issues assigned in the postconviction motion at the time of the direct appeal, (2) failed to assign those issues on direct appeal, and (3) did not assign as error the failure of appellate counsel on direct appeal to raise the issues assigned in the postconviction motion. 9. Effectiveness of Counsel: Proof: Words and Phrases: Appeal and Error. To prevail on a claim of ineffective assistance of counsel under Strickland v. Washington, 466 U.S. 668, 104 S. Ct. 2052, 80 L. Ed. 2d 674 (1984), the defendant must show that his or her counsel’s per formance was deficient and that this deficient performance actually prejudiced the defendant’s defense. To show prejudice under the preju- dice component of the Strickland test, the defendant must demonstrate a reasonable probability that but for his or her counsel’s deficient per- formance, the result of the proceeding would have been different. A rea- sonable probability does not require that it be more likely than not that the deficient performance altered the outcome of the case; rather, the defendant must show a probability sufficient to undermine confidence in the outcome. 10. Effectiveness of Counsel: Appeal and Error. When a claim of inef- fective assistance of appellate counsel is based on the failure to raise a claim on appeal of ineffective assistance of trial counsel (a layered claim of ineffective assistance of counsel), an appellate court will look at whether trial counsel was ineffective under the two-part test for inef- fectiveness established in Strickland v. Washington, 466 U.S. 668, 104 S. Ct. 2052, 80 L. Ed. 2d 674 (1984); if trial counsel was not ineffective, then the defendant was not prejudiced by appellate counsel’s failure to raise the issue. 11. ____: ____. Much like claims of ineffective assistance of trial counsel, a defendant claiming ineffective assistance of appellate counsel must show that but for appellate counsel’s failure to raise the claim, there is a reasonable probability that the outcome would have been different. Appeal from the District Court for Douglas County: Gary B. Randall, Judge. Affirmed. Michael J. Wilson, of Schaefer Shapiro, L.L.P., for appellant. Douglas J. Peterson, Attorney General, and Stacy M. Foust for appellee. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, and Papik, JJ. - 934 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 Funke, J. Tracy N. Parnell appeals from the denial of postconvic- tion relief without an evidentiary hearing. Parnell asserts that the trial court erred in determining that his claims of ineffec- tive assistance of appellate counsel are procedurally barred. Although we agree that one of Parnell’s claims is not procedur- ally barred, we nonetheless conclude that Parnell is not entitled to relief. We therefore affirm. BACKGROUND Convictions and Sentences In State v. Parnell, 1 this court affirmed Parnell’s jury trial convictions of first degree murder, attempted first degree mur- der, two counts of use of a deadly weapon to commit a felony, and possession of a weapon by a prohibited person. The district court for Douglas County sentenced Parnell to life imprison- ment on the murder conviction, 40 to 50 years’ imprisonment for attempted first degree murder, 40 to 50 years’ imprisonment for each count of use of a deadly weapon to commit a felony, and 3 to 20 years’ imprisonment for possession of a weapon by a prohibited person, to be served consecutively, with credit for time served. The facts which resulted in Parnell’s convictions are set forth in our opinion on direct appeal. On October 30, 2012, at around 8:14 p.m., Eriana Carr and Nakia Johnson were shot in Omaha, Nebraska. Carr was shot twice and died from her injuries. Johnson was shot 11 times and survived. Johnson told investigators that the shots came from “a blue Nissan Altima with a messed up front bumper.” Johnson stated that Parnell and three others threatened her at a party at her friend’s apartment 2 days before the shooting, because “they felt like [she] had brought someone into the house from another side,” or “[a]nother hood.” Detectives discovered that Parnell had been stopped while driving a blue Nissan Altima several months earlier. The 1 State v. Parnell, 294 Neb. 551, 883 N.W.2d 652 (2016). - 935 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 registered owner of the car was Jasmine Nero, the mother of Parnell’s child. When interviewed by investigators, Parnell denied any knowledge of an Altima and stated that he never drove any of Nero’s vehicles. Parnell spoke to Nero about the Altima in a call from jail. Nero testified that she understood from that call that Parnell wanted her “to get rid of” the car. Nero moved the car to a garage, where investigators later found it. The car’s front bumper was damaged, and it contained a box with Parnell’s thumbprint on it. Pretrial Discovery Prior to trial, Parnell filed a motion to exclude the State’s expert witness William Shute, a special agent with the Federal Bureau of Investigation (FBI) and a member of the FBI’s “Cellular Analysis Survey Team” who performs “historical cell site analysis” using call detail records provided by cellu- lar carriers. Shute explained that call records show the tower and the sector that a particular cell phone used. Cell towers usually have three sectors. The towers and sectors can be plotted on a map in order to locate a cell phone at a particu- lar time. Shute testified regarding the locations of Parnell’s cell phone around the time of the shooting. Parnell’s call detail records showed that his cell phone connected to tower: (1) 201 at 7:52 p.m., (2) 729 at 8:07 p.m., (3) 201 at 8:11 p.m., (4) 729 at 8:20 p.m., and (5) 201 at 8:20 p.m. Shute plotted the towers and their coverage areas on a map. He testified that the coverage areas for towers 201 and 729 overlap and that the way Parnell’s cell phone switched between towers 201 and 729 showed it was definitely located within the overlapping coverage area at the time of the shooting. The court overruled the motion to exclude, finding that Shute was qualified to testify as an expert and that his methods were reliable. Parnell’s counsel later moved to exclude Shute’s testimony or continue trial based on the discovery of undisclosed evidence. Counsel filed an affidavit stating that he attended a seminar - 936 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 with a presentation by cellular analyst Michael O’Kelly. The State had disclosed in discovery that O’Kelly had performed cell phone mapping services on the case for the Omaha Police Department (OPD). In response to a question from Parnell’s counsel, O’Kelly stated that he performed more services than disclosed in the report. In supplemental discovery, O’Kelly provided Parnell’s counsel with an affidavit detailing his inter- actions with the State, and the State disclosed a series of emails between O’Kelly, a detective of the OPD, and a deputy county attorney. In the emails, the detective asked O’Kelly if he had a formal report to present to the county attorney. O’Kelly responded that he could do so in about 10 days. He stated, “Remember, if it’s in writing it’s Discoverable[.] I would recommend the county attorney and I visiting and then letting them decide.” O’Kelly then later wrote to the deputy county attorney, “It was a pleasure visiting Friday[.] I am sending the cell maps and my cell forms, guides and CV[.] When you have a moment after reviewing these, call and I will walk you through each.” In his affidavit, O’Kelly stated that he “reviewed the . . . call detail records and concluded that [Parnell’s cell phone] appeared to travel from the west side of Omaha [where Parnell lived] to the east side, then north and south and then travel- ing back to the general area on the west side.” O’Kelly said that he “began processing and mapping the individual cell site registrations. The handset transition west to east, north/ south and east to west activities were confirmed.” He then provided the OPD detective with “multiple maps depicting handset movements consistent with cell site registrations that supported physical movement from Omaha’s west side to the east side and possible travel movements north and south on the east side.” O’Kelly also stated that he informed the detective that “it is impossible to identify a specific location stop(s), specific surface roadway travels based upon the existing cellular data.” He stated that “drawing circles and other shapes with defined - 937 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 boundaries is unreliable and at best simple guessing with an agenda. The ‘guessing’ may be based upon experience and training but will still have no foundation and/or credible sup- port that is rooted with existing electronic wireless data.” And he stated that “in order to possibly place the subject [cell phone] in the immediate area of the crime scene . . . it will be necessary to conduct an RF Signal Field Survey.” He explained that his approach to performing such a survey, or drive test, “is time consuming and labor intensive covering days if not weeks.” In his motion to exclude Shute’s testimony or continue trial, Parnell argued that the State failed to disclose O’Kelly’s opin- ions that a drive test was necessary and that the FBI’s methods were not reliable. In support of his motion, Parnell offered O’Kelly’s affidavit, but not the emails. The State responded that O’Kelly’s opinion was not exculpatory and that O’Kelly placed Parnell’s cell phone in the same area as Shute had, although O’Kelly was not as specific. The court overruled the motion, finding the evidence was not exculpatory and had been provided at an early date. The court permitted Parnell to retain O’Kelly as an expert witness and allowed 12 days to prepare his testimony. Before trial, Parnell renewed his motion to continue the trial, offering the email exchanges with O’Kelly as support. The court overruled the renewed motion. Trial At trial, Johnson testified and described the shooting, the blue Nissan Altima, and the threatening incident 2 days before the shooting. Nero testified regarding the Altima and her rela- tionship with Parnell. Nero testified that she lied to police for Parnell and was charged as an accessory to a felony. Shute testified that towers 201 and 729 form an overlap area and that Parnell was within the overlap area at the time of the shooting. O’Kelly was present throughout the trial but did not testify. The jury returned a verdict of guilty on all counts. - 938 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 Motion for New Trial Parnell timely moved for a new trial. He offered a second affidavit from O’Kelly which he contended showed proof of newly discovered evidence which could not have been discov- ered and produced at trial. O’Kelly averred that after his initial work on Parnell’s case, he “informed the government that addi- tional field testing by means of a ‘drive test’ would be required in order to move from speculation to accuracy in the cell tower connection plotting.” A drive test involves making cell phone calls while driving and then obtaining call detail records to see which towers the cell phone used. Shute did not perform such a drive test. O’Kelly began a drive test on the last day of the trial. He averred that the drive test revealed that the crime scene was between towers 201 and 729, which are 1.84 miles apart. The drive test showed that the coverage areas for towers 201 and 729 do not overlap or border each other, as Shute claimed. O’Kelly stated that Parnell had to have left the crime scene in order to connect to tower 729. However, O’Kelly also said that the data showed that Parnell’s cell phone “was in the general vicinity (1 - 2 miles of the crime scene) before, during and after the shooting.” The district court overruled the motion for new trial, finding that O’Kelly’s opinions could have been discovered and pro- duced using reasonable diligence. In addition, the court found that Parnell could have disputed Shute’s testimony by calling O’Kelly as a witness. The court noted that the State had dis- closed early in the discovery process that O’Kelly had worked on the case. Lastly, the court concluded that O’Kelly’s opinions were not material, because they would not have affected the outcome of trial. The court found that the drive test results “seem to incriminate [Parnell].” Direct Appeal On direct appeal, Parnell assigned that the district court erred in overruling his motion to exclude Shute’s testimony - 939 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 or continue trial and his motion for a new trial. Parnell also claimed that his trial counsel was ineffective because he did not call O’Kelly to testify as an expert witness at trial. We found no merit to any of Parnell’s assigned errors. We found that under Brady v. Maryland, 2 the timing of the State’s disclosure of O’Kelly’s opinions did not violate Parnell’s right to due process because the State disclosed the evidence 1 week before trial. We found that the State had no duty to disclose O’Kelly’s oral, unrecorded opinions under Neb. Rev. Stat. § 29-1912 (Reissue 2016), because his comments on the need for more data were akin to an internal, informal document and were not results or reports of examinations or scientific tests under § 29-1912(1)(e). We also found Parnell did not make it clear to the district court that O’Kelly required more than 12 days to perform a drive test. We therefore con- cluded that the district court did not abuse its discretion in overruling Parnell’s motion to exclude Shute’s testimony or continue trial. We rejected Parnell’s argument that the court erred in over- ruling his motion for a new trial, finding that, even assuming O’Kelly’s opinions constituted newly discovered evidence, there was not a reasonable probability of a substantially dif- ferent result. We found that even though O’Kelly criticized the precision of Shute’s opinions, O’Kelly’s opinions still incriminated Parnell, because O’Kelly placed Parnell’s cell phone within 1 to 2 miles of the crime scene before, dur- ing, and after the shooting. In addition, the incriminating testimony of Johnson and Nero substantially diminished the importance of the evidence regarding the location of Parnell’s cell phone. In addressing Parnell’s argument that his trial attorneys were ineffective for failing to call O’Kelly to testify, we first addressed whether Parnell was represented by the same coun- sel at trial as on appeal and concluded that he was not. We 2 Brady v. Maryland, 373 U.S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). - 940 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 found that the two attorneys who represented Parnell at trial intended to withdraw in the trial court, but because there was no order memorializing their withdrawal, they were certified as appellate counsel to this court, and that they did not then file a motion to withdraw in this court. In response to our show cause order, Parnell’s trial counsel submitted affidavits stating that they had no contact with him after sentencing and did not participate in his appeal. As such, we concluded that we were able to address Parnell’s ineffectiveness claim on direct appeal. We found that had O’Kelly testified, the outcome would not have been different, because he opined that Parnell’s cell phone was near the crime scene when the shooting occurred. We determined that the record conclusively refuted Parnell’s claim that he was prejudiced by the actions of his trial counsel. Postconviction As a self-represented litigant, Parnell filed a motion for postconviction relief which asserted claims of trial court error, prosecutorial misconduct, and ineffective assistance of trial and appellate counsel. Most of the allegations in Parnell’s motion concern issues previously raised and addressed on direct appeal, especially with regard to O’Kelly’s opinions and the drive test. Of particular note in this appeal, Parnell alleged that his trial counsel and appellate counsel failed to “submit” the email exchanges with O’Kelly to show that O’Kelly’s data is more reliable than Shute’s data. Parnell further alleged that the State committed prosecutorial misconduct by “allowing the testimony of Shute at trial knowing that his testimony as an expert was not accurate.” He alleged that, contrary to Shute’s testimony that cell towers 201 and 729 form an overlap area, O’Kelly opined that the cell tower areas do not overlap and that the performance of a drive test was required in order to obtain more accurate data. The district court dismissed the motion without an evidentiary hearing, concluding that all of Parnell’s claims are procedurally barred because they were known or - 941 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 knowable at the time of his direct appeal. Parnell filed a notice of appeal. Parnell’s counsel entered his appearance and filed a brief on his behalf. ASSIGNMENTS OF ERROR Parnell assigns, restated, that the district court erred in determining that his claims for postconviction relief are pro- cedurally barred; in particular, his claim in which he alleges that appellate counsel was ineffective by failing to raise trial counsel’s failure to “introduce certain evidence and correct prosecutorial misconduct.” In the alternative, Parnell assigns that the court erred in determining that any of his claims are procedurally barred because it was unclear as to whether he was represented by the same lawyers during trial and direct appeal. STANDARD OF REVIEW [1,2] In appeals from postconviction proceedings, an appel- late court reviews de novo a determination that the defendant failed to allege sufficient facts to demonstrate a violation of his or her constitutional rights or that the record and files affirmatively show that the defendant is entitled to no relief. 3 Whether a claim raised in a postconviction proceeding is pro- cedurally barred is a question of law which is reviewed inde- pendently of the lower court’s ruling. 4 ANALYSIS Parnell argues that the district court erred in determining that all of his claims are procedurally barred, because his motion raises ineffective assistance of appellate counsel claims and postconviction is his first opportunity to raise such claims. The State does not contest this point, but argues that based on the ineffective assistance of appellate counsel allegations raised in the motion, Parnell is entitled to no relief. 3 State v. Hessler, ante p. 451, 940 N.W.2d 836 (2020). 4 State v. Mata, 304 Neb. 326, 934 N.W.2d 475 (2019). - 942 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 [3,4] Under the Nebraska Postconviction Act, 5 a prisoner in custody may file a motion for relief on the ground that there was a denial or infringement of the prisoner’s consti- tutional rights that would render the judgment void or void- able. Postconviction relief is a very narrow category of relief. 6 A motion for postconviction relief cannot be used to secure review of issues which were or could have been litigated on direct appeal. 7 [5,6] In a postconviction proceeding, an evidentiary hearing is not required (1) when the motion does not contain factual allegations which, if proved, constitute an infringement of the movant’s constitutional rights; (2) when the motion alleges only conclusions of fact or law; or (3) when the records and files affirmatively show that the defendant is entitled to no relief. 8 In a motion for postconviction relief, the defend ant must allege facts which, if proved, constitute a denial or violation of his or her rights under the U.S. or Nebraska Constitution. 9 In the absence of alleged facts that would ren- der the judgment void or voidable, the proper course is to overrule a motion for postconviction relief without an eviden- tiary hearing. 10 Claims Procedurally Barred Parnell contends that his claims of prosecutorial miscon- duct were not procedurally barred. However, we agree with the State that this portion of Parnell’s motion asserts in a con- clusory fashion, without factual support, that he was denied ineffective assistance of appellate counsel. An evidentiary hearing is not required when a motion for postconviction 5 Neb. Rev. Stat. §§ 29-3001 to 29-3004 (Reissue 2016). 6 State v. Beehn, 303 Neb. 172, 927 N.W.2d 793 (2019). 7 Mata, supra note 4. 8 State v. Newman, 300 Neb. 770, 916 N.W.2d 393 (2018). 9 Id. 10 State v. Allen, 301 Neb. 560, 919 N.W.2d 500 (2018). - 943 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 relief alleges only conclusions of fact or law without support- ing facts. 11 Upon review of the allegations supporting Parnell’s pros- ecutorial misconduct claims, it is clear that he did not allege that his appellate counsel was ineffective for failing to raise on direct appeal that his trial counsel was ineffective for failing to raise the alleged prosecutorial misconduct with respect to Shute’s testimony. Additionally, he did not allege how inclu- sion of the issue would have changed the outcome of his direct appeal. Because Parnell’s prosecutorial misconduct claims do not include factual allegations concerning the effectiveness of appellate counsel, we do not view these claims as ineffec- tive assistance of appellate counsel claims, and as a result, the district court did not err when it determined these claims were procedurally barred. Claim Not Procedurally Barred While we agree with the district court’s observation that Parnell’s motion mainly discusses claims that either were raised or could have been raised on direct appeal, upon de novo review of Parnell’s postconviction motion, and in consid- eration of the errors assigned by Parnell in this appeal, we find that Parnell has raised one ineffective assistance of appellate counsel claim which is not procedurally barred and must be analyzed under Strickland v. Washington. 12 [7] In the instant case, Parnell was represented by differ- ent counsel on direct appeal than at trial. Ordinarily, when a defendant’s trial counsel is different from his or her counsel on direct appeal, the defendant must raise on direct appeal any issue of trial counsel’s ineffective performance which is known to the defendant or is apparent from the record. 13 11 Id. 12 Strickland v. Washington, 466 U.S. 668, 104 S. Ct. 2052, 80 L. Ed. 2d 674 (1984). 13 Parnell, supra note 1. - 944 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 Otherwise, the issue will be procedurally barred. 14 A claim of ineffective assistance of appellate counsel which could not have been raised on direct appeal may be raised on postconvic- tion review. 15 Parnell’s counsel on direct appeal argued that trial coun- sel was ineffective for failing to call O’Kelly as a witness. For reasons previously discussed herein, we rejected Parnell’s argument, because O’Kelly’s testimony tended to incriminate Parnell and had O’Kelly testified, the outcome of trial would have been the same. In his motion for postconviction relief, Parnell asserts that his appellate counsel was ineffective for failing to raise trial counsel’s failure to “submit the e-mails by [the OPD detective, the deputy county attorney,] and O’Kelly, concerning their meeting about O’Kelly’s data being more reli- able than Shute’s data.” [8] When a person seeking postconviction relief has differ- ent counsel on appeal than at trial, the motion for postconvic- tion relief is procedurally barred if the person seeking relief (1) knew of the issues assigned in the postconviction motion at the time of the direct appeal, (2) failed to assign those issues on direct appeal, and (3) did not assign as error the failure of appellate counsel on direct appeal to raise the issues assigned in the postconviction motion. 16 Here, the record reflects that at the time of his direct appeal, Parnell was aware of the fac- tual basis for his claim that trial counsel was ineffective for failing to “submit the e-mails.” While trial counsel did offer the emails in support of Parnell’s renewed motion to exclude Shute’s testimony or continue trial, the emails were not offered into evidence during trial for the jury’s consideration. Parnell’s appellate counsel did not assert this issue on direct appeal. Because Parnell alleged in his motion for postconviction relief that appellate counsel was ineffective in not doing so, the issue 14 Id. 15 State v. Vela, 297 Neb. 227, 900 N.W.2d 8 (2017). 16 State v. Bishop, 263 Neb. 266, 639 N.W.2d 409 (2002). - 945 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 was presented at Parnell’s first opportunity and is not procedur- ally barred. 17 Because we conclude that Parnell has raised an ineffective assistance of appellate counsel claim that is not procedurally barred, we do not reach Parnell’s alternative assignment of error that the court erred in determining that any of his claims are procedurally barred because it was unclear as to whether he was represented by the same lawyers during trial and direct appeal. An appellate court is not obligated to engage in an analysis that is not necessary to adjudicate the case and controversy before it. 18 Moreover, it is clear from the discussion on this issue in our opinion on direct appeal that Parnell’s counsel on appeal was different than his counsel at trial. Appellate Counsel Not Ineffective Although we find that Parnell’s motion raises a discrete issue that is not procedurally barred, given that we concluded on direct appeal that Parnell was not prejudiced by counsel’s failure to call O’Kelly as a witness, we similarly conclude that Parnell failed to show that he was prejudiced by counsel’s failure to submit the emails by the OPD detective, the deputy county attorney, and O’Kelly into evidence at trial. [9] A proper ineffective assistance of counsel claim alleges a violation of the fundamental constitutional right to a fair trial. 19 To prevail on a claim of ineffective assistance of counsel under Strickland, the defendant must show that his or her counsel’s performance was deficient and that this deficient performance actually prejudiced the defendant’s defense. 20 To show preju- dice under the prejudice component of the Strickland test, the defendant must demonstrate a reasonable probability that but 17 See id. 18 State v. Goynes, 303 Neb. 129, 927 N.W.2d 346 (2019). 19 Vela, supra note 15. 20 Id. - 946 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 for his or her counsel’s deficient performance, the result of the proceeding would have been different. 21 A reasonable prob- ability does not require that it be more likely than not that the deficient performance altered the outcome of the case; rather, the defendant must show a probability sufficient to undermine confidence in the outcome. 22 [10,11] When a claim of ineffective assistance of appel- late counsel is based on the failure to raise a claim on appeal of ineffective assistance of trial counsel (a layered claim of ineffective assistance of counsel), an appellate court will look at whether trial counsel was ineffective under the Strickland test. 23 If trial counsel was not ineffective, then the defendant was not prejudiced by appellate counsel’s failure to raise the issue. 24 Much like claims of ineffective assistance of trial coun- sel, the defendant must show that but for counsel’s failure to raise the claim, there is a reasonable probability that the out- come would have been different. 25 In determining whether trial counsel’s performance was deficient, courts give counsel’s acts a strong presumption of reasonableness. 26 In analyzing Parnell’s claim, we focus on the allegations in his postconviction motion. 27 Here, on the issue of preju- dice, Parnell alleged that had his trial counsel submitted the emails into evidence, “[t]his would have proved that the State knew that there existed exculpatorial [sic] material evidence that [Parnell] was possibly in another area of town when the 21 Id. 22 Id. 23 State v. Foster, 300 Neb. 883, 916 N.W.2d 562 (2018), disapproved on other grounds, Allen, supra note 10. 24 Id. 25 Id. 26 Id. 27 See State v. Haynes, 299 Neb. 249, 908 N.W.2d 40 (2018), disapproved on other grounds, Allen, supra note 10 (appellate court will not consider factual allegations made for first time on appeal). - 947 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 murder was committed.” Based on the record, we find no support for Parnell’s claim that counsel’s introduction of the emails would have created a probability sufficient to under- mine confidence in the outcome at trial. This is because, as stressed by this court in its opinion on direct appeal, the testi- mony of Johnson and Nero provided powerful and compelling evidence of Parnell’s guilt, which significantly reduced the importance of the expert testimony concerning the location of Parnell’s cell phone. 28 Johnson testified that Parnell had threatened her 2 days before the shooting and that the shooter was driving a blue Nissan Altima with a damaged bumper. Nero testified that Parnell drove her Altima on the night of the shooting, and she admitted to lying to police about the Altima in order to help Parnell. When police found the Altima, the car’s front bumper was damaged and an item inside the car contained Parnell’s thumbprint. Because these witnesses directly incriminated Parnell in several respects, even if the emails were introduced into evidence and effectively used to rebut aspects of Shute’s testimony, the likelihood of acquittal is low. This conclusion is reinforced when the actual content of the emails are considered. Had the jury been presented with the emails, it would have merely learned that O’Kelly met with the prosecution to discuss his report and findings and that the prosecution ultimately had Shute testify as an expert rather than O’Kelly. While Parnell’s claim about the emails does not refer to calling O’Kelly as a witness, his motion does state that the emails concern the prosecution’s “meeting about O’Kelly’s data being more reliable than Shute’s data.” Parnell’s claim of ineffectiveness therefore includes a comparison between the findings of the two experts. In evaluating this claim, we assume for the sake of argument only that Parnell’s trial counsel would have introduced the emails through O’Kelly as a witness and that the jury would then have learned O’Kelly’s opinions. We 28 See Parnell, supra note 1. - 948 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. PARNELL Cite as 305 Neb. 932 explained on direct appeal that, although he was not as precise as Shute, O’Kelly’s testimony incriminated Parnell, because O’Kelly placed Parnell in the general vicinity of the crime scene at the time of the shooting. We must therefore conclude that trial counsel was not ineffective, because it is clear that trial counsel’s strategic decision not to call O’Kelly as a wit- ness and introduce the emails through him benefited Parnell, because O’Kelly would have incriminated Parnell. Because Parnell’s trial counsel was not ineffective, Parnell’s appellate counsel was not ineffective in failing to raise this issue, and Parnell suffered no prejudice as a result of the actions of appel- late counsel. Postconviction relief without an evidentiary hear- ing is properly denied when the files and records affirmatively show that the prisoner is entitled to no relief. 29 CONCLUSION For the foregoing reasons, although our reasoning differs from that of the district court, we affirm the order of the dis- trict court denying Parnell’s motion for postconviction relief without an evidentiary hearing. Affirmed. Freudenberg, J., not participating. 29 State v. Fox, 286 Neb. 956, 840 N.W.2d 479 (2013).	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622153/	MARSHALL HERBERT AND VIRGINIA HELTON HICKEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHerbert v. CommissionerDocket No. 11615-84.United States Tax CourtT.C. Memo 1986-186; 1986 Tax Ct. Memo LEXIS 421; 51 T.C.M. (CCH) 983; T.C.M. (RIA) 86186; May 6, 1986. Marshall Herbert Hickey, pro se. Nancy W. Hale, for the respondent. GUSSISMEMORANDUM OPINION GUSSIS, Special Trial Judge: This case was assigned to Special Trial Judge James M. Gussis pursuant to section 7456(d)(3) of the Internal Revenue Code of 1954 and Rules 180, 181, and 182 of the Tax Court Rules of Practice422 and Procedure.1Respondent determined a deficiency in petitioners' Federal income tax for the year 1980 in the amount of $1,149.85. The sole issue for determination is whether petitioners are entitled to a residential energy credit for $1,149.85 under section 44C(a)(2). 2Some of the facts have been stipulated and are found accordingly. Petitioners resided in Knoxville, Tennessee at the time they filed their petition. During 1980, petitioners installed a self-designed hearing and cooling system in their residence. The system utilized water from the nearby Melton Hill Reservoir at temperatures between 43 degrees Fahrenheit (approximately 6 degrees Celsius) and 73 degrees Fahrenheit (approximately 23 degrees Celsius) for heating and cooling the petitioners' home. On their joint 1980 Federal income tax423 return, petitioners claimed an energy credit in the amount of $1,149.85. Respondent, in his notice of deficiency, disallowed the claimed credit on the ground that the ground water heat pump (system) did not meet the requisite definition of "renewable energy source property" pursuant to section 44C. Section 44C allows a credit to individual taxpayers for qualified energy source expenditures made with respect to renewable energy source property. Section 44C(a)(2). Renewable energy source property includes property which transmits or uses energy derived from geothermal deposits. Section 44C(c)(5)(A)(i). Under section 44C(c)(6)(A)(i), the Secretary is empowered to issue regulations which establish criteria to be used in prescribing performance and quality standards for renewable energy source property. Pursuant to this authority, regulations were promulgated (sec. 1.44C-2(h), Income Tax Regs.) which defined "geothermal energy property" to include: equipment * * * necessary to transmit or use energy from a geothermal deposit to heat or cool a dwelling * * . A geothermal deposit is a geothermal reservoir consisting of natural heat which is from an underground source and is424 stored in rocks or in an aqueous liquid or vapor (whether or not under pressure), having a temperature exceeding 50 degrees Celsius as measured at the wellhead * * * [Emphasis added.] The parties have stipulated that the petitioners' heating and cooling equipment utilized ground water at temperatures between 6 degrees Celsius and 23 degrees Celsius for heating and cooling the petitioners' home. It is evident therefore that the system does not qualify as geothermal property under the regulations. The fact that the system may be energy efficient is, by itself, irrelevant to a determination of whether such property qualifies for the residential energy credit under section 44C(a)(2). See Reddy v. Commissioner,T.C. Memo 1984-395">T.C. Memo 1984-395, affd. per order (4th Cir. Aug. 29, 1985). Petitioner argues that the regulations do not reflect the intention of Congress. However, similar arguments have been previously considered and rejected by this Court. Peach v. Commissioner,84 T.C. 1312">84 T.C. 1312 (1985), on appeal (4th Cir., Sept. 13, 1985). Congress indicated what it meant by geothermal energy in the Committee Report that accompanied the passage of the Energy Tax*425 Act of 1978 (92 Stat. 3174). The Senate Report defines geothermal equipment as equipment necessary to distribute or use geothermal steam and associated geothermal resources (as defined in section 2(c) of the Geothermal Steam Act of 1970; 30 U.S.C. sec. 1001(c) (1982)). As stated therein, geothermal reservoirs consist of natural heat stored in rocks or an aqueous liquid or vapor (whether or not under pressure), including hot brine, dry heat, and hot water. S. Report No. 95-529 (1977), 1978-3 C.B. (Vol. 2) 199, 232. It appears, thereford, that the regulations do reflect the intent of Congress in enacting section 44C. We have no authority to go beyond the explicit terminology of the statute. See Donigan v. Commissioner,68 T.C. 632">68 T.C. 632, 636 (1977). We must conclude on this record that petitioners are not entitled to a residential energy credit under section 44C(a)(2) in the year 1980. Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Section 44C was redesignated as section 23 by section 471(c) of the Deficit Reduction Act of 1984, 98 Stat. 826, effective for taxable years beginning after December 31, 1983.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622156/	Estate of Proctor D. Rensenhouse, Deceased, The Michigan Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentEstate of Rensenhouse v. CommissionerDocket No. 57683United States Tax Court31 T.C. 818; 1959 U.S. Tax Ct. LEXIS 258; January 23, 1959, Filed 258 A widow's allowance in a lump sum, paid by petitioner estate pursuant to an order of a Michigan Probate Court, held not to constitute a terminable interest within meaning of section 812(e)(1) (B), I.R.C. 1939 (on assumption pursuant to mandate of Court of Appeals that it was an interest in property passing from decedent as defined in section 812(e)(3), see 27 T.C. 107">27 T.C. 107). Estate of Edward A. Cunha, 30 T.C. 812">30 T.C. 812, distinguished. Held, further, section 812 (e)(1)(B) is applicable to a widow's allowance. Irving Rothholtz, Esq., for the petitioner.J. Bruce Donaldson, Esq., for the respondent. Kern, Judge. Pierce, J., concurring in part and dissenting in part. KERN 818 SUPPLEMENTAL OPINION.This case (in which our original Findings of Fact and Opinion are reported at 27 T.C. 107">27 T.C. 107) is again before us pursuant to the mandate of the United States Court of Appeals for the Sixth Circuit to which was attached the following order (as amended):The above cause coming on to be heard upon the record, the briefs of the parties, and the arguments of counsel260 in open court, and it appearing that petitioning executor claimed a marital deduction for a widow's allowance under Section 812(e) of the Internal Revenue Code of 1939, and that the Tax Court denied such claim on the ground that the widow's allowance did not constitute property passing from the decedent, as defined in Section 812(e)(3); and it further appearing that the grounds upon which the Tax Court decided the case have been abandoned by the Treasury Department and by present counsel for the Commissioner on this appeal; and it appearing that the single and controlling issue, now presented to the court, is whether the widow's allowance in question was a "terminable interest" within the meaning of Section 812(e)(1)(B) of the Internal Revenue Code of 1939, as amended; and it appearing that respondent contends that it is a terminable interest because it does not vest until after a petition has been filed for such allowance, and, further, that the allowance of the deduction depends on whether the widow received an indefeasible interest in the estate of her husband when he died; and it appearing that petitioner contends that such allowance is an indefeasible, vested right under the 261 law of Michigan, relying upon 819 King v. Wiseman, 147 F. Supp. 156">147 F. Supp. 156; and it further appearing that petitioner contends that such interest qualifies for the marital deduction without regard to whether the allowance vests or not, since Congress did not intend the terminable interest rule to be applicable to a widow's allowance; and it further appearing that the Tax Court has not passed upon these contentions of petitioner; and the court being duly advised,Now, Therefore, It Is Ordered, Adjudged, and Decreed That the case be and is hereby remanded to the Tax Court for its further consideration and for its decisions on the issue whether such allowance constituted a terminable interest within the meaning of Section 812(e)(1)(B) of the Internal Revenue Code of 1939, as amended, and whether the terminable interest rule is applicable to a widow's allowance, under the statute.It is apparent that respondent has abandoned the position originally taken by him in this proceeding with regard to the question of whether a widow's allowance is an interest in property passing from the decedent within the meaning of section 812(e)(3), I.R.C. 1939 (see 27 T.C. 107">27 T.C. 107, 113),262 and has now reverted to the position stated by him in Revenue Ruling 83, 1953-1 C.B. 395, which reads as follows:Advice is requested whether amounts allowed and paid pursuant to State law for the support of a surviving spouse during the period of settlement of the estate of the deceased spouse qualifies as a marital deduction for estate tax purposes under section 812(e)(1)(A) of the Internal Revenue Code.Under the general rule of subparagraph (A) of section 812(e)(1) of the Code, the marital deduction will be allowed with respect to any interest in property included in the gross estate which passes from a decedent to his surviving spouse as absolute owner. In order to qualify under this subparagraph, any right of a widow to an allowance in her husband's estate must be a vested right of property which is not terminated by her death or other contingency. Therefore, if a widow's allowance for the full period of settlement of the estate is such that the allowance, or any unpaid balance thereof, will survive as an asset of her estate in case she dies at any time following the decedent's death, the interest thus taken by the widow would clearly263 constitute a deductible interest under section 812(e)(1)(A) of the Code. Whether any interest thus taken by a widow satisfies the statutory requirements in this respect is to be determined in the light of the applicable provisions of the State statutes, as interpreted by the local courts.There are cases, however, where it appears that the provisions of State statutes providing for allowances for support during the period of settlement of an estate do not confer upon the surviving spouse of a decedent any vested indefeasible right of property which would constitute a deductible interest under section 812(e) of the Code. In many States local courts have held that such allowances, or any rights thereto, terminate ipso facto upon remarriage and that death also terminates any rights to subsequent allowances. Under such circumstances, the interests passing to the surviving spouses of decedents in the forms of allowances, made for their support, pursuant to local law, amount to no more than annuities payable out of the assets of the estates during the periods of settlement or until prior death or remarriage of the surviving spouses and, as such, constitute terminable interests within264 the meaning of section 812(e)(1)(B) oft he Code, no portion of the values of which qualify for the marital deduction.820 In view of the foregoing, it is held that the interest in an estate which passes to a surviving spouse pursuant to State law in the form of an allowance for support during the period of settlement of the deceased spouse's estate must constitute a vested right of property such as will, in the event of her death as of any moment or time following the decedent's death, survive as an asset of her estate, in order to qualify under section 812(e)(1)(A) of the Internal Revenue Code for the estate tax marital deduction.The facts in the instant case are not in dispute. They are fully set out in 27 T.C. 108">27 T.C. 108, 109. As stated therein, decedent died on May 24, 1952. By will he devised his residuary estate to a trust, the corpus of which was distributable to his children upon the death of his widow. On October 29, 1952, the appropriate State court of Michigan entered an order upon the petition of the widow directing that "an allowance in the sum of $ 10,000.00 per year to be paid at the rate of $ 833.33 per month be and the same is hereby 265 granted out of the estate of said deceased for the support and maintenance of the widow for one year from the date of the death of said deceased." On August 3, 1953, the executor of decedent's estate paid to the widow a lump sum of $ 10,000 in satisfaction of the order of the State court. The widow died in 1954.Respondent on brief states that he "accepts the view that the critical consideration upon which the right to the deduction [of the widow's allowance] depends is whether the widow's interest was a terminable one within the meaning of Section 812(e)(1)(B)" of the Internal Revenue Code of 1939, 1 and further states the question to be decided as "whether a widow's allowance in the State of Michigan constituted a terminable interest under Section 812(e)(1)(B) of the Internal Revenue Code of 1939, as amended, and whether the terminable interest rule is applicable to a widow's allowance, under the statute." As we understand his present argument, it is to the effect: (1) That since a petition by the widow is a prerequisite to the granting of a widow's allowance since the widow may fail or refuse to make 821 such a petition and since an order of the State court is necessary 266 to fix the allowance in final form, there may be a "failure of an event or contingency to occur," upon which the "interest passing to the surviving spouse [the widow's allowance] will * * * fail," and (2) since the death of the widow after the entry of an order granting a widow's allowance would abate such allowance for the period after her death, and the remarriage of the widow would terminate her right to such allowance for the period following remarriage, there may be "the occurrence of an event or contingency," upon which the "interest passing to the surviving spouse [the widow's allowance] will terminate."267 In determining whether the widow's allowance here involved constituted a "terminable interest" within the meaning of section 812(e)(1)(B) we must look at the facts and the rights of the parties as they existed at the time of decedent's death. Estate of Edward A. Cunha, 30 T.C. 812">30 T.C. 812. See also Estate of Wallace S. Howell, 28 T.C. 1193">28 T.C. 1193, 1195; Shedd's Estate v. Commissioner, 237 F. 2d 345, affirming 23 T.C. 41">23 T.C. 41.As of the decedent's death his widow was entitled to a widow's allowance for 1 year and her right to this allowance was not lost by reason of her subsequent death or remarriage. Bacon v. Perkins, 100 Mich. 183">100 Mich. 183, 58 N.W. 835">58 N.W. 835; Isabell v. Black, 259 Mich. 100">259 Mich. 100, 242 N.W. 853">242 N.W. 853. Of course the widow (or her representative) had to ask for the enforcement of this right or interest by petition to the appropriate Probate Court, and the Probate Court by its order would render the right enforcible. However, we are unable to agree with respondent that the necessity of 268 invoking the proper legal procedures for the enforcement of a right is a contingency to the existence of the right (i.e., a "failure of an event or contingency to occur" upon which the "interest passing to the surviving spouse will * * * fail") within the meaning of the statute. The invocation of the proper legal procedure is required with regard to widow's allowances in most jurisdictions, and if this were a relevant factor in considering the applicability of section 812(e)(1)(B) it would almost universally preclude the allowance as a marital deduction of "amounts expended in accordance with the local law for support of the surviving spouse of the decedent." It was not considered a relevant factor by the respondent in Revenue Ruling 83, 1953-1 C.B. 395, quoted above. The clear inference from the congressional reports referred to in our original opinion (see 2 C.B. 478">1950-2 C.B. 478, 576) is that Congress assumed that in many cases at least a widow's allowance would be allowable as a marital deduction. This congressional assumption (even though erroneous under our interpretation of section 812(e)(3); see 27 T.C. 107">27 T.C. 107)269 negatives any congressional intent that the necessity for the widow to file a petition asking 822 for the allowance or the discretion and power of the local probate judge with regard to fixing and modifying the amount of such allowance should be relevant factors to be considered under section 812 (e)(1)(B). This view is implicit in our decision in Estate of Gertrude P. Barrett, 22 T.C. 606">22 T.C. 606. In that case decedent's husband contended that decedent's will was invalid and asserted a claim to a one-third interest in decedent's personal property as provided by State statute. A compromise was effected whereby the husband agreed to renounce his contention and settle his claim for $ 10,250 paid to him by the executor with the approval of the Probate Court. It was held that this amount was a marital deduction under the provisions of section 812(e). In that case it is obvious that the enforcement of the husband's rights required the invocation of proper legal procedures and the extent of the rights (i.e., the dollar amount of his interest) depended upon the action of officers of the Probate Court subject to the court's approval. Yet we allowed the amount270 paid to the husband as a marital deduction. The instant case is a stronger one for the taxpayer.The difficult question is whether the widow's right to a support allowance for 1 year, existing under the law of Michigan as of the decedent's death was subject as of that time to be terminated by her death or remarriage within the year so that the occurrence of either event must be considered "the occurrence of an event or contingency" upon which the "interest [represented by the widow's allowance] will terminate."In Estate of Edward A. Cunha, supra, a case involving the law of California, the answer to this question was comparatively easy since in that case the award was for monthly sums and we were able to point out that petitioner in that case conceded that the effect of In re Blair's Estate, 42 Cal. 2d 728">42 Cal. 2d 728, 269 P. 2d 612, was that a widow's allowance in that State terminates or abates upon her death or remarriage. See also Estate of Hamilton, 66 Cal. 576">66 Cal. 576, 6 Pac. 493.However, in the instant case the reasoning of the Michigan courts in the two Michigan cases271 above cited and in others would indicate that the law of Michigan on this point is not like the law of California. See also McAvinchey, Michigan Probate Practice sec. 120.The general rule on this question is stated by 3 Schouler, Wills, Executors and Administrators (6th ed.) sec. 2655, as follows:Usually where, at the death of a widow, portions of an amount allowed to her as a widow's allowance remain unpaid, such amounts may be recovered by her representative [citing In re Rice's Estate, 146 Iowa 48">146 Iowa 48, 124 N.W. 792">124 N.W. 792]. And effect of her death, after a decree unappealed from has established her right, absolutely and conclusively, to an allowance, appears to cause this right of property to pass to her personal representatives [citing Drew v. Gordon, 13 Allen (Mass.) 120].823 The difficulty of formulating a general rule applicable to all jurisdictions is indicated by a consideration of 144 A.L.R. 264">144 A.L.R. 264 and the cases cited and discussed in the annotation, at 270-286. However, we are satisfied that there is no such general rule contra to the contention of petitioner as to the272 law of Michigan on this subject as to justify us in holding that the burden of proving the law of Michigan as an exception to a general rule is on petitioner under the doctrine of Helvering v. Fitch, 309 U.S. 149">309 U.S. 149. See Helvering v. Stuart, 317 U.S. 154">317 U.S. 154. We have before us all of the precedents of that State which counsel have presented on brief and our own research has found available. It must be our responsibility, without relying on any rule of burden of proof, to determine what the law of Michigan is on this question.We limit the question, of course, to the precise facts here involved. It should be pointed out that in this case, unlike the Cunha case, the award was in one lump sum covering the period of a year ("an allowance in the sum of $ 10,000 per year"), even though the order permitted the award "to be paid at the rate of $ 833.33 per month." Thus by the terms of the order the allowance "granted * * * for the support and maintenance of the widow for one year from the date of the death of * * * deceased" was the one sum of $ 10,000, and not an allowance of monthly payments. As to the term for which 273 the award was granted, it was for 1 year after the death of decedent and as to such a term the widow's right to an allowance was "an absolute vested right." See Bacon v. Perkins, supra.It is our opinion that under the law of Michigan a widow's allowance granted by the Michigan Probate Court for 1 year in a lump sum does not terminate or abate upon the death or remarriage of the widow prior to its payment.We conclude that under the facts of the instant case (and limiting strictly our decision to these facts) the widow's allowance here in question did not constitute a terminable interest within the meaning of section 812(e)(1)(B) of the Internal Revenue Code of 1939, as amended.We reach this conclusion in conformity with the mandate of the Court of Appeals, above quoted, and not because we have in any way receded from the views expressed in our original opinion herein, to the effect that the widow's allowance here involved was not an interest in property passing from the decedent as defined in section 812(e)(3).The Court of Appeals by its order which is quoted above calls for our further consideration and decision "on the issue whether274 such allowance constituted a terminable interest within the meaning of Section 812(e)(1)(B) of the Internal Revenue Code of 1939, as amended, and whether the terminable interest rule is applicable to a widow's allowance, under the statute." In deciding the first question 824 posed by the Court of Appeals ("whether such allowance constituted a terminable interest within the meaning of Section 812(e)(1)(B)"), it is obvious that an assumption must be made that "the terminable interest rule is applicable to a widow's allowance." We have considered and decided that even though "the terminable interest rule is applicable to a widow's allowance," the widow's allowance here in question under the peculiar facts of this case did not constitute a terminable interest within the meaning of "the terminable interest rule." Having thus decided the first question stated by the Court of Appeals in a way which will dispose of the case in petitioner's favor, even on an assumption with regard to the second question stated which is contrary to petitioner's position any comments by us on the second question may well be characterized as dicta. However, in conformity with the order of the Court of 275 Appeals, we express the opinion that "the terminable interest rule is applicable to a widow's allowance."Petitioner's contention on this question is that the two conditions to the application of "the terminable interest rule" (section 812(e)(1)(B)), which are set out in subsections (i) and (ii) of section 812(e)(1)(B), are not fulfilled in cases involving a widow's allowance since upon the termination of such an allowance the interest therein does not pass to and may not be possessed or enjoyed by any person other than the surviving spouse directly but the interest in such property will revert to the decedent's estate and pass through that estate (subject to tax) to such other person or persons.Petitioner's argument on this question is ingenious, but it is not supported by the language of the statute nor by any legislative history. In theory it is incompatible with administrative interpretation, Rev. Rul. 56-26, 1 C.B. 447">1956-1 C.B. 447. In our opinion it is without merit.Decision will be entered of no deficiency. PIERCE (In Part) PIERCE (In Part) Pierce, J., concurring in part and dissenting in part.Because of the importance of this276 case in the administration of the Federal estate tax, I believe it appropriate to set forth my views, not only with respect to the final result reached by the Court in this particular case, but also with respect to the answers made by the Court to the specific questions presented in the mandate of the Court of Appeals for the Sixth Circuit. Since this is the first case involving the qualification of widows' awards for the estate tax marital deduction, which has received consideration by any of the Courts of Appeals, and since in the proceedings above the Treasury Department and its counsel made important concessions which caused the case to be remanded for 825 decision on two crucial questions, I believe that the conclusions and reasoning employed by this Court in arriving at its answers to said questions have a bearing on the estate tax treatment of widows' awards, generally, that goes far beyond their application in the instant case.I concur in the Court's holding that the particular widow's award here involved does not constitute a "terminable interest" within the meaning of section 812(e)(1)(B) of the 1939 Code; and I join in the holding that the decision herein should277 be for the petitioner. I respectfully dissent, however, from the Court's answer to the second question presented by the Court of Appeals -- that "the terminable interest rule [contained in subparagraph (B) of section 812(e)(1)] is applicable to a widow's allowance." And I also am impelled to disagree with the conclusions expressed and applied by the Court in arriving at its answer to the first question of the Court of Appeals. These conclusions are, in substance: That the controlling test for determining whether a particular widow's award qualifies for the estate tax marital deduction, is whether the widow's right to the particular amounts actually received by her had vested in her at the time of her husband's death, under the local law as interpreted by the local courts -- so as to preclude any possibility that payment of such amounts might have been stopped or discontinued by the local court, in the event she had died or remarried immediately after her husband's death.Such interpretation and application of section 812(e) is, in my view, erroneous and out of harmony with the overall scheme of the marital deduction provisions of the Code, as indicated by their own278 terms. Also, the so-called vesting test which the Court adopted and applied in determining whether the widow's award qualified, is neither mentioned in the Code nor specifically authorized by the terms thereof; and I find no warrant for inferring that Congress intended the operation of the Federal statute to be dependent on State law. Such test, because of the paucity or indefiniteness of local court decisions in many State jurisdictions (see statement in the Court's opinion, as to the difficulty of formulating any general rule as to vesting), would complicate the administration of the estate tax law, by making it difficult or even impossible in many instances for taxpayers, their counsel, and the administrative officials, to determine with reasonable certainty whether a particular widow's award qualifies -- thus stimulating litigation and hindering the prompt settlement of estates. And further, such test, because of the differing views expressed by local courts in their consideration of similar facts and similar State statutes, would produce diametrically opposite results in cases arising in different States (compare, for example, the result reached in the instant case involving279 a Michigan estate, with that reached by this Court in a case 826 involving a California estate, Estate of Edward A. Cunha, 30 T.C. 812">30 T.C. 812, pending on appeal to C.A. 9); and thus it would tend to defeat the objective of attaining a uniform application of the estate tax statutes to a nationwide scheme of taxation.In answering the questions presented by the Court of Appeals, I would have given effect to the following considerations:(1) The meaning and application of Federal tax statutes is a Federal question, which should be resolved by application of settled principles relating to the construction of Federal tax statutes.In Burnet v. Harmel, 287 U.S. 103">287 U.S. 103, 110, the Supreme Court, in dealing with the meaning and application of a Federal income tax statute, said:Here we are concerned only with the meaning and application of a statute enacted by Congress, in the exercise of its plenary power under the Constitution, to tax income. The exertion of that power is not subject to state control. It is the will of Congress which controls, and the expression of its will in legislation, in the absence of language evidencing280 a different purpose, is to be interpreted so as to give a uniform application to a nation-wide scheme of taxation. * * State law may control only when the operation of the federal taxing act, by express language or necessary implication, makes its own operation dependent upon state law. * * See also Lyeth v. Hoey, 305 U.S. 188">305 U.S. 188, 193-194, in which the Supreme Court said:The question as to the construction of the exemption in the federal statute is not determined by local law. We are not concerned with the peculiarities and special incidences of state taxes or with the policies they reflect [relative to the administration of decedents' estates]. * I think that such principles are applicable here.(2) Section 812(e) provides a comprehensive plan for dealing with interests which commonly would be considered as passing from a decedent to his surviving spouse; and it provides its own definition of an interest passing, which is broad enough to cover all the interests included in determining the value of the decedent's gross estate under the various subsections of section 811 of the Code.When Congress first established the estate281 tax marital deduction in 1948, the basic scheme was to permit the spouse who died first, to pass to his surviving spouse free from the burden of estate tax, up to one-half of his adjusted gross estate; provided that the interest so passed was of such character that it would qualify for taxation in the estate of the surviving spouse. See Estate of Edward F. Pipe, 23 T.C. 99">23 T.C. 99, 104, affd. 241 F. 2d 210, certiorari denied 355 U.S. 814">355 U.S. 814. This scheme was made effective by adding to section 812 of the 1939 Code, a new subsection (e) which included the following basic provision, and the following overall limitation:827 (e) Bequests, Etc., to Surviving Spouse. -- (1) Allowance of marital deduction. --(A) In General. -- An amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate. [Emphasis supplied.] * * (H) Limitation On Aggregate Of Deductions. -- The aggregate amount of the deductions allowed under this paragraph282 (computed without regard to this subparagraph) shall not exceed 50 per centum of the value of the adjusted gross estate, as defined in paragraph (2).Included also in section 812(e) are several other paragraphs and subparagraphs (including subparagraph (B) here involved) which provide special limitations, exceptions and definitions, that serve to make effective the scheme of the subsection, and also provide for such latitude in its application as will make its operation both practical and certain. Such latitude is provided, not only by the terms "passes or has passed" contained in subparagraph (A), but also by the definition contained in paragraph (3) of section 812(e), which states that, "For the purposes of this subsection * * * [certain specified interests] in property shall be considered as passing from the decedent." (Emphasis supplied). Among the interests that shall be so considered as passing is an interest "inherited" (sec. 812(e)(3)(B)); and, by reason of the above-mentioned concessions made by the Treasury Department in the instant case when it was before the Court of Appeals, the widow's award here involved which was actually paid out of the decedent's gross283 estate to the widow, is to be regarded as an interest "inherited." Still other interests considered as passing from the decedent include: Statutory interests assigned, in certain States, in lieu of dower or curtesy (sec. 812(e)(3)(C)); a cash amount received in settlement of a will contest ( Estate of Gertrude P. Barrett, 22 T.C. 606">22 T.C. 606); and the limited statutory interest in an estate, which a widow may have elected to take against her husband's will (S. Rept. No. 1013, 80th Cong., 2d Sess., 1 C.B. 285">1948-1 C.B. 285, 334).In a statute of such fine mesh, I find no room for the inclusion of tests based on the peculiarities and policies of differing State laws, which are not specifically authorized.(3) The Court's holdings and conclusions as to the application and effect of subparagraph (B) fail, in my view, to give recognition to the limited scope of said subparagraph, as indicated by its terms. The opening sentence of this subparagraph reads as follows: (B) Life Estate or Other Terminable Interest. -- Where, upon the lapse of time, upon the occurrence of an event or contingency, or upon the failure of an event or contingency 284 to occur, such interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed with respect to such interest --828 (i) if * ; and(ii) if * ;and no deduction shall be allowed * * (iii) if * * . [Emphasis supplied.]It will be observed that, in order for the marital deduction to be disallowed under this subparagraph, the conditions of clauses (i) and (ii), or of clause (iii), must be met. None of these clauses has the remotest relation to a widow's award; and hence, the condition precedent to the application of said subparagraph to such an award, is not met.Moreover, it is obvious from the context of subparagraph (B), that the "terminable interests" intended to be controlled thereby, are interests passing to a surviving spouse, which are not of such character that they would qualify for taxation in the surviving spouse's estate -- as for example, a life estate, or an estate for a term of years, or a contingent interest that is subject to curtailment or extinguishment, and to which clauses (i) and (ii) or (iii) would pertain. The subparagraph has, in my view, no application whatever to interests which pass285 to the widow, absolutely for her sole use and consumption.Widows' awards simply do not fit into the pattern of subparagraph (B). They are allowances which an appropriate local court, acting under an empowering statute, may authorize the executor or administrator to expend and pay out of the decedent's gross estate for the temporary support of the surviving widow. Except in some States where a minimum allowance is provided, the local court usually has discretionary power to fix the amount or amounts to be paid, either in a single lump sum or in a series of monthly lump sums; and in addition, it has discretionary power to determine how long the payments shall run -- as for example, until the widow's interest in the estate is assigned to her; or for 1 year; or until further order of the court. Because such allowances are for the relief of the widow only, and because on the other hand they may operate against the interests of other persons, the local court usually has discretionary power also to stop the payments, or to increase or decrease their amounts, so as to give effect to their purpose. Neither the empowering local statute nor the discretionary orders of the local court286 can, in any realistic sense, be regarded as creating interests in property which pass to the widow prior to the time or times when the particular support payments are actually or constructively received by her. There is no corpus represented by the award, in which the widow has only a limited or contingent use; there are no remainders; and there is no reverter.I would have held that subparagraph (B) is in no way applicable to widows' awards.829 (4) There is legislative history which indicates clearly an intention of Congress that support allowances actually paid to a widow out of her husband's gross estate, should qualify for the estate tax marital deduction.Prior to the creation of the marital deduction in 1948, and continuing until 1950, amounts paid to a surviving spouse as a widow's award, were, to the extent "reasonably required and actually expended for the support during the settlement of the estate," expressly deductible for estate tax purposes, under section 812(b)(5) of the 1939 Code. In 1950, however, such deduction was eliminated from the Code; and in explanation of such action, the Senate Finance Committee made the following statements (S. Rept. No. 2375, 81st287 Cong., 2d Sess., 2 C.B. 483">1950-2 C.B. 483, 525, 576):This deduction [allowed by section 812(b)(5)] is inconsistent with the concept of the estate tax as a tax on all properties transferred at death. In practice it has discriminated in favor of estates located in States which authorize liberal allowances for the support of dependents, and it has probably also tended to delay the settlement of estates.Section 502 of your committee's bill repeals this particular feature of the estate tax law. * ** * * Under existing law amounts expended in accordance with the local law for support of the surviving spouse of the decedent are, by reason of their deductibility under section 812(b), not allowable as a marital deduction under section 812(e) of the Code. However, as a result of the amendment made by this section [section 502 of the Revenue Act of 1950] such amounts heretofore deductible under section 812(b) will be allowable as a marital deduction subject to the conditions and limitations of section 812(e). [Emphasis supplied.]The last of the above-quoted statements appears also, in identical words, in the report of the Ways and Means Committee288 of the House (H. Rept. No. 2319, 81st Cong., 2d Sess., 2 C.B. 380">1950-2 C.B. 380, 478).Thus it will be seen, that the intended effect of the repeal of said section 812(b)(5) was merely to shift the deduction for widows' awards from one subsection of section 812 to another; and thereby place the allowances under the 50 per cent limitation on aggregate marital deductions, which is provided by section 812(e)(1)(H) of the 1939 Code.In view of the above statements contained in the report of the Senate Finance Committee, to the effect that such action was motivated, at least in part, by a desire to eliminate discrimination among the States and to prevent delay in the settlement of estates, it cannot reasonably be inferred that Congress intended that the qualification of widows' awards for the marital deduction, should be subjected to the uncertainties and variations of local law.I believe that the intention of Congress, as disclosed by the above quotations from the committee reports, should be given effect in respect of widows' support allowances, generally. Footnotes1. SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate -- * * * (e) Bequests, Etc., to Surviving Spouse. -- (1) Allowance of marital deduction. -- * * * (B) Life Estate or Other Terminable Interest. -- Where, upon the lapse of time, upon the occurrence of an event or contingency, or upon the failure of an event or contingency to occur, such interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed with respect to such interest --(i) if an interest in such property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to any person other than such surviving spouse (or the estate of such spouse); and(ii) if by reason of such passing such person (or his heirs or assigns) may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse;and no deduction shall be allowed with respect to such interest (even if such deduction is not disallowed under clauses (i) and (ii)) --↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622157/	Elana T. McQuade, Petitioner v. Commissioner of Internal Revenue, RespondentMcQuade v. CommissionerDocket No. 22429-81United States Tax Court84 T.C. 137; 1985 U.S. Tax Ct. LEXIS 129; 84 T.C. No. 9; January 31, 1985. January 31, 1985, Filed 129 Held, under Montana v. United States, 440 U.S. 147">440 U.S. 147 (1979), P is a party in the prior litigation with the United States. Held, further, R is collaterally estopped from determining Federal tax deficiencies against P for the years in dispute where a bankruptcy court, a court of competent jurisdiction, previously determined that P and her deceased husband owe no taxes for those years. Held, further, United States v. Mendoza, 464 U.S. 154 (1984), is not applicable to this situation in which prior litigation dealt with tax liability of P, her deceased husband, and his wholly owned corporation, for years before this Court. Held, further, since no genuine issue of material fact is before this Court, P's motion for summary judgment is granted. Fred T. Witt, Jr., and David W. Elrod, for the petitioner.Richard D. Ames and Mark L. Puryear, for the respondent. Dawson, Chief Judge. Cantrel, Special Trial Judge. DAWSON; CANTREL137 OPINIONPetitioner's motion for summary judgment was assigned to Special Trial Judge Francis J. Cantrel for hearing, consideration, and ruling thereon. 1 After130 a review of the record, we agree with and adopt his opinion, which is set forth below.138 OPINION OF THE SPECIAL TRIAL JUDGECantrel, Special Trial Judge: This case is before the Court on petitioner's motion for summary judgment, filed on June 13, 1984, pursuant to Rule 121(a), Tax Court Rules of Practice and Procedure.2Respondent issued a notice of deficiency to petitioner on May 28, 1981, in which he determined deficiencies in petitioner's Federal income tax and additions to the tax for the taxable calendar years 1976 and 1977 in the following respective amounts:Addition to tax, I.R.C. 1954YearsIncome taxSec. 6653(b)1976$ 710,670.31$ 377,610.151977861,605.22452,117.61 131 On the same day, respondent issued a joint notice of deficiency for the same years and in the exact same amounts to Estate of Joel H. McQuade, deceased, and Elana T. McQuade, executrix; Elana T. McQuade, surviving wife.The above amounts were determined based on a sequence of events that began in 1974 when petitioner's husband Joel H. McQuade (hereinafter referred to as Joel or McQuade), Ray Acker (hereinafter referred to as Acker), a vice president at Southwestern Bell Telephone Co. responsible for leasing equipment for the company, and others organized a venture to share in fees, commissions, and profits to be made from certain leveraged lease transactions. In the transaction's most basic form, Acker would pass on to McQuade the leasing needs and requirements of Southwestern Bell, along with the amount of the low bid, so that McQuade could put in the lowest bid on behalf of the company he worked for, ITEL Corp.For part of the time, McQuade was a partner in a partnership formed to carry on this venture. At some point in 1974 or 1975, McQuade began using his wholly owned corporation, Systems Financing, Inc. (hereinafter referred to as SFI), as part of the venture. The entire enterprise132 was structured so that on any equipment-leasing transaction on which the bid submitted to Southwestern Bell by McQuade for ITEL met the necessary criteria, McQuade and Acker would share various 139 profits and commissions. This scheme continued through 1977, during which time McQuade and SFI received their shares of profits and income.Respondent determined in the notices of deficiency that the McQuades failed to report as income certain amounts received as a result of the venture as income, including income from kickbacks, salary from consulting fees, and capital gain from distributions from SFI, and McQuade's distributive share of partnership income arising out of the venture.At some point prior to the issuance of the deficiency notices, McQuade and SFI filed for bankruptcy, i.e., for an arrangement under chapter 11. The Internal Revenue Service was the sole creditor. Also, on May 23, 1979, McQuade died leaving his wife as executrix of his estate.On October 28, 1983, the Bankruptcy Court for the Northern District of Texas, Dallas division, entered findings of fact and conclusions of law in the case of Systems Financing, Inc., and Joel Herndon McQuade v. Internal Revenue133 Service, BK Nos. 3-79-0194-F & 3-79-0195-F (Bankr. N.D. Tex 1983). These findings were based on a trial, during which the United States introduced as evidence certain tax computations based on its income analysis for Elana T. McQuade (hereinafter referred to as Elana or petitioner) as well as for Joel. Both notices of deficiency were introduced as evidence, as were the joint Federal income tax returns for the McQuades for the years at issue here.After setting out in detail the items of income, loss, deductions, and credits for the McQuades, as part of its findings of fact, the Bankruptcy Court found --74. For the taxable year 1975, the McQuades has no federal income tax liability. * * 100. The McQuades had no taxable income in 1976 and, therefore, had no federal income tax liability in 1976. * 122. The McQuades had no federal income tax liability for 1977.123. For the taxable years 1975, 1976 and 1977, respectively, the amounts listed for each item of income, gain, loss, deduction or credit of the McQuades and SFI in the schedules prepared by Mr. Dick Holmes and introduced at trial as Plaintiff's Exhibits 13 through 19 are true and correct. * [Emphasis134 added.]The court reiterated in its conclusions of law that "4. The McQuades have no federal tax liability for the taxable years 140 1975, 1976 and 1977." (Emphasis added.) Thereupon the court entered an order on October 28, 1983, "that the claims of the Internal Revenue Service filed herein be disallowed." The determination of Joel's income tax liability for 1976 and 1977 was a necessary finding by the Bankruptcy Court. A fortiori, a determination on Elana's notice, identical in every respect with Joel's, must obtain the same result, i.e., that she likewise had no tax liability for 1976 and 1977.The United States filed a notice of appeal from the judgment of the Bankruptcy Court on November 2, 1983. Subsequently, on January 2, 1984, the United States voluntarily moved to dismiss its appeal on the ground that "it has determined that no appeal should be taken in this matter." 3 The motion was granted, and the appeal was dismissed by order entered on February 1, 1984.135 Thus, and both parties agree, the decision of the Bankruptcy Court is final for all purposes.Petitioner subsequently filed her motion for summary judgment in this Court on the grounds of collateral estoppel, res judicata, and the contention that respondent has not shown that any genuine issue of material fact exists in this case. 4Petitioner asks us to determine that respondent is collaterally estopped from determining a deficiency against her for 1976 and 1977 because the Bankruptcy Court has already determined in a final, judicial proceeding that she and her deceased husband had no tax liability136 for those years. More specifically, we must decide whether petitioner Elana, who was not a named party in the bankruptcy proceeding, should nevertheless be considered bound by the proceeding because she was an interested party and directed the course of action of the suit. In support of her motion, petitioner argues that she was a real party in interest in the bankruptcy proceeding because she was named by respondent individually as surviving wife and as executrix in the notice of deficiency sent to McQuade's estate. She claims that the same issues of law and fact that are involved in the present case were adjudicated in the bankruptcy 141 proceeding. Alternatively, petitioner argues that the judgment of the Bankruptcy Court is res judicata as to the present case because there exists sufficient identity of parties and issues.Finally, petitioner contends she is entitled to summary judgment because no material facts are at issue here. She has set forth the facts as determined in the prior suit; respondent withdrew his appeal stating that no appeal should be taken; and respondent has not come forward with any facts to controvert the findings of the Bankruptcy Court.Respondent, 137 of course, argues that petitioner was not a party to the prior lawsuit and asks us to hold that, as such, she cannot use nonmutual offensive collateral estoppel to forestall respondent from obtaining his day in court with respect to her tax liabilities for the years in dispute. Respondent further claims, somewhat vaguely, that the thrust of a bankruptcy case, where a judge is trying to protect all creditors, especially small businesses, is different from a tax case. Thus, apparently, his contention is that the Tax Court should not allow petitioner to use the findings of the prior suit to collaterally estop respondent from determining deficiencies here. He also contends that his voluntary dismissal of the McQuade bankruptcy appeal should not be taken to mean that the appeal did not have merit. 5138 The general principle of res judicata provides that once a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are bound as to each matter that sustained or defeated the claim, and as to any other admissible matter that could have been offered for that purpose. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 597 (1948).Where the second action between the same parties is on a different claim, however, the judgment in the prior action operates as an estoppel as to those matters at issue or points controverted, and upon which the findings or verdict were rendered. Commissioner v. Sunnen, supra at 597-598. In other words, once a party has fought out a matter in litigation with 142 the other party, "he cannot later renew that duel." Commissioner v. Sunnen, supra.The Supreme Court further developed the rules for application of collateral estoppel in Montana v. United States, 440 U.S. 147">440 U.S. 147 (1979). There, the Court held that the United States, which directed and financed the first139 litigation in State court, was collaterally estopped in a subsequent suit it, itself, filed in Federal court from disputing rights, issues, and facts previously determined by a court of competent jurisdiction. The Supreme Court held that where the United States, even though not a (named) party to the prior suit, has assumed sufficient control over the litigation, and has a sufficient and direct financial or proprietary interest in the outcome of the suit, then the principles of collateral estoppel should apply to the United States. Montana v. United States, supra at 153-154.the persons for whose benefit and at whose direction a cause of action is litigated cannot be said to be "strangers to the cause. * * * [One] who prosecutes or defends a suit in the name of another to establish and protect his own right, or who assists in the prosecution or defense of an action in aid of some interest of his own * * * is as much bound * * * as he would be if he had been a party to the record." * * * [Montana v. United States, supra at 154, citing Souffront v. Compagnie des Sucreries, 217 U.S. 475">217 U.S. 475, 486-487 (1910).]140 Whether a litigant has exercised control over the prior litigation is essentially a factual analysis. See Montana v. United States, supra at 155. In the present case, Elana, executrix of Joel's estate and clearly a person with a definite interest in the outcome of the bankruptcy proceeding, had a sufficient financial stake in the litigation for her not to be considered a "stranger to the cause." No evidence was introduced by either party here to elucidate the full extent of petitioner's participation in the bankruptcy suit, although her attorneys assert that she did take an active role. Respondent does not dispute this assertion nor does he argue that she was not actively involved. Nevertheless, the facts are clear and undisputed that the notice of deficiency respondent issued to petitioner and other evidence of her tax liability for the years at bar were introduced into evidence in the prior litigation, and the court made a determination of her income tax liabilities. Moreover, the fact remains that the same issues decided in the prior proceeding are those presented here.143 In Parklane Hosiery Co. v. Shore, 439 U.S. 322">439 U.S. 322 (1979),141 the Supreme Court distinguished the traditional difference between offensive use of collateral estoppel, where a plaintiff seeks to foreclose a defendant from raising an issue the defendant has previously litigated and lost, and its defensive use, where a defendant seeks to preclude a plaintiff from raising an issue the plaintiff has previously lost. The Court concluded that the offensive use of collateral estoppel should be allowed and that the trial courts should have "broad discretion" to determine when a party to the later suit could assert nonmutual offensive collateral estoppel against the other litigant, a party to a prior suit. Parklane Hosiery Co. v. Shore, supra at 331. 6142 The Court in Parklane Hosiery, however, concluded that certain circumstances might justify reluctance to allow the offensive use of collateral estoppel by a nonparty to the prior litigation; for example, where the plaintiff could easily have joined in the earlier action or the defendant in the first action might have had little incentive to mount a vigorous defense. But where none of these circumstances, nor other compelling reasons, are present, the purposes of collateral estoppel are met whether or not the party seeking to apply the principle was a litigant in the prior suit.In a prior opinion involving these issues, Graham v. Commissioner, 76 T.C. 853">76 T.C. 853 (1981), the taxpayer's former wife had transferred a secret formula to a corporation they controlled. We find that Graham is distinguishable from the instant case in that, here, petitioner in the prior bankruptcy litigation is to be construed a "party" in all but a technical sense. In Graham, the taxpayer and his former wife received royalties from the proceeds of sales of products using the formula. After respondent issued notices of deficiency jointly for certain years, and individually143 to the taxpayer and his former wife for later years, she paid the tax for 1 year and filed suit for refund in the U.S. District Court. That court held that the transaction was a sale of nondepreciable property. The Tax Court, in the taxpayer-husband's later suit, used the broad discretion 144 granted to trial courts by the Supreme Court in Montana v. United States, supra, and held that Graham was an appropriate case in which to collaterally estop respondent from asserting the same position he had held in the former wife's case. Graham v. Commissioner, supra at 858. The issues decided by the District Court were the same as would be decided by the Tax Court; the Government had had a full and fair opportunity to litigate its case before the District Court; and the taxpayer was not forum shopping. Since Graham is distinguishable from the present case, we leave for another day the effect, if any, of United States v. Mendoza, 464 U.S. 154">464 U.S. 154, 157-158 (1984), on Graham.Respondent strenuously argues that the instant case is controlled by United States v. Mendoza, supra,144 in which the Supreme Court held that under certain circumstances the United States cannot be collaterally estopped on an issue adjudicated against it in an earlier lawsuit brought by a different party. United States v. Mendoza, 464 U.S. at 155. For the reasons we now discuss, we find Mendoza to be inapplicable to the present situation.In Mendoza, the Court dealt with an issue involving the constitutionality under the Nationality Act of 1940 of a decision to withdraw a naturalization examiner from the Philippines in 1945. The Court found that where the Government is litigating issues involving legal questions of substantial public importance, allowing nonmutual collateral estoppel against it could thwart the development of important questions of law by freezing the first final decision on a particular legal issue. United States v. Mendoza, supra.The Supreme Court held in Mendoza that the Government was not bound by a decision in a prior case that involved different litigants. 7 See and compare United States v. Stauffer Chemical Co., 464 U.S. 165">464 U.S. 165 (1984), in which the Supreme145 Court allowed the Stauffer company to assert collateral estoppel successfully against the United States in a later suit involving the issue of whether private contractors were authorized representatives under 145 provisions of the Clean Air Act, Pub. L. 95-95, 91 Stat. 686, 42 U.S.C. sec. 7414(a)(2) (1976 and Supp. V 1981). The United States had already litigated the issue against one of the company's other plants in another location and lost. The Court called this principle "mutual defensive collateral estoppel," where "Like Montana the case at bar involves the defensive use of collateral estoppel against the government by a party to a prior action." United States v. Stauffer Chemical Co., 464 U.S. at 170.146 In Mendoza, the Court distinguished the different situation in Montana v. United States, supra, where the Government was bound by the prior decision because it had financed and controlled the first litigation; thus for all practical purposes, the United States had been a party in the first case. United States v. Mendoza, 464 U.S. at 159.Here we have a situation similar to that in Montana where the unnamed party in the former suit was nevertheless an interested party, took part in the action, and was financially affected by the outcome. Thus, petitioner constituted a "party" in all but a technical sense. As a result, mutuality of parties exists sufficient to activate the principle of estoppel, so that petitioner is not attempting to use "nonmutual offensive collateral estoppel" against respondent.The Bankruptcy Code, Pub. L. 95-598, 92 Stat. 2582, 11 U.S.C. sec. 505(a)(1) (1982 ed.), authorizes a bankruptcy court to "determine the amount or legality of any tax." This Court, in Comas, Inc. v. Commissioner, 23 T.C. 8">23 T.C. 8, 12 (1954), has concluded that147 "Congress intended that once a bankruptcy court allowed a deficiency for which claim was filed and that court's action became final, the amount and validity of the deficiency was not thereafter to be the subject of a consideration by the Tax Court." 8The bankruptcy proceeding with which we are concerned determined the tax liability of the McQuades and of Joel's wholly owned corporation, SFI, for the same years now before this Court. Although the court did not have petitioner before it as a named party, the deficiencies determined against 146 McQuade's estate named her as the executrix and surviving wife. The court also had before it the deficiency notice148 naming petitioner individually and other documents relating to petitioner's tax liability. Furthermore, the deficiencies determined against her here involve exactly the same issues that were decided in the bankruptcy proceeding, i.e., the income tax deficiencies and fraud additions to the tax arising from Joel's activities in the venture with Ray Acker and others in the lease transactions.Because we decide that respondent is collaterally estopped from asserting the issues already decided by the Bankruptcy Court, a court of competent jurisdiction, we grant petitioner's motion for summary judgment. It cannot be legitimately disputed that she has no Federal income tax liability for the years 1976 and 1977, so there are no genuine issues as to any material facts remaining in this case. 9 Therefore,An appropriate order and decision will be entered.149 Footnotes1. This case was assigned pursuant to Delegation Order No. 8 of this Court, 81 T.C. XXV (1983).↩2. All Rule references are to the Tax Court Rules of Practice and Procedure.↩3. Respondent has come forward with no other or more specific rationale for voluntarily dismissing the appeal in the bankruptcy case.↩4. Petitioner's prayer for costs and attorneys' fees pursuant to the Equal Access to Justice Act of 1980, Pub. L. 96-481, 94 Stat. 2321, 5 U.S.C. sec. 504 (1982 ed.)↩, in her petition is not a part of this summary judgment motion. Petitioner must file a motion under Rule 231(a)(2) to claim reasonable litigation costs; thus, her prayer for costs and attorneys' fees are not a part of this case.5. Respondent's attempt to raise petitioner's Fifth Amendment right to due process is wholly meritless. Suffice it to say that he has no standing to do so. Baker v. Carr, 369 U.S. 186">369 U.S. 186, 204-206↩ (1962).6. Collateral estoppel serves to "relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication." United States v. Mendoza, 464 U.S. 154">464 U.S. 154, 158 (1984), citing Allen v. McCurry, 449 U.S. 90">449 U.S. 90, 94↩ (1980).7. See and compare Sun Towers, Inc. v. Heckler, 725 F.2d 315">725 F.2d 315 (5th Cir. 1984), in which the court held that United States v. Mendoza, supra, foreclosed the use of nonmutual collateral estoppel against the Secretary, Department of Health and Human Services, who had denied payment of certain costs claimed to be due under the Medicare Act. The court noted that the scope of the Mendoza decision was ambiguous, but found that Mendoza applied "to all issues." Sun Towers, Inc. v. Heckler, supra↩ at 323 n. 8.8. See also Huckabee Auto Co. v. United States↩, an unreported case ( Bankr. M.D. Ga. 1984, 84-2 USTC par. 9841), where the Bankruptcy Court for the Middle District, Georgia, held that once a ch. 11 plan is confirmed by the court, the plan is binding on the United States and it may not attempt to collect the tax in another manner.9. There can be no valid contention that respondent's fraud allegations are still at issue. Suffice it to say that if there is no tax liability, and therefore no underpayment, there cannot be an addition to tax for fraud. See sec. 6653(b)(1).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622103/	Estate of Charles C. Hanch, Deceased, Hazel M. Hanch, Executrix, Petitioner, v. Commissioner of Internal Revenue, RespondentHanch v. CommissionerDocket No. 30093United States Tax Court19 T.C. 65; 1952 U.S. Tax Ct. LEXIS 65; October 27, 1952, Promulgated 65 Decision will be entered under Rule 50. 1. The decedent had a one-third interest in the estate of his deceased wife, which had not yet been distributed at the date of his death. Distribution was made to his estate somewhat less than two months after his death. Held, the decedent's interest in his wife's estate must be measured by one-third of the value of her estate as it was composed on the date of his death, rather than by the specific assets that were subsequently distributed to his estate. Section 811 (a), I. R. C.2. Held, that one-third of the net assets of the wife's estate, as it was composed on the date of her husband's death, but valued as finally determined in her gross estate, is the measure of the deduction for previously taxed property. Section 812 (c), I. R. C.3. An Illinois probate court approved a $ 20,000 award to decedent's 48-year-old daughter for her support for a period of 9 months after his death. Held, the estate is not entitled to a deduction by reason of that award, since the daughter was neither "dependent" upon the decedent nor was the award "reasonably required" for her support during the settlement of the decedent's estate. Section66 812 (b) (5), I. R. C.James J. Costello, Jr., Esq., and K. Raymond Clark, Esq., for the petitioner.Harold H. Hart, Esq., for the respondent. Raum, Judge. Opper, J., dissenting. RAUM66 FINDINGS OF67 FACT AND OPINION.The Commissioner of Internal Revenue determined an estate tax deficiency in the amount of $ 7,959.77 against the estate of Charles C. Hanch, who died on October 22, 1946. Several adjustments made by the Commissioner are no longer in dispute. The decedent's wife, Dorothy M. Hanch, had died intestate on August 9, 1945, and he became entitled to one-third of her estate. However, no distribution had been made to him prior to his death. As a result, two related issues are raised: (1) In determining the husband's gross estate, how much shall be included with respect to his interest in his wife's estate? (2) How shall the deduction for prior taxed property be computed under section 812 (c)? A third question for decision is whether a $ 20,000 award approved by an Illinois probate court to the decedent's adult daughter is deductible under section 812 (b) (5) of the Internal Revenue Code.A stipulation of facts filed by the parties is hereby adopted as part of our findings and is incorporated herein by reference. Such additional facts as may be required for the disposition of this case will be stated in the course of the opinion.1. The decedent's estate was valued 68 as of October 22, 1947, one year after death, as permitted by section 811 (j) of the Code. The estate of the prior decedent (Dorothy) consisted primarily of corporate securities plus some cash; and distribution of the assets of her estate was made on December 18, 1946, more than a month after Charles' death. The securities composing Dorothy's estate on October 22, 1946, were as follows:Number of sharesDescription of stock300Commercial Investment Trust Corporation3802May Department Stores Co.100Texas Gulf Sulphur Co.100Natomas Co.50Standard Brands, Inc.171National Distillers Products Corporation5000Crystal Silica Co.In the distribution that was made on December 18, 1946, Charles' estate did not receive precisely one-third of the shares of stock listed above. Rather, the distribution to his estate consisted of the following:Number of sharesDescription300Commercial Investment Trust Corporation1000May Department Stores Co.100Texas Gulf Sulphur Co.100Natomas Co.50Standard Brands, Inc.57National Distillers Products CorporationCash in the amount of $ 206.08.67 The first issue is whether the amount to be included in 69 Charles' gross estate is one-third of the value of Dorothy's estate as it was composed on October 22, 1946, but valued as of October 22, 1947, or whether it is the value, as of October 22, 1947, of the specific assets distributed to Charles' estate on December 18, 1946. The amounts involved are not in dispute. The amount to be included if the first method is adopted is $ 64,274.44, but if it is computed under the second method it is $ 68,062.77.The Commissioner insists that the first method must be employed. He points to section 811 (a), which requires the inclusion of all property "To the extent of the interest therein of the decedent at the time of his death." These provisions contemplate that the decedent's interest in property be determined as of the date of his death. And at Charles' death, he had a one-third interest in the undivided net assets of Dorothy's estate as it was then composed. That is the interest which must be included in his gross estate (cf. Estate of Eugene L. Bender, 41 B. T. A. 80, 83, affirmed, sub nom. Bahr v. Commissioner, 119 F. 2d 371 (C. A. 5), certiorari denied 314 U.S. 650">314 U.S. 650),70 and it is that interest which is valued on the optional valuation date rather than the specific items that were distributed to Charles' estate after his death.It is clear that the Commissioner's method operates to petitioner's advantage on this issue, and petitioner has resisted it only because of the possible adverse consequences that it might have on its deduction for prior taxed property. Although the matter may not be entirely free from doubt, we think that the Commissioner's method is correct.2. Our decision on the first issue goes far towards resolving the second, namely, the amount to be allowed as a deduction to petitioner for previously taxed property under section 812 (c). 1 The deduction is allowable "only in the amount finally determined as the value of such property in determining the value of * * * the gross estate 68 of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate * ."71 The difference between the parties herein relates to the computation of the value of the property which was included in the gross estate of the prior decedent. If the "property" is to be regarded as the specific shares of stock plus the small amount of cash in fact distributed on December 18, 1946, then the value of such property as finally determined in the estate of the prior decedent was $ 60,802.96. On the other hand, if the "property" is to be regarded as one-third of the net assets of the prior decedent's estate, as it was composed on October 22, 1946, the value of one-third of such assets as finally determined in the gross estate of the prior decedent would be a lesser amount.Petitioner contends that it is the amount of $ 60,802.96 that is the measure of the deduction. Its contention is closely related to its position on the first issue that the property which must be included in the gross estate of the second decedent consists of the specific securities and cash actually distributed after the death of the second decedent.Section 812 (c) speaks of allowing the deduction only in the amount finally determined as the value of "such property" in determining the gross estate72 of the prior decedent and only to the extent that the value of "such property" is included in the gross estate of the second decedent. It seems plain to us that the term "such property," as used in section 812 (c) refers to the property that was properly included in the estate of the second decedent. And in this case that property, in accordance with our decision on the first issue, was one-third of the assets of the prior decedent's estate as it was composed on the date of death of the second decedent.Accordingly, we must rule against the petitioner on this issue, and we hold that the deduction must be measured by one-third of the net assets of the prior decedent's estate as it was composed on October 22, 1946, but valued in the amount finally determined as the value of such assets in determining the gross estate of the prior decedent. However, we think that the method employed by the respondent in attempting to achieve this result was incorrect. His computation is set forth in the margin. 273 69 The difficulty with respondent's computation is that he takes the entire gross estate of the prior decedent as it existed at the time of the prior decedent's death, and undertakes to subtract therefrom debts, charges, and Federal estate taxes, in arriving at "net residue of estate," one-third of which he treats as the share of the second decedent. It is highly dubious whether such computation is consistent with the decision in Estate of Edith P. Garland, 46 B. T. A. 1243, affirmed sub nom. Commissioner v. Garland, 136 F. 2d 82 (C. A. 1). The correct computation, we think, requires respondent to take the securities that comprised Dorothy's estate as of October 22, 1946, value them as they were finally valued in determining Dorothy's gross estate, make adjustments for cash receipts and debts accrued to October 22, 1946 (such as were made in valuing these assets as of October 22, 1947), and then divide the result by three. Such computation is based upon Charles' one-third interest in the estate of Dorothy as it was composed on October 22, 1946, and does not run afoul of the decision in the Garland case. 74 The valuations of the specific securities comprising Dorothy's estate as finally determined in determining her gross estate are contained in the stipulation filed by the parties herein, and by the use of such valuations the correct computation in this case can be made under Rule 50.3. The third issue is whether a $ 20,000 award approved by an Illinois probate court to petitioner's adopted 48-year-old daughter, Hazel M. Hanch, is deductible under section 812 (b) (5) of the Code. The deduction is not available to the estate of any decedent dying after September 23, 1950, the date of enactment of the Revenue Act of 1950, which (by section 502) eliminated these provisions from the Code but left them applicable with respect to estates of decedents who had died theretofore. Section 812 (b) (5) allowed a deduction from the gross estate for amounts "reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent."Hazel M. Hanch is the daughter of Dorothy M. Hanch; Charles M. Hanch adopted her in 1914 when she was 16 years old. At the time of the decedent's death, Hazel was unmarried and had resided with him and his wife75 since childhood; during the fifteen years prior to his death their residence was a ten-room apartment at 1400 Lake Shore Drive, Chicago, Illinois. Hazel was not gainfully employed, but she was in good health and was active in social affairs and charitable organizations.Charles, Dorothy, and Hazel each had independent means. Their gross income for the years 1943-1945, as reported on their Federal income tax returns was as follows: 70 YearCharlesHazelDorothy1943$ 15,337.38$ 4,168.75$ 8,582.60194415,154.384,367.408,292.68194516,413.715,308.391 4,052.10Dorothy had been an invalid for some eight years prior to her death on August 9, 1945, and Hazel's time and effort during this period were devoted entirely to the management of the household and care for her mother. During this period Hazel had paid servants' wages and part of the household expenses, and had also paid for sick-room supplies. On June 12, 1946, Charles gave Hazel a block of stock said to be worth about $ 20,000 in partial recognition of her contribution towards maintenance of the household and assistance to her mother.Upon her mother's death, Hazel76 became entitled to two-thirds of her net estate, which was actually distributed in December 1946. She was also Charles' sole heir.The annual living expenses of the decedent, his wife, and daughter, during 1943, 1944, and 1945 were about $ 25,000. The family employed two maids and a cook. The household furnishings were valued in the estate tax returns of Charles at $ 1,630.Hazel continued to reside at 1400 Lake Shore Drive, Chicago, Illinois, for approximately one year after Charles' death, when she married and thereafter moved to California.The "appraisers" appointed for the estate of Charles filed with the Probate Court of Cook County, Illinois, their award (dated January 6, 1947) to Hazel, consisting of family pictures, wearing apparel, jewels, and ornaments, as well as the sum of $ 20,000 for "support" for a period of nine months after the death of the decedent. The award was made pursuant to Ill. Rev. Stats. (1945), c. 3, secs. 330 and 331. The award was approved by the Probate Court on January 8, 1947. Payment of the aforesaid "child's award" was made by the decedent's estate in installments on January 16, January 24, May 23, and August 22, 1947, with a final payment77 of $ 265 on January 7, 1948. The estate of the decedent remained open until June 1949.We hold that Hazel was not "dependent" upon the decedent within the meaning of section 812 (b) (5), and, in any event, that the award was not "reasonably required" for her support during the settlement of the decedent's estate. Hazel was about forty-eight years of age at the time of his death, and, although not gainfully employed, was in good health and active. She certainly was not legally a dependent of Charles. True, she had been making her home with her parents, but she had independent means, and there is no ground based upon ill health, poverty, or any other consideration, which could be urged as a reason for treating her as a legal dependent of Charles; nor has any 71 such ground been advanced by petitioner. This case is therefore sharply to be distinguished from those in which deductions have been allowed in connection with awards to decedents' widows or minor children, who, although having independent means in some cases, are nevertheless generally regarded as legally dependent upon their husbands or fathers. Cf. Estate of Peter D. Middlekauff, 2 T. C. 203;78 Estate of Ralph Rainger, 12 T.C. 483">12 T. C. 483. It is quite immaterial that the award herein, euphemistically referred to in situations such as this one as a "child's award," was made in accordance with Illinois law. The question here is one of applying the Federal statute, and not even under Illinois law is it contended that Hazel was a dependent. The award was based merely upon those provisions of Illinois law which direct that when a decedent leaves no surviving spouse, "There shall be allowed to all children of the decedent under twenty-one years of age and all female children residing with him at the time of his death an award equivalent to a widow's and child's award * * ." Ill. Rev. Stats. (1945), c. 3, sec. 331.Petitioner urges that since Hazel had in fact been residing with her parents, she was actually a dependent within the meaning of the Federal statute. It is far from clear that any such result would follow even if her parents had in fact furnished her support. But cf. Estate of Daisy W. Jacobs, 8 T.C. 1015">8 T. C. 1015. However, the record in this case does not contain satisfactory proof that her parents, and decedent in79 particular, did provide her with support. To be sure, she resided in their apartment. But she had been contributing substantial amounts for a number of years towards its maintenance. While it is true that the decedent felt a moral obligation to repay her for such contribution as well as for her efforts in caring for her mother, and actually did give her some securities in partial recognition of her contribution, the fact remains that she did help in shouldering the burden of running the household, and we cannot say, on this record, that she was in fact a dependent of the decedent. Hazel did not appear as a witness, and there is no satisfactory proof that, at the time of the decedent's death, Hazel was not paying her share of the expenses. We must rule that she was not "dependent upon the decedent," under section 812 (b) (5).Moreover, even if it could be said that she was "dependent," we think the amount involved was not "reasonably required" for her support during the settlement of the estate. We have found that the annual living expenses of Charles, Dorothy, and Hazel during 1943, 1944, and 1945 were about $ 25,000, and the record suggests, and certainly does not satisfactorily80 show otherwise, that these expenses were met out of the combined incomes of all three of them. It must be remembered, furthermore, that at the time of the "child's award" herein, Dorothy's estate had already been distributed, with two-thirds 72 of it going to Hazel. Thus, at that time, Hazel not only had income from her own property, but also a newly acquired source of income from the estate of her mother. And, although the expenses of the entire family had formerly been about $ 25,000 a year, it seems clear that Hazel's requirements, merely for her own expenses, were considerably less. The "child's award" of $ 20,000 covered a 9-month period, and in about a year after Charles' death, Hazel was married. Taking all these facts into account, we are convinced that the $ 20,000 award was not "reasonably required" for Hazel's support. She was Charles' sole heir, and the award had the effect merely of distributing a portion of his estate to her.4. The petition for review seeks an additional deduction to the estate for attorneys' fees in these proceedings. Although this matter has not been discussed by the parties, the deduction is available under the statute, and if the parties81 can agree upon the amount involved, it will be taken into account in the computation under Rule 50; otherwise, it may be considered under Rule 51.Decision will be entered under Rule 50. OPPEROpper, J., dissenting: It is stipulated that the sums in question were actually paid out by petitioner for the daughter's support. See Regs. 105, sec. 81.40. The other statutory condition that they be also "reasonably required" to fulfill the daughter's "standard of living" is met at least prima facie by the court order requiring the executors to make payments, as here they actually did. Mary M. Buck et al., Executors, 25 B. T. A. 780, 791, reversed on other grounds, (C. A. 9) 73 F. 2d 760. And the other reasons given for reaching the same result are, in my view, untenable. Notwithstanding the temporary nature of the question, in view of the amendments contained in the Revenue Act of 1950, they should not be regarded as a sound justification for the position taken.The daughter was, under the decided cases, as much a dependent in the legal sense as a wife or minor child. In Estate of Daisy W. Jacobs, 8 T. C. 1015,82 we held by implication that if it could be shown that the surviving husband of a deceased wife had actually been supported by the wife, he could, although an adult, be treated as a dependent under the Federal statute. "The fact that the widow had income of her own and did not have to have the allowance made by the Probate Court is beside the question." Estate of Peter D. Middlekauff, 2 T.C. 203">2 T. C. 203. See also Estate of Ralph Rainger, 12 T.C. 483">12 T. C. 483.Since the showing here is adequate that the daughter did in fact live with decedent and was in fact dependent in the sense in which that term has been used in other cases construing this statute, I am forced to note my dissent on the final issue. Footnotes1. Internal Revenue Code:SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --* * * (c) Property Previously Taxed. -- An amount equal to the value of any property (1) forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, * * where such property can be identified as having been received by the decedent from * * * such prior decedent by * * * bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received. * * * This deduction shall be allowed only where * * * an estate tax imposed under this chapter or any prior Act of Congress, was finally determined and paid by or on behalf of * * * the estate of such prior decedent, * * * and only in the amount finally determined as the value of such property in determining the value of * * * the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate, * * *.↩2. The computation of the deduction for property previously taxed is as follows:↩Gross estate of Dorothy M. Hanch as finallydetermined$ 178,439.11Less: bank account in joint tenancy with daughter of Dorothy M.Hanch469.23$ 177,969.88Less:Debts and charges$ 8,013.55Federal estate tax as finally determined23,100.8631,114.41Net residue of estate$ 146,855.47One-third share of Charles C. Hanch48,951.82Less:State inheritance tax applicable to this decedent575.47Net value of decedent's interest$ 48,376.35Amount of property previously taxed otherwisedeductible$ 48,376.351. To Aug. 9, 1945.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622105/	Orange and Rockland Utilities, Inc., Orange and Rockland Utilities, Inc. and Subsidiaries; Rockland Electric Company, Petitioners v. Commissioner of Internal Revenue, RespondentOrange & Rockland Utilities, Inc. v. CommissionerDocket No. 10715-82United States Tax Court86 T.C. 199; 1986 U.S. Tax Ct. LEXIS 152; 86 T.C. No. 14; February 18, 1986, Filed 152 Decision will be entered under Rule 155. Petitioners, regulated public utility companies, reported income on an accrual calendar year basis. Petitioners employed the cycle meter reading method of accounting for tax purposes. Consequently, revenue generated for utility services furnished after the last cycle meter reading date in December was not accrued until after the close of the taxable year. Expenses related to such utility services were deducted in the taxable year such service was furnished to the customers. For financial statement purposes, petitioners accrued so-called unbilled revenue relating to utility services furnished between the last cycle meter reading date in December and the end of the calendar year. Because of the foregoing disparity between income recognition of unbilled revenue for Federal income tax and financial accounting purposes, respondent determined that unbilled revenue was accruable for tax purposes due to the conformity requirement within Rev. Rul. 72-114, 1 C.B. 124">1972-1 C.B. 124. Held, the cycle meter reading method of accounting clearly reflects income under sec. 446(b), I.R.C. 1954, even though petitioners153 record unbilled revenue for financial accounting purposes. Public Service Co. of New Hampshire v. Commissioner, 78 T.C. 445 (1982), followed. Held, further, the cycle meter reading method of accounting is a permissible method of accrual accounting under sec. 446(c)(2), I.R.C. 1954. John C. Richardson and Alison E. Clapp, for the petitioners.David N. Brodsky, for the respondent. Hamblen, Judge. HAMBLEN200 Respondent determined deficiencies with respect to the Federal income tax liability of petitioners as follows:PetitionerYearDeficiencyOrange & Rockland Utilities, Inc.1976$ 4,239,516(O & R)Rockland Electric Co. (Rockland)19762,813Orange & Rockland Utilities, Inc.,19771,651,500and Subsidiaries (O & R group)After concessions, 155 1 the issue presented for decision is whether petitioners may use the "cycle meter reading" method of accounting for Federal income tax purposes where such method does not conform to the method of accounting used by petitioners for financial statement and regulatory reporting purposes. 2FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly. 156 The stipulation of facts and attached exhibits are incorporated by this reference.O & R group is an affiliated group of corporations within the meaning of section 1504. 3 O & R, as parent of the O & R Group, filed a consolidated federal income tax return on behalf of the O & R group for the calendar yearend 1977. O & R filed a separate Federal income tax return for the calendar year 1976. Rockland is a member of the O & R group and was included in the 1977 O & R group consolidated Federal income tax return. Rockland filed a separate 1976 Federal income tax return.201 Petitioners are regulated public utilities. Petitioners have been engaged in the distribution of utility service for over 50 years and furnish utility service to approximately 275,000 customers. Petitioners maintained a principal place of business157 at Pearl River, New York. O & R furnished gas and electric service in southern New York State and was subject to regulation by the New York Public Service Commission and the Federal Power Commission. Rockland furnished electric service in northern New Jersey and was subject to regulation of the Board of Public Utility Commissioners of the State of New Jersey and the Federal Power Commission. Pike County Light & Power Co., an affiliated member of the O & R group included in the 1977 O & R group consolidated Federal income tax return, furnished gas and electric service in Pike County, Pennsylvania, and was subject to regulation by the Pennsylvania Public Utility Commission and the Federal Power Commission.The applicable public utility commission regulations and rate tariffs did not permit petitioners, except in unusual credit situations, to bill customers more frequently than monthly or bimonthly depending upon the class of service. These regulations and tariffs provided for customer billing, except in unusual credit situations, only after a meter reading or an interim estimate. Petitioners could not bill customers prior to the next cycle meter reading date for utility service158 furnished between the last cycle meter reading date and the end of the calendar year unless new tariffs were submitted to and approved by the appropriate regulatory agencies.Under the applicable public utility commission regulations and rate tariffs, petitioners were permitted to terminate service to a customer for nonpayment, except in unusual credit situations, only upon nonpayment of a bill, for a specified period and under specified circumstances.The applicable public utility commission regulations and rate tariffs determined the allowable rates charged for utility service and varied depending upon usage, class of service, and demand.In accordance with the applicable tariffs, petitioners billed customers monthly or bimonthly, depending on the class of service and related meter reading and billing cycle. As is 202 customary within the industry, petitioners did not read all customer meters on the last day of each month. Petitioners assigned to each customer a certain date of each month for meter reading purposes. Petitioners read the meters of residential gas heating customers on the assigned date on a bimonthly basis and estimated the meter reading for interim months. 159 For residential electric customers other than heat and hot water customers, petitioners also read the customers' meters on the assigned date on a bimonthly basis and estimated the meter reading for interim months. However, for residential heat and hot water electric customers and for commercial and industrial electric customers, petitioners read the customers' meters on an assigned date every month. The assigned date on which a customer's meter was read or was estimated for interim months where applicable is referred to herein as the "cycle meter reading date."Petitioners prepared bills according to the applicable tariff rate schedules approximately 2 to 5 days after each cycle meter reading date. Large power customers were billed in the same manner. However, petitioners attempted to coordinate the cycle meter reading date for such customers with the close of each month.From their incorporation over 50 years ago through and including the taxable years here involved, petitioners have consistently for Federal income tax purposes accrued revenue from sales of gas and electricity as income on the basis of their meter reading and billing cycles. Under this method, petitioners accrued160 as income all amounts billable during the year based upon their meter reading and billing cycles. In each year, therefore, petitioners accrued the gross income billable for the gas or electricity used (or, as to interim months, where applicable, estimated to have been used) for all cycle meter reading dates falling within the year. Accordingly, the income accrued during the year included the revenue for gas or electricity furnished to a customer between the last cycle meter reading date of the prior year and the end of such prior year. Income accrued during a current taxable year did not include the revenue for gas or electricity furnished to a customer between the last cycle meter reading date of that year and the end of 203 that year. Such income is sometimes referred to within the industry as "unbilled revenue."Petitioners deducted for Federal income tax purposes the cost of producing and delivering gas and electricity delivered after the last meter reading date in the year through the end of the year, but did not deduct the cost of meter reading and billing for such gas and electricity as these activities had not been performed by the end of the year.In contrast with161 the method of accounting used for Federal income tax purposes, petitioners recorded estimated unbilled revenue at the end of each year for book and financial accounting purposes, a financial reporting practice used for years beginning after December 31, 1969. For all prior years, petitioners used the cycle meter reading method of accounting for both financial statement and tax purposes.The unbilled revenue was included in income by petitioners in all its certified financial reports submitted to shareholders, creditors, and regulatory agencies. The amount of unbilled revenue so recorded as income for book and financial accounting purposes was not, however, included within the accounts receivable in the financial accounts of petitioners but was instead included in a separate category entitled "accrued utility revenue."The amount of "accrued utility revenue" for financial reporting purposes as of December of each year in issue for electric customers was determined as follows: An actual meter reading is taken for each customer whose meter is read on December 31 in a given class of customers. Approximately one-thirtieth of petitioners' customers are on a December 31 meter reading 162 cycle. For residential electric customers, actual usage of December 31 cycle customers for the period ending December 31 is then compared with actual usage of such customers for the immediately preceding meter reading period to develop a growth factor. Then, for residential electric customers, the actual daily usage to the last meter reading date is multiplied by the growth factor thus developed and, in turn, by the number of days of usage to be estimated as "accrued utility revenue" for each such customer whose meter is not read on December 31. For commercial and industrial customers, actual daily 204 usage to the last meter reading date is multiplied by the number of days of usage to be estimated as "accrued utility revenue." The sum of "accrued utility revenue" thus determined for all customers is the total "accrued utility revenue" at December 31 of each year. The procedure for computing "accrued utility revenue" for gas customers is similar but includes, in place of the growth factor, a weather factor. Also, there is a daily "base load" for certain gas customers, which is not adjusted by the weather factor.Petitioners and their outside accountants have no records or163 other evidence indicating that any test checks were performed, either by petitioners or by petitioners' outside accountants, to verify the method of calculating unbilled revenue prior to the implementation of the method.However, after implementation of the method of computing unbilled revenue, both petitioners and their outside accountants checked to insure that the method had been correctly applied and that the results of such application were mathematically correct. This was done by applying the method manually to randomly selected customers and comparing the results with the computer-generated amount of unbilled revenue for each customer. In addition, the billing program, particularly that part of the program relating to estimated bills, was checked by petitioners by comparing the actual amounts reflected by a meter reading for a group of customers comprising an entire meter reading cycle with amounts calculated under the estimated billing procedure for the same customers for the period covered by the meter reading. The results of petitioners' checks of the billing program have shown, generally, that the program generates estimated bills which are reasonably accurate (varying164 from 90 percent to 105 percent of actual). This test check, however, is not a confirmation of the accuracy of the method used to determine unbilled revenue but rather a method to determine the accuracy of estimated interim billings generated under the billing program.Petitioners' outside accountants, in connection with their annual examination of petitioners' consolidated financial statements, performed certain test checks and applied certain auditing procedures to petitioners' method of computing 205 unbilled revenue. The test checks of unbilled revenue performed by petitioners' outside accountants indicated that the unbilled revenue calculation for 1976 was 93-percent accurate and such calculation for 1977 was 95-percent accurate.Petitioners maintained workpapers as part of their permanent records that reconcile the method used in reporting for Federal income tax purposes the income from sales of gas and electricity with the method used for book and financial reporting purposes, and such a reconciliation is filed each year with respondent as part of petitioners' Federal income tax returns. Petitioners reported in Schedule M-1 to their Federal income tax returns for the165 taxable years here involved the difference between the method used in reporting for tax purposes the income from sales of gas and electricity and the method used for book and financial reporting purposes.Petitioners' method of accounting for sales of gas and electricity for income tax purposes is a generally accepted practice employed in the utility industry for book and financial accounting purposes. The method of accounting for sales of gas and electricity which petitioners employed for book and financial accounting purposes also is a generally accepted accounting practice employed in the utility industry for book and financial accounting purposes. For book and financial accounting purposes, the majority of major public utilities did not during the years at issue and currently do not accrue as revenue gas or electricity delivered to the customer subsequent to the last cycle meter reading of the year. If petitioners had also employed the cycle meter reading method of accounting for book and financial accounting purposes, respondent would have accepted that method of accounting as clearly reflecting petitioners' income for Federal income tax purposes and would not have required166 petitioners to change their method of accounting to one that would require the accrual as income of gas and electricity delivered to customers subsequent to the last cycle meter reading of the year. See Rev. Rul. 72-114, 1 C.B. 124">1972-1 C.B. 124.206 OPINIONWe must determine (1) whether the cycle meter reading method of accounting which petitioner employed for tax reporting purposes clearly reflects income under section 446(b), and (2) if it does, whether such method is a permissible method under section 446(c).This case is essentially identical to and indistinguishable from Public Service Co. of New Hampshire v. Commissioner, 78 T.C. 445 (1982), where we held that the cycle meter reading method of accounting clearly reflects income for Federal income tax purposes even though such method of income was not used for financial statement purposes and that respondent had abused his discretion under section 446(b) by requiring unbilled revenue to be included in income where the treatment of such revenue did not conform for income tax and financial reporting purposes. Respondent's position under section 446(b) in 167 Public Service Co. of New Hampshire is a mirror reflection in this case. Our opinion in Public Service Co. of New Hampshire is dispositive of respondent's assertions that the cycle meter reading method of accounting fails to clearly reflect income within section 446(b), unless there is conformity between tax and financial reporting, and we must reject respondent's efforts to subsume us again in the conformity and clear reflection of income issue under section 446(b).As in Public Service Co. of New Hampshire, respondent concedes that the cycle meter reading method of accounting clearly reflects income where such method is in conformity with the method of accounting used for financial statement purposes. Nevertheless, where such conformity is absent, respondent asserts that the cycle meter reading method fails to clearly reflect income. See Rev. Rul. 72-114, supra. Respondent, therefore, premises his argument upon the existence vel non of conformity because, in his view, conformity is required to insure the clear reflection of income. However, respondent has not shown us a common denominator that predicates a correlation168 between conformity of income tax and financial accounting reporting practice and the clear reflection of income sufficient to condition the use of the cycle meter reading method of 207 accounting upon such conformity. Public Service Co. of New Hampshire v. Commissioner, supra; cf. Bay State Gas Co. v. Commissioner, 689 F.2d 1">689 F.2d 1, 6 (1st Cir. 1982), affg. 75 T.C. 410">75 T.C. 410, 420 (1980); see generally Dubroff, Cahill & Norris, "Tax Accounting: The Relationship of Clear Reflection of Income to Generally Accepted Accounting Principles," 47 Albany L. Rev. 354 (1983). We perceive no meaningful distinction between petitioners' reporting practice and that of similarly situated public utilities which do conform tax and financial reporting practices as directed by respondent within Rev. Rul. 72-114, supra.We conclude again and reiterate that petitioners' use of the cycle meter reading method of accounting clearly reflects income and that respondent abused his discretion by requiring income recognition of unbilled revenue merely due to169 the absence of conformity of such treatment between Federal income tax purposes and financial statement purposes. See Public Service Co. of New Hampshire v. Commissioner, supra.However, in Public Service Co. of New Hampshire we declined to consider respondent's argument that the cycle meter reading method of accounting is a hybrid method of accounting not specifically permitted under section 446(c) because respondent's notice of deficiency failed to specify such a contention and the notice of deficiency was not supplemented by respondent's answer. Public Service Co. of New Hampshire v. Commissioner, supra at 454. Nevertheless, as the requirement that a taxpayer's method of accounting clearly reflects income under section 446(b) is in addition to the requirements of sections 446(a)4 and 446(c), respondent was permitted to amend his answer by order of this Court subsequent to our decision in Public Service Co. of New Hampshire. In the amendment to answer, respondent posits that Public Service Co. of New Hampshire is not controlling because respondent's central legal position under section 446(c), that the170 cycle meter reading method of accounting is not a permissible method of accounting for income tax purposes where such method does not conform 208 to the method used for financial reporting purposes, was not addressed by the Court. Respondent bears the burden of proof as to the matters pertaining to section 446(c) and the Court so noted in its order granting respondent's motion to amend his answer herein. Rule 142(a). In addressing respondent's section 446(c) assertions within the amendment to his answer, we discern the thrust of respondent's arguments to be as follows:(1) Petitioner's unbilled revenue is currently accruable under the all events test within the meaning of section 1.446-1(c)(1)(ii), Income Tax Regs.(2) Because petitioners do not accrue unbilled revenue for tax purposes, the cycle meter reading method is not a specifically permitted method of accounting described in the Internal Revenue Code and regulations thereunder.(3) Respondent may authorize the use of a method of accounting not otherwise described in the Internal Revenue Code and regulations thereunder if, in the opinion of the Commissioner, such method clearly reflects income. Sec. 1.446-1(c)(1)(ii), 171 Income Tax Regs.(4) The imposition of a condition of conformity between tax and financial accounting is a proper exercise of respondent's broad discretion within section 1.446-1(c)(2)(ii), Income Tax Regs., and is necessary to insure that the cycle meter reading method of accounting clearly reflects income.(5) Since petitioners use a method which accrues unbilled revenue for financial statement purposes and use the cycle meter reading method for tax purposes, petitioners' method of accounting fails to clearly reflect income.Respondent asserts that section 446(c) and section 1.446-1(c)(2)(ii), Income Tax Regs., provide him wide latitude to establish conditions to insure that a method of accounting not specifically permitted under section 446(c) clearly172 reflects income. Respondent also asserts that the cycle meter reading method of accounting is not a specifically permitted method under section 446(c), and that the conformity requirement of Rev. Rul. 72-114, supra is a proper exercise of authority under section 1.446-1(c)(2)(ii), Income Tax Regs. Although we did not reach the "permissible method" issue under section 446(c) in Public Service Co. of New Hampshire, our opinion there is a foundation for and foreshadows 209 the determination we make here. In Public Service Co. of New Hampshire we indicated that:Whether petitioner's unbilled December revenues are properly accruable in December within the meaning of section 1.446-1(c)(1)(ii), Income Tax Regs., is the linchpin of respondent's argument under section 446(c), because if they are not properly accruable, then petitioner's meter reading and billing cycle method of accounting is an accrual method within the meaning of respondent's regulations, and as such, it is a "permissible method" pursuant to section 446(c)(2). That is, respondent's arguments under section 446(c)(4) are premised on our finding that petitioner's173 method of accounting is a "hybrid" * * rather than an accrual method, * * * [Public Service Co. of New Hampshire v. Commissioner, supra at 453-454; citations omitted.]We also noted that the billing requirements of the applicable public utility commission regulations and rate tariffs "may well be critical with respect to the issue of accruability." Public Service Co. of New Hampshire v. Commissioner, supra at 454-455.The method of accounting used by a taxpayer to determine when income is recognized will be accepted as a permitted method of accounting if such method comports with generally accepted accounting principles, is consistently used by the taxpayer from year to year, and is consistent with the regulations. Sec. 1.446-1(c)(1)(ii), Income Tax Regs.The cycle meter reading method of accounting is in accord with generally accepted accounting principles and is predominate in use within the utilities industry. See Public Service Co. of New Hampshire v. Commissioner, supra at 456; Commissioner v. Idaho Power Co., 418 U.S. 1">418 U.S. 1, 15 (1974); Madison Gas & Electric Co. v. Commissioner, 72 T.C. 521">72 T.C. 521, 556 (1979),174 affd. 633 F.2d 512">633 F.2d 512 (7th Cir. 1980). It has long been considered a generally accepted accounting principle for utilities to accrue revenues based on either cycle meter readings or bills rendered basis with no accounting recognition of unbilled revenue, and certified public accountants issue unqualified financial statements prepared so as to accrue revenue when meters are read or the consumer is billed. Financial statements which reflect unbilled revenue also are prepared in accordance with generally accepted accounting principles. Petitioners have consistently used the cycle meter reading method of accounting 210 for tax purposes from incorporation over 50 years ago through the tax years in issue and for financial statement purposes from incorporation through the year ended December 31, 1969.The issue as to whether the cycle meter reading method of accounting is a permissible method of accounting must focus upon the determination as to whether such method is consistent with the regulations. Section 1.446(c)(1)(ii), Income Tax Regs., states that "Generally under an accrual method, income is to be included for the taxable year when all the events 175 have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. "Accordingly, the cycle meter reading method of accounting which operates to defer unbilled December revenue, will be a permissible method of accrual accounting within section 446(c)(2) if all events which fix petitioners' right to receive such unbilled revenue have not occurred as of December 31 of each year in issue or the amount thereof cannot be determined with reasonable accuracy. Sec. 1.446-1(c)(1)(ii), Income Tax Regs. Respondent asserts that unbilled December revenue is properly accruable as of December 31 of each year in issue and that the cycle meter reading method of accounting is not specifically authorized by the Internal Revenue Code on the regulations thereunder. Accordingly, respondent posits that the cycle meter reading method of accounting is a variation or combination of an accrual method of accounting within the meaning of section 446(c)(4) and that respondent's imposition of the conformity requirement in order to insure the clear reflection of income is a proper exercise of respondent's authority under section 1.446-1(c)(2)(ii), Income176 Tax Regs.Respondent asserts that the delivery of utility services after the last cycle meter reading date in December fixed petitioners' right to receive unbilled revenue accrued for financial statement purposes as of December 31 of each year in issue, and respondent cites Bay State Gas Co. v. Commissioner, supra, secs. 1.446-1(c)(1)(ii) and 1.471-1, Income Tax Regs., and City Gas Co. of Florida v. Commissioner, T.C. Memo. 1984-44, to support his contention.211 Respondent relies on the opinion of the Court of Appeals for the First Circuit in Bay State for the proposition that delivery of utility service after the last cycle meter reading date in December was sufficient under the strict rules of accrual accounting to require income recognition of unbilled revenue because delivery fixed the customer's obligation to pay for utility services and the amount thereof was reasonably capable of determination. The issue before us here, however, whether under the cycle meter reading method, unbilled December revenue is properly accruable as of December 31 of each year within the meaning of section 1.446-(c)(1)(ii), Income Tax Regs., was not decided177 in Bay State by either the Court of Appeals for the First Circuit, Bay State Gas Co. v. Commissioner, 689 F.2d at 5, or by this Court. The Court of Appeals for the First Circuit stated in Bay State that the "Tax Court correctly recognized, implicitly if not explicitly, that, under a strict accrual method, income for the calendar year would have resulted from late December sales to both regular and budget billing customers." Bay State Gas Co. v. Commissioner, 689 F.2d at 5. 5 However, neither the opinion of that court nor our opinion in Bay State reached the issue as to whether the company's unbilled revenues were properly accruable in December within the meaning of section 1.446-1(c)(1)(ii), Income Tax Regs. Cf. Public Service Co. of New Hampshire v. Commissioner, supra at 454. The issue for decision in Bay State was whether respondent, having permitted the company to use the cycle meter reading method of accounting for tax purposes as provided in Rev. Rul. 72-114, supra, could require the company to accrue revenue generated by178 the delivery of gas to the company's "budget billing" customers.6179 Respondent had determined that, as to budget billed customers, the cycle meter reading method of accounting did not clearly reflect income to the extent an 212 excess budget bill was estimated as of the assigned cycle meter reading date where gas had subsequently been delivered, but payment had not been received prior to the end of the taxable year. 7In Bay State, we stated that "Except to the extent that they [the company] show the customer's actual or estimated usage of gas through the last cycle meter reading date, the monthly statements * * [the company] * * * sends its budget billing customers are not enforceable bills." Bay State Gas Co. v. Commissioner, 75 T.C. at 421. We also stated that differing accounting treatment might be justified if the budget bills were legally enforceable or if the budget bills were in fact180 paid prior to the close of the taxable year, although, under the applicable utility commission regulations, all customers had precisely the same payment obligations. Bay State Gas Co. v. Commissioner, 75 T.C. at 423. Therefore, in Bay State, we held that the company's method of accounting as to budget billing customers clearly reflected income because we found no meaningful distinction in the payment obligations of budget billing customers as compared to the company's regular billing customers. In Bay State, we focused on the occurrence of the cycle meter reading date because such date fixed the company's right to receive income as provided within the applicable public utility commission regulations. Bay State Gas Co. v. Commissioner, 75 T.C. at 420-421.We believe that our analysis in Bay State is equally applicable to the present case. Under the pertinent public utility commission regulations and rate tariffs, petitioners were not entitled to bill unbilled revenue or pursue an enforceable right to such revenue until after the occurrence of the cycle meter reading date in the following January. Consequently, 181 all events which fix petitioners' right to receive unbilled December revenue have not occurred as of December 31 of each year in issue. The applicable public utility commission regulations and rate tariffs are such that 213 the critical event necessary to fix petitioners' right to receive unbilled December revenue is the occurrence of the respective cycle meter reading date which does not take place until the following January. In order to bill at other intervals, petitioners would have to obtain approval from the appropriate regulatory agency. Furthermore, termination of service was subject to the terms and conditions specified within the applicable public utility commission regulations and rate tariffs. We conclude, therefore, that for tax purposes, the cycle meter reading date in the following January, which fixed the billing requirements and terms of regulated performance, is the critical event necessary to fix petitioners' right to receive income generated by service provided between the last cycle meter reading date in December and the end of the taxable year. We note that a "strict method" of accrual accounting used by petitioners for financial statement purposes182 does recognize unbilled December revenue and that such method is in accord with generally accepted accounting principles. However, generally accepted accounting principles are not dispositive of characterization for tax purposes. Thor Power Tool v. Commissioner, 439 U.S. 522">439 U.S. 522 (1979). Furthermore, the cycle meter reading method of accounting also is an accrual method which is in accord with generally accepted accounting principles and is in predominate usage within the utility industry. We find that, for income tax purposes, the cycle meter reading date in the following January is the critical event necessary to properly accrue unbilled December revenue within the meaning of section 1.446-1(c)(1)(ii), Income Tax Regs. The effect of the regulatory and tariff requirements preclude any other holding. See Commissioner v. Idaho Power Co., supra at 15.Respondent relies upon City Gas Co. of Florida v. Commissioner, supra, for the assertion that petitioners are manufacturing companies which must accrue income upon delivery and that the act of billing is not a factor within the all events test. 183 See sec. 1.446-1(c)(1)(ii), Income Tax Regs.City Gas is distinguishable as that case concerned the appropriate characterization and time of recognition concerning certain advance deposits received by a gas company. Whether unbilled revenue is properly accruable within 214 the meaning of section 1.446-1(c)(1)(ii), Income Tax Regs., was not at issue in City Gas. Respondent's reliance upon City Gas for the assertion that petitioners are manufacturers which must accrue income upon delivery, whether or not billed, is misplaced as that opinion does not characterize petitioners as manufacturers for purposes of the all events test within the meaning of section 1.446-1(c)(1)(ii), Income Tax Regs.We recognize that under the regulations manufacturers accrue income as of delivery, whether or not billed. Sec. 1.446-1(c)(1)(ii), Income Tax Regs.; Bentley Laboratories, Inc. v. Commissioner, 77 T.C. 152">77 T.C. 152, 165 (1981). We, however, are of the view that petitioners, as regulated public utility companies, provide services as so classified by the accounting profession in Accounting Research Study No. 7. 8185 Furthermore, we distinguish the event which184 renders services as billable from the mere ministerial act of billing. We note that under Accounting Principles Board, Statement No. 4, revenue from services rendered is recognized when services have been performed and are billable. 9 The billing and termination of service regulations and rate tariffs of the applicable public utility commissions are such that the occurrence of the respective cycle meter reading date in January is the critical event necessary to fix petitioners' right to unbilled December revenue and renders such services billable. Billing is purely a ministerial act which has no effect on petitioners' revenue recognition treatment. Petitioners accrue revenue as of the cycle meter reading date, not the billing date.215 In Decision, Inc. v. Commissioner, 47 T.C. 58">47 T.C. 58, 63 (1966), we held that all events which fixed the rights of an accrual basis advertising concern had not occurred as of the end of the taxable year where the terms of the contractual arrangement provided that the contract was not billable and payment not due until the following taxable year. Furthermore, in Cox v. Commissioner, 43 T.C. 448">43 T.C. 448, 457 (1965), we held, in part, that unbilled fees relating to investment management services were not accruable where the unbilled fees were not payable under the terms of the contract until billed and supported by services186 rendered. Our opinions in Decision, Inc. and Cox are applicable here where the pertinent public utility commission regulations and rate tariffs provide that unbilled December revenue is not billable and termination of regulated performance not permissible until after the occurrence of the respective cycle meter reading date in January.We hold that all events which fixed petitioners' right to receive unbilled December revenue had not occurred as of December 31 of each year in issue. Consequently, the cycle meter reading method of accounting is a permissible method of accrual accounting within the meaning of section 1.446-1(c)(1)(ii), Income Tax Regs., and respondent abused his discretion by requiring petitioners to adopt a method of accounting other than the cycle meter reading method of accounting for tax purposes. Since we have determined that the cycle meter reading method is a specifically permitted accrual method of accounting within section 446(c)(2), respondent's imposition of a condition of conformity was an abuse of discretion as respondent's discretion within section 1.446-1(c)(2)(ii), Income Tax Regs., is relevant only to determine whether a method of accounting187 not specifically permitted clearly reflects income. Pierce Ditching Co. v. Commissioner, 73 T.C. 301">73 T.C. 301, 305 (1979). 10188 We have reached 216 our determination irrespective of the burden of proof which was placed on respondent by Order of this Court. 11We also reach our determination notwithstanding the fact that all events which fix petitioners' liability for expenses related to unbilled December revenue have occurred as of December 31 of each year in issue. As in Public Service Co. of New Hampshire v. Commissioner, 78 T.C. 445">78 T.C. 445 (1982),189 we recognize that the cycle meter reading method of accounting operates to mismatch revenue recognition and related expenses ( Public Service Co. of New Hampshire v. Commissioner, supra at 457), and that the matching of revenues and related expenses is a desirable objective. Commissioner v. Idaho Power Co., 418 U.S. 1">418 U.S. 1, 11 (1974); American Automobile Association v. United States, 367 U.S. 687">367 U.S. 687, 692 (1961). However, it is well established that the matching of revenue recognition and related expenses is not absolutely essential. Public Service Co. of New Hampshire v. Commissioner, supra at 457; e.g., Schlude v. Commissioner, 372 U.S. 128 (1963). The result here is one of a timing difference which operates to defer income recognition of unbilled December revenue, but it is quite clear from the context of the applicable public utility commission regulations and rate tariffs that petitioners have not deliberately manipulated its income recognition procedure so as to prevent income from accruing that petitioners otherwise would have become190 entitled to receive as of December 31 of each year in issue. We are of the view that in the context of the public utility industry, the matching of revenue and related expenses is an inconsequential factor to our determination that the cycle meter reading method of accounting clearly reflects income and is a permissible method of accrual accounting. 217 We conclude that this so-called misnomity, if any, is incidental and not inconsistent.In view of the applicable public utility commission regulations and rate tariffs, we determine that petitioners' method of accounting for tax purposes clearly reflects income under section 446(b) and that petitioners' method of accounting for tax purposes is a permissible method of accrual accounting within section 446(c)(2). Based on the foregoing,Decision will be entered under Rule 155. Footnotes1. Respondent concedes by stipulation of fact that certain fuel adjustments were improperly included as unbilled revenue within the statutory notices of deficiency.↩2. Respondent's determination that petitioners must accrue unbilled revenue with respect to utility service furnished between the last cycle meter reading date and the calendar yearend in prior taxable years necessitated computational adjustments to the following tax attributes: (1) The net operating loss carryforward to the 1977 O & R group return; (2) the investment credit carryforward to the 1976 O & R return; and (3) the net operating loss carryforward to the 1976 Rockland return.↩3. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩4. As in Public Service Co. of New Hampshire v. Commissioner, 78 T.C. 445">78 T.C. 445 (1982), respondent does not argue that sec. 446(a)↩ denies petitioners the opportunity to use the cycle meter reading method of accounting to compute taxable income.5. As the fundamental issue of accruability under the all events test concerning the circumstances presented here was not before the Court of Appeals for the First Circuit in Bay State Gas Co. v. Commissioner, 689 F.2d 1 (1st Cir. 1982), affg. 75 T.C. 410">75 T.C. 410 (1980), respondent's reliance upon that court's language relating to accruability under the all events test is misplaced as Bay State↩ should be read only in the context of the issue there decided.6. In Bay State↩ the gas company offered residential gas customers a budget billing plan whereby gas costs for the entire heating season were estimated in advance such that the customer was billed a pro rata portion of the entire heating season estimate each month, with an adjustment for actual usage at the end of the heating season.7. In Bay State, the company conceded that, to the extent that a budget billing customer has in fact paid the December budget bill during that month, it must accrue as income an amount to the extent that such customer has in fact paid for gas consumed during the taxable year. Bay State Gas Co. v. Commissioner, 689 F.2d at 6; 75 T.C. at 420. See also Schlude v. Commissioner, 372 U.S. 128 (1963); American Automobile Association v. United States, 367 U.S. 687↩ (1961).8. Accounting Research Study No. 7 provides:* * * Recognition at time of sale.In the case of businesses selling services, such as public utilities, the act or process of furnishing service, together with invoicing usually provides the occasion for recognition of revenue. * [American Institute of Certified Public Accountants, Accounting Research Study No. 7, P. Grady, Inventory of Generally Accepted Accounting Principles for Business Enterprises 76-77 (1965).]↩9. Accounting Principles Board, Statement No. 4 provides in relevant part:"Revenue from sales of products is recognized under this principle at the date of sale, usually interpreted to mean the date of delivery to customers. Revenue from services rendered is recognized under this principle when services have been performed and are billable. * *"[AICPA, A.P.B. Accounting Principles Statement No. 4, at 9086 (1970).]↩10. In Pierce Ditching Co. v. Commissioner, 73 T.C. 301 (1979), a cash basis construction company had historically accrued as a deduction bonuses for its employees determined at yearend and paid within 2 1/2 months after the close of the taxable year. Respondent had audited the company for several years without adjustment as to this "hybrid" method of accounting. We determined there that a hybrid method of accounting was employed and that respondent's prior examination without adjustment was not a "positive act" sufficient for this Court to find that respondent had approved such hybrid method by exercising his authority granted under sec. 1.446-1(c)(2)(ii), Income Tax Regs. We have determined here that the cycle meter reading method of accounting is an accrual method specifically permitted under sec. 446(c)(2) and that such method of accounting clearly reflects income under sec. 446(b). No "hybrid" method is involved here, respondent's assertion to the contrary notwithstanding. Therefore, respondent's reliance on Pierce Ditching Co., and sec. 1.446-1(c)(2)(ii), Income Tax Regs.↩, is misplaced, and the Court's holding there is irrelevant to our determination here.11. We note, however, that respondent has not carried his burden of proof here. Respondent also asserts that unbilled December revenue may be determined with resonable accuracy within the meaning of sec. 1.446-(c)(1)(ii), Income Tax Regs.↩, as evidenced by certain test checks performed by petitioners' outside accountants with respect to unbilled revenue amounts as of Dec. 31, 1976 and 1977. We have determined that the applicable public utility commission regulations and rate tariffs are such that the occurrence of the respective cycle meter reading date aftert the close of the taxable year is critical to the proper accrual of unbilled December revenue. Therefore, we find it unnecessary to address respondent's assertion as to the reasonabnle accuracy of petitioners' calculation of unbilled revenue estimated for financial statement purposes.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622106/	GEORGE L. SHEARER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WILLIAM A. W. STEWART, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Shearer v. CommissionerDocket Nos. 29228, 29229.United States Board of Tax Appeals18 B.T.A. 393; 1929 BTA LEXIS 2052; November 30, 1929, Promulgated 2052 The provisions of Title XII of the Revenue Act of 1924 do not authorize a 25 per cent reduction of tax on calendar year 1924 income reported in 1925 but taxable in part at 1923 rates under section 207(b) of the Revenue Act of 1924. Charles Colip,5 B.T.A. 123">5 B.T.A. 123 followed. C. H. Butler, Esq., for the petitioners. L. A. Luce, Esq., for the respondent. GREEN 393 In these proceedings, which have been consolidated for hearing and decision, the petitioners seek a redetermination of their income-tax liabilities for the calendar year 1924, for which year the respondent has determined a deficiency as to George L. Shearer in the amount of $8,488.18, of which $6,811.08 is in controversy, and as to William A. W. Stewart in the amount of $7,435.71, of which $5,933.23 is in controversy. The sole question involved in both proceedings is whether the 25 per cent reduction provided by Title XII of the Revenue Act of 1924 reduces the calendar year 1924 tax payable in 1925, of an individual partner whose taxable income for the calendar year 1924 394 is made up in part of a share of the income of a partnership whose fiscal year ended2053 April 30, 1924. The facts were stipulated. FINDINGS OF FACT. The petitioners are individuals and residents of New York, with their offices located at 45 Wall Street, New York City. They made and filed their individual income-tax returns on the basis of a calendar year. The partnership of Stewart & Shearer, whose members are the petitioners herein, made and filed a partnership return of income on the basis of a fiscal year ended April 30, 1924. The respondent determined the net income of petitioner Shearer for the calendar year 1924 to be $103,613.53, of which amount $67,462.38 represents that part of the net income of the partnership attributable to the year 1923. He further determined that the tax on the income attributable to 1924 was $3,071.67, and that the tax on the income attributable to 1923 was $27,244.32. The respondent determined the net income of petitioner Stewart for the calendar year 1924 to be $91,165.35, of which amount $71,462.39 represents that part of the net income of the partnership attributable to the year 1923. He further determined that the tax on the income attributable to 1924 was $688.43, and that the tax on the income attributable to*2054 1923 was $23,732.92. OPINION. GREEN: The petitioners contend that under Title XII of the Revenue Act of 1924 the respondent should have reduced the tax on the income attributable to 1923 by 25 per cent. As previously stated, the amounts of taxes here in controversy are $6,811.08 as to Shearer, and $5,933.23 as to Stewart, which represents 25 per cent of the amounts of $27,244.32 and $23,732.92, respectively, set out in our findings as representing the tax on each of the petitioner's share of partnership net income attributable to the year 1923. We have held in a long list of decisions following , that the statute did not permit the 25 per cent reduction here contended for where the facts were such as are present in the instant proceedings. The respondent's determination must, therefore, be approved. See also , which case is now pending before the Circuit Court of Appeals for the Seventh Circuit, October term, 1929, as Docket No. 4188. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622108/	THE FIRST NATIONAL BANK IN ALBUQUERQUE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFirst Nat'l Bank v. CommissionerDocket No. 4878-86.United States Tax CourtT.C. Memo 1988-516; 1988 Tax Ct. Memo LEXIS 542; 56 T.C.M. (CCH) 575; T.C.M. (RIA) 88516; November 7, 1988. 542 P, a bank, sold a building in Albuquerque to a partnership in exchange for cash and a promissory note. Thereafter, Albuquerque issued metropolitan redevelopment bonds to finance acquisition and redevelopment of the building. P, along with a correspondent bank, purchased all of the bonds. The bond proceeds were deposited in an account maintained by P as trustee. P, as trustee of the bond proceeds account, then paid the face value of the promissory note to itself as noteholder. Held, P disposed of the promissory note at face value and must recognize gain on the note consistent with I.R.C. section 453(d). John A. Budagher, for the petitioner. John S. Repsis, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Chief Judge: Respondent determined deficiencies in petitioner's income tax for the years 1980 and 1981 in the respective amounts of $ 382,415 and $ 75,699. Concessions having been made, the issue remaining for decision is whether tax-exempt bonds were substituted for the purchase money promissory note (the purchase note) in controversy or whether the purchase note was retired in a taxable event under section 453. 1 Only the 1980 deficiency is now in contention in this case. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and exhibits544 attached thereto are incorporated herein by this reference. Petitioner, First National Bank in Albuquerque, is a corporation organized under the laws of the State of New Mexico. When the petition was filed, petitioner's principal place of business was Albuquerque, New Mexico. Petitioner owned the old First National Bank Building in Albuquerque (hereinafter called the building) from October 1, 1933, until it was sold on July 9, 1979. Petitioner's basis in the building at the time of sale was $ 323,477. The building is located in the Alvarado Metropolitan Redevelopment Area of downtown Albuquerque. The Alvarado district experienced severe urban decay in the mid-to-late 1970s. In 1978, Albuquerque targeted the blighted Alvarado district for economic renewal. Anticipating the economic opportunities inherent in Albuquerque's plans, two real estate developers, Joe Fritz (Fritz) and John Binford, began preliminary negotiations with petitioner in September, 1978, for the purchase and redevelopment of the building. In November, 1978, voters of Bernalillo County, in which Albuquerque sits, rejected county plans to acquire and renovate the building. Public rejection of county545 acquisition cleared the way for private investment. After the county vote Fritz, as general partner, and others formed the Old Bank limited partnership (the partnership) to acquire, redevelop and operate the building. William H. Oldaker (Oldaker), an experienced Albuquerque bond lawyer, informed Fritz of the possibility of using low cost municipal bond financing for the acquisition and renovation of the building. Oldaker was familiar with pending state legislation referred to as Metropolitan Redevelopment Code of the State of New Mexico (hereinafter called redevelopment code). The redevelopment code proposed to allow private entities to use tax-exempt bond financing to redevelop blighted urban areas within the confines of section 103. 1979 N.M. Laws 391. The redevelopment code was enacted by the New Mexico legislature in March, 1979, and became effective on July 1, 1979. 1979 N.M. Laws 391. The bond issuance in contention was the first of its kind in New Mexico under the new redevelopment code. Sale of the BuildingIn December, 1978, Fritz, on behalf of the partnership, acquired a renewable option for the purchase of the building from petitioner. Fritz, on behalf546 of the partnership, made approximately $ 14,000 in option payments to petitioner from December 12, 1978, to July 9, 1979. On March 28, 1979, the partnership notified petitioner of its intent to exercise the option. The partnership intended to acquire and renovate the building with tax-exempt municipal financing. The lower interest rate afforded by tax-exempt status and a 33-year repayment period made municipal bond financing the most economical method of acquiring and rehabilitating the building. On June 14, 1979, immediately before the effective date of the redevelopment code, petitioner and the partnership entered into a purchase agreement which provided that petitioner would sell the building and its underlying real estate to the partnership for $ 1,735,000. The purchase agreement specified interim financing for acquiring and renovating the building. The interim financing consisted of a $ 1,335,000 nonrecourse subordinated purchase money promissory note (the purchase note) and a $ 3,065,000 construction loan promissory note (the construction note). The record is not clear as to the amount of construction funds advanced to the partnership. The purchase note and construction547 note were intended to provide financing until bonds were issued and proceeds became available or in the alternative long-term conventional financing was needed. The purchase agreement contemplated "alternative long term, non-recourse financing arrangements to finance the purchase the purchase price of the building and rehabilitation costs." The two alternative forms of long term financing were: (1) conventional financing with an annual interest rate of ten percent, or (2) tax-exempt municipal bond financing with a maximum interest rate of seven and one-half percent with bond maturities from one to thirty-three years. Thus, the parties viewed the notes as merely a temporary measure until permanent financing could be secured in either bond or conventional form. On July 9, 1979, petitioner conveyed title in the building to the partnership under the terms of the purchase agreement for a $ 400,000 cash down payment and the purchase note. The purchase note structured payments as follows: (1) accrued interest at nine percent payable on the earlier of December 14, 1980, or the completion of rehabilitation, (2) principal and interest in 180 equal monthly installments of $ 10,560.32548 beginning the earlier of January 1, 1981, or the first day of the first month after completion of rehabilitation, and (3) one final balloon payment of $ 1,136,159.51 on the first day of the 181st month. The purchase note was secured by a mortgage on the building. Petitioner is an accrual basis taxpayer. In 1980 petitioner elected to report gain from the sale on the installment method under section 453. Petitioner sold the building to the partnership prior to availability of long-term bond financing because: (1) petitioner needed to rapidly dispose of the building to comply with the state comptroller's office rules on bank ownership of real property; (2) the partnership wanted to stop making costly option payments which were not being credited towards the final purchase price; and (3) rising inflation rates made it imperative for the partnership to quickly accept a bid submitted by a construction firm for a fixed price rehabilitation contract before the bid was cancelled. Bond Financing MechanismThe redevelopment code required the partnership and Albuquerque to "jump through a series of hoops" imposed by the state to qualify for municipal bond financing. The building549 was placed on the National Registry as a certified historic structure. The partnership appeared before the City Council of Albuquerque, seeking a resolution expressing Albuquerque's intent to issue redevelopment bonds in order to induce the partnership to acquire and renovate the building. On May 1, 1980, long-term financing was provided by proceeds from the contemplated tax-exempt Albuquerque bond issuance. Petitioner and the First National Bank in Dallas (the Dallas bank) were the sole purchasers of the issue. Legal lending limitations prohibited petitioner from purchasing bonds in excess of $ 3,600,000. The Dallas bank, a correspondent bank, agreed to buy the remaining $ 800,000 of bonds required to finance the project. The Dallas bank predicated its purchase upon a "last-in first-out" condition, i.e., the Dallas bank was to receive interest and principal bond payments before petitioner received any principal payments in 1995. However, interest payments to petitioner commenced on May 1, 1981, and ran concurrently with those of the Dallas bank. The bond indenture specified this seniority scheme in the case of partial redemption. The only security for payment of the bonds550 consisted of a mortgage and indenture of trust (the indenture) executed on May 1, 1980. The partnership transferred title to the building to Albuquerque and subsequently entered into a long-term leaseback agreement (the lease). The indenture pledged all partnership lease payments to a bond fund account maintained by petitioner as trustee. The bond fund in turn paid interest and principal on the bonds to petitioner, as bondholder. Albuquerque's only liability extended to the mortgage on the building. Albuquerque issued the bonds on May 1, 1980. Petitioner purchased 33-year bonds with an aggregate face amount of $ 3,600,000 and an annual interest rate of seven and one-half percent. The Dallas bank purchased the remaining $ 800,000. The record indicates, however, that petitioner issued two checks in the respective amounts of $ 3,600,000 and $ 800,000. It is a reasonable assumption from the entire record that the check for $ 800,000 represents the Dallas bank's purchase. Petitioner's two checks totalling $ 4,400,000 were deposited in the acquisition fund, an account maintained by petitioner as trustee for Albuquerque. The acquisition fund formed the repository of acquisition551 and rehabilitation monies. The bond proceeds deposited in the acquisition fund were then used to liquidate the purchase note, in the amount of $ 1,335,000, and to finance rehabilitation of the building. Section 3.11 of the indenture explicitly directs petitioner as trustee of the acquisition fund to expend the bond proceeds as directed in section 4.4 of the lease. Section 4.4(j) of the lease directs liquidation of the purchase note with bond proceeds. As discussed above, pursuant to the bond financing, the partnership conveyed title to the building toe Albuquerque and leased the building back from Albuquerque. The lease payments went to a second account (the bond fund) maintained by petitioner as trustee, wearing yet another of its many hats. The lease payment exactly equaled the amounts required to meet the principal and interest payments on the bonds. The lease payments followed through the bond fund and into petitioner's own account as bond payments. The partnership expensed the interest portion of the lease payments and depreciated the building on a 32-year life under the straight line method. Further agreements provided for a return to the partnership of title to the552 building upon final bond payout in 2013 through exercise of an option to purchase the building for $ 1,000. OPINION On July 1, 1979, New Mexico's redevelopment code became effective. The redevelopment code authorized municipalities to issue metropolitan redevelopment bonds with the aim of stimulating private investment in blighted urban areas. Petitioner wanted to sell a building that it owned in a blighted area of Albuquerque. On July 9, 1979, petitioner sold the building to a partnership formed for the purpose of acquiring and redeveloping the building. The building qualified for tax-exempt financing under the redevelopment code. The partnership and petitioner intended to finance the acquisition and renovation of the building with tax-exempt bonds issued by Albuquerque under the auspices of the new redevelopment code. However, this was the first bond issuance under the new redevelopment code and it was not clear when the bond financing would become available. The partnership and petitioner were unwilling to wait until the desired tax-exempt financing became available because: 553 (1) petitioner, as a bank, was under pressure from the comptroller of the State of New Mexico to divest itself of the building; (2) the partnership was tired of paying the monthly renewal fee on an option to purchase the building; and (3) the partnership desired n disposition occurred within the intent of section 453(d). 2 Rather, petitioner argues under two distinct theories, the step transaction and substitution theories, that the "substitution" of the purchase note "was merely an internal progression" which should be ignored. Respondent counters that a portion of the bond proceeds directly satisfied the full face value of the purchase note; thus the deferred gain should be recognized under section 453(d). We agree with respondent. 554 The law has been well established for over 50 years regarding the tax treatment of cash dispositions of installment obligations commencing with the Board of Tax Appeal's opinion in Thos. Goggan & Bro. v. Commissioner,45 B.T.A. 218">45 B.T.A. 218, 222 (1941). As we have found the facts, the case before us is straightforward and rests on a firm legal foundation. Petitioner argues that the transaction centered on a substitution of bonds for the purchase note. Petitioner then concludes that section 453(d) does not apply in this case. However, the record does not support petitioner's description of the transaction. We conclude, after consideration of the entire record, that petitioner disposed of the purchase note by satisfying it with a part of the bond proceeds, as respondent maintains.Respondent's determinations in the statutory notice of deficiency are presumptively correct and petitioner bears the burden of proving otherwise. Rule 142(a). Petitioner raises two argument in attempting to rebut respondent's determination under section 453(d): (1) the step transaction doctrine and555 (2) the substitution theory. The step transaction doctrine is based upon Kimbell-Diamond Milling Co. v. Commmissioner,14 T.C. 74">14 T.C. 74 (1950), affd. per curiam 187 F.2d 178">187 F.2d 178 (5th Cir. 1951), cert. denied 342 U.S. 827">342 U.S. 827 (1951). Kimbell-Diamond involved a multiple step stock purchase and liquidation. Under an overall plan to acquire assets, the purchaser effectively collapsed the steps to acquire the corporate assets tax-free. Petitioner first bases its application of the step transaction doctrine on the view that the bonds were substituted for the purchase note, and then concludes that the substitution, as an intermediate step on the way to long-term bond financing, should be "collapsed" tax-free. See Stuetzer, Installment Sales under the 1954 Code: A Critical Analysis, 13 N.Y.U. Annual Institute on Federal Taxation 1215, 1228-1230 (1955). Petitioner's second argument is likewise predicated upon a substitution view of the transaction. The substitution argument posits that the purchase note was merely substituted by another obligation and as such petitioner has not realized any income from the underlying note and therefore should556 not incur tax. In making this argument petitioner analyzes an extensive list of cases. See, e.g., Cunningham v. Commissioner,44 T.C. 103">44 T.C. 103 (1965); Burrell Groves, Inc. v. Commissioner,22 T.C. 1134">22 T.C. 1134 (1954), affd. 223 F.2d 526">223 F.2d 526 (5th Cir. 1955); Kutsunai v. Commissioner,T.C. Memo 1983-182">T.C. Memo. 1983-182. As indicated, petitioner bases application of both the step transaction and substitution theories on the view that petitioner substituted bonds for the purchase note. We find petitioner's premise incorrect. The bonds were not substituted for the purchase note. Instead, petitioner used $ 1,335,000 of the bond proceeds to satisfy the purchase note. Our conclusion is fully supported by the record. Luther W. Reynolds (Reynolds), a member of the board of directors of petitioner and the chief financial officer of the Maloof Company, which owned the controlling interest in petitioner, testifed on cross examination that "This note [purchase note] was paid off with the bond proceeds." Reynolds further responded affirmatively when asked if petitioner received the "physical cash" contemplated by the purchase note from the bond proceeds. 557 We find Reynolds' testimony forthright and persuasive. Other evidence in the record corroborates Reynolds' testimony. Section 3.11 of the indenture explicitly directs petitioner as trustee of the acquisition fund to expend the bond proceeds as directed in section 4.4 of the lease. Section 4.4(j) of the lease directs "Payment of amounts necessary to liquidate the Outstanding Obligations * ." "Outstanding Obligations" are defined in the lease as "the obligations of the Lessee described in Exhibit B hereto to be liquidated with a portion of the proceeds of the Series 1980 Bonds deposited in the Acquisition Fund." The purchase note and the construction note are found in Exhibit B. Reynolds' testimony leads us to conclude that petitioner carried out the directions of the indenture and lease. Petitioner did not "substitute" the bonds for the purchase note, but liquidated it with "physical cash" from the bond proceeds. In actuality there was no substitution of bonds for the purchase note to support application of petitioner's theories. See Commissioner v. National Alfalfa Dehydrating & Milling Co.,417 U.S. 134">417 U.S. 134, 149 (1974). Petitioner would have us alter the558 form of the transaction into a substitution to reach these theories. As the Supreme Court said there, "This Court has observed repeatedly that, while a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not * * * and may not enjoy the benefit of some other route he might have chosen to follow but did not." Petitioner chose to follow the route of liquidating the purchase note with bond proceeds and "he must accept the tax consequences of his choice." Moreover, petitioner had a heightened awareness of the multiple Federal, state and local tax consequences of the sale and redevelopment of the building. The record establishes that petitioner and the partnership structured the purchase and redevelopment in the foregoing manner in an attempt to: (1) obtain tax-exempt financing for both acquisition and renovation, (2) avoid both property taxes on the building and local sales tax on the items purchased for redevelopment by having title of the building remain in Albuquerque, (3) allow559 the partnership to expense the interest portion of each lease payment and depreciate the building, and (4) allow petitioner to receive tax-exempt income on both the sale and redevelopment funds that it lent through the mechanism of the bond issuance. We do not suggest abuse. Nevertheless, in light of petitioner's demonstrated awareness of the tax consequences of this project, it would be inconsistent to hold that petitioner may avoid the burdens of the route it chose, while simultaneously enjoying the multiple benefits. It is a basic tenet of income taxation that income is realized when there is a cash liquidation at face value of an installment obligation. Burrell Groves, Inc. v. Commissioner,22 T.C. 1134">22 T.C. 1134, 1136 (1954), affd. 223 F.2d 526">223 F.2d 526 (5th Cir. 1955). See Roche, Dispositions of Installment Obligations, 41 Tax L.Rev. 1, 5 n.14 (1985). This tenet is dually grounded in an accretion to wealth theory and in the assumption that once the taxpayer has been paid for the note he has the ability to pay the tax liability. By liquidating the purchase560 note, petitioner has both experienced an accretion to wealth and has obtained the wherewithal with which to pay the tax liability. Petitioner contends on brief that to find for respondent would "stretch the confines of Section 453(d) beyond its intended reach and to unduly burden and restrict the exercise of good business judgment, as well as to limit the flexibility and imagination which manage to achieve such admirable public goals such as urban renewal within the economic realities of the business world." We do not agree. As stated at the outset, the income tax consequences of cash liquidations of installment notes have been well established for well over 50 years. See Thos. Goggan & Bro. v. Commissioner, supra.It is only the convoluted nature of the transactions surrounding the liquidation of the purchase note, structured in large part by petitioner, that might on its face appear to have created a pitfall for the well-intentioned urban renewer. The facts of this case are likely to by atypical, and we are not persuaded that the holding will deter investment in urban renewal under section 103. Moreover, the holding in this case is well within "the confines*561 of Section 453(d)" as it was originally envisioned by Congress, petitioner's argument to the contrary notwithstanding. In his notice of deficiency, respondent based his deficiency determination upon the theory that the entire proceeds of the bond issue were received by petitioner and applied by it to satisfy various obligations. To reflect the holding herein that only an amount of proceeds sufficient to satisfy the purchase note were applied, a recomputation will be required. To reflect the foregoing and concessions, Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 in effect during the years in question. Similarly, unless stated otherwise, all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Section 453(d) provided in pertinent part: (d) GAIN OR LOSS ON DISPOSITION OF INSTALLMENT OBLIGATIONS. -- (1) GENERAL RULE. -- If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and -- (A) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or (B) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange. Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. (2) BASIS OF OBLIGATION. -- The Basis of an installment obligation shall be the excess of the face value of the obligation over the amount equal to the income which would be returnable were the obligation satisfied in full.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622109/	BRADLEY LEE AND JOY A. SHERMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSherman v. CommissionerDocket No. 10803-86.United States Tax CourtT.C. Memo 1989-269; 1989 Tax Ct. Memo LEXIS 269; 57 T.C.M. (CCH) 599; T.C.M. (RIA) 89269; June 7, 1989. 269 On the facts,held, (1) P's writing activity was not carried on with an actual and honest objective of making a profit. 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); (2) Ps are not entitled to a dependency exemption deduction under I.R.C. sections 151 and 152(a); (3) Ps are not liable for the addition to tax for negligence under I.R.C. sections 6653(a)(1) and (2); and (4) Ps are liable for the late filing addition under I.R.C. section 6651(a)(1). Bradley Lee Sherman, pro se. Andrew Ouslander, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Chief Judge: Respondent determined the following deficiency in income tax and additions to tax for the taxable year 1983: Additions to TaxDeficiencySec. 6651(a)(1)Sec. 6653(a)(1)Sec. 6653(a)(2)$ 1,463.00$ 8.50$ 244.2050 percent ofinterest on partof underpayment dueto negligence(Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year 1983. All Rule references are to the Tax Court Rules of Practice and Procedure.) Concessions having been made, the issues remaining for decision are (1) whether petitioners may deduct miscellaneous business expenses, including a home office expense under section 280A, that petitioner Bradley L. Sherman incurred as a writer; (2) whether petitioners may claim an exemption for supporting Bradley L. Sherman's mother; and (3) whether petitioners are liable for the delinquency and negligence additions to tax under sections273 6651(a)(1) and 6653(a)(1) and (2), respectively. FINDINGS OF FACT Petitioners Bradley L. Sherman and Joy A. Sherman filed their joint return as husband and wife for the taxable year 1983 on April 26, 1984. Petitioners resided in Staten Island, New York, when they filed their petition with the Court. Hereinafter, for convenience, we will refer to Bradley L. Sherman as petitioner. During 1983, the taxable year at issue, petitioner worked a minimum of 35 hours per week as a case worker for the Human Resources Administration in New York City. Petitioner was frequently able to work overtime during the year. Petitioner's primary activity outside of his full-time job was writing. Petitioner began writing in 1967 and he steadily honed his skills as a writer during the ensuing 17 years. In 1983 he wrote in an office that he set up in a room of his home. Petitioner wrote a fiction piece titled "The Glass Mask," which he submitted to the Massachusetts Review, a quarterly review of literature, the arts and public affairs. The Massachusetts Review chose not to publish "The Glass Mask." Petitioner never published any of his pieces. Outside of "bartering" a biography of his mother274 to his mother for $ 700, petitioner never sold a manuscript. In 1983, petitioner's mother, Editta Sherman (Editta), was a 76-year-old widow who photographed celebrities and lived in an apartment in Carnegie Hall. During 1983 she earned less than $ 1,000. This income came from sporadic sales of "celebrity" photographs. Editta received monthly social security benefits of $ 240 which totaled $ 2,880 in 1983. Petitioner, together with his brother and sister, supplemented Editta's income in 1983 by giving her approximately $ 3,000 in cash and by paying her rent. Each sibling paid one-third of Editta's rent. Petitioner and his brother and sister were their mother's primary source of support in 1983. On their 1983 return, petitioners claimed a business loss from petitioner's writing activities and a dependency exemption for Editta. In the statutory notice of deficiency, respondent disallowed both. OPINION Petitioners contend that petitioner was engaged in the activity of writing for profit and that petitioners are entitled to a dependency exemption for petitioner's mother. Respondent contends under section 183 that petitioner was not engaged in the activity of writing for profit275 and that petitioners are not entitled to a dependency exemption under sections 151 and 152. We agree with respondent on both issues. Writing for Profit under Section 183Petitioners bear the burden of proving by a preponderance of the evidence that petitioner was engaged in writing for profit. Rule 142(a). They have failed to sustain their burden. Section 183(a) provides that if an "activity is not engaged in for profit, no deduction attributable to such activity shall be allowed." Section 183(c) defines "activity not engaged in for profit" to mean "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." Section 162 generally permits the deduction of expenses incurred in a trade or business and paragraphs (1) and (2) of section 212 generally permit a similar deduction for expenses incurred "for the production or collection of income" or "for the management, conservation, or maintenance of property held for the production of income." Petitioner asserts that the requisite profit motive is self-evident from his 17 years of writing, his home office, his piece "The Glass276 Mask," and his attempt at publication in the Massachusetts Review. We do not agree. Petitioner testified that respondent's counsel challenged him in a pre-trial conference on whether he was engaged in writing for profit, which petitioner "thought was somewhat of an insult" because as he added "it seems to me to be a [foregone] conclusion that anyone who writes is engaged in it for profit." The objective facts in this case do not confirm the accuracy of petitioner's premise. For the expenses at issue to be allowed as a deduction, petitioner must establish that the activity was engaged in for profit. Whether an activity is engaged in for profit turns on whether petitioner carried on his activity with an actual and honest objective of making a profit. Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 646 (1982), affd. without published opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1982). The regulations list nine factors as an aid in making the profit objective determination under section 183. Section 1.183-2(b), Income Tax Regs.We need not examine the nine factors in specific detail in this case to reach the conclusion, based upon the evidence before us, that petitioner277 lacked the requisite profit objective. Over a 17-year period, he failed to publish a single manuscript, and over that same time submitted only one for publication, and it was rejected. The only income from this activity over the entire period was $ 700 received by petitioner in 1983 from his mother, Editta, for a biography of her which he wrote. The record does not indicate that the biography was ever published. The record likewise does not show that petitioner ever systematically attempted to sell any of his work. On this record we are forced to conclude that petitioner's writing activity was engaged in by him essentially for personal pleasure and recreation and that his activity does not meet the profit objective test above recited. We hold for respondent on this issue. Because we find that petitioner did not write for profit, we do not reach the issue of whether petitioners are entitled to a home office deduction under section 280A. We note, however, that respondent concedes that petitioners are entitled to a $ 700 deduction under section 183(b)(2) because petitioner generated $ 700 of income from his writing activity by bartering a biography to his mother. Deduction278 for Dependent Exemption under Section 151For the year 1983, section 151(e)(1) allowed a taxpayer to claim a $ 1,000 exemption for each of his dependents as defined in section 152. A taxpayer could claim a $ 1,000 exemption for his mother as a dependent if two requirements were met: (1) his mother's gross income was less than $ 1,000; and (2) he provided over one-half of her support. Sections 151(e)(1)(A) and 152(a). Petitioners bear the burden of proving that both of these requirements have been met. Blanco v. Commissioner,56 T.C. 512">56 T.C. 512, 514-515 (1971); Stafford v. Commissioner,46 T.C. 515">46 T.C. 515, 517 (1966); Vance v. Commissioner,36 T.C. 547">36 T.C. 547, 549-551 (1961). Respondent asserts that petitioners have failed to establish that both requirements have been met. First, we must determine whether petitioner's mother, Editta, had less than $ 1,000 of gross income as required by section 151(e)(1)(A). Editta testified that she received $ 240 per month in social security benefits or $ 2,880 in 1983. Social security payments are not included in gross income for purposes of the maximum income allowable under section 151(e)(1)(A). Finley v. Commissioner,T.C. Memo. 1978-421.279 However, the social security payments must be taken into account in determining whether an individual claiming a dependency exemption deduction under section 152(a) provided more than one-half of the putative dependent's support. Section 1.152-1(a)(2)(ii), Income Tax Regs.; see Black v. Commissioner,T.C. Memo 1972-135">T.C. Memo. 1972-135. We have found that Editta received less than $ 1,000 from sales of her celebrity photographs. Except for whatever amount these sales produced, it is apparent that Editta was completely dependent upon her children and social security for support. Petitioner testified that his mother "started hitting -- you know calling me up for some money. And I couldn't deny her." Since we have found that petitioner's mother had less than $ 1,000 of gross income in 1983 (the $ 2,880 in social security payments being excluded for this purpose), the first requirement of the two-pronged support test has been met. Next we must determine whether petitioner provided over one-half of his mother's support in 1983. Section 152(a). Petitioners bear the burden of proving that petitioner provided over one-half of Editta's support. Rule 142(a). Petitioners have failed280 to carry this burden. Petitioner testified that he gave his mother $ 3,000 in cash in 1983. Even if we were to accept without documentation this $ 3,000 figure, petitioners have not shown the total amount required for Editta's total support in 1983. Therefore, we cannot determine whether $ 3,000 would exceed one-half of the necessary amount. Furthermore, as noted above, the $ 2,880 in social security payments which Editta received in 1983 must be taken into account in making the one-half of support determination under section 152(a). Editta was unable to recall even approximately what amount was required for her support. She could not confirm that petitioner had given her $ 3,000. She did state that petitioner, his brother and sister each paid one-third of her rent. However, petitioner's assistance with Editta's rent is inconclusive as to whether petitioner provided over one-half of Editta's support. In addition, we note that section 152(c) provides that in specific instances where multiple taxpayers support one dependent, those taxpayers may agree as to which supporting taxpayer may claim a dependency exemption for the dependent. Section 152(c)(4) requires a written declaration281 from the taxpayers providing support, other than the one claiming the deduction, that they will not claim the supported individual as a dependent. Section 1.152-3(c), Income Tax Regs., provides that the written declaration may be made on Form 2120 or in a similar manner. Petitioners have not produced the required declarations. We sustain respondent's determination on this issue. Negligence Additions under Section 6653(a)Respondent contends that petitioners are liable for the negligence additions under sections 6653(a)(1) and (2). For 1983, sections 6653(a)(1) and (2) provided: Sec. 6653 [1954 Code]. (a) NEGLIGENCE OR INTENTIONAL DISREGARD OF RULES AND REGULATIONS WITH RESPECT TO INCOME, GIFT, OR WINDFALL PROFIT TAXES.-- (1) IN GENERAL. -- If any part of any underpayment (as defined in subsection (c)(1)) of any tax imposed by subtitle A, by chapter 12 of subtitle B or by chapter 45 (relating to windfall profit tax) 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. (2) ADDITIONAL AMOUNT FOR PORTION ATTRIBUTABLE TO NEGLIGENCE, ETC. 282 -- There shall be added to the tax (in addition to the amount determined under paragraph (1)) an amount equal to 50 percent of the interest payable under section 6601 -- (A) with respect to the portion of the underpayment described in paragraph (1) which is attributable to the negligence or intentional disregard referred to in paragraph (1), and (B) for the period beginning on the last date prescribed by law for payment of such underpayment (determined without regard to any extension) and ending on the date of the assessment of the tax (or, if earlier, the date of the payment of the tax). We do not agree with respondent. The record satisfies us that there was at least colorable justification for the positions taken by petitioners on their return with regard to petitioner's writing activity and support of Editta. We therefore hold for petitioners on this issue. Late Filing Addition under Section 6651(a)(1)Petitioners filed their return on April 26, 1984. Their return was due April 15, 1984, and was thus 11 days late. Section 6651(a)(1) provides in part that a return must be filed "on the date prescribed therefor * * unless it is shown that such failure is due to283 reasonable cause and not due to willful neglect * *." Petitioners have failed to offer a reasonable cause for their delay. We hold for respondent on this issue. To reflect the foregoing, Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622110/	PARAMOUNT CLOTHING CO., INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentParamount Clothing Co. v. CommissionerDocket No. 11069-77.United States Tax CourtT.C. Memo 1979-64; 1979 Tax Ct. Memo LEXIS 463; 38 T.C.M. (CCH) 261; T.C.M. (RIA) 79064; February 27, 1979, Filed Shale D. Stiller and Jerome D. Carr, for the petitioner. Charles B. Zuravin, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: Respondent determined deficiencies in petitioner's Federal income tax for the taxable years ended June 30, 1974, and June 30, 1975, in the amounts of $ 14,400 and $ 39,678.85, respectively. The only issue presented for decision is whether under section 162(a)(1), Internal Revenue Code, 1 amounts paid and deducted by Paramount Clothing Co., Inc. to its two officers, Marvin Goldman and Daniel Goldman, during the taxable years ended June 30, 1974, and June 30, 1975, constituted464 reasonable compensation for services rendered. FINDINGS OF FACT Some of the facts are stipulated and are found accordingly. Paramount Clothing Co., Inc. (petitioner) is a corporation organized under the laws of the State of Maryland on June 11, 1946. Its principal offices are located at 419 West Redwood Street, Baltimore, Maryland. Its U.S. Corporation Income Tax Returns (Forms 1120) for the fiscal years ended June 30, 1974, and June 30, 1975, were timely filed with the respondent. Petitioner is engaged in the manufacturing of men's suits. Petitioner's authorized capital stock consists of 1,000 shares of preferred stock and 1,000 shares of common stock. Since the time of its incorporation Marvin Goldman (Marvin) and Daniel Goldman (Daniel) have owned all of the outstanding common stock in equal shares. No preferred stock has ever been issued. During the taxable years 1974 and 1975 Marvin was president of the petitioner corporation and a member of its board of directors. Daniel was its secretary-treasurer and a465 member of the board of directors. History of the BusinessPetitioner was founded in 1918 by the father of Marvin and Daniel Goldman to operate as a men's clothing manufacturer. The Goldmans' father, a merchant tailor who made hand-tailored clothing, organized petitioner in an effort to fulfill his ambition of engaging in his own men's clothing manufacturing business. For several years after its inception, petitioner consisted of the Goldmans' father and one of his daughters, who left school at the age of 16 to assist him. From the start, petitioner was located in Baltimore, Maryland. However, the business required that the Goldmans' father go out "on the road" to sell three or four days a week, with packing and shipping accomplished on the weekends. Marvin was born in 1913. He first entered petitioner's business while he was attending junior high school. He worked for petitioner after school and full time, 8 a.m. until 5 p.m. or 6 p.m., during vacation periods. Marvin's activities in the business while he was in school included packing packages, tying packages, running packages to the Post Office, sweeping the floor, and whatever else was necessary. Marvin has466 worked in petitioner's business ever since he was 13 years old. With the exception of his school years, including one year of college at the University of Baltimore, and his Army service from May 1941 until August 1945, he has worked virtually full time in the business since his graduation from high school. Daniel was born in 1917. He worked part time in the business during school, starting at the age of 10 or 11, including Saturdays and Sundays, and full time in the summers. While he was in school, Daniel's activities in the business consisted of whatever his father wanted him to do, including tying pants and sweeping floors. With the exception of three years, from 1942 until October 1945, during which he served in the Army, Daniel has worked virtually full time in petitioner's business since 1935. From 1934 until the start of World War II, petitioner conducted its manufacturing operations through independent contractors. It bought piece goods, cut the goods and sold the finished goods to its customers. The manufacturing function was subcontracted because petitioner did not have its own factory. It generally sold small concerns during this time. Its most important account467 was Bell Clothes, a retailer with one store in Baltimore and four stores in Washington, D.C. Petitioner manufactured men's sport coats, top coats, and pants, in addition to men's suits, along with any other kind of men's clothing which was salable. Daniel and Marvin, with their father, were involved in virtually all activities of petitioner's business from 1935 until World War II. Marvin and Daniel went on the road to sell, they worked in the cutting room, in the shipping department, and they even sold to little storekeepers at the petitioner's shop on Sundays. In addition, they visited the contractors who performed the manufacturing operations on petitioner's clothing, to assure that the clothes would be finished in a timely fashion with high quality. Their only employee was a cutter. During World War II both Daniel and Marvin served in the Army, although Marvin continued to work for petitioner even during his military service. Marvin was stationed at Fort Belvoir, and he was able to return to Baltimore every weekend, where he worked in the business. He left Fort Belvoir on Saturdays at noon and returned on Monday mornings. While Marvin and Daniel were serving in the468 Army, their father had major surgery and began to decline in health. In 1947 their father died. After World War II, piece goods (the cloth used to make clothing) were very scarce. The Goldmans received an inquiry about green colored piece goods used for the Marines. With their veterans' priorities, they were able to purchase these goods and then strip the goods into navy, tan, brown, and other colors for civilian clothing. To finance this plan, they pre-sold the suits, receiving a $ 10 advance for each suit. They sold between 30,000 and 50,000 suits in this manner, generating both substantial income and the impetus to form their own clothing factory. The Goldmans also used their veterans' priorities to obtain machinery for petitioner in 1946, so that petitioner could conduct its own manufacturing operation. The Goldmans did virtually everything in the business from 1946 through 1958, including sweeping the floors when there was not enough help around to do it, packing suits and selling merchandise to individual customers who visited the factory, spreading goods (placing the piece goods on a table and marking the patterns on it), and serving as the salesmen for petitioner. 469 During this period they started to sell different kinds of accounts, such as department stores. Their two largest accounts were The Hecht Company and Woodward & Lothrop. Relationship with Sears, Roebuck & CompanyPetitioner began selling to Sears, Roebuck & Company in 1958. Its initial effort to sell Sears was unsuccessful. However, the Goldmans were determined to do business with Sears, and, with the assistance of a men's clothing manufacturer, Howard Schloss, who made a contact with Sears, the men's suit buyer at Sears, Vlad Kay, and his superior, Clarence Sakara, came to Baltimore to see the Goldmans. In 1958, petitioner was manufacturing a wash-and-wear men's suit. Because of its unusual construction, this suit was produced by only a limited number of manufacturers, including Haspel and Palm Beach, the two leaders in the market. Smaller manufacturers did not venture into the wash-and-wear field, which was, therefore, wide open for competition. However, Gayley & Lord, the primary source of the cloth used to make wash-and-wear suits, tried to prevent outsiders such as petitioner from using its cloth. After meeting with Sears, the Goldmans agreed to manufacture470 wash-and-wear suits for Sears for $ 12.85 each. This was a substantial gamble for the Goldmans and petitioner since they did not even own the piece goods necessary to make these suits. However, Burlington Mills, the parent company of Gayley & Lord, started to produce the wash-and-wear cloth around this time, and Marvin was able to purchase these goods from Burlington, to satisfy the tremendous order placed by Sears with the petitioner. Paramount sold only wash-and-wear clothing to Sears for a couple of years, including approximately 30,000 suits sold by Sears through its catalogue. Petitioner then started to sell Sears other items, including dacron and wool tropical suits. After the Goldmans received the large order from Sears in 1958 to make wash-and-wear suits, they decided that the manufacturing facility operated by petitioner in Baltimore was not large enough. Therefore, they opened a plant in Hampstead, Maryland, using a building, previously operated as a clothing factory, then partially owned by Daniel. This factory is not owned by petitioner. It is today operated by a separate corporation, Maryland Hampstead Company, Inc. (Hampstead), in which each of the Goldmans471 own all of the outstanding stock in equal shares. The Goldmans hired John Mancini to supervise the Hampstead facility, a role which he still maintains. Petitioner is responsible for manufacturing the suits, including the sewing portion of the operation, which is contracted out to Hampstead. If the quality is wrong, if the garments are not properly made or sewn, or if losses are sustained, petitioner bears the responsibility. Hampstead only has the responsibility of a contractor. Petitioner has the same relationship to Hampstead as it would have with any other contractor who performed work for it. Duties of the Goldmans During the Years in IssueIn 1974, Marvin and Daniel each received a salary of $ 80,000 from petitioner. In 1975, petitioner paid Daniel a salary of $ 100,000 and Marvin a salary of $ 115,000. In 1975 Marvin was traveling to New York to visit the fabric mills one or two days a week, either every week or every other week, and he made some extraordinary buys allowing petitioner to get more business from Sears in that year. Petitioner does not provide the Goldmans with any of the normal perquisites customarily granted to officers of other men's suit472 manufacturing companies. It has no pension plan or profit sharing plan. It does not offer major medical insurance, disability income insurance or employee life insurance payable to family members. It does not pay for country club dues for the Goldmans. It does own a small life insurance policy on each of the Goldmans, but this is payable to petitioner. In Hampstead, the benefit package offered to its union employees amounts to approximately 34 percent of the employees' salaries. The package of fringe benefits afforded top management in the men's suit manufacturing industry generally (but not given to Marvin and Daniel) costs an extra 30 percent to 40 percent of regular cash compensation.During 1974 and 1975 the Goldmans worked for petitioner Mondays through Saturdays, and about 20 Sundays per year. They arrived at work about 8:00 in the morning, every Monday through Friday, and generally stayed until 6:00 at night and sometimes later. On Saturdays, the Goldmans arrived at 8:00 in the morning and worked until 12 or 1 o'clock in the afternoon. When they worked on Sundays, they would come down at 10:00 a.m. and leave at 1:00 p.m. Every evening, the Goldmans would talk by telephone473 with each other for at least 30-45 minutes about what had transpired during the day. In addition, one or the other might call their designer or the foreman in the cutting department. The Goldmans also spoke with Sears during the evenings. During 1974 and 1975 Marvin took only one week of vacation in one year and no vacation in the other year. Daniel took one week of vacation in each year. Neither of the Goldmans was ill during 1974 and 1975.The Goldmans did not attend any conventions during 1974 and 1975, although Daniel occasionally attended a bobbin show or other industrial show where machinery was exhibited. During the taxable years 1974 and 1975 the Goldmans had total responsibility for running petitioner's business. They always operated in a manner which gave them responsibility over every aspect of the business. The duties which they performed at petitioner have not changed since 1965, although during the years in issue they had more responsibilities than they previously had. During 1974 and 1975 the Goldmans were responsible for all of petitioner's sales, most of the material purchases, the financing, shipping, hiring and firing, and design. During 1974 and474 1975 Sears sold to petitioner approximately 50 percent of the piece goods which petitioner used to satisfy the Sears account. The other 50 percent of the piece goods were purchased by Marvin, who was an outstanding piece goods buyer. Because of the faith that Sears had in Marvin and his experience, Marvin would go to New York to work with the major mills to accumulate piece goods for use by Sears in its promotions. He was given considerably more options and opportunities to purchase piece goods than Sears provided to the other manufacturers with whom it dealt.Marvin was given carte blanche to go to the mills and buy goods, at mill overruns or special prices, so that Sears could afford its promotions. Marvin had superb relationships with the fabric mills. The mills knew that he was very honorable and that he would do what he said he would do. He had the ability to evaluate an available lot of piece goods for quality, price, salability, and manufacturability. He might review 500 different styles of goods at any time. In purchasing piece goods, Marvin had to select goods suitable to petitioner's manufacturing operation, as well as goods which would be desired by Sears and its475 customers. The Goldmans shouldered total responsibility for their purchases of piece goods, and they also bore the risks. Sears would have the privilege of rejecting suits if it did not feel that the patterns or colors selected by the Goldmans were needed, or if Sears did not care for the goods. As good as Marvin was in purchasing piece goods, Sears did reject certain goods during the 1974-1975 period. The Goldmans are not told by Sears to purchase only certain types of patterns. During the taxable years in issue, Daniel was responsible for the purchase of linings, buttons, and pocketing which go into the garments produced by petitioner. Sears did not give Daniel instructions as to the purchase of interlinings and pants pockets, the trimmings. Petitioner, through Daniel, was responsible for buying these materials at the best price, and matching the colors to the suiting fabric. In purchasing these materials, Daniel had to select the proper fabric and weight which would conform with the clothing to which these goods would be assigned. With respect to buttons, Daniel would buy the buttons from the supplier designated by Sears. Daniel executed his purchasing responsibilities476 with respect to linings, pocketings, and buttons efficiently. He was able to deliver suits that incorporated the design expression which Sears wanted. Sears was satisfied with Daniel's performance, which is one of the reasons that petitioner has received the Symbol of Excellence Award from Sears 5 years in a row, and why Sears has desired to continue its business with petitioner. The Goldmans were also responsible for the design and styling of suits for petitioner. They worked with their designer, John Mancini, who actually cut the patterns after the Goldmans told him what they wanted. Marvin and Daniel directed the suit styling which was then submitted in sample form to Sears. Although Sears, as the buyer, had the ultimate decision with respect to the suits that petitioner would manufacture, style and design were constantly discussed between the Goldmans and Sears. Sears actively solicited the Goldmans' advice in this area because they each had 50 years' experience in the business, and, having spent virtually their entire business careers involved in clothing, they had seen the cyclical changes in the market. The Goldmans would show Sears a wider lapel or a narrower lapel, 477 a higher vent or a lower vent, hacking pockets or flat pockets, etc., depending on the trends which the Goldmans anticipated would be in demand. The design process is continuous, and the Goldmans are always changing models. During 1974 and 1975 the Goldmans talked with Sears on the telephone approximately three to four times a day. Petitioner's long distance telephone charges during this period, solely to Sears, were approximately $ 435 per month. The Goldmans and Sears would discuss production, inventory, model trends, cost of fabric, and various other subjects, including seemingly routine matters. The buyer at Sears during 1974 and 1975, Donald Wallin, indicated that he spoke with the Goldmans on a daily basis, probably ten times a week, during this period. In addition, Marvin and the Sears buyer would talk in the evenings, as the Sears executives were quite busy during the day and often out of the office. The Goldmans also spent time during 1974 and 1975 reviewing numerous apparel and equipment magazines, looking for new equipment and production methods, new fabric, and other items that might help in the business. The magazines reviewed by the Goldmans during this period478 included Turnkey,Retail Week,Southern ApparelManufacturing,Southern Garment, and Apparel magazines. Daniel was responsible during the taxable years for assuring that petitioner had the proper insurance, including fire and extended coverage, public liability, burglary, transportation, and mysterious disappearance insurance. Daniel was also responsible during the taxable years for petitioner's compliance with government controls, rules, and regulations applicable to the men's clothing business, including OSHA and Census Bureau matters. Petitioner does not have a separate customer service department to handle any complaints from Sears or other customers. The Goldmans handle all complaints. The Goldmans, primarily Marvin, are also responsible for material control and for cost control, there being no staff accountant. The Goldmans are also responsible for all personnel work, including union matters, with Daniel more active in this area than Marvin. Daniel is also responsible for repairs and maintenance. Marvin, principally, maintains the daily contact with Sears. There is nobody else at petitioner, except the Goldmans, to carry out these functions, 479 which they performed in 1974 and 1975. Petitioner's financing was the responsibility of both of the Goldmans during the taxable years, although Marvin typically did more in this area than Daniel. Petitioner borrows necessary funds from Maryland National Bank, with whom the Goldmans have dealt for over 50 years. Petitioner maintains proper lines of credit so that funds are available to keep the factory in production. In 1973 and 1974 petitioner had to request lines of credit from Maryland National Bank which were larger than those normally maintained. Its line of credit is negotiated for a 6-month period. For the particular period petitioner will draw moneys down from this line of credit and the total amount borrowed must be repaid at the end of the 6-month term. Special Talents of the Goldmans: Anticipation of Style Changes, Cost Controls, and Manufacturing MethodsOne of the major reasons for the success of petitioner and its excellent relationship with Sears has been the ability of the Goldmans to anticipate style changes in men's suits, and to stay away from short-lived styles. One of the popular style changes in the early 70's was the leisure suit. Sears asked480 petitioner to produce a better-tailored leisure suit. However, the Goldmans did not manufacture the leisure suit because they felt that this item was not a tailored garment and could be made more cheaply by sport or outerwear manufacturers. This assessment proved correct. Another style which appeared in the last 5 to 10 years was the Nehru suit. The Goldmans made some samples of Nehru suits, and several of their customers, including Sears, asked them to enter this market. However, petitioner did not wish to manufacture Nehru suits because the Goldmans felt that they were simply a fad and that the entry of petitioner into this area would be disastrous. The Goldmans were responsible for putting Sears in the double-knit business. Marvin sampled double-knit pants and felt that this would be a tremendous item which would revolutionize the clothing business. He introduced samples of double-knit suits to Vlad Kay, the Sears buyer at the time. As a result, Sears, despite Kay's initial reservations, purchased 5,000 suits in double-knit cloth from petitioner. The Goldmans conceived the double-knit suit used by Sears, and instructed petitioner's designer how to make it. They discussed481 the potential of the suit with Sears, and the sizing modifications required because of its stretch characteristics. Initially, there were many problems in manufacturing this garment which the Goldmans, and the industry, in general, had to overcome. The double-knit suit was the item that helped put Sears "on the map" with respect to tailored clothing. Petitioner produced all of the Sears double-knit suits, which were first introduced at Sears in 1970 and 1971. Sears built a product line around petitioner's suit, first titled "the Traveller," and later changed to the "Travel Knit." This suit helped Sears achieve increased market penetration. Sears doubled its sales in the two or three years when the Travel Knit suit predominated. Petitioner continued to produce Travel Knit suits for Sears through June 30, 1975. Marvin also advised Sears to introduce vests with their men's suits. In the fall of 1973, or early spring of 1974, Marvin told Don Wallin, the Sears buyer, that many vested suits were appearing in other stores. He suggested that Sears add vests to its Travel Knit suits to continue the success of this item. Although the marketing plans of Sears had already been set482 for spring, 1974, Marvin persuaded Sears to try vested suits in its major market stores. The 2,000 vested suits initially supplied by petitioner to Sears did so well that Sears suddenly was purchasing a substantial number of vests, and petitioner made all of them. Vested suits have been a continuing and substantial part of the Sears regular lines since fall, 1974. Petitioner initially sold vests to Sears at a price which was below its cost. The Goldmans felt that vests would become so popular that petitioner would make up for the initial losses through extra production. The Goldmans were aware that Sears did not want to deviate from its price categories, and the price reduction by petitioner was added incentive for Sears to introduce vests to their customers. The Goldmans have also counseled Sears with respect to certain other types of suits or suit items. Marvin encouraged Sears to purchase a polywool type of suit, made of a wood-blend fabric. In the spring, 1975, Sears recognized the importance of polywool in the marketplace and they introduced a major mix of the suit, with a vest, labeled the executive suit. Petitioner also manufactured a rope-shouldered suit, called483 a California coat, for Sears. However, the Goldmans accurately predicted that this type of suit would not endure, and after one good season with it, the Goldmans convinced Sears to return to a conventional style of coat. The Goldmans were instrumental in convincing Sears to match the plaid suits which it purchased from petitioner at all points, as opposed to only a four-way match. The Goldmans felt that this form of matching was necessary to meet the increasing demands of the consumer and to keep the suits salable. The Goldmans felt that plaid suits not fully matched would have to sell for $ 10 to $ 12 less per suit. The Goldmans agreed to match the plaids for an additional $ 1.50 per suit, an amount actually less than their cost of about $ 2.50 per suit. After Sears agreed fully to match their suits, which occurred in 1973, 1974 or 1975, the Sears suit buyer indicated to the Goldmans that he did not know what he would have done if he had not matched the plaids, as the Goldmans suggested. The Goldmans have performed extraordinary services for Sears, a factor which has played a significant role in their success and the long-term relationship of petitioner with Sears. There484 have been occasions where petitioner has shared a loss with Sears to make the goods salable. Other accommodations which the Goldmans have made to Sears included their agreements to produce vests and matched suits, both at a price which was less than petitioner's cost at the time. The Goldmans have introduced many new concepts in the process of manufacturing men's clothing. The Goldmans were one of very few manufacturers, especially in their size category, to use an examining machine so that they did not have to send their piece goods to an independent examiner. In addition, they eliminated the process of sponging piece goods, a procedure which prevents shrinkage, by purchasing piece goods that were already stabilized--pre-sponged. These innovations, which were introduced by the Goldmans in 1973 or 1974, helped the Goldmans decrease petitioner's costs. In addition, use of an examining machine allowed petitioner to maintain better quality control over the piece goods, with allowances from mills for rejected goods. Most other manufacturers sent their goods out to a public examiner. Petitioner was also one of the first manufacturers in the Baltimore area to purchase and use485 a photomarker, a machine which streamlined the process of marking piece goods. This item was purchased after the Goldmans had traveled to Philadelphia to observe its operation in another plant. Before the introduction of a photomarker, petitioner employed four people to mark piece goods. With the photomarker petitioner was able to decrease this to two employees, who worked only part time marking piece goods. The photomarker was introduced by the Goldmans to Paramount about 1973. Petitioner was also one of the first men's suit manufacturers in the Baltimore area to introduce certain machinery used in the process of spreading piece goods. At the outset of its business, piece goods were spread by hand by two people. However, the Goldmans introduced several items of equipment to this process including a plain spreading machine, then an Edgematic, then a Champion spreader, and finally a lifter. As a result of the introduction of this machinery, the Goldmans were able to convince the union to allow petitioner to employ only one man in the spreading operation. Because of these various devices, the employee engaged in this process was more productive and less taxed physically from the486 task. This series of machinery was first put into operation by petitioner somewhere during 1972-1973 or 1974. Other manufacturers, after observing Paramount's use of new machinery, then began using the same machinery. Paul Sachs is employed by petitioner to make up the cutting slips and supervise the cutters. He also receives the purchase orders from Sears, and compiles the finished goods report, indicating to Sears that the goods are ready for shipment. Although Paul Sachs is capable of carrying out his job, he reports to the Goldmans, who are responsible to make sure that the goods are cut properly. In addition, the Goldmans review cut garments to be certain that waistbands, lapels, belt loops, and other items are the proper width, and if not, they take appropriate corrective action. Cut goods are assembled and sent to Hampstead for sewing. After the goods are sewn by Hampstead, they are returned to petitioner for assembly. The goods are matched by lot, size, cut, and shade. The Goldmans are responsible for this operation, and they go into the factory and examine suits at random to check that the assembly was carried out properly by their employees. The Goldmans have487 engineered certain cost and timesaving features in the matching procedure used by petitioner with respect to goods shipped back from Hampstead. In addition, they initiated a color-coded system which assists in the performance of the cutting operation. These innovations, and others, introduced by the Goldmans, are the types of things which they have been doing in petitioner's business since its incorporation. The fully assembled garments produced by petitioner for Sears are distributed pursuant to purchase orders which are received from Sears. Sears specifies the basic color, year, model, and style of piece goods. They also specify the size and cut. However, it is the responsibility of petitioner and the Goldmans to supply the Sears fashion centers, where the goods are shipped, a good assortment of plaids, stripes, and plain colored goods. Sears does not detail by patterns. The mix must also take into account the area where the goods are being sent, as each area requires something a little different. The Goldmans instruct their employees regarding assembly of the proper mix of goods to fill a Sears order. They have developed a know-how in picking goods for Sears' fashion488 centers. If petitioner sent too many bad shipments, Sears would have a very difficult problem, and the fashion centers would no longer want its goods. Finished goods which have been assembled to fill a Sears order may be shipped in various ways, but most are sent by truck. The goods must be placed in the truck in a precise way or else the fashion centers will send the goods back to petitioner. The Goldmans have successfully operated petitioner in a manner so as to control their costs and keep their prices within Sears' "price points." They perform all the administrative functions, while other manufacturers employ separate personnel to perform each of these functions. Other manufacturers employ salesmen, piece goods buyers, lining buyers, production managers, and designers. The Goldmans handle all of these functions and duties for petitioner. Many manufacturers of men's suits have been unable to remain cost competitive, and, as a result, have lost Sears' business. These manufacturers were unable to keep their prices within Sears' price points. Petitioner could not have survived, or made a profit, unless the Goldmans performed the sales function for petitioner without489 salesmen. Their cost control in performing numerous functions is a major reason for petitioner's survival in the business, while other men's suit manufacturers have gone bankrupt. There are only 5 clothing manufacturers left in Baltimore out of 100 that were once present. Sears' Perception of Petitioner and the Hazards of the Men's Clothing IndustryDonald A. Wallin (Wallin) has been the senior buyer at Sears for all men's tailored clothing, including men's suits, sport coats, and tailored slacks, since February 1, 1977. From February 1, 1973, to February 1, 1977, Wallin was Sears' full buyer of the men's suit line in the men's tailored clothing department. He was engaged in this position for the entire period encompassing the taxable years 1974 and 1975. Wallin has been employed by Sears for 24 years, receiving a steady series of promotions during that time. In one of his earlier positions at Sears, Wallin's primary responsibility was working directly with each manufacturer of finished garments with which Sears dealt on a day-to-day basis, as well as with the piece goods mills. He would also issue the cutting tickets which indicated the size scales to be utilized by490 the manufacturers. Wallin's responsibilities as the full buyer for the men's tailored suit line were to examine the marketplace, work with the ten manufacturers with whom Sears dealt, and to build the suit line which would be marketed and distributed to Sears retail stores through its five fashion centers. From February 1, 1973, until June 30, 1975, Wallin was in contact with petitioner and the Goldmans on a daily basis. At the time petitioner was making the Travel Knit suit for Sears, which was the item that really put Sears on the map in terms of men's tailored clothing.Wallin had also been in contact in the late 1960's with petitioner and the Goldmans as assistant buyer in the men's suit line. Petitioner was the prime source with which he conducted business at this time although he then worked with five manufacturers. From February 1, 1973, until June 30, 1975, petitioner was the most helpful to Sears of the ten men's clothing manufacturers with whom Sears conducted business.Wallin actively solicited Marvin's advice and counsel with respect to the marketplace. Marvin would go to the piece goods market and visit with the major mills, and then discuss with Wallin information491 on trends and directions in the industry. Wallin could speak with Marvin "one-on-one" in all areas of the men's suit manufacturing business, including piece goods, cost of trimmings, and style changes. With other manufacturers, Wallin would have to speak with three or four people just to get the same imput and market knowledge. In the other nine companies which manufactured men's clothing for Sears, there was a separate individual responsible for each phase of the production so that no one individual could provide the answers that Wallin would need. With petitioner, Wallin could simply talk to Marvin, as he wore all five hats. Wallin received more imput and guidance from petitioner in developing the suit line than he received from the other nine men's suit manufacturers with whom Sears dealt. In Wallin's opinion petitioner rates as the best of the ten men's suit manufacturers with whom Sears dealt during 1974 and 1975. The Goldmans made Wallin's job easier and took away a lot of the burden. Because petitioner and the Goldmans do the best job of execution, Wallin can concentrate on other areas, knowing that petitioner will deliver its goods in top quality fashion, and literally492 trouble-free. Marvin was the one individual who helped Wallin create and build the total men's suit line for Sears. Although petitioner does not make garments in all of Sears' five price points, Marvin was aware of the other lines carried by Sears. He would constantly inquire as to the types of goods that Sears was purchasing, with suggestions as to style changes Sears might make with respect to the goods that they purchased, such as his suggestion concerning vested suits. As a result of Marvin's suggestion concerning the introduction of vested suits in Sears' line, vested suits became the "in demand item for the consumer," and Wallin received an award called "The Sears Best Award." Sears is petitioner's major customer. Sales to Sears accounted for 85 percent or 90 percent of petitioner's sales in 1974-1975. As a result of this concentration, the Goldmans have more responsibilities, not fewer responsibilities than other clothing manufacturers. Sears is and always has been more exacting than any individual customer. Because the Goldmans rely so heavily on Sears for their business, they must always stay on their toes and accommodate Sears. This disadvantage would not be present493 if petitioner had 200 accounts, so that a loss of 2 or 3 accounts would not cause a loss of the business. Petitioner does not have a long-term contract with Sears. Petitioner and Sears contract almost from season to season. The fact that petitioner could be dropped by Sears at any time increased the risk to it.Petitioner received the Symbol of Excellence Award from Sears for five consecutive years--1974, 1975, 1976, 1977, and 1978. Each year's award represents its performance in the immediately preceding year. This award, which was established by Sears approximately 13 or 14 years ago, is presented on an annual basis to less than 5 percent of Sears' regular suppliers of all types of merchandise. It recognizes the excellence of the manufacturer in servicing Sears, combined with the construction of a quality product, which provides good value, and which the suppliers deliver relatively free of any service problems to Sears' distribution centers. The only other men's tailored clothing manufacturer to have received the Symbol of Excellence Award from Sears was Cross Country Clothes which received the award twice, in earlier years around 1969 or 1970. Out of the approximately494 600 regular manufacturers which receive the Symbol of Excellence Award from Sears, only 200 have received the award for five years.It becomes more and more difficult for a manufacturer to maintain the standards for the award and consistently to receive it. The Symbol of Excellence Award is given to manufacturers after selection by a Sears' committee. Wallin would make a recommendation to his superior based upon the performance of a given manufacturer and of his product. Wallin's superior, in turn, would submit the recommendation to the company committee, which is comprised of members of Sears' testing lab that are involved in examining the product. The committee examines the product for conformance to quality standards, timely distribution, and the product's relative freedom from service problems. Many recommendations are rejected each year. Approximately 10 years ago, there were 10 manufacturers of men's clothing producing suits for Sears. Of those 10 manufacturers, only 3, the petitioner, Cross Country Clothes, and Joseph & Feiss still sell to Sears. The other firms are no longer in business, having gone out of business after terminating their relationships with Sears. 495 These firms, such as Michael Stern, Sagner, and Craigmore Clothes, were unable to re-engineer or adjust their pricing situation to satisfy Sears' needs. Since that time, Sears has adopted and has become involved with some Southern, low-cost outer-wear type of manufacturers in obtaining their goods. One of the main advantages derived by Sears in dealing with petitioner was its ability to adjust suit production, in the course of the production cycle, to meet the demands of the Sears distribution centers. If adjustments were necessary, Wallin would telephone Marvin, or Marvin would telephone Wallin, and petitioner's cuttings would be adjusted accordingly. This could be done easily with petitioner because Marvin controlled the cutting room, whereas, in other firms with which Sears dealt, the president of the company typically was in a New York office and the factory was in a different location. On the short side, it would take a week for the other manufacturers to make the kinds of necessary decisions that Marvin was able to make on the spot. The other firms were simply not as flexible as petitioner. The suits provided by petitioner to Sears amount to slightly over 20 percent496 of the total Sears' purchases of men's suits in the entire United States. The Goldmans understand Sears' business very well because they work so closely with Sears in all phases of the operation.Sears talks with the Goldmans, and seeks their advice, in all areas, from procuring the piece goods to styling the garment and suggesting the width of lapels. The Goldmans have spent their entire business careers in the clothing industry and are familiar with the cyclical changes. No other men's clothing manufacturer in the country has been able to retain Sears as a customer with the success of petitioner. Sears is very demanding. It does not negotiate; a manufacturer must meet its needs and demands. The Goldmans have always found a solution to answering Sears' needs. The Goldmans have been able to maintain Sears as a customer in spite of the fact that Sears has gone offshore and to non-union manufacturers to obtain clothing. The Goldmans and petitioner have been able to survive in a very hazardous industry. The men's tailored clothing manufacturing industry has gone through a disastrous period in the last ten years. There have been several fashion changes and each was rather violent497 to the industry productionwise. In addition, the industry has moved into southern non-union firms or to offshore points. Today approximately 30 percent of all suits in the United States are manufactured offshore. From 1967 to 1976, there was a 31 percent shrinkage in the number of workers in the men's tailored clothing industry, and those remaining workers spent 33 percent less hours working in the field. Between 1971 and 1976, 310 men's tailored clothing manufacturing companies, or one-third of the total number of companies, have gone out of business. 196 of these companies closed between 1974 and 1976. This decline is still continuing today. Several of the important men's suit manufacturers who have gone out of business over the last five to seven years include Sagner and Raleigh Clothes, both of whom did approximately $ 18 million in business per year. Sagner closed in 1974 and 1975 and Raleigh closed about 1972 or 1973. Others that terminated business during this period were Fashion Park, which formerly had $ 15 million in sales, Steinbloch, Kuppenheimer's with $ 17 to $ 18 million in sales, Trimount, with $ 30 to $ 40 million in sales, Daroff, with $ 50 million in annual498 sales, Friedman-Marks, and Michael Stern, which at one time did about $ 14 to $ 15 million in sales. The Time Devoted to Petitioner by the GoldmansDuring the taxable years 1974 and 1975 the Goldmans each spent around 60 hours per week on business matters. Their vacations do not exceed one week a year, and in one taxable year, Marvin took no vacation. They are "workaholics." Marvin and Daniel own stock in a number of corporations in addition to petitioner. Each of the Goldmans received salaries from five of these corporations during 1975. All of the salaries were for services rendered by the Goldmans to the respective corporations. However, the Goldmans did not devote more than 10 hours per week to their business activities unrelated to petitioner. The following chart sets forth the names of the other corporations, the salaries if any were paid to the Goldmans in the aggregate, percentage of stock owned by the Goldmans in the aggregate, the average aggregate weekly time, if any, devoted by the Goldmans on a combined basis, and the business activity, if any, of the corporation: [SEE TABLE IN ORIGINAL] Maryland Hampstead Company, Inc. (Hampstead) is a corporation499 which sews the coats, pants, and vests manufactured by petitioner. The Goldmans spent four to five hours per week, combined, on the affairs of Hampstead. They would review the manner in which work was progressing at the Hampstead facility, take care of any large problems that would arise, including certain union negotiations, insurance matters, the purchase of new equipment, and modernization of plant facilities that might be necessary. John Mancini was in charge of the Hampstead operation during 1974 and 1975. With the assistance of a foreman, and about six supervisors, John Mancini handled all the day-to-day operations, including production, machinery repair, and minor labor disputes. In addition, Mancini had responsibility for hiring and firing employees. John Mancini and his foreman were capable of running the day-to-day operation of Hampstead.Hampstead is a union shop which employs approximately 300 employees. The union negotiates all raises and benefits. The raises and benefits are negotiated nationally and Hampstead has no control over them. Ten Calvert Corporation owns and operates an office building at Ten Calvert Street in Baltimore. There are approximately 140500 or 150 tenants in this building. The building is managed by Sam Sher, the Goldmans' brother-in-law.The Goldmans' sisters, who each own one-sixth of the stock of this corporation, did not draw any salaries. The Goldmans received salaries because of their help in shaping the policy of the Ten Calvert building and the role which they played as consultants to the other shareholders and Sam Sher regarding the building. Matters concerning this building, including policy, repairs, rental policies, and whether or not the building should be sold, were discussed by the Goldmans and the other stockholders and Sam Sher approximately once a week at family gatherings. In addition, the Goldmans would spend about an hour per week on the affairs of this building. One-Ten Paca Corporation owns a 9-story office building, known as the Paca-Pratt Building, which is rented to the General Services Administration. Milton Schwaber, as associate of the Goldmans in several real estate investments, owns 50 percent of the One-TenPaca stock. During 1974 and 1975 Daniel was responsible for any problems that came up in connection with the operations of the Paca-Pratt Building, which he would resolve in501 consultation with Milton Schwaber and Marvin. The Goldmans and Schwaber also spent time discussing policy with respect to this building. Marvin spent less time in connection with the affairs of One-Ten Paca Corporation than Daniel did. During 1974 and 1975 the Goldmans and Schwaber were engaged in the negotiation of a lease with the Government Services Administration for the Paca-Pratt Building. Daniel was responsible for the actual lease negotiations. Part of the reason why Daniel received substantially more salary from One-Ten Paca Corporation than his brother is because Daniel negotiated a new lease with the government for a rental which was approximately $ 250,000 per year more than either Marvin or Milton Schwaber had wanted. The lease negotiated by Daniel extended for three years, with two one-year options. The Goldmans are also stockholders in Civic Howard Corporation, an entity which owns and operates an office building located at Howard and Lombard Streets in Baltimore. During 1974 and 1975 seven floors of the Civic Howard Building were occupied by the Social Security Administration, pursuant to a lease with the General Services Administration, and one floor was rented502 and occupied by the Maternity Center of Baltimore City. During 1974 and 1975 the Goldmans, in conjunction with Mr. Schwaber, performed the overall policymaking of the Civic Howard Corporation and took care of the problems and complaints related to the Civic Howard Building. They consulted almost every night with Mr. Schwaber. Pursuant to the lease with General Services Administration, the Goldmans were required to be available to handle the problems associated with the building. The Goldmans were also responsible for handling problems that could not be taken care of by the building manager. In total, the Goldmans spent approximately one to two hours per week on the affairs of Civic Howard Corporation. In addition to their day-to-day work with Civic Howard Corporation during 1974 and 1975, the Goldmans, with Mr. Schwaber, negotiated a lease with the Social Security Administration (through the General Services Administration), for the Civic Howard Building. Through newspaper articles, the Goldmans found out that Social Security would be moving to a new location in the future. Therefore, in connection with these negotiations, the corporation had to start accumulating funds to503 renovate the Civic Howard Building, built before 1904, to accommodate multiple tenants. In the negotiations conducted by the Goldmans with the government over the leasing of space in the Civic Howard Corporation and One-Ten Paca Corporation, negotiating periods would generally not last more than an hour or an hour and a half per week, and negotiations would sometimes extend over a period of time--six months to a year. During 1974 and 1975, S & G Realty Company leased a warehouse in Richmond, Virginia, to A & P on a net lease basis. Milton Schwaber owned 50 percent of the stock in S & G. Part of the Goldmans' compensation from S & G was related to the fact that they had not taken salaries in previous years for work done, because they were waiting until S & G was in a position to pay them salaries for the work. East Hartford Holding Company owned a warehouse building in Hartford, Connecticut, which was leased to A & P on a net lease basis. Milton Schwaber owned 50 percent of the stock of this corporation. The salaries received by the Goldmans from East Hartford Holding Company in 1975 represented their work in connection with certain problems which the corporation had with504 the roof and paving at the leased property, and also payment for certain of the work performed by the Goldmans in past years for which they had not been compensated. Northwood Corporation owned and operated the Northwood Shopping Center located at Northwood and Havenwood Road in Baltimore. Milton Schwaber owned 50 percent of the stock. Northwood Shopping Center had approximately 25 tenants. The Goldmans were involved in overall policy for this corporation, including center operations, tenant problems, and leasing problems. Sam Sher was in charge of the daily activities of Northwood Corporation. Reasonableness of the Compensation Paid to the Goldmans by PetitionerTed S. Decker (Decker), a witness for the petitioner, is an expert in the men's suit manufacturing industry and with respect to compensation paid by men's clothing manufacturers and suit manufacturers to executives in this field. He has had long and impressive experience in these areas, and was well qualified to testify with respect to these fields, as indicated below. A. From 1954 through 1973 Decker held several executive positions with L. Greif & Bros., Baltimore, Maryland, the largest and most successful505 manufacturers of men's clothing in the United States. From 1971 to 1973 Decker had nine different men's apparel companies under his supervision, as senior vice president of manufacturing for Genesco Corporation's Men's Apparel Group, including L.Greif & Bros. and Phoenix Clothiers, two sizable men's clothing companies. In 1973 Decker was appointed president of L. Greif & Brothers. B. Decker is presently a business consultant for Genesco, L. Greif, Palm Beach, Lebow Brothers, and Haas Tailoring, all well-known men's clothing manufacturers. In this capacity he has been asked to render his opinion as to the executive compensation offered by these corporations. He has served these firms since 1974. C. Decker is presently associated with the executive search firm of Coltan, Bernard and Seitchik of San Francisco. This organization specializes in searching for executive talent in the apparel and textile industry. In this role, he is very well acquainted with the salary needs and compensation arrangements that are made in the apparel industry. D. From 1968 through 1976 Deceker served as chief of the labor negotiating committee for the Clothing Manufacturers Association of506 the United States, a committee with which he is still involved.In this position he had access to a massive amount of data on member companies, including overhead costs in the various businesses, which took into account executive compensation. E. In 1974, Decker performed a detailed management compensation analysis for Palm Beach Clothing Company, including a comparison of that firm's management compensation to other clothing firms and other industries in general. Decker conducted a similar study for Fairlanes Corporation, a recreation firm with headquarters in Baltimore, in his position as head of Fairlanes' management compensation committee. Decker heard the testimony of the Goldmans at this trial. In addition, he examined the financial statements of Paramount for 1974 and 1975, as well as certain financial information of Paramount for earlier years, including records of sales, the Goldmans' salaries, and net income. He also personally visited petitioner's factory and inspected its operation. Decker had no contact with either of the Goldmans prior to his employment as an expert to examine the compensation paid to the Goldmans by petitioner in 1974 and 1975. He had previously507 heard of the Goldmans' general reputation in the men's clothing industry. Decker knew that the Goldmans ran a very low-cost operation. He also knew that the Goldmans were one of the few manufacturers able to retain Sears because of their unique talents in controlling costs. Much of Decker's knowledge came from the clothing workers' unions, who held the Goldmans up as a model example of manufacturers able to remain cost competitive with off-shore and non-union manufacturers. Decker's opinion was that petitioner is a "one-of-a-kind" and "unique" business. In his experience, he knows of no men's suit manufacturing company, small or large, in which two people are the "whole show," as is the case with petitioner. The Goldmans are able to run petitioner's business themselves, without support or backup, because of their ability and talents to keep things simple, make decisions quickly, and "be done with it." In a typical men's tailored clothing manufacturing company, with around $ 4,000,000 - $ 7,000,000 of sales, there would be a sales manager and sales force on commission. In addition, there would be a piece goods buyer, a financial man, a manager of customer service, a production508 manager, and a shipment manager. The Goldmans' talents and ability to keep things simple and make decisions allow them to perform all of these functions. The salaries drawn by the Goldmans between 1964 and 1970 were substantially smaller than the average in the industry for a company of petitioner's size. In its fiscal years 1964 through 1970, the Goldmans received compensation from petitioner as follows: YearMarvin GoldmanDaniel Goldman1964$ 6,450$ 6,45019658,1008,10019667,5007,50019678,1008,10019687,5007,500196922,80022,800197023,32023,320A firm could not have employed anyone to perform the duties of the Goldmans for the salaries which petitioner paid to the Goldmans during this period. A successful men's suit manufacturing company could not have expected to obtain a chief executive in the open market, in 1964, for even $ 50,000. The Goldmans were paid low wages in these prior years in an effort on their part to build the strength of petitioner so it could grow. They purposely kept their compensation to a minimum in the 1960's to enable petitioner to build up equity so that it could expand. In Decker's509 opinion the Goldmans were also underpaid by petitioner in 1974 and 1975. He based this opinion, in part, upon the total financial picture of petitioner, the sales generated by the Goldmans, their ability to keep petitioner's overhead under 10 percent, the qualifications of the Goldmans, the extent and scope of their work, the size and complexity of petitioner's business as well as its gross and net income, or its profitability, and the time that the Goldmans spent performing their duties for petitioner. The compensation paid to the Goldmans during 1974 and 1975, when viewed as a percentage of the sales of petitioner in the respective years, was under the industry norm. Decker was familiar with compensation paid to salesmen for men's suit manufacturing companies and, during 1974 and 1975, the industry average for compensation provided by a men's tailored clothing manufacturer to its salesmen was between 5-1/4 percent and 5-1/2 percent commission on sales, representing the commission cost plus the fringe benefits. In the firm in which Decker was employed from 1954-1973, L. Greif & Bros., there were persons who did purely selling who earned over $ 150,000 per year. Other men's510 suit manufacturers of a comparable size to petitioner pay various fringe benefits to their top management, including major medical, bonus arrangements, substantial pension and profit sharing plans, medical insurance for the executive's entire family, and automobile, country club dues, insurance, and stock option plans. None of these is available at petitioner. The fringe benefits afforded top management generally cost between 30 percent to 40 percent normal compensation. As part of his analysis of the compensation paid by petitioner to the Goldmans during 1974 and 1975, Decker made written comparisons of its financial performance against industry statistics which he compiled from Robert Morris Associates and the American Apparel Manufacturers' Association. Each of these organizations compiles industry-wide statistics in the men's clothing manufacturing field. In his analysis of Paramount's percentage of pretax income to sales, as compared with the industry average, and the average for men's suit manufacturers with sales volumes from $ 1 to $ 10 million, petitioner bettered both groups in 1974 and 1975. In 1974 its percentage of profit to sales was 5.36, against an industry511 average of 5.4 and a percentage of 2.5 with respect to those manufacturers doing business of $ 1 to $ 10 million in sales. In 1975 petitioner's percentage was 4.44, as against 3.3 for the general industry and 2.6 percent for the $ 1 to $ 10 million sales group. Its percentage was better than the overall industry in all years analyzed, from 1967 through 1975, except in 1967 when petitioner was slightly below the industry-wide average. With respect to petitioner's percentage of pretax net income to its net worth, in each of the years studied, 1967 through 1975, its percentage exceeded the industry percentage, except in 1975 when the industry was a little better, 20.0 as compared with 18.34 for Paramount. The financial analysis made by Decker which he considered of primary significance in assessing petitioner's performance was a comparison of its percent of overhead to its sales, in contrast to the industry average. Petitioner was far superior to the industry in each of the years for which industry figures were available, 1972-1975. In 1974, petitioner's percentage was 7.84, as contrasted with an industry percentage of 16.5. In 1975 its percentage of overhead to sales was 9.36, 512 in contrast with an industry figure of 17.2 percent. In all of his experience, Decker had never seen a men's suit manufacturing company with an overhead of 10 percent or under. In his financial analysis Decker also analyzed the total salaries and wages paid by petitioner, including officers and other employees, as a function of its sales. In his comparison with the general men's suit manufacturing industry, from 1973 through 1975, the years for which industry figures were available, petitioner consistently outperformed the industry. In 1974 petitioner's percentage was 5.15, in contrast with a figure of 8.6 for the industry. In 1975, its percentage in this area was 6.9, as compared with 8.9 percent for the industry. Decker supervises Esquire Sportswear, which makes tailored sportswear. During 1973 and 1974 Esquire Sportswear had about $ 8 to $ 10 million in sales volume. In 1973 the two chief executives of this company received $ 80,000 each, and they did not perform the functions performed by the Goldmans. Esquire Sportswear also had a sales manager, a sales force, a production manager, an office manager, a piece goods buyer, and a New York office. The use of Hampstead, 513 by petitioner, to perform the sewing function for it has no effect on the reasonableness of the compensation paid by petitioner to the Goldmans. Its use of Hampstead is no different than if it had an independent contract shop perform the sewing function, something which petitioner had previously done and other manufacturers now have. In 1974 petitioner had sales of $ 5,276,644 and, in 1975, its sales declined to $ 4,587,502. Although there was a decrease of approximately $ 699,000 in sales from 1974 and 1975, petitioner did very well in 1975. Several men's suit manufacturers went into bankruptcy during 1975. The economy was bad, there was a sharp drop-off in retail sales, and imports hit very heavily in the marketplace. The Goldmans did a better job with petitioner in 1975, showing a smaller net income after taxes, than they did in the four previous years. They beat the downtrend and outperformed the industry. In his capacity as a full buyer in the suit line, Donald Wallin, Sears' senior buyer, had become familiar with the compensation paid by other manufacturers to people like piece goods buyers and trimming buyers in 1974 and 1975. In the early 1970's, piece goods buyers514 and trimmings buyers each were earning about $ 50,000 to $ 60,000 per year. These piece goods buyers were not responsible for styling the garment. All they did was buy the piece goods. The firms with which they worked had a separate sales manager, a piece goods buyer, a trimmings buyer, a stylist and a quality control man, and a production manager. Many of the other manufacturing firms would also have someone else in charge of financing. There are no supervisory personnel at petitioner other than the Goldmans. They run the entire operation. The Goldmans determined their salaries for 1974 and 1975 based upon what they felt they were worth. They never related their salaries to net profits. Both of them thought their salaries should have been higher for all of the services they performed for petitioner. For example, they knew that a salesman in their field would receive a sales commission of 5 percent. If such a salesman sold $ 4 million worth of clothing, he would receive $ 200,000. In 1974 the Goldmans drew a total salaries of $ 160,000, with sales in excess of 4.5 million. In 1975, the total compensation drawn by the Goldmans from petitioner was $ 215,000. A comprehensive515 summary and analysis of certain financial information concerning petitioner is set forth in the tables which follow. FINANCIAL DATA OF PARAMOUNT CLOTHING CO., INC.Compensation of Goldmans[SEE TABLE IN ORIGINAL] Net WorthTotal Salaries 1964 $ 301,817$ 72,6761965310,50663,7081966334,62866,5021967347,13775,0661968374 ,00868,1031969420,316110,7301970469,294110,0541971534,882140,3181972715,453156,2921973871,207246,58419741,006,814271,81019751,103,381316,645PARAMOUNT CLOTHING CO., INC. Performance Ratios[SEE TABLE IN ORIGINAL] PERFORMANCE RATIOS OF PARAMOUNT CLOTHING CO., INC.GOLDMAN'S COMPENSATION AS PERCENTAGE OF: [SEE TABLE IN ORIGINAL] On its Federal corporate income tax returns for the fiscal years ended June 30, 1974, and June 30, 1975, petitioner claimed the following deductions for officers' salaries: MarvinDaniel Fiscal Year EndedGoldmanGoldmanJune 30, 1974$ 80,000$ 80,000June 30, 1975115,000100,000In his notice of deficiency516 dated August 10, 1977, respondent made the following adjustments with respect to the deductions claimed by petitioner for compensation paid to its officers: Marvin GoldmanDaniel Goldman Fiscal Year EndedAllowedDisallowedAllowedDisallowedJune 30, 1974$ 65,000$ 15,000$ 65,000$ 15,000June 30, 197565,00050,00065,00035,000ULTIMATE FINDINGS OF FACT The amounts paid by petitioner to Marvin and Daniel Goldman for the taxable years ended June 30, 1974, and June 30, 1975, were reasonable compensation for personal services rendered, and the entire amounts of such compensation were properly deducted in those years under section 162(a)(1) of the Code. OPINION The only issue in controversy here is whether the petitioner is entitled to deduct $ 160,000 in its taxable year ended June 30, 1974, and $ 215,000 in its taxable year ended June 30, 1975, for compensation paid to Marvin and Daniel Goldman, its two officers. Respondent determined that the compensation paid to the Goldmans was excessive and disallowed $ 30,000 in 1974 and $ 85,000 in 1975. 517 Petitioner bears the burden of proving that it is entitled to the deductions claimed. Botany Worsted Mills v. United States,278 U.S. 282">278 U.S. 282 (1929). The deductibility of the compensation paid to the Goldman brothers turns on the meaning of section 162(a)(1) which permits a taxpayer to deduct "a reasonable allowance for salaries or other compensation for personal services actually rendered." To be deductible, it must be established that the payments: (1) were actually intended to be paid purely for the services, and (2) did not exceed the reasonable compensation for the services actually rendered. Sec. 1.162-7, Income Tax Regs.; Electric & Neon, Inc. v. Commissioner,56 T.C. 1324">56 T.C. 1324, 1340 (1971), affd. without opinion 496 F. 2d 876 (5th Cir. 1974); Nor-Cal Adjusters v. Commissioner,503 F. 2d 359, 362 (9th Cir. 1974), affg. a Memorandum Opinion of this Court; Klamath Medical Service Bureau v. Commissioner,29 T.C. 339">29 T.C. 339, 347 (1957), affd. 261 F. 2d 842 (9th Cir. 1958), cert. 518 denied 359 U.S. 966">359 U.S. 966 (1959). Whether the petitioner intended the payments to be compensation for services presents a question of fact, to be resolved on the basis of all the surrounding facts and circumstances. Paula Construction Co. v. Commissioner,58 T.C. 1055">58 T.C. 1055, 1059 (1972), affd. without opinion 474 F. 2d 1345 (5th Cir. 1973); Electric & Neon, Inc. v. Commissioner,supra.Similarly, the reasonableness of the amount of the compensation presents a factual issue. Charles Schneider & Co. v. Commissioner,500 F. 2d 148, 151 (8th Cir. 1974), affg. a Memorandum Opinion of this Court, cert. denied 420 U.S. 908">420 U.S. 908 (1975); Pacific Grains, Inc. v. Commissioner,399 F. 2d 603, 605 (9th Cir. 1968), affg. a Memorandum Opinion of this Court; Levenson & Klein, Inc. v. Commissioner,67 T.C. 694">67 T.C. 694, 711 (1977); Pepsi-Cola Bottling Co. of Salina v. Commissioner,61 T.C. 564">61 T.C. 564, 567 (1974), affd. 528 F. 2d 176 (10th Cir. 1975). The factors generally519 considered relevant in determining the reasonableness of compensation include: the employee's qualifications; the nature, extent and scope of the employee's work; the size and complexities of the business; a comparison of salaries paid with the gross income and the net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; the prevailing rates of compensation for comparable positions in comparable concerns; the salary policy of the taxpayer as to all employees; and in the case of small corporations with a limited number of officers the amount of compensation paid to the particular employee in previous years. * * [Mayson Mfg. Co. v. Commissioner,178 F. 2d 115, 119 (6th Cir. 1949), revg. a Memorandum Opinion of this Court.] Commercial Iron Works v. Commissioner,166 F. 2d 221, 224 (5th Cir. 1948), affg. a Memorandum Opinion of this Court; Pepsi-Cola Bottling Co. of Salina v. Commissioner,61 T.C. at 567-568; Dahlem Foundation, Inc. v. Commissioner,54 T.C. 1566">54 T.C. 1566, 1579 (1970). No single factor is decisive; rather, we must consider and weigh the totality520 of the facts and circumstances in arriving at our decision. Mayson Mfg. Co. v. Commissioner,supra.We think the evidence in this record clearly establishes the reasonableness of the compensation paid for the valuable services performed for petitioner by Marvin and Daniel Goldman during the years in question. There is no doubt that the Goldmans, through their ingenuity and hard work, were primarily responsible for the success of the business. Obviously they have been the heart and soul of petitioner for over 30 years, although their combined salaries are less than 5 percent of sales. Edwin's Inc. v. United States,501 F. 2d 675, 678 (7th Cir. 1974); Schanchrist Foods, Inc. v. Commissioner,T.C. Memo. 1977-129. While we will specifically refer only to those factors on which we have placed the greatest reliance, we have carefully considered all relevant criteria in reaching our conclusion. The facts are fully detailed in our findings. Some of the most important ones which have influenced our judgment can be summarized as follows: 1. The Goldmans had extensive duties and responsibilities with respect to the operations521 of petitioner during the taxable years 1974 and 1975, and indeed in every year since its incorporation in 1946.2. Petitioner's success in retaining its business with Sears is primarily attributable to the total commitment of the Goldmans. They have had an enormous influence on Sears' styling by anticipating style changes in men's suits. They were responsible for putting Sears into selling double-knit suits and vested suits. 3. The ability of petitioner to stave off competition from off-share and non-union manufacturers and generally to outperform the industry is attributable to steps taken by the Goldmans in the use of technology and their accurate perceptions of the demands on the men's tailored clothing industry. 4. The men's clothing business is very hazardous. A substantial number of manufacturers have gone out of business in the last decade. 5. Petitioner does not provide the Goldmans with fringe benefits normally granted to other business executives. 6. The Goldmans are hard working people, having devoted at least 50 hours per week to petitioner's business. 7. The Goldmans were substantially underpaid in prior years so that petitioner could retain as522 much capital as possible for future growth. 8. The Goldmans are responsible for and active in every aspect of petitioner's business, including sales, production, material purchases, financing, shipping, and customer service.They perform the duties and functions for petitioner which are generally conducted by at least five persons in other men's tailored clothing manufacturers of similar size. 9. Salaries paid to other executives in the men's clothing manufacturing industry, both in prior years and during the taxable years here involved, show that the Goldmans have been underpaid. We note that substantially all of the testimony supports the conclusion that the amounts paid to the Goldmans constitute reasonable compensation for services actually rendered. In addition to the credible testimony of Marvin and Daniel Goldman, petitioner offered the testimony of two witnesses--Donald Wallin, Sears' head buyer of men's suits during the taxable years 1974 and 1975 and a recognized student of the industry; and Ted S. Decker, one of the leading experts in the country on men's tailored clothing manufacturing and on the subject of executive compensation in that industry. Mr. Decker's523 unequivocal opinion was that the salaries paid to the Goldmans were reasonable. 2Respondent points out that petitioner, in its long history, has never paid a dividend. Hence it is argued that "this case is perfectly fit for application of the McCandless doctrine." Respondent refers to the "automatic dividend rule" for closely held corporations enunciated in Charles McCandless Tile Service v. United States,422 F. 2d 1336 (Ct. Cl. 1970). In that case the Court of Claims found that the compensation paid by a closely held corporation with a poor dividend record to its two shareholder-officers was within the realm of reasonableness, but it nevertheless concluded that a portion of the purported compensation was not in fact paid for services rendered and was therefore in reality a dividend distribution. In cases decided after McCandless the Tax Court has repudiated any "automatic dividend rule" based solely on a poor dividend record by stating that 524 "while the absence of dividends may indicate the presence of disguised dividends, it does not convert compensation determined to be reasonable into dividends." Davis & Sons, Inc. v. Commissioner,T.C. Memo. 1975-229; Laure v. Commissioner,70 T.C. 1087">70 T.C. 1087, 1098 (1978). In another opinion of this Court it was held that, although the absence of a dividend was "significant," other factors were important. Nor-Cal Adjusters v. Commissioner,T.C. Memo. 1971-200, affd. 503 F.2d 359">503 F.2d 359 (9th Cir. 1974). Furthermore, two Courts of Appeals which have considered this issue have declined to adopt an "automatic dividend rule." See Charles Schneider & Co. v. Commissioner,500 F. 2d 148, 153 (8th Cir. 1974), and Edwin's Inc. v. United States,501 F. 2d 675 (7th Cir. 1974). See also Rev. Rul. 79-8, I.R.B. 1979-2, page 6, in which the Commissioner has recently reled that deductions for reasonable compensation paid to shareholder-employees of a closely held corporation will not be denied on the sole ground that the corporation has not paid more than an insubstantial portion of its earnings as525 dividends on its outstanding stock. In the instant case the evidence regarding the dividend history of petitioner, though relevant, is not conclusive. The Goldmans were undercompensated in prior years to permit the accumulation of needed corporate capital. Under such circumstances the absence of dividend history carries little weight. Respondent argues that much of the Goldmans' time was devoted to a multitude of business interests other than that of petitioner. This argument is not supported by the record which discloses that the Goldmans, on a combined basis, spent about 10 hours per week on other businesses. Accordingly, we hold that the amounts paid by petitioner to Marvin and Daniel Goldman during the taxable years ended June 30, 1974, and June 30, 1975, constitute reasonable compensation for services rendered and are therefore fully deductible as ordinary and necessary business expenses under section 162(a)(1). Decision will be entered for the petitioner.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, unless otherwise indicated.↩*. Includes compensation to Goldmans↩2. Respondent had no witnesses and offered no expert testimony to support his adjustments to the Goldmans' salaries.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622111/	Estate of Amelia B. Woodworth, Deceased, Citizens & Southern National Bank of South Carolina and Leonard Becker, Jr., Executors, Petitioners v. Commissioner of Internal Revenue, RespondentWoodworth v. CommissionerDocket No. 1953-65United States Tax Court47 T.C. 193; 1966 U.S. Tax Ct. LEXIS 16; November 23, 1966, Filed 16 Decision will be entered for the respondent. In her last will and testament the decedent devised her residuary estate to named trustees for the purpose of assisting in the establishment of a Catholic hospital in Spartanburg County, S.C., or for the purpose of maintaining a Catholic hospital in Spartanburg County, in the discretion of the trustees. There was no Catholic hospital in Spartanburg County on the date of the decedent's death. Held, that petitioners are not entitled to a charitable deduction under sec. 2055, I.R.C. 1954, in any amount by reason of the alleged charitable devise. The petitioners have not sustained their burden of proof that the possibility that the charitable transfer will not become effective is not so remote as to be negligible under sec. 20.2055-2(b), Estate Tax Regs. The doctrine of cy pres is not recognized in South Carolina. T.E. Walsh, for the petitioners.Thomas A. Brown, for the respondent. Dawson, Judge. DAWSON194 OPINIONRespondent determined a deficiency in estate tax against the petitioners in the amount of $ 27,706.60.Some adjustments made in the notice of deficiency were not contested by petitioners. The only issue for decision is whether the petitioners are entitled to a charitable deduction of $ 180,904.14 by reason of a devise in the decedent's residuary estate.All of the facts have been stipulated by the parties and are adopted as our findings.Amelia B. Woodworth (hereinafter called the decedent) died testate on September 23, 1961, a resident of Spartanburg County, S.C. After the decedent's death, 18 her last will and testament was admitted to probate in the Probate Court for Spartanburg, S.C. Reverend Maurice R. Daly, Leonard Becker, Jr., and the Citizens & Southern National Bank of Spartanburg were appointed as coexecutors of the estate. Reverend Maurice R. Daly, pastor of St. Paul's Catholic Church in Spartanburg, died on May 25, 1962.The tenth item of the decedent's last will and testament provided:I will, devise and bequeath all the rest, residue and remainder of my estate -- real estate, buildings, furniture, linens, diamonds, silver and silverware and any and all other real and personal property -- to Rev. Maurice R. Daly, Leonard Becker, Jr. and the Citizens and Southern National Bank of Spartanburg, South Carolina, as Trustees, for the purpose of assisting in the establishment of a Catholic Hospital in Spartanburg County, South Carolina, or for the purpose of maintaining a Catholic Hospital in Spartanburg County, South Carolina, in the discretion of my Trustees. In the event Leonard Becker, Jr. predeceases me or dies during the continuance of this Trust, then, in that event, I nominate and appoint Col. A. J. Becker of Columbia, South Carolina, to serve in his place19 and stead.(a) My Trustees are authorized to invest and reinvest the Trust Estate in such stocks, bonds, mortgages, securities or other property, real or personal, as will yield a reasonable income consistent with reasonable safety and my desire to help in establishing or maintaining a Catholic Hospital in Spartanburg County, South Carolina. In making investments and reinvestments, my Trustees shall have full and complete authority to exercise their discretion thereon.(b) My Trustees are authorized to retain any securities, investments or other real or personal property received by them hereunder from my estate or from any other sources, for such time as they believe advisable for the best interests of my estate and the accomplishment of the purposes of my Will.(c) My Trustees are authorized to sell, exchange, lease, option or otherwise dispose of all or any portion of the Trust Estate in such manner and upon such terms and conditions as they shall believe advisable and in the best interests of my estate, and to make, execute and deliver deeds, assignments and other documents necessary to effect any of these powers.195 The twelfth item of the decedent's last will and testament20 provided:I have tried to divide my property among those who have been kind to me and to help the very special charity I have wanted to help, namely, the establishment of a Catholic Hospital for Spartanburg, South Carolina, or the establishment of a fund for the purpose of maintaining a Catholic Hospital in Spartanburg, South Carolina.At the date of the decedent's death there was no Catholic hospital in existence in Spartanburg County, S.C.The trust established in the tenth item of the decedent's last will and testament and the transfer thereof to a charitable organization was dependent and conditioned upon the organizing or building of a Catholic hospital in Spartanburg County, S.C.On December 31, 1962, the Citizens & Southern National Bank of South Carolina and Leonard Becker, Jr., as coexecutors of the Estate of Amelia B. Woodworth, filed a Federal estate tax return for the estate with the district director of internal revenue at Columbia, S.C. In the Federal estate tax return the petitioners claimed a charitable deduction in the amount of $ 180,904.14 relating to the trust set out in the tenth item of decedent's last will and testament. Respondent, in his notice of deficiency, 21 disallowed the claimed charitable deduction with the following explanation:The charitable bequest claimed in Schedule N of the return in the amount of $ 180,904.14, representing a trust for the purpose of assisting in the establishment of a Catholic hospital or for the purpose of maintaining a Catholic hospital in Spartanburg County, South Carolina, has been disallowed since it has not been shown that there has been or will be an effective transfer of funds, passing unconditionally to or for the benefit of a trust beneficiary, established and operating as a charitable organization.The issue to be resolved is whether the devise of decedent's residuary estate is contingent or conditional within the meaning of section 2055 (a)(3), 1 I.R.C. 1954, and the regulations 2 promulgated thereunder 196 and, if so, whether the possibility that the charitable transfer will not become effective is so remote as to be negligible.Petitioners contend that the devise here in issue is final, absolute, unconditional, and irrevocable. They argue that it was a certainty on the day of her death (Sept. 23, 1961) and that it should not be defeated because the Spartanburg community or the Catholic Church "may need to take further action in order to complete the bequest." The substance of petitioners' position is stated in their brief as follows:The fact that Mrs. Woodworth anticipated that the money would be used "to assist in establishing a Catholic Hospital" clearly indicates that the bequest was to be used as a catalyst in accomplishing this great objective. We 23 do not understand that the Regulations are so rigid as to require proof as of the date of her death that the hospital will be established with a mathematical certainty.Respondent, on the other hand, claims that the bequest is contingent on a Catholic hospital coming into existence in Spartanburg County or the creation of a fund to establish a hospital; that it is speculative or conjectural that this will ever occur; and, there being no cy pres doctrine in South Carolina, there is no assurance that the charitable bequest will ever become effective. Consequently, the respondent argues that the devise is subject to a condition which requires the disallowance of the charitable deduction because the possibility that it will not become effective is not so remote as to be negligible.Without doubting the highly laudable and charitable purpose of the decedent, we are constrained to agree with the respondent's position. It is clear from the provisions of section 20.2055-2(b), Estate Tax Regs., that a deduction cannot be allowed for a devise, bequest, or transfer which in fact is conditional. And, if the bequest is conditional, then the inquiry is whether the possibility that the charity24 will not take is or is not so remote as to be negligible. See Estate of Moffett v. Commissioner, 269 F. 2d 738 (C.A. 4, 1959), affirming 31 T.C. 541">31 T.C. 541 (1958). As a practical matter, we think the bequest was conditional within the meaning of the regulations. In the first place, the ultimate object of the bequest was not in existence at the date of the decedent's death and, secondly, the bequest was limited to either of two specific purposes mentioned in the decedent's will. Moreover, since the trustees could not use the fund for purposes other than those stated in the will and until steps were taken to establish a Catholic hospital, the fund would lie idle and for the use of no one. Thus the bequest had no semblance of certainty unless action was taken to establish either a hospital or a fund to build one. Petitioners have failed to produce any evidence that the hospital contemplated by the decedent would be established. They had the burden of proving that the hospital would be built and the funds in trust would be used for that purpose, and their failure of proof is fatal to their cause. See Merchants National 197 v. Commissioner, 320 U.S. 256">320 U.S. 256 (1943);25 and Hammerstein v. Kelley, 349 F. 2d 928 (C.A. 8, 1965). Likewise, the petitioners have the burden of proving that the possibility that the transfer will not become effective is so remote as to be negligible. They have submitted no evidence of any nature to support their position and to meet their burden of proof.The only material fact in this record, as of the date of death of the decedent, is that there was no Catholic hospital in Spartanburg County. The probability or possibility that a Catholic hospital in Spartanburg County would be established and that the residuary estate will pass to a Catholic hospital there for its use and benefit after the decedent's death is too speculative to conclude that the possibility that the charitable transfer will not become effective is so remote as to be negligible. This is true for two reasons: (1) There is no guarantee or certainty that there will ever be a Catholic hospital in Spartanburg County which could take this residuary bequest; and (2) in the event there would never be a Catholic hospital in Spartanburg County, there is no judicial or statutory recognition of the doctrine of cy pres in the26 State of South Carolina which would enable the trust fund to be used by the trustees for other charitable purposes. There are no readily ascertainable or reliably predictable facts in this record upon which we may conclude that, as a practical certainty, charity will receive the contemplated financial benefit. St. Louis Union Trust Co. v. Burnet, 59 F. 2d 922 (C.A. 8, 1932).The phrase "so remote as to be negligible" contained in section 20.2055-2(b) of the regulations has been defined as "a chance which persons generally would disregard as so improbable that it might be ignored with reasonable safety in undertaking a serious business transaction." United States v. Dean, 224 F. 2d 26 (C.A. 1, 1955). It is likewise a chance which every dictate of reason and common sense would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance. United States v. Provident Trust Co., 272">291 U.S. 272 (1934). Applying these criteria to the facts of this case, it is apparent that the possibility that a Catholic hospital would not 27 be built in Spartanburg could not be ignored with reasonable safety if this were connected with a serious business transaction. There is nothing absolute or certain with respect to the fact that a Catholic hospital might or might not come into existence and, therefore, is not so remote as to be negligible.To permit the petitioners to prevail in this controversy would mean the allowance of an immediate and irrevocable deduction from the gross estate of the decedent in the amount of $ 180,904.14 with a very distinct possibility that charity will receive nothing since there is a good chance that the specific charity will never come into existence. 198 In our opinion these circumstances surrounding the devise constitute a barrier to the trustees in carrying out the testator's charitable purpose. And surely it was not the intent of this statute to allow a chariable deduction one day and on the next day have the charitable bequest defeated because of a failure of a beneficiary being capable of accepting the gift.As an important part of his argument that there is no assured bequest to a beneficiary who can take and use the fund for charitable purposes, the respondent points out28 that under the laws of South Carolina there is no doctrine of cy pres3 to uphold this devise if the initial intent of the decedent be frustrated or rendered impossible of performance. There is no statute in South Carolina pertaining to the doctrine of cy pres. In fact, it is recognized by leading legal authorities that South Carolina has rejected the doctrine. See Restatement, Trusts, sec. 399 (2d ed.); 15 Am. Jur. 2d, Charities, sec. 132; Attorney General v. Jolly, 2 Strob. Eq. 379 (S.C. 1848); Pringle v. Dorsey, 3 S.C. 502 (1872); Mars v. Gibert, 93 S.C. 455">93 S.C. 455, 77 S.E. 131">77 S.E. 131 (1913); City of Columbia v. Monteith, 139 S.C. 262">139 S.C. 262, 137 S.E. 727">137 S.E. 727 (1927); and Furman University v. McLeod, 238 S.C. 475">238 S.C. 475, 120 S.E. 2d 865 (1961). See also 1 S.C.L.Q. 331 (1949). The absence of the cy pres doctrine in South Carolina makes the bequest here even more remote with respect to a charity ever taking the bequest. Furthermore, even if we assume 29 arguendo that the cy pres doctrine is recognized in South Carolina, it is doubtful that the trust here involved has the necessary "general charitable intent" since the gift is too specific as to purpose and thus forecloses the possibility of any deviation from the purposes stated in the twelfth item of decedent's last will and testament.In the instant case there is no existing designated, identifiable, organized charity to accept the gift, and, under State law, 30 the gift will fail completely and the trust property will revert to the donor's estate to pass as intestate property to her heirs at law unless a Catholic hospital is constructed or purchased. In our judgment the happening of this event is too remote to allow the claimed charitable deduction. While the estate tax provisions encourage charitable bequests by authorizing deductions for such purposes, they provide no deductions for bequests which may never reach the charity. Commissioner v. Sternberger's Estate, 348 U.S. 187">348 U.S. 187, 198 (1955). We believe the allowance of the deduction sought here would open a door to easy abuse.199 We hold, on this record, that the possibility that the charitable transfer will not become effective is not so remote as to be negligible. Cf. Estate of Abraham L. Buckwalter, 46 T.C. 805">46 T.C. 805 (1966), and Estate of Russell Harrison Varian, 47 T.C. 34">47 T.C. 34 (1966) (issue 3). Accordingly,Decision will be entered for the respondent. Footnotes1. SEC. 2055. TRANSFERS FOR PUBLIC, CHARITABLE, AND RELIGIOUS USES.(a) In General. -- For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers (including the interest which falls into any such bequest, legacy, devise, or transfer as a result of an irrevocable disclaimer of a bequest, legacy, devise, transfer, or power, if the disclaimer is made before the date prescribed for the filing of the estate tax return) -- * * *(3) to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, and no substantial part of the activities of such trustee or trustees, or of such fraternal society, order, or association, is carrying on propaganda, or otherwise attempting, to influence legislation; or↩2. Sec. 20.2055-2(b), Estate Tax Regs., provides, in pertinent part, as follows:Transfers subject to a condition or a power↩. If, as of the date of a decedent's death, a transfer for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible.3. In the Restatement, Trusts, sec. 399 (2d ed.), the cy pres↩ doctrine is stated as follows: If property is given in trust to be applied to a particular charitable purpose, and it is or becomes impossible or impracticable or illegal to carry out the particular purpose, and if the settlor manifested a more general intention to devote the property to charitable purposes, the trust will not fail but the Court will direct the application of the property to some charitable purpose which falls within the general charitable intention of the settlor.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622116/	Farnham Manufacturing Company, Successor by Merger to Paragon Research, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentFarnham Mfg. Co. v. CommissionerDocket No. 16299United States Tax Court13 T.C. 511; 1949 U.S. Tax Ct. LEXIS 76; September 30, 1949, Promulgated 76 Decision will be entered under Rule 50. During the taxable years, petitioner was engaged in designing and engineering special machinery to be used in manufacturing airplane wings. Its capital stock was owned by four stockholders, all of whom were regularly engaged in the active conduct of the business. Capital was not an income-producing factor. Held, petitioner is entitled to personal service classification under the provisions of section 725, I. R. C.J. Eugene McMahon, Esq., and Stanley H. Montfort, Esq., for the petitioner.William A. Schmitt, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 511 The respondent determined deficiencies of $ 47,797.11 and $ 21,151.75 in the petitioner's excess profits tax liability for the fiscal years ended June 30, 1943 and 1944, respectively. He also determined an overassessment in income tax for those respective years in the amounts of $ 23,165.55 and $ 7,143.35.The sole issue is whether or not the petitioner is entitled to be classified as a personal service corporation under the provisions of section 725 of the Internal Revenue Code.FINDINGS OF FACT.Certain facts were stipulated. In so far as they77 are material to the issue, they are as follows:The petitioner, hereinafter called Farnham, is a corporation organized under the laws of the State of New York on May 7, 1942, and has its principal office in Buffalo, New York. By statutory consolidation, under section 686, Stock Corporation Law of New York, as of December 27, 1946, the petitioner acquired all assets and assumed all liabilities of Paragon Research, Inc., hereinafter called Paragon, to which corporation the notice of deficiency was addressed. The returns for the taxable years were filed with the collector of internal revenue for the twenty-eighth district of New York.Paragon had outstanding 210 shares of preferred and 10,000 shares of common stock. As of July 1, 1943, and June 30, 1944, the stock was owned as follows: 512 Shares held July 1,Shares held June 30,19431944StockholderPreferredCommonPreferredCommonPaul Dubosclard, president1505,0001505,000Frank L. Boutet, comptroller603,000603,000Howard C. Reimann, treasurer1,0001,000Roland S. Georger, secretary1,0001,000Total shares issued21010,00021010,000Paul Dubosclard78 and Frank L. Boutet each owned 25 per cent of the common stock of Farnhan prior to and during the taxable years.Engineering fees earned by Paragon for the taxable years were as follows:June 30, 1943June 30, 1944Farnham Manufacturing Co$ 407,934.46$ 331,102.26Douglas Airplane Co4,500.0016,000.00Amphibian601.84Briggs7,500.00Ryan12,750.00Total fees earned412,434.46367,954.10Salaries and fees paid by Paragon for the taxable years were as follows:June 30, 1943June 30, 1944Officers' salaries$ 43,315.34$ 42,132.77Commissions and fees136,032.6782,601.53Draftsmen67,721.7391,087.84Other salaries21,969.3525,959.70Additional amount credited to officers andstockholders43,768.42Total312,807.51241,781.84Officers' salaries paid by Paragon for the taxable years were as follows:June 30, 1943June 30, 1944Paul Dubosclard, president$ 24,380.00$ 23,920.00Howard Reimann, treasurer6,481.816,080.03Roland Georger, secretary6,393.536,152.74Frank Boutet, comptroller6,060.005,980.00Total43,315.3442,132.77Paul Dubosclard and Frank Boutet, president and comptroller, 79 respectively, of Paragon received salaries from Farnham during the taxable years as follows: 513 June 30, 1943June 30, 1944Paul Dubosclard$ 6,011$ 6,000Frank Boutet24,04524,000During the taxable years, Paragon employed from 20 to 40 draftsmen.During the fiscal year ended June 30, 1943, dividends of $ 40,000 were paid, of which $ 12,000 was paid in cash, $ 21,000 was paid in preferred stock, and $ 6,400 was paid in other property, and $ 3,768.42 was declared but was undistributed.The balance sheets of Paragon as of June 30, 1942, 1943, and 1944, were as follows:June 30, 1942June 30, 1943June 30, 1944ASSETSCash$ 8,000.00 $ 4,864.09$ 4,930.79Accounts receivable:Farnham Manufacturing Co21,791.96 126,657.90137,337.39Douglas Airplane Co4,500.00Amphibian Car Co401.84Advanced employees800.00Organization expense415.00 415.00415.00Total assets30,206.96 136,436.99143,885.02LIABILITIESReserve for Federal tax2,751.38 29,178.959,734.26Dividend payable (common)10,000.00 Notes payable (dividend):F. L. Boutet1,000.001,000.00H. Reimann2,700.002,700.00R. Georger2,700.002,700.00Accounts payable -- purchases953.35 1,962.65Accrued salaries:John R. H. Neal1,580.00Accrued taxes:New York unemployment tax895.96723.68Social security tax199.68278.16Withholding tax200.00New York franchise tax2,188.42Accrued preferred dividends:Paul Dubosclard750.00F. L. Boutet300.00Accrued interest:F. L. Boutet50.00R. Georger135.00H. Reimann135.00Accrued commissions:Theo. Jacobowitz2,460.10 39,232.7923,442.83Henry Powis2,765.40 3,754.6538,142.02Chas. L. Wachter1,284.50 11,190.662,748.86Wilbur Johndrew4,375.356,311.60Thomas Speller4,375.356,311.60Ball Zwak & Royals983.70Briggs & Weaver95.75Williams & Wilson1.584.40Eichman Machy Co2,070.35Preferred stock:Paul Dubosclard15,000.0015,000.00F. L. Boutet6,000.006,000.00Common stock:Paul Dubosclard5,000.00 5,000.005,000.00F. L. Boutet3,000.00 3,000.003,000.00H. Reimann1,000.00 1,000.001,000.00R. Georger1,000.00 1,000.001,000.00Surplus(7.77)3,760.6710,407.09Total liabilities and capital30,206.96 136,435.99143,885.0280 514 The record discloses the following additional facts:Dubosclard presently is not a stockholder or officer of either Farnham or Paragon and has no personal interest in those corporations. He was born in France and is an American citizen. He is a graduate of the French Sorbonne, a licensed engineer of New York, and a member of the Engineering Institute of Aeronautical Sciences and of the American Society for Metals. He also is a fellow of the American Society of Mechanical Engineers, one of less than 40 among a membership of over 20,000.During 1920 Dubosclard was a designer for the Lincoln Woods Manufacturing Co., manufacturing cranes, cables, etc. On January 3, 1921, he was made assistant engineer of that company and from 1926 to 1930 he was in charge of research, with full responsibility. In 1930 he was consulting engineer for the American Hoist & Gear Co. of St. Paul. From late in 1931 to 1933 he was chief engineer of International Milling Co. of Minneapolis. On January 1, 1934, until Paragon was organized in 1942, he was president and general manager of Farnham.Dubosclard first became interested in designing aircraft making machinery in 1938 in connection with81 the Bell Aircraft Co. He has lectured before the Society of Automotive Engineers, the American Society of Mechanical Engineers, the American Society for Metals, and similar groups on the subject of airplane design, with particular reference to airplane wings, and has written papers for technical societies on that subject.Previous to the organization of Paragon, no concern in the United States other than Farnham was exclusively making such machinery for the airplane industry. Each type of plane required, in large part, its own specially designed machines. Petitioner was especially concerned with five types of machines required for aircraft production. They were the spar miller, the form roll, the counter sinker, the drill, and the router. A spar is the backbone of the wing. The spar miller is a machine which carves a piece of aluminum into the proper shape for use in the spar. By the invention of the spar millers the number of machine hours required to produce the spar was reduced from about 800 to 12, with a saving of $ 1,764 in the cost of manufacturing each spar (normally costing $ 1,800). The form roll leaded plane edges. A counter-sinker is a small machine used in drilling82 V-shaped sinker holes for fitting rivets. A drill rivets holes in the plane wing. A router was used to cut contours.During the taxable years, Paragon's principal income was from designing spar millers. During the same period, Farnham's manufacturing capacity was 4 spar millers, seven form rolls, and 10 counter sinkers a month, in addition to the drills and routers.515 Dubosclard designed and engineered each type of machine. He was assisted by Reimann and Georger. From 20 to 40 persons were employed during the taxable years. Some of these were designers or draftsmen. The work of all of them was under the direct supervision of Reimann and Georger. All plans and designs were initiated and developed by Dubosclard, who was an outstanding figure and a recognized authority in the field of airplane designing. He was responsible for the creation and invention of appropriate machinery necessary to produce the airplane parts which the plane manufacturers indicated were needed. The manufacturers furnished blueprints of spars or wings which they wished to build, but offered no drawings or blueprints relating to the machines essential to building them. The requirements of the83 military airplane program were constantly changing and his services and skill were in continuous demand to create new designs and to redesign and reengineer machines in use.Georger became the secretary of Paragon in 1942. He is a member of the American Society of Mechanical Engineers. He taught technical drawing at Cornell University and lectured on perspective drawing of machinery.Reimann attended the Rochester Mechanical Institute, the University of Buffalo and the Berkshire Summer School of Art. He had been employed at the R. & H. Chemical Co. and the International Milling Co. He was employed by Farnham in 1934 under the supervision of Dubosclard. In 1945 he and Georger formed a company engaged in special machine designing, and they are now designing and manufacturing brackets and bolt lifts.Boutet, as comptroller, had charge of the financial affairs of Paragon. He supervised the analyzing of refunds and other work done by the accountant in charge of Paragon's books.Nothing was done in the operation of Paragon without the approval of Reimann, Georger, Boutet, or Dubosclard. Before final plans of a machine were submitted to Farnham for manufacture, they were studied and84 checked by Reimann and Georger, whom Dubosclard had trained since 1935. They were key men in the Paragon organization.During the taxable years Paragon's activities were limited exclusively to designing and engineering special machinery needed for the manufacture of fighter aircraft. The Government forbade its accepting any other commitments and Paragon refused such type of orders. The chief engineer of an airplane manufacturing company would ask Dubosclard, representing Paragon, if an airplane could be built with a certain type spar or wing. If Dubosclard answered affirmatively, he would work out methods and means of fashioning it, draw sketches and outline the proper procedure. Then the manufacturer 516 would ask Dubosclard to proceed with the designing and drafting of the proposed machine. He would first make a sketch of the desired machine and then pass it to Reimann and Georger for study to reduce it to scale and check for balance, proportion, counter motion, etc. After Dubosclard checked the design and was assured that it satisfied the requirements, it was turned over to the detail draftsmen, who prepared the drawings to be sent to Farnham, which manufactured the85 machine in accordance therewith. After its completion the machine was inspected by Dubosclard and his assistants. The time required to initiate the design and to complete the engineering therefor was uncertain, varying from one-half hour to two years.Prior to and during the process of creating and engineering the various machines which Dubosclard invented, he was in constant touch and consultation with the airplane companies. He spent half of his time away from Buffalo on such missions.Paragon was represented by three "contact men," or field representatives -- one in New York, one in Detroit, and one in Los Angeles. Each also represented other companies. They were paid on the commission basis. The function and duties of these men were to keep in touch with the manufacturing companies, to arrange for their officers to consult with Dubosclard, to secure repair parts, to report to Paragon on matters relating to the progress of plans, to expedite orders from the manufacturers, and to facilitate cooperation between the airplane companies and Paragon in order to make available promptly and efficiently the special machinery being designed by Dubosclard and his associates. They rendered86 no engineering or designing skill or service to Paragon. In general, they knew how to read a blueprint and were familiar with the names and purposes of the machines. The compensation of each was a commission of 15 per cent, up to $ 25,000 a year, and thereafter one-fourth of the rate. They maintained their own offices. Their contracts were later renegotiated.As president of Farnham, Dubosclard's duties became too detailed and onerous and thus they interfered with his engineering and designing function -- his "prime work." Therefore, he resigned as president of Farnham and devoted his entire time and attention to designing specialized machinery to aid the war effort. Paragon secured larger quarters, leased from Farnham, and rented its equipment from Farnham.By agreement with Farnham, Paragon was paid for its designing and engineering service 25 per cent of Farnham's receipts, subject to adjustment, which later was made. All machines were built and sold by Farnham. Paragon purchased no material, machinery or equipment. Its sole income was derived from designing and engineering special airplane-manufacturing machines.517 Paragon's initial capital was $ 10,000, but only87 a small portion of it was utilized. From the beginning of its operation, Paragon received payments from Farnham. It drew on Farnham for its pay rolls. The contact men were paid after the machines were accepted and paid for by the Government. Capital was not a material income-producing factor in the petitioner's business during the taxable years.The petitioner filed its tax return as a personal service corporation, under the provisions of section 725 of the Internal Revenue Code, on the accrual basis and claimed the benefits of that section. In his notice of deficiency the Commissioner held that the petitioner was not entitled to such classification.During the taxable years the petitioner was a personal service corporation within the meaning of section 725 of the Internal Revenue Code, and it is entitled to the benefits of that section.OPINION.We have before us the sole question whether or not the petitioner is entitled to be classified as a personal service corporation within the purview of section 725 of the Internal Revenue Code. 188 The statute itself provides a definition which sets forth the following essential elements:(1) The income of the corporation must be ascribed primarily to the activities of its shareholders.(2) They must be regularly engaged in the active conduct of its affairs.(3) They must be the owners of at least 70 per cent in value of each class of its stock.(4) Capital must not be a material income-producing factor.Respondent raises no question as to the second and third requirements having been met. His position is twofold: (1) That the efforts of the three contact men, whom he calls "field engineers," and the services of other employees contributed substantially to petitioner's income, as shown by the amount of compensation paid to them in comparison to the salaries of Dubosclard and his associate stockholders, and (2) that capital was a material income-producing factor. The petitioner contends that it has brought itself strictly within the terms of the statutory definition.518 We shall first consider the respondent's second point, that capital was a material income-producing factor, since it requires little discussion, in view of the state of the record. The petitioner89 started with a capital of $ 10,000. Dubosclard testified that the capital was an "ornament" on the balance sheet; that from the day the petitioner began its operations it drew on Farnham for its pay roll commitments and that perhaps for a day or two capital was used until the draft was covered. The petitioner had no physical assets. All equipment, including even drafting tables and tools, was rented. The large sums due to the contact men were paid after the Government accepted and paid for the machines ordered through them. Thus, at no point in the conduct of the petitioner's business was any substantial amount of capital required. Its method of doing business precluded the use of more than a nominal amount of capital.The petitioner's balance sheets show that on June 30, 1942, its cash account was $ 8,000, while on June 30, 1943 and 1944, it was $ 4,864.09 and $ 4,930.79, respectively. The petitioner's original capital was cash, but it may have been converted to another form of asset. However, assuming that it still remained in the cash form, the amount was reduced by $ 2,000 on June 30, 1942, and by a little over a half of the original capital in succeeding years. Compared90 with the large amounts of accounts receivable shown on the balance sheet (and there is no record of the petitioner's total yearly receipts), the amount of capital is very small. It was not a material factor in producing the petitioner's income.The respondent's main contention, that the petitioner's income was not to be ascribed primarily to the activities of Dubosclard, Reimann, Georger, and Boutet, its sole stockholders, rests on his conclusion that the three contact men and other employees contributed substantially to the production of income.A short and complete answer to respondent's argument might well be to point out that the word "primarily" and the word "substantially" are not interchangeable equivalents. One might admit that the three contact men contributed "substantially" to the production of income without denying or negating the fact that the income was nonetheless to be "ascribed primarily" to the activities of the stockholders. Thus it might well be said that respondent's whole argument on this phase of the case begs the question. It is our conclusion that petitioner's income was to be ascribed primarily to its stockholders and not to the contact men. While it91 is recognized that the three contact men were paid large sums for their services, the basis of their compensation was a commission computed on a fixed percentage of the sale price of the machines. The sudden demand for such machinery to manufacture 519 airplane spars and other parts resulted in the extraordinary amount of such commissions. We note from the record that this percentage was reduced and that the contracts with the contact men were later renegotiated.The character of the services rendered by the contact men is a much more important test than the amount of money they received. See H. Newton Whittelsey, Inc., 9 T.C. 700">9 T. C. 700. The respondent stresses the skill and efficiency which he says they possessed and argues that they were essential in obtaining the orders from the airplane manufacturers, in the proper adaptation of the machinery to the changing needs, and to the successful manufacture and delivery of the completed equipment. Again we might admit respondent's contention without fatality to petitioner's claim to personal service classification. Undoubtedly, it was necessary to have intelligent contact men, but to admit that is not92 to establish that they were primarily responsible for petitioner's income. During the taxable years little effort was required either to sell the ideas created by the petitioner or the completed machinery manufactured by Farnham. It was a seller's market in which demand far outran supply. The three field representatives of the petitioner were stationed at strategic points in the United States in order to keep in constant touch with the current needs of airplane manufacturers, to arrange for conferences with Dubosclard, and to serve as "trouble shooters" after machines were sold and installed. Their work was important, but they contributed little to the phase of petitioner's activity that was in demand and to which its income was primarily to be ascribed, namely, designing and engineering.The success of petitioner's business was due primarily to Dubosclard, Reimann, and Georger. In applying Dubosclard's genius and peculiar talents to the complicated problems of construction, Reimann and Georger played an important part. They were the type of men whom it would have been difficult to replace. Their services were vitally important to petitioner's smooth and efficient operation. 93 They had been carefully trained by Dubosclard in the particular field in which they were engaged. During his frequent absences from the plant (consuming perhaps one-half of each year), they took over and carried on the work. Together with Dubosclard, they constituted a team, all members of which were essential, and as a team, were primarily responsible for petitioner's success.It is our conclusion that petitioner's income was to be ascribed primarily to the activities of its stockholders. It follows that petitioner is entitled to personal service classification.Decision will be entered under Rule 50. Footnotes1. SEC. 725. PERSONAL SERVICE CORPORATIONS.(a) Definition. -- As used in this subchapter, the term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of shareholders who are regularly engaged in the active conduct of the affairs of the corporation and are the owners at all times during the taxable year of at least 70 per centum in value of each class of stock of the corporation, and in which capital is not a material income-producing factor; * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622120/	Louis L. Staffilino v. Commissioner.Staffilino v. Comm'rDocket No. 265-64.United States Tax CourtT.C. Memo 1966-20; 1966 Tax Ct. Memo LEXIS 263; 25 T.C.M. (CCH) 110; T.C.M. (RIA) 66020; January 25, 1966263 Held: 1. That respondent has failed to prove fraud for the years 1954 and 1955 by clear and convincing evidence. 2. That, in absence of fraud or waivers, the deficiencies determined by respondent are barred by the statute of limitations. John Kennedy Lynch, 907 East Ohio Bldg., Cleveland, Ohio, and D. Paul Camilletti, for the petitioner. Gordon B. Cutler and Alan E. Cobb, for the respondent. DAWSONMemorandum Findings of Fact and Opinion DAWSON, Judge: Respondent determined the following income tax deficiencies and additions to tax against the petitioner: Additions to TaxYearDeficiencySec. 6653(b) 11954$3,272.36$1,636.1819556,722.143,361.07264 The principal issue for decision is whether any portion of any deficiency determined by respondent in income tax for the years 1954 and 1955 is due to fraud. A subsidiary, but related, issue is whether the assessment and collection of the deficiencies determined by respondent for such years are barred by the statute of limitations. Findings of Fact Some of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Louis L. Staffilino (hereafter sometimes referred to as petitioner) resides in Mingo Junction, Ohio. He timely filed his Federal income tax returns for the years 1954 and 1955 with the district director of internal revenue, Cleveland, Ohio. Petitioner's parents, Rose and Guiseppe Staffilino (hereafter sometimes referred to as Rose and Guiseppe), were married in 1917 in Steubenville, Ohio, shortly after immigrating from Italy. They lived their entire married life in Mingo Junction. Except for sporadic short layoffs, Guiseppe worked continuously from 1909 until about265 two years before his death in 1959. His work included employment as a millwright, part of the time as a foreman, with the Carnegie-Illinois Steel Corporation (Mingo Works) from January 9, 1909 to September 8, 1945, and employment with Steel Service, Inc. (The Berkman Company), from August 19, 1946 to June 10, 1957. When Rose and Guiseppe married they had already saved $1,100. They set up housekeeping in a home for which they paid $10 a month rent and immediately took in six boarders. With Guiseppe's pay and the rent paid by the boarders the Staffilinos were able to save between $50 and $100 a month. This pattern of saving continued throughout their married life. They lived frugally, worked hard, and as their earnings increased, so did their savings. Petitioner's older brother, Fred Staffilino, was born on December 5, 1917, and petitioner was born on December 30, 1918. They were the only two Staffilino children. By 1921 the Staffilinos had saved at least $12,500 and took a trip to Italy to see their family during a temporary shutdown of the steel mill. Guiseppe stayed for a short period of time, until the mill reopened, while the rest of his family stayed for approximately one year. 266 During this period the boarders remained and paid rent. Rose and her two sons, without Guiseppe, made another trip to Italy in 1930. At this time Rose was still taking in boarders. Guiseppe had inherited one-half of a large house in Italy and while Rose was there she bought the other half of the house from Guiseppe's brother for $3,000. By this time the Staffilinos had saved approximately $20,000. The house in Italy produced rental income until it was sold. Shortly after her second return from Italy, Rose invested $10,000 in the purchase of 200,000 Italian lire. She did not make any money on this investment. At some subsequent time Rose and Guiseppe received several inheritances from relatives in Italy. From about 1932 to May 1946, Rose operated a grocery store in the family home which was located in the steel mill workers' area of Mingo Junction. This store was open from approximately 6 o'clock in the morning to 11 o'clock at night, 7 days a week. There was infrequent hired help. The store was operated by Rose with the assistance of Guiseppe (during the hours he was not working at the steel mill) and her two sons. On May 4, 1946, the steel company, which was purchasing all the property267 in the area, purchased Rose's property. She was paid $7,000 for the premises and $2,000 for the grocery business. During the depression several of the banks in which the Staffilinos had money on deposit closed temporarily. Although Rose and Guiseppe recovered 90 percent of their money, they lost some of their faith in banks. It was also during this period that the Staffilinos received an extortion note from the Maffia. The Staffilinos, because of their consistent bank deposits and real estate transactions, had gained the reputation of being well-to-do. Although they never paid any money to the Maffia, the Staffilinos, fearing recurrences of this sort of thing, became even further afraid of depositing substantial sums of money in banks. However, they did maintain bank accounts. Rose at all times managed the cash for the family. She kept the cash in a box from which she paid the store expenses and the family expenses. Several months after the steel company purchased the Staffilino's property at 229 Cleveland Avenue, the family moved to 603 St. Clair Street. At that time Rose had accumulated approximately $35,000 in her money box. Guiseppe received a pension from the Carnegie-Illinois268 Steel Corporation from 1945 until he reached age 65 in 1953 and became eligible for Social Security. However, Guiseppe chose to work until 1957 rather than collect Social Security, but he received Social Security payments from 1957 until his death in 1959. Rose and Guiseppe made the following purchases of real estate, all in Mingo Junction, Ohio, paying cash with no mortgage loans: December 20, 1939, 229 Cleveland Avenue, cost approximately $1,000; April 10, 1946, 707 St. Clair Street, cost approximately $12,000; November 14, 1947, 668 Commercial Street, cost approximately $5,500; June 12, 1946, 603 St. Clair Street, cost approximately $8,600. In the latter part of 1955 they built a residence on the rear of their property at 603 St. Clair Street which cost approximately $10,000. Rose and Guiseppe sold the following real estate in Mingo Junction, Ohio: March 7, 1941, rear house and land, 229 Cleveland Avenue, sale price $1,000; May 2, 1946, front portion of real estate at 229 Cleveland Avenue (to the steel corporation), sale price $9,000. The Staffilino family was close-knit and the parents were very generous to their sons. The boys received frequent gifts from their mother and269 father, often sums of money. Rose and Guiseppe also purchased several automobiles for each of their sons. When Fred married in 1942 they gave him money and furniture. They also gave him a home rent free at 707 St. Clair Street. Guiseppe and Rose made the following stock transactions as recorded in the Securities Register books in the Mingo National Bank: SharesSharesDateName of StockholderName of StockBoughtSoldAmount1- 8-51Joseph StaffilinoWheeling Steel100$3,680.658-24-51Joseph StaffilinoWheeling Steel1004,194.7712-19-51Joseph StaffilinoWheeling Steel1003,781.152-23-53Joseph StaffilinoPenn. Railroad1001,787.7510-11-52Rose StaffilinoWheeling Steel10352.559-18-53Rose StaffilinoWheeling Steel10321.554-14-54Joseph StaffilinoU.S. Steel482,117.2611-23-54Joseph & Rose StaffilinoWheeling Steel1205,636.756- 7-55Rose StaffilinoWheeling Steel1005,528.5411-22-55Rose StaffilinoWheeling SteelRights11058.337-16-59Rose StaffilinoWheeling Steel1106,941.123- 5-60Rose StaffilinoWheeling Steel1256,432.25 In270 addition, from the time they were married and for a number of years thereafter, Rose and Guiseppe bought one share of Carnegie-Illinois Steel Corporation stock each month. Petitioner graduated from Mingo Junction high school in 1938 at which time he was awarded several football scholarships. He accepted one at the University of Chattanooga but became homesick and returned to Mingo Junction after 6 weeks. A year later he went to the University of Kentucky but again returned home after a short time. Petitioner then went to work at the Carnegie-Illinois steel mill as a laborer. He worked there sporadically until the end of 1945, except for about one year of service in the United States Army from which he was honorably discharged because of an old knee injury. Petitioner worked in Rose's store part time while working for the steel mill and full time from the end of 1944 until the steel mill purchased the store in 1946. Petitioner did not receive a regular salary from Rose but received varying sums of money from her at frequent intervals. For the next 3 years petitioner was not regularly employed although he did some professional boxing. During this period he continued to live with his271 parents who provided for him generously. In these years, petitioner spent substantial time collecting some $16,000 in debts owed to Rose by people to whom she had extended credit when operating her grocery store. All of the money was turned over to Rose. Rose and Guiseppe had promised petitioner he would eventually receive a large share of these collections. In 1950 petitioner opened a variety store, known as Lane's Lounge, at 668 Commercial Street, Mingo Junction, selling cigars, cigarettes, candy, stationery, and other sundries. The building at that time was owned by Rose and Guiseppe, having been purchased by them in 1947. Prior to petitioner's occupation of the premises, Rose and Guiseppe realized rental income from the building. Petitioner was not required to pay rent to his parents for the use of this property. In 1954 petitioner had one pinball machine operating in his store and in 1955 he had two. In 1954 and 1955 petitioner also had in his store a Western Union sporting events ticker tape and a blackboard listing current sporting events. On October 24, 1954, Rose and Guiseppe conveyed title to the property at 668 Commercial Street to petitioner. For several years prior to272 1954 his parents had told petitioner that the store would eventually be his. During the years 1954 and 1955, Hugh Longo maintained the books and records for petitioner's store. He would pick up all invoices, tapes from the cash register, and the record from the pinball machine receipts and enter them in a ledger. In addition, Longo was given paid bills and other receipts. Longo prepared petitioner's 1954 and 1955 income tax returns. On his returns for the years 1954 through 1959 the petitioner reported from his business the following gross receipts and cost of goods sold: 195419551956195719581959Gross Receipts$14,826.21$16,667.69$21,153.39$27,563.81Sale of Mdse.$14,953.83$14,680.79Wagering Income6,317.905,612.00Pinball Machine11,661.0013,076.00$14,826.21$16,667.69$21,153.39$27,563.81$32,932.73$33,368.79Cost of Goods Sold$ 6,591.55$ 7,662.45$ 9,436.31$ 8,948.83$ 8,064.03$10,138.86For the years 1954 and 1955 the gross receipts listed above included all income from wagering and pinball machines. Additionally, on Schedule H of his 1956 return he reported $2,500273 "games of chance" income; and on Schedule H of his 1957 return he reported $2,056.45 "wagering" income. In 1945 petitioner married Nancy Patterson. The couple lived with Rose and Guiseppe in their home, paying no rent. All food for petitioner's family was provided by Rose and Guiseppe as well as some clothing for the children. This situation continued into 1955 when Rose and Guiseppe moved into a new home they had built on the rear of their property at 603 St. Clair Street. They left petitioner and his family to live in the older house on the front of the same lot. Rose and Guiseppe continued to give petitioner's family free rent and food. During 1954 and 1955 petitioner's living expenses did not exceed $1,500 annually. On October 19, 1953, savings account No. XXXX was opened in the OhioValley Savings and Loan Company (hereafter referred as the Ohio Valley Bank) in Steubenville, Ohio, in the name of petitioner. His signature is the only one that appears on the signature card for that account. The initial deposit was $1,500. During 1954 and 1955 deposits totaling $9,570 and $7,700, respectively, were made in this account. On September 25, 1954, petitioner was requested by Guiseppe274 to drive him to the Ohio Valley Bank. Upon arriving there Guiseppe told the cashier that he wanted $1,000 and thereupon a withdrawal slip was given to petitioner by Guiseppe to sign to authorize the withdrawal of that sum from account No. XXXX. Petitioner signed the slip and Guiseppe was given $1,000 by the bank clerk. Guiseppe used the money to pay for storm windows for the family home. All deposits made to savings account No. XXXX in the Ohio Valley Bank were made by Rose and Guiseppe for petitioner. It was the intention of the Staffilinos to amass approximately $25,000 in this account for the benefit of petitioner. On March 7, 1950, petitioner opened a safe deposit box in the Mingo National Bank. In September 1954, petitioner had approximately $11,000 in cash in the box which he had accumulated from the earnings and gifts from his parents. On September 20, 1954, petitioner entered the box and removed all of the cash, planning to use it to pay for the partial demolition and reconstruction of his store located at 668 Commercial Street. Petitioner, about the time he withdrew the cash from his safe deposit box, removed a safe from his store to his home and placed the cash in it. 275 When the store improvement was delayed, the petitioner began to deposit the cash in his checking account during 1955. Some of the cash remained in the safe after the store was reconstructed and was then kept in the safe at the store. This money was used to cash customers' checks which were then deposited in his bank accounts. The existing store building was partially demolished during 1955 and reconstructed at a cost of about $7,000. During 1955 petitioner deposited $15,536.69 in his checking account at the Mingo National Bank of which at least $8,300 came from cash removed from his safe deposit box on September 20, 1954. Approximately $7,000 of this money was used to pay for the reconstruction of the store building. On November 23, 1954, petitioner opened savings account No. X7225 in The Steubenville Building and Loan Association Company in Steubenville, Ohio. In 1954 petitioner made $8,650 in deposits in this account and no withdrawals. In 1955 petitioner made $5,695.58 in deposits in the same account and withdrew $3,000. On January 3, 1952, petitioner opened savings account No. XXXX in the Mingo National Bank. He made no deposits or withdrawals in 1954 and 1955 except that276 on September 20, 1955, the account balance of $5,050.12 was withdrawn, the account closed, and the money redeposited in his checking account in the same bank on the same day. Prior to 1960 the petitioner or his wife redeemed the following United States savings bonds: DateIssueRedemptionOwnerRedeemedDateValueWife1-20-4811/47$ 75.00Petitioner9-11-5211/5118.75750.00750.00750.00750.001/51380.00380.00760.00On January 29, 1962, in the United States District Court for the Northern District of Ohio, Eastern Division, in the case of United States v. Louis L. Staffilino, Criminal Case. No. 23650, the petitioner was aquitted of charges of wilfully and knowingly attempting to evade and defeat a large part of his income taxes due and owing by him to the United States for the taxable years 1954 and 1955, pursuant to the granting of his motion for judgment of acquittal. Respondent's notice of deficiency was mailed to petitioner on November 15, 1963. Petitioner did not sign any waivers extending the period for assessment or collection of the deficiencies determined by respondent for the277 years 1954 and 1955. Ultimate Findings 1. No part of each deficiency determined by respondent for the taxable years 1954 and 1955 is due to fraud with intent to evade tax. 2. In the absence of fraud or waivers extending the period for assessment and collection, the assessment and collection of any deficiencies for the years 1954 and 1955 are barred under the provisions of section 6501(a). Opinion Respondent determined deficiencies in petitioner's income tax for 1954 and 1955 by reconstructing his income on the "bank deposits and cash expenditures" method. This reconstruction the respondent justifies on the ground that petitioner's books and records were inadequate and inconsistent with his income. Moreover, respondent asserts that petitioner substantially understated his income for 1954 and 1955; that there were no sources of nontaxable income to which the alleged unreported income could be attributed; that there were likely taxable sources; and that such understatements were due to fraud. Petitioner, on the other hand, maintains that he has proven sources of substantial nontaxable income and that, in the absence of proof of fraud, the statute of limitations bars the assessment278 and collection of any income tax deficiencies for the years in controversy. The burden of proving fraud is upon the respondent, section 7454(a), and it must be established by clear and convincing evidence. Arlette Coat Co., 14 T.C. 751">14 T.C. 751 (1950); W. A. Shaw, 27 T.C. 561">27 T.C. 561 (1956), affd. 252 F. 2d 681 (C.A. 6, 1958); and Emanuel Hollman, 38 T.C. 251">38 T.C. 251, 260 (1962). It is necessary for respondent to show that petitioner's income tax returns for 1954 and 1955 were false and fraudulent with intent to evade tax. Denny York, 24 T.C. 742">24 T.C. 742, 743 (1955). A failure to overcome the presumptive correctness of a deficiency cannot be regarded as proof of fraud. Driebourg v. Commissioner, 225 F. 2d 216 (C.A. 6, 1955). Likewise, a failure of proof cannot be substituted for the evidence necessary to sustain respondent's affirmative burden. Luerana Pigman, 31 T.C. 356">31 T.C. 356 (1958); Jacob D. Farber, 43 T.C. 407">43 T.C. 407, 419 (1965), on appeal (C.A. 3, November 11, 1965). Respondent contends that the sums of money deposited in petitioner's bank accounts and other sums allegedly spent by him represented income taxable279 to him in 1954 and 1955. Throughout the trial respondent endeavored to show a likely source of unreported income by attempting to prove that petitioner engaged in substantial gambling activities in those years. While he succeeded to some extent in creating an air of suspicion as to petitioner's activities in 1954 and 1955, we cannot transmute mere suspicion into hard fact or, for that matter, into even reasonably believable circumstantial evidence. Here, as in many "fraud" cases where there is no direct evidence that petitioner failed to report all of his income, respondent has resorted to an indirect means to prove unreported income. In doing so, he has utilized what is commonly known as the "bank deposits and expenditures" method. Since we have found that petitioner's personal living expenses were no higher than he claimed, thus substantially eliminating the expenditure side of the computation, we limit our discussion to the bank deposits. As in the case of net worth increases, Holland v. United States, 348 U.S. 121">348 U.S. 121, 137 (1954), respondent must introduce evidence to support the claim that bank deposits are attributable to current taxable income. Bank deposits, Denny York, supra,280 and Goe v. Commissioner, 198 F.2d 851">198 F. 2d 851, 852 (C.A. 3, 1952), like net worth increases, Holland v. United States, supra, pp. 137-8, standing alone, do not prove current taxable income. Furthermore, respondent has neither negated all reasonably likely sources of nontaxable income nor established a likely source from which the bank deposits came. See Holland v. United States, supra, as explained in United States v. Massei, 355 U.S. 595">355 U.S. 595 (1958). In this case respondent has attempted to establish gambling activities as the likely source of income but has not done so to our satisfaction. The variety store and pinball machines were unable to generate the sums we are concerned with here. In fact, we find no specific instances of omitted income. In view of the conflicting evidence as to the adequacy of petitioner's business records, the propriety of using the "bank deposits and expenditures" method to reconstruct income is at least doubtful under these particular circumstances. Respondent281 also tried to negate the sources of nontaxable income claimed by petitioner but we are unable to conclude, on this record, that he has done so. Certainly the weight of the evidence convinces us that the parents of petitioner were the source of most, if not all, of the sums respondent questions. From the evidence presented we must decide this issue on the failure to carry the requisite burden of proof. Accordingly, respondent's determination of fraud is not sustained. There being no fraud and no waivers extending the 3-year period provided by section 6501(a) for the assessment of a deficiency, we hold that the assessment and collection of the income tax deficiencies determined by respondent are barred by the statute of limitations. Decision will be entered for the petitioner. Footnotes1. All section references herein will be to the Internal Revenue Code of 1954 unless otherwise indicated.↩*. This sentence was substituted for the one previously appearing at this point by official Tax Court Order dated 2/15/66 and signed by Judge Dawson.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622121/	Hatboro National Bank, Petitioner, v. Commissioner of Internal Revenue, RespondentHatboro Nat'l Bank v. CommissionerDocket No. 46155United States Tax Court24 T.C. 786; 1955 U.S. Tax Ct. LEXIS 128; July 28, 1955, Filed 128 Decision will be entered for the respondent. Petitioner acquired real estate and other assets in 1930 as collateral for a loan. In 1936, pursuant to the instructions of the National Bank Examiner, petitioner's board of directors passed a resolution directing the transfer of the "loan" from the loans and discounts account to the other real estate account. In 1946 petitioner sold part of the real estate pledged as collateral. Held, the real estate was held as collateral and petitioner did not realize a capital gain or loss on its sale. Held, further, in computing the proper additions to petitioner's reserve for bad debts for the years 1947 and 1948, respondent did not err by including the above loan in the amount of petitioner's outstanding loans in the years 1930 to 1935, inclusive, or by failing to make any adjustment for partial worthlessness of the above loan. Early L. Gilbert, C. P. A., and Edward B. Duffy, Esq., for the petitioner.William J. Hagan, Esq., for the respondent. Bruce, Judge. BRUCE 787 Respondent determined deficiencies in the income tax of petitioner for the years 1946, 1947, and 1948 in the amounts of $ 1,864.41, $ 1,895.63, 129 and $ 232.30, respectively. The issues for decision are:1. Whether petitioner realized a capital gain or loss on the sale of certain real estate which it had received as collateral for a loan.2. Whether the Commissioner properly disallowed an increase in petitioner's reserve for bad debts in the amounts of $ 1,763.26 and $ 488.91 in the years 1947 and 1948, respectively.FINDINGS OF FACT.The stipulated facts are so found.The Hatboro National Bank, the petitioner, is a corporation organized under the National Banking Laws of the United States, with its principal office or place of business in Hatboro, Pennsylvania. The petitioner filed timely Federal income tax returns for the calendar years 1946, 1947, and 1948 with the collector of internal revenue for the first district of Pennsylvania. It keeps its books of account on the cash receipts and disbursements basis of accounting.On January 9, 1930, petitioner increased its loan to Warren M. Cornell (hereinafter referred to as Cornell) from $ 23,730 to $ 32,500, accepting his demand note in that amount together with collateral security as follows:(a) Life insurance policy for $ 10,000 on the life of Cornell, written by Penn Mutual130 Life Insurance Co.(b) Life insurance policy for $ 5,000 on the life of Cornell, written by New York Life Insurance Co.(c) Twenty-five shares of the corporate stock of Hatboro Trust Co., Hatboro, Pennsylvania.(d) By deed dated January 3, 1930, from Cornell and wife to petitioner, certain parcels of real estate briefly described as follows:(1) Certain lot or piece of land with dwelling house and office building thereon in the Borough of Hatboro, Pennsylvania.(2) Certain premises, farm buildings, plantation or tract of land situate in the Township of Horsham, Montgomery County, Pennsylvania, containing 76 acres and 46/100 of an acre, more or less.(3) An undivided one-half interest in land, known as "Hatboro Farms", containing about 146 lots.The note provided that the undersigned, Cornell, has delivered the above assetsas collateral security for the prompt payment, at maturity, of this and of any other liability or liabilities of the undersigned, due or not become due, or of 788 any that may be hereafter contracted with the holder of this Promissory Note; which collaterals, either the whole or any part thereof, hereby authorize and empower the holder of this Promissory131 Note (provided the same or any other liability of the undersigned, as before described, be not paid at maturity) to sell at public or private sale at any time or times thereafter, without further reference or notice to , and with the right on the part of the holder of this obligation to become the purchaser, at such sale or sales, of the whole or any part of said collaterals (freed and discharged of any equity of redemption) and to transfer, assign and deliver up the same; and, after deducting all legal and other costs, attorney fees and expenses for collection, sale and delivery, to apply the residue of the proceeds of such sale or sales so made, to pay any, either or all of said liabilities, as said holder shall deem proper, returning the overplus, if any, to and should any deficiency occur, further promise and agree to pay the same to the holder hereof on demand.On March 12, 1930, petitioner entered into an agreement with Cornell and Sarah E. Yerkes whereby the latter agreed to become primarily liable on certain additional notes of Cornell held by petitioner. The agreement also recites that petitioner holds the above-described real estate as collateral security for132 the payment of Cornell's $ 32,500 note. Petitioner promised in the agreement to hold and apply any surplus from the proceeds derived from the collateral securing Cornell's $ 32,500 indebtedness to the payment of the indebtedness assumed by Sarah E. Yerkes. Petitioner also agreed not to convert and make sale of any of the parcels of real estate deeded to the petitioner as collateral security until the prices offered be first submitted to Sarah E. Yerkes and she be given 30 days thereafter in which to purchase the parcel or secure a purchaser therefor at a higher price.The petitioner placed the Cornell loan of $ 32,500 in its loans and discounts account in its general ledger. The National Bank Examiner's report of his examination of the books and accounts of the petitioner that ended at 1 p. m., January 4, 1936, in connection with the aforesaid $ 32,500 loan, contains the following:OverdueMaker, indorser, and securityAmountDue dateClass "A"Slow$ 32,500. Warren M. Cornell. Real estate8-23-31$ 32,500$ 32,500operator. Bank has deed to office buildingnow housing Post Office, also 1/2 interestin 140 [sic] lots. R/E claimed to be worth$ 50M, subject to prior liens of $ 10,500;$ 15,000 insurance with CVS $ 3,200. Thisshould be transferred to other real estateaccount. Previously instructed.133 The minutes of the meeting of the board of directors of the petitioner dated March 12, 1936, read in part as follows:It was regularly moved, seconded and carried that we transfer to other real estate Warren M. Cornell's loan of $ 32,500.00.789 Through the medium of a book entry the said Cornell loan of $ 32,500 was transferred on March 18, 1936, from the loans and discounts account to the other real estate account on the books of the petitioner. There were two mortgages on this real estate that were paid by the petitioner. Petitioner paid $ 1,714 to the Hatboro Building and Loan Association on July 7, 1938, and paid $ 7,500 to the Montgomery Trust Co. on August 23, 1939. Both payments were charged to other real estate, making a total of $ 41,714 charged to other real estate on the books of the petitioner.Those certain premises, farm buildings, plantation or tract of land in the Township of Horsham, being a part of the collateral security given by Cornell, were abandoned by the petitioner when the mortgagee foreclosed.On or before January 30, 1933, Cornell paid a total of $ 3,181.57 in interest on the $ 32,500 note, all of which was credited to interest income on the books134 of petitioner. A further interest endorsement of $ 78 was made on the note on July 15, 1938.Petitioner caused the unimproved lots, known as Hatboro Farms, to be appraised as of June 1, 1938. At that time the lots had an aggregate fair market value of $ 70,154.30, and the one-half interest in the 122 1/2 lots which petitioner sold on July 12, 1946, had an aggregate fair market value of $ 27,745.65 on June 1, 1938. The value of the lots was lower in 1936 than it was in 1938.On February 1, 1944, petitioner transferred on its books the cash surrender value of the life insurance policies in the amount of $ 6,000 from other real estate to other assets.In liquidating the collateral security given for the Cornell loan the following was realized: (a) Liquidating dividends received from Trustee of Hatboro Trust Co. inliquidation. The dates of receipts and amounts are as follows:DateAmountJanuary 23, 1939$ 177.26February 20, 194062.50October 29, 194262.50Total$ 302.26 (b) Net proceeds from sale of one-half interest in 23 1/2 lots in"Hatboro Farms" sold at various times between April 28, 1939 andOctober 30, 19435,818.89 (c) Net proceeds of sale of dwelling house and office buildingNovember 25, 194111,584.61 (d) Net proceeds of sale of remaining 122 1/2 lots in HatboroFarms July 12, 194611,142.85 (e) March 9, 1950 received from Mutual Life Insurance Co9,776.56 (f) June 1, 1950 received from New York Life Insurance Co5,163.42Total received in liquidation of loan to Cornell$ 43,788.59135 790 On its 1946 income tax return petitioner claimed a long-term capital loss of $ 7,736 on the sale of the unimproved lots. The Commissioner disallowed $ 7,246.83 of the claimed loss, holding that the one-half interest in the lots sold in 1946 had a cost basis of $ 11,632.02 with a resulting loss of $ 489.17.By letter dated January 6, 1948, the Commissioner granted petitioner's request to employ the reserve method of accounting for bad debts, for Federal income tax purposes, beginning with the taxable year ending December 31, 1947. On its 1947 and 1948 income tax returns petitioner deducted $ 9,915.40 and $ 8,137.61, respectively, as additions to its reserve for bad debts. Of the amounts deducted the Commissioner disallowed $ 1,763.26 in 1947 and $ 488.91 in 1948. In computing the allowable deductions for additions to the reserve for bad debts in those years, using a 20-year moving average, the Commissioner did not include an amount representing any loss in connection with the Cornell loan, but did include the loan of $ 32,500 in the aggregate of loans outstanding in the years 1930 to 1935.OPINION.The principal issue presented is to determine the tax consequences of 136 petitioner's sale of a one-half interest in certain unimproved lots in 1946.In view of the shifting positions (including its lack of clarity as to any of them) taken by petitioner -- in its returns for the taxable years involved, in its petition, in its opening statement at the hearing, and on brief -- it is somewhat difficult to apprehend precisely upon what theory petitioner is relying. In its return for the year 1946 petitioner claimed a long-term capital loss of $ 7,736 on the sale of lots. Respondent allowed a long-term capital loss of $ 489.17. In its petition the petitioner claims that the sale "constituted a liquidation of a debt." However, petitioner now contends in its brief that when it took the lots together with other assets received as collateral security for the $ 32,500 loan to Cornell in 1930, it was really purchasing the lots and other assets for $ 32,500.Respondent contends that the assets, including the lots, were received by petitioner as collateral security for the loan. Respondent further contends that when in 1936 petitioner transferred "Cornell's loans of $ 32,500" from its "loans and discounts" account to its "other real estate" account it acquired absolute137 title to the collateral, and that petitioner's basis for determining gain or loss as to each of the properties formerly held as collateral was the value of such property when taken in satisfaction of the loan.In our opinion, the correct theory is the one set forth in the petition which, paradoxically, is the theory least favorable to the petitioner. 791 There is absolutely no merit in petitioner's position that it was purchasing assets when it received the lots and other assets as collateral security for the Cornell loan. We also disagree with respondent's position that petitioner acquired absolute title to the collateral when it transferred the loan from one account to another in 1936 pursuant to the instructions of the National Bank Examiner. "Bank holding note as [sic] collateral does not, because of default in payment of debt due it, become owner of collateral, but must acquire title thereto in manner authorized by contract of pledge." 7 Zollmann, Banks and Banking, section 4886. The note given by Cornell authorized the petitioner, if the debt was not paid at maturity, to sell the collateral at public or private sale to anyone including itself, and to apply 138 the proceeds to the payment of the debt and costs, returning any surplus to Cornell. While this contract gave petitioner the right to purchase the assets pledged as collateral at private sale, this right was not exercised. As the Supreme Court of Pennsylvania pointed out in Thomas v. Waters, 38 A. 2d 237, 240, 241, 350 Pa. 214">350 Pa. 214, "* * * the power to sell and to buy was not one to be executed by a taking. * * * Until foreclosure the pledgee could not obtain an absolute title and the foreclosure could take place only pursuant to the agreement contained in the notes; * * ." Respondent does not contend that petitioner sold the assets to itself. The wording of the resolution of petitioner's board of directors passed on March 12, 1936, negates any possibility that a sale, rather than a mere book transfer, was intended. Also, the interest endorsement to the note made on July 15, 1938, is wholly incompatible with the position that in 1936 petitioner accepted the collateral in full discharge of the indebtedness.Absolute title to the collateral did not pass and Cornell's equity of redemption was not foreclosed until petitioner sold to others139 or otherwise liquidated the collateral in later years. Jones v. Costlow, 36 A. 2d 460, 349 Pa. 136">349 Pa. 136; Huntingdon Valley Trust Co. v. Norristown-Penn Trust Co., 196 Atl. 821, 329 Pa. 356">329 Pa. 356. See also Moss Industries v. Irving Metal Co., 61 A. 2d 159 (N. J.). The proceeds from the sale of the lots in 1946 should have been applied toward the discharge of the indebtedness, and petitioner did not realize any capital gain or loss on the sale. Old Colony Trust Associates v. Hassett, 150 F.2d 179">150 F.2d 179.The facts in the instant case are unlike those in Elverson Corporation, 40 B. T. A. 615, affd. (C. A. 2) 122 F. 2d 295, and First National Bank, Philipsburg, Pa., 43 B. T. A. 456, cited by respondent. There the taxpayer acquired title to the collateral by or in accordance with the terms of an agreement with the debtor.In passing we might point out that petitioner's right to a deduction for partial worthlessness of the Cornell loan in 1946 is140 not before us as petitioner has not claimed a right to such a deduction in either its 792 1946 income tax return or in its petition. (Cf. Regs. 111, sec. 29.23 (k)-1(c).) Furthermore, in no event could the deduction exceed the difference between the cash surrender value of the policies of insurance, which was the only remaining collateral, and the remaining balance due on the loan. Dominion National Bank, 26 B. T. A. 421. Since there is no evidence with respect to the cash surrender value at the end of 1946 of the policies of insurance it is impossible to determine if and to what extent the Cornell loan had become worthless. Cf. Mayer Tank Mfg. Co. v. Commissioner, (C. A. 2) 126 F.2d 588">126 F. 2d 588.Respondent granted petitioner's request to switch to the reserve method of accounting for bad debts beginning with the taxable year 1947. Petitioner complains that respondent, in computing (in the manner provided in Mim. 6209, 1947-2 C. B. 26) the proper deductions for additions to petitioner's bad debt reserve in 1947 and 1948, erroneously included the $ 32,500 Cornell loan in aggregate loans*141 outstanding in the years 1930 to 1935, inclusive. In the alternative petitioner contends that if there was debt it became partially worthless, and an appropriate adjustment should be made in the aggregate amount of bad debts used in the computation. There is no merit in either of petitioner's alternative contentions. The evidence shows that the Cornell loan was outstanding in the years 1930 to 1935, inclusive, and petitioner has not shown that the loan became partially worthless. Therefore, there is no basis for disturbing respondent's determination.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622123/	Thomas W. and Myrtle M. Otis v. Commissioner.Otis v. CommissionerDocket No. 59677.United States Tax CourtT.C. Memo 1957-67; 1957 Tax Ct. Memo LEXIS 181; 16 T.C.M. (CCH) 290; T.C.M. (RIA) 57067; April 30, 1957181 Items of alleged expenses disallowed for lack of substantiation. Malcolm E. Rosser, Esq., for the petitioners. T. W. Sommer, Esq., for the respondent. VAN FOSSAN Memorandum Opinion VAN FOSSAN, Judge: Respondent determined a deficiency of $257.37 in petitioners' income tax for the year 1954. The return for the taxable year was filed with the district director of internal revenue at Oklahoma City, Oklahoma. The petitioners took deductions for three items of alleged expense, - (1) the amount of $441 for cost of meals eaten at their place of employment, (2) the amount of $86 alleged to be the cost of a health and accident policy, and (3) the alleged dependency of a grandson, all of which items respondent disallowed for lack of substantiation. Petitioner Thomas W. was employed as a guard and his wife Myrtle M., as a check inspector at the plant of the Corning Glass Works in Muskogee, Oklahoma, during the year 1954. They worked 8 hours in straight shifts and took their meals with them or had them sent in. They ate their meals on the plant property and were not reimbursed for the cost of same. The record shows little else as to the first item. The amount of the182 expense, if otherwise allowable, was not adequately substantiated. Moreover, it is purely a personal expense, not allowable as a business expense deduction unless incident to a travel status away from home in pursuit of a trade or business. The item is not allowable. Fred Marion Osteen, 14 T.C. 1261">14 T.C. 1261. In their return petitioners claimed $86 as a medical expense deduction for a health and accident policy premium. The record before the Court fails entirely to establish this item. Respondent's action is affirmed. The third item involves a claim for the dependency of petitioners' grandson. The record shows that the child lived with petitioners for 7 months during the taxable year and with his father for 5 months. It shows further that the father expended $50 per month for the child's care during a period of 5 months. It shows nothing as to the amount of the expense sustained by petitioners. The test of a dependency credit is not the amount of time but the amount of money spent in the alleged support. Bennett H. Darmer, 20 T.C. 822">20 T.C. 822. The statute provides that a "dependent" means one of certain related individuals "over half of whose support, for the calendar*183 year" is received from the taxpayer. This item must be disallowed for lack of substantiation. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622124/	Henry Glass & Co., Petitioner, v. Commissioner of Internal Revenue, RespondentHenry Glass & Co. v. CommissionerDocket No. 39257United States Tax Court34 T.C. 954; 1960 U.S. Tax Ct. LEXIS 77; September 15, 1960, Filed 77 Decision will be entered for the respondent. Excess Profits Tax, Sec. 722. -- Held, that petitioner is not entitled to relief under section 722 (a), (b)(1), (b)(4), and (b)(5) for the taxable fiscal years ended June 30, 1941 to 1946, inclusive, or to the benefit of any carryover from the fiscal year ended June 30, 1940, based on a constructive average base period net income for those years. J. Nathan Helfat, Esq., and Bernard A. Helfat, Esq., for the petitioner.Martin D. Cohen, Esq., Jules W. Breslow, Esq., and Victor H. Frank, Jr., Esq., for the respondent. Kern, Judge. KERN 954 The petitioner contests the respondent's disallowance of its timely filed applications for relief under section 722 of the Internal Revenue Code of 1939 and related claims for refund of excess profits taxes for the fiscal years78 ended June 30, 1941 to 1946, inclusive. Petitioner also claims benefit of a carryover credit from the fiscal year 1940.The questions presented for decision are whether the petitioner has established the existence of qualifying factors for relief under section 722(b)(1), (b)(4), and (b)(5), and, if so, whether the petitioner has established a fair and just amount representing normal earnings to be used as a constructive average base period net income under section 722(a). Petitioner has abandoned its claimed qualification for relief under section 722(b)(2) and (b)(3)(A).FINDINGS OF FACT.Some of the facts have been stipulated by the parties. The stipulation and exhibits thereto attached are incorporated herein by this reference.955 The petitioner is a New York corporation organized in June 1904, and since that time it has maintained its principal office and place of business in the city and State of New York. Petitioner maintained its books of account and filed its tax returns on the accrual basis and for the fiscal year ending June 30. Its income and excess profits tax returns for the taxable year 1941 were filed with the then collector of internal revenue for the second79 district of New York, and its returns for all subsequent taxable years involved herein were filed with the then collector of internal revenue for the third district of New York.For a number of years following its incorporation petitioner was engaged in business primarily as an importer of household linens and some dress linens. Since about the end of the First World War and at all times material here the petitioner has engaged in business primarily as an independent converter of woven fine cotton grey goods into finished piece goods imprinted with various designs and color combinations originated by petitioner. Over a long period of years petitioner's "Peter Pan" trademark printed on the selvage edge of all of its piece goods was generally accepted in the piece goods trade as a guaranty of new styles in high-quality fast-color goods. The petitioner's piece goods, usually in 120-yard lengths, were sold principally to manufacturers of the higher priced lines of ladies' and children's apparel, dresses, skirts, sports clothes, and swimsuits. Petitioner also made sales to wholesalers of piece goods and in some instances direct to retail yard goods stores and department stores.At 80 all times material here petitioner was one of a comparatively small group of cotton converters known in the trade as "originators of designs" or "style leaders" in cotton piece goods. Every year and for each season of the year such converters originated new styles in both designs and colors. Each year the petitioner prepared about 125 new designs the creation of which was a very important factor in the petitioner's business. New style and design ideas were developed mainly by petitioner's officers through research, travel, and consultation with leading stylists, many of whom lived abroad. The petitioner's new designs were sent to outside professional designers for execution, that is, the making of scaled water-colored drawings thereof with appropriate spacing so that the designs could be engraved on the copper rollers owned by the finishing plant and used in the printing process.As an independent converter the petitioner owned no machinery, equipment, or plant facilities for finishing and printing cotton fabrics. At all times material here the petitioner purchased from cotton mills and for its own account the woven fine cotton grey goods which was shipped direct to an independent81 finisher with whom petitioner 956 had a contract to do the finishing. The finisher had petitioner's designs engraved on copper rollers used in the printing process and carried out petitioner's instructions as to the color combinations and quantities of yardage to be printed. When the finishing work was completed, petitioner received samples which were used by its salesmen when calling upon old customers and prospective new customers.Prior to and during the base period years the petitioner's business was competitive, particularly with a small group of independent converters known as "style leaders" who "sold fashion by the yard." During that period a large group of converters consisted of integrated concerns which operated their own plant facilities. Several of these integrated converters produced some lines of fine cotton piece goods which, even though not complete style lines, were competitive with petitioner's cotton piece goods in both quality and price. The bulk of the integrated converters generally produced coarser cotton piece goods for use in lower price lines of wearing apparel, made fewer changes in designs, and sold at lower prices than the petitioner. While82 such goods were not in direct competition with petitioner's cotton piece goods in either quality or price, the petitioner could not fix its prices too far out of line with the lower priced piece goods.During the fiscal years June 30, 1924 to 1940, inclusive, Max Wilner, John Glass, Samuel Silver, Isidor Wilner, Herbert I. Glass, and Ellis H. Wilner owned most of petitioner's outstanding common and preferred stock, and they were the petitioner's officers and directors. At all times material here those men were well known in the cotton fabric piece goods trade and they accounted for about 50 per cent of petitioner's sales every year and also helped petitioner's other salesmen consummate sales. Throughout that period and prior thereto Max Wilner was a principal stockholder and the president of petitioner; Max Wilner and Ellis H. Wilner were in charge of styling and the creation of new designs; and Isidor Wilner, as the converter, supervised the purchase of grey goods and the finishing and printing done by the finishing plants.The petitioner earned substantial profits each year over a period of 9 years prior to the depression of the early 1930's, and it had an average net income, 83 in round figures, of $ 243,000 for the 9 fiscal years from June 30, 1923 to 1931, inclusive. For the fiscal years June 30, 1932 to 1937, inclusive, the petitioner had a net loss of $ 262,116.47 for 1932, a net loss of $ 81,062.16 for 1933, net income of $ 180,146.90 for 1934, a net loss of $ 113,434.99 for 1935, net income of $ 12,918.85 for 1936, and net income of $ 116,400.87 for 1937.After the close of the fiscal year ended June 30, 1937, the petitioner's officers decided that while the profit for that year was fairly 957 good the volume of sales was considerably below what it should have been under general business conditions. A survey of customers in regard to the demand for petitioner's cotton piece goods revealed that in the manufacture of ladies' and children's wearing apparel there was a definite trend toward an increased use of rayon, an artificial silklike material which differed from cotton in texture, appearance, and feel. Petitioner's officers concluded that competition from rayon piece goods was responsible for a decrease in the demand for petitioner's cotton piece goods. In the latter part of 1937 or early in 1938 petitioner decided that in addition to its84 principal business of converting cotton grey goods into piece goods it would engage in converting rayon grey goods into piece goods for the purpose of supplying the demands of its customers and also for sale to other users of rayon.At sometime in 1938 prior to the end of the fiscal year June 30, 1938, petitioner purchased a stock of rayon grey goods for conversion into finished piece goods imprinted with original designs in fast colors. At one time during this period approximately 40 per cent of the inventory was rayon. Petitioner was inexperienced in handling rayon materials and it hired a rayon cloth stylist and two salesmen who specialized in selling rayon piece goods. In general, petitioner's method of handling rayon cloth was the same as for cotton cloth, that is, the rayon grey goods were purchased from the mill for petitioner's own account and shipped to the finisher which carried out petitioner's instructions as to designs, color combinations, and quantities of finished rayon piece goods. Petitioner used the same finisher for both rayon and cotton. In the fiscal year ended June 30, 1938, petitioner started converting rayon as a supplemental line, but throughout the fiscal85 year June 30, 1938, petitioner continued doing business primarily as a converter of fine cotton goods. The net sales of petitioner fell off from $ 2,631,809.25 for fiscal 1937 to $ 1,899,753.45 for fiscal 1938, and it sustained a net loss of $ 152,505.84 for the latter year.Sometime around the end of the calendar year 1938 petitioner's rayon piece goods venture proved to be a failure. Petitioner found that its competitors were quickly getting better prices at the mills for rayon grey goods, were copying petitioner's designs, and were using less expensive finishing methods, with the result that petitioner's rayon piece goods were not competitive pricewise.In December 1938 or January 1939 the stockholders decided that petitioner's rayon venture should be terminated. Further, and because of the combined effect on petitioner's business resulting from the failure of the rayon venture, the substantial net loss for the fiscal year June 30, 1938, and the decline in the demand for petitioner's 958 cotton piece goods as a result of competition with rayon, the petitioner's president and principal stockholder, Max Wilner, proposed that the petitioner liquidate and go out of business. 86 Beginning early in 1939 petitioner initiated a program leading to a substantial reduction in its inventory of goods on hand at June 30, 1939. Petitioner kept its contracts with finishers. Petitioner continued sales of its finished cotton goods to customers at more or less its usual markup during most of fiscal 1939. With respect to its contracts with mills for grey goods, petitioner was able to negotiate cancellation of some contracts where the cloth had not been woven but generally petitioner had to accept the grey goods contracted for and then sell the goods in the grey state, usually at a loss. For the fiscal year ended June 30, 1939, petitioner's purchases amounted to $ 698,087.83 as compared with purchases in excess of a million dollars for each of the 2 preceding years. For fiscal 1939 petitioner's opening inventory amounted to $ 622,808.75, which was comparable to the 2 prior years, and the closing inventory had been reduced to $ 209,332.79. Petitioner's net sales declined from $ 1,899,753.45 for fiscal 1938 to $ 1,804,622.59 for fiscal 1939, and for the latter year petitioner sustained a net loss of $ 241,733.73.Early in 1939 when it became known in the piece goods87 trade that petitioner was liquidating its inventory and was not making advance preparations for a full line of new styles, some customers urged that petitioner continue in the cotton piece goods business. In May 1939 all of petitioner's stockholders agreed to Samuel Silver's proposal that petitioner concentrate on the cotton piece goods business during the next 2 months with a reduced staff of employees and a drastic cut in officers' salaries, as an experiment to determine whether the business could operate profitably. As of June 1, 1939, there was a reduction from 56 to 38 in the number of employees, and a reduction of approximately one-third in the total amount of officers' salaries. As a result of the experiment all of petitioner's stockholders agreed in July 1939 that they would not liquidate the business and that they would continue the petitioner's cotton piece goods business in the same manner as previously conducted prior to the introduction of rayon, but on the basis of the then reduced scale of operation. At or about the same time the stockholders further agreed to reduce the capitalization of petitioner and requested counsel to work out the details.Pursuant to agreements88 between stockholders, corporate resolutions, and a certificate of reduction of capital stock filed with the secretary of state and county clerk, all before December 31, 1939, the petitioner's authorized capital stock was reduced from $ 680,000 959 (represented by 4,300 shares of $ 100 par preferred and 2,500 shares of $ 100 par common) to $ 319,000 (represented by 3,150 shares of $ 100 par preferred and 4,000 shares of $ 1 par common) and certain old shares were eliminated and new shares were issued to the same stockholders as agreed between themselves.Throughout the fiscal year ended June 30, 1940, the petitioner continued its business primarily as an independent converter of cotton grey goods into finished piece goods, but on a smaller scale of operations than for previous years. During the first part of that fiscal year the petitioner did not have a complete new line of styles or designs which had not been prepared in advance for the fall season and which normally required at least 20 weeks' time. At the beginning of fiscal 1940 petitioner's inventory was at a low figure of only $ 209,332.79 consisting of $ 183,651.52 finished goods and $ 25,681.27 grey goods, and petitioner's89 grey goods purchases were normally delivered at a rate of only about 10 per cent weekly. For fiscal 1940 petitioner's purchases amounted to $ 571,444.50 which was substantially less than for the previous year and petitioner's net sales further declined to $ 1,124,396.28. For fiscal 1940 petitioner had net income of $ 11,838.45 as compared to its substantial net loss for the previous year. War factors did not affect or influence the petitioner's business operations or earnings during any portion of its fiscal year ended June 30, 1940.Joint Exhibit 17-Q, attached to the stipulation, consists of statements regularly maintained by petitioner, over a period of years, showing profit and loss from its operations on a monthly basis, but without yearend adjustments so that the data contained therein as to yearly totals does not reconcile in all respects with totals shown on petitioner's tax returns nor with certain stipulated yearly totals. Those records disclose, inter alia, income from "cottons" (that is, sales less discount and cost) for every month during the fiscal years ended June 30, 1937 and 1938. Those records further disclose, in a similar manner, income from "cottons and90 rayons" for every month during the fiscal years ended June 30, 1939 and 1940, except for the month of June in each year for which the records are not available. For the fiscal years 1939 and 1940 those records show no breakdown of sales as between cotton goods and rayon goods or finished goods and grey goods. For every month except June during the fiscal year 1940 those records show "cotton and rayon purchases" without any breakdown of the cost as between cotton and rayon.During the petitioner's 4 base period fiscal years ended June 30, 1937 to 1940, inclusive, the percentage of petitioner's gross profit to 960 sales or markup for each month, as derived from the above-mentioned Joint Exhibit 17-Q and agreed to by the parties, was as follows:Fiscal year ended June 30 --Month1937193819391940July16.8716.5815.3516.35August16.7818.1018.1418.51September16.9416.2716.0521.12October18.6815.3013.3919.77November19.8113.3510.6320.43December28.3714.2914.0420.90January19.2314.7217.5221.00February19.138.7316.2722.33March20.5810.5314.5021.47April20.1611.708.6220.32Mya16.8811.774.3018.63June12.604.48(1) (1) 91 The petitioner's profit and loss statements per its Federal income tax returns as adjusted by revenue agents' reports, and also its excess profits net income for the base period fiscal years ended June 30, 1937 to 1940, inclusive, are as follows:Fiscal year ended June 30 --19371938Sales$ 2,631,809.25$ 1,899,753.45 Cost of goods sold:Inventory-beginning656,634.75666,516.12 Purchases1,381,029.401,070,366.65 Other costs694,416.68566,356.63 Total2,732,080.832,303,239.40 Inventory -- end666,516.12622,808.75 Cost of goods sold2,065,564.711,680,430.65 Gross profit566,244.54219,322.80 Other income4,045.6424,174.59 Total income570,290.18243,497.39 Deductions:Compensation of officers86,615.2072,900.00 Salaries and wages92,361.7883,630.69 Rent17,419.9217,289.92 Bad debts6,000.00Interest7,560.0510,512.79 Taxes8,691.4213,980.15 Contributions2,173.70Depreciation1,202.001,232.03 RepairsOther deductions231,865.24196,457.65 Total deductions453,889.31396,003.23 Net income116,400.87(152,505.84)Less:Capital gain128.50170.00 Dividends received2,791.202,858.60 Excess profits net income113,481.17(155,534.44)92 Fiscal year ended June 30 --19391940Sales$ 1,804,622.59 $ 1,124,396.28Cost of goods sold:Inventory -- beginning622,808.75 209,332.79Purchases698,087.83 571,444.50Other costs543,226.33 321,789.35Total1,864,122.91 1,102,566.64Inventory -- end209,332.79 213,790.75Cost of goods sold1,654,790.12 888,775.89Gross profit149,832.47 235,620.39Other income5,102.40 6,580.99Total income154,934.87 242,201.38Deductions:Compensation of officers71,100.00 51,000.00Salaries and wages71,724.66 59,886.88Rent16,536.62 15,000.00Bad debts3,800.00Interest7,103.85 4,894.51Taxes10,888.22 6,647.22Contributions623.08Depreciation1,145.15 957.00Repairs3,077.98 Other deductions215,092.12 87,554.24Total deductions396,668.60 230,362.93Net income(241,733.73)11,838.45Less:Capital gain550.00Dividends received2,881.00 2,802.60Excess profits net income(244,614.73)8,485.85961 The petitioner's balance sheets in summarized form per its Federal income tax return for each of the fiscal years ended June 30, 1923 to 1940, inclusive, are set93 forth in Joint Exhibit 14-N attached to the stipulation. Those balance sheets for the base period fiscal years ended June 30, 1937 to 1940, inclusive, are as follows:Balance sheets as of June 30 --19371938AssetsCash$ 90,766.40$ 107,858.24Accounts receivable (net)375,897.25259,935.74Inventories666,516.12622,808.75Investments91,037.5062,596.30Capital assets (net)6,680.685,522.96Other assets (deferred charges, ad-vances to employees, etc.)144,080.31173,525.64Total Assets1,374,978.261,232,247.63LiabilitiesNotes payable350,000.00400,000.00Accounts payable36,316.9578,265.58Accrued expenses26,943.771,578.40Total liabilities413,260.72479,843.98Net worthCapital stock561,000.00561,000.00Surplus400,717.54191,403.65Total net worth961,717.54752,403.65Total liabilities and net worth1,374,978.261,232,247.63Balance sheets as of June 30 --19391940AssetsCash$ 108,427.64 $ 43,106.98Accounts receivable (net)277,361.28 168,301.27Inventories209,332.79213,790.75Investments62,069.30 58,007.30Capital assets (net)10,807.06 9,850.06Other assets (deferred charges,advances to employees, etc.)181,743.43 7,094.39Total assets849,741.50 500,150.75LiabilitiesNotes payable335,000.00 150,000.00Accounts payable23,302.83 18,891.04Accrued expenses2,088.29 7,169.31Total liabilities360,391.12 176,060.35Net worthCapital stock561,000.00 319,000.00Surplus(71,649.62)5,090.40Total net worth489,350.38 324,090.40Total liabilities and net worth849,741.50 500,150.7594 The averages shown on Exhibits 12-L and 13-M are herein set out and for convenience combined in one schedule, as follows:Averages in dollar amountsFiscal years ended June 30 --1923-19401937-1940Net sales$ 3,837,464.43$ 1,865,145.39 Cost of goods sold3,079,081.431,572,390.34 Gross profit758,383.00292,755.05 Total income769,890.39302,730.96 Deductions677,396.45369,231.02 Net income (or loss)92,493.95(66,500.06)Excess profits net income (or loss)91,658.68(69,545.54)Averages of ratios interms of per cent tonet salesFiscal years ended June 30 --1923-19401937-1940Net sales100.00100.00 Cost of goods sold80.2484.30 Gross profit19.7615.70 Total income20.0616.23 Deductions17.6519.80 Net income (or loss)2.41(3.57)Excess profits net income (or loss)2.39(3.73)For the fiscal years 1923 through 1940 petitioner's net sales (omitting cents), percentage of gross profits to net sales, deductions (omitting cents), ratio of deductions to net sales, net income or loss (omitting cents), and ratio of net income or loss to net sales were as follows: 962 Per centFiscal year ended June 30 --Net salesgross profitDeductionsto net sales1923$ 4,713,84120.75$ 775,91719245,935,69018.87931,09419255,377,46420.06857,92119266,003,81020.05936,32919276,358,80521.971,074,88119285,187,34523.98946,88919295,830,90323.221,061,77719304,779,94722.49879,11419314,754,12318.26794,57819322,714,93312.04599,40719332,030,84217.75449,02419343,194,76721.66516,83719352,441,21914.10463,76819362,290,08119.11428,67019372,631,80921.52453,88919381,899,75311.54396,00319391,804,6228.30396,66819401,124,39620.96230,36295 Ratio ofRatio ofFiscal year ended June 30 --deductionsNet incomenet incometo net sales(or loss)(or loss)to net sales192316.46$ 216,096 4.58 192415.69205,125 3.46 192515.95233,960 4.35 192615.60283,510 4.72 192716.90353,507 5.56 192818.25301,732 5.82 192918.21303,311 5.20 193018.39212,290 4.44 193116.7184,904 1.79 193222.08(262,116)(9.65)193322.11(81,062)(3.99)193416.18180,146 5.64 193519.00(113,434)(4.65)193618.7212,918 .56 193717.25116,400 4.42 193820.84(152,505)(8.03)193921.98(241,733)(13.39)194020.4911,838 1.05 Petitioner's excess profits tax liability as finally determined by respondent without the benefit of section 722, the amount paid thereon by petitioner, and the amount of refund claimed by petitioner for each of the taxable years involved herein are as follows:Excess profitsAmountAmount ofFiscal year ended June 30 --tax liabilitypaidrefundclaimed1941$ 15,001.11$ 15,001.11$ 15,001.111942128,848.17128,848.17115,352.551943166,866.531 135,017.72135,017.721944235,681.501 206,022.23206,022.23194543,264.8143,264,8143,723.2719462,352.302,352.302,479.6696 For each of the taxable years involved herein and as determined without the benefit of section 722 the petitioner's excess profits net income, excess profits credit under the invested capital method, specific exemption, and adjusted excess profits net income are as follows:Excess profitsFiscal year ended June 30 --Excess profitscredit undernet incomeinvested capitalmethod1941$ 95,793.48$ 37,933.171942328,637.0751,185.861943239,021.2048,613.941944321,231.2145,494.021945109,024.7348,422.61194656,936.5441,478.94Adjusted excessFiscal year ended June 30 --Specificprofits netexemptionincome1941$ 5,000$ 52,860.3119425,000272,451.2119435,000185,407.265,0001 270,737.19194410,0002 265,737.19194510,00050,602.12194610,0005,457.60963 OPINION.The petitioner contests97 the respondent's disallowance of its applications for relief, under section 722(a), (b)(1), (b)(4), and (b)( 5) of the Internal Revenue Code of 1939, 1 from excess profits taxes as determined by respondent for the fiscal years ended June 30, 1941 to 1946, inclusive. Petitioner also claims the benefit of any carryover of unused excess profits credit from the fiscal year ended June 30, 1940.98 The petitioner is entitled to use the excess profits credit based on income pursuant to section 713 or based on invested capital pursuant to section 714 of the Internal Revenue Code of 1939, whichever results in the lesser excess profits tax. The credit allowed in respondent's determination is based on invested capital. The petitioner contends that in lieu of such credit and under the benefit of section 722 it is entitled to an excess profits credit based on a constructive average base period net income of $ 100,000.The petitioner has the burden of proof that it comes within the requirements prescribed by section 722. The petitioner must (1) establish that the tax computed without the benefit of section 722964 results in an excessive and discriminatory tax in that its average base period net income is an inadequate standard of normal earnings because of an event of the type embraced within subsection (b) as a qualifying factor, (2) establish what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income (CABPNI) in lieu of its average base period net income (ABPNI) otherwise determined, and (3) establish that99 this CABPNI would result in an excess profits tax credit in excess of that allowed under the provisions of section 714. See sec. 712 (a); Clayton Coal Co., 27 T.C. 810">27 T.C. 810, 819, 820; Old Homestead Bread Co., 28 T.C. 306">28 T.C. 306, 313.The respondent contends that on the record herein the petitioner has failed to show a qualifying event under either subsection (b)(1), (b)(4), or (b)(5) and, even if so, it has failed to show any reasonable method of reconstruction resulting in a CABPNI which would produce an excess profits credit in excess of that to which petitioner is entitled under the provisions of section 714.The petitioner's claim for section 722 relief, mainly under (b)(4) and in the alternative under (b)(1) or (b)(5), is based on the same factual circumstances. A brief summary of the salient facts is as follows: Prior to the base period years ended June 30, 1937 to 1940, inclusive, the petitioner was engaged primarily in the competitive business of an independent converter of fine cotton grey goods into piece goods imprinted with fast colors according to petitioner's original styles or designs. Petitioner owned no machinery, 100 equipment, or plant facilities. During fiscal 1937 competition from rayon, an artificial silklike material, caused a decline in the demand for petitioner's cotton goods. To meet that competition and before the end of fiscal 1938 petitioner purchased rayon grey goods and started converting it into piece goods as a supplemental line. Petitioner's converting operations were essentially the same for both cotton and rayon, the only difference being the type of fabric used. There is only an approximation as to the extent to which petitioner engaged in converting rayon resting on the testimony of one witness to the effect that "maybe as high as 40 percent of our line was rayon." Petitioner's books show sales and purchases of "cotton and rayon." No sales of rayon were made until late in fiscal 1938. In fiscal 1938 petitioner's net sales of cotton piece goods declined substantially from the previous year and it sustained an operating net loss. According to its books petitioner's first substantial sales of rayon were made in July 1938 and by the following December its rayon venture proved to be a failure because of severe competition from other converters of rayon goods. In December 101 1938 or January 1939 petitioner's stockholders decided that the rayon venture should 965 be terminated and, further, its principal stockholder proposed the liquidation of petitioner's business. However, there was no definite decision to actually wind up the business. During the remainder of fiscal 1939 petitioner kept its contracts with its finisher, presumably as to both cotton and rayon, and made sales of finished piece goods to its customers. At the same time petitioner initiated a program to reduce its inventory by canceling contracts for grey goods where the fabric had not been woven and selling some goods in its grey state, with the result that its closing inventory for fiscal 1939 was only about one-third of that for the 2 preceding years. Also during the last part of fiscal 1939 petitioner did not prepare a full line of new designs in advance for the next year. For fiscal 1939 petitioner's net sales of cotton and rayon combined declined substantially from the previous year's sales which were, either entirely or primarily, of cotton and it sustained an operating net loss. During June and July 1939 petitioner reduced its staff of employees, cut officers' salaries, 102 and concentrated on the sale of cotton piece goods to determine whether the business could operate profitably. In July 1939 petitioner's stockholders agreed that they would not liquidate the business and would continue converting cotton in the same manner as before but with the elimination of rayon. They also agreed to reduce petitioner's capitalization which was done prior to December 31, 1939. The operation of petitioner's business, primarily as a converter of cotton, was continued during the fiscal year ended June 30, 1940. For fiscal 1940 petitioner's operations were on a greatly reduced scale as compared to previous years and there was a further substantial decline in total net sales, but it showed a small profit for that year.With respect to its claimed qualification for relief under section 722(b)(4), petitioner's brief states the following:The petitioner relies here primarily on these propositions:(1) That the reversal by petitioner of a prior decision to liquidate its business, which liquidation was in the process of completion, and a determination in August 1939 in effect to start business over again, eliminating rayon and confining itself to cotton, and the implementation103 of such determination during the base period, and before December 31, 1939, qualifies petitioner for relief under Section 722(b)(4) as a taxpayer who commenced or changed the character of its business and whose base period income does not reflect the normal operations for the entire base period of its business.(2) That because the petitioner's inventory was depleted and the petitioner was devoid of a new line of styles and because of other material factors present at the time when it resumed or began operation in August 1939, the business of the petitioner did not reach the earning level at the end of the base period which it would have reached then, if it had commenced business or changed the character of its business two years before it did so, it qualifies under Section 722(b)(4) for a reconstruction on the assumption that it had commenced 966 or changed the character of its business two years before it actually did so.(3) If the petitioner is held not to qualify as having commenced business during the base period, or changed the character of its business by a reversal to discontinue and the determination to resume business, then the petitioner claims it has changed the104 character of its business by a change in the products or services furnished.On the record in this proceeding we find it unnecessary to determine whether the base period events, particularly the reversal of a decision to liquidate and the determination to continue solely as a cotton converter with discontinuance of rayon piece goods thereby eliminating the expenses and losses connected therewith, constituted a qualifying factor or qualifying factors for relief under section 722(b)(1), (b)(4), or (b)(5).Even if we assume that petitioner qualifies for relief as contended, we are unable to find from the record herein a fair and just amount representing normal earnings to be used as a constructive average base period net income (CABPNI) which would afford a credit in a greater amount than the excess profits credit allowed by respondent under the invested capital method. Accordingly, petitioner has failed to meet that aspect of its burden of proof that it comes within the requirements prescribed by section 722.The petitioner's claimed CABPNI of $ 100,000 is unsupported by any satisfactory factual basis and rests upon a mere estimate by petitioner's president who impressed us as being105 much more interested in styling and designing than in business and financial matters. He testified without giving any satisfactory economic reasons that it was his opinion that after application of the 2-year push-back rule to the base period events petitioner's net sales of cotton piece goods "couldn't have been any worse probably than 2 1/2 million dollars" with a profit of "say somewhere around" $ 125,000 for the last base period fiscal year ended June 30, 1940.The petitioner's president, who was the only witness to testify on this subject, estimated, under a 2-year push-back, that petitioner's sales of cottons would have fallen off from the previous year and it would have had a net loss of from $ 10,000 to $ 20,000 for the fiscal year June 30, 1937-1938; that sales of cottons would be $ 2,225,000 and profits thereon over $ 100,000 for the fiscal year June 30, 1938-1939; that sales of cottons would be $ 2,500,000 and profits thereon $ 125,000 for the fiscal year June 30, 1939-1940; and that the increased sales for the fiscal years 1939 and 1940 would have brought about increased costs amounting to about 3 1/2 per cent of increased sales for commissions, advertising, etc.These106 unsupported and, in our opinion, unrealistic estimates do not give proper consideration to the actual base period experience 967 of petitioner including the actual reduced scale of its operations in the fiscal year 1940, the competition of integrated converters, and especially the effect of rayon competition.In its fiscal year 1937 petitioner's officers noted a trend from cotton to rayon which affected its sales of cotton piece goods. There is no showing that this trend did not continue during the base period. Petitioner did not start into the rayon converting business until the latter half of its fiscal year 1938, yet for that year its combined sales of cotton and rayon amounted to only $ 1,899,753 as compared with $ 2,631,809 for the prior year. The record does not disclose how much of this constituted cotton sales. In its fiscal year 1940 petitioner concentrated on cotton sales and these sales amounted only to $ 1,124,396. We recognize that petitioner entered this year with a depleted inventory, no fall line of newly designed goods, and a smaller sales force. However, there is nothing in the record other than the unsupported estimate of petitioner's president which107 would lead us to believe that sales of cotton goods for that year could have been restored to anywhere near the level of such sales prior to the beginning of rayon competition if the decisions to abandon the conversion of rayon and the reversal of its policy of liquidation had been made 2 years before.Petitioner, in its argument on this point, lays stress on some words used by respondent's counsel in his opening statement to the effect that petitioner was "a member of the cotton converters" who did better during the base period than in other periods. In the first place this statement is not evidence, nor, in its context, does it constitute an admission. In the second place it is apparent that the industry which respondent's counsel categorizes as "cotton converters" differs from the industry of which petitioner considers itself to be a member. Petitioner contends that its industry was composed of a comparatively small group of cotton converters known in the trade as "originators of designs" or "style leaders" in cotton piece goods printed in fast colors. Respondent's conception of "cotton converters" would include all types of converters including integrated converters producing108 coarse cotton piece goods printed in nonfast colors according to copied designs. It might also include converters who engaged in the conversion of rayon using cheap finishing methods and copied designs and were the type of converters that were able to undersell petitioner during its participation in the business of converting rayon.The petitioner's books and records made no segregation as between its cotton piece goods business and its supplemental rayon piece goods business and, accordingly, it is impossible to determine what, if any, increased level of earnings might have resulted from petitioner's 968 discontinuance of rayon thereby achieving a saving of rayon expenses and losses. Cf. Crowell-Collier Publishing Co., 25 T.C. 1268">25 T.C. 1268, affd. 259 F. 2d 860, certiorari denied 358 U.S. 928">358 U.S. 928.On the record before us we are unable to find a constructive average base period net income in an amount which would be greater than the excess profits credit allowed by respondent under the invested capital method. Therefore we conclude and so hold that petitioner is not entitled to relief under section 722109 for the taxable fiscal years ended June 30, 1941 to 1946, inclusive, or to the benefit of any carryover from the fiscal year ended June 30, 1940, based on a CABPNI for those years.Reviewed by the Special Division.Decision will be entered for the respondent. Footnotes1. Not available.↩1. The difference between the liability and the amount paid, or $ 31,848.81 for 1943 and $ 29,659.27 for 1944, represents the amount of deferment under section 710(a)(5) of the Internal Revenue Code of 1939↩.1. Computed under law applicable to 1943.↩2. Computed under law applicable to 1944.↩1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. * * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- (1) in one or more taxable years in the base period normal production, output, or operation was interrupted or diminished because of the occurrence, either immediately prior to, or during the base period, of events unusual and peculiar in the experience of such taxpayer. * * (4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. For the purposes of this subparagraph, the term "change in the character of the business" includes a change in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operation, * *(5) of any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period and the application of this section to the taxpayer would not be inconsistent with the principles underlying the provisions of this subsection, and with the conditions and limitations enumerated therein.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622125/	S. E. Ponticos, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentS. E. Ponticos, Inc. v. CommissionerDocket No. 84692United States Tax Court40 T.C. 60; 1963 U.S. Tax Ct. LEXIS 150; April 18, 1963, Filed 150 Decision will be entered for the respondent. Petitioner sold a building, which was rented to commercial tenants as a warehouse and place of business, to the City of Cincinnati, Ohio, under threat of condemnation. The proceeds of such sale were reinvested in a garden-type apartment development. Held, that the property purchased did not constitute "property similar or related in service or use to the property so converted," within the meaning of section 1033(a)(3)(A), I.R.C. 1954, and that the petitioner is therefore not entitled to nonrecognition of gain upon the disposition of the converted building. John J. Kelly, Jr., for the petitioner.Gene E. Hutson, for the respondent. Dawson, Judge. Mulroney, J., dissenting. Forrester and Fay, JJ., agree with this dissent. DAWSON60 Respondent determined a deficiency in the petitioner's income tax for the calendar year 1956 in the amount of $ 28,551.49.The only issue presented is whether the petitioner reinvested the proceeds received by it from the sale of property under threat of condemnation in other property "similar or related in service or use" to the property condemned within the meaning of section151 1033(a)(3) (A) of the Internal Revenue Code of 1954.FINDINGS OF FACTMost of the facts are stipulated and are so found.S. E. Ponticos, Inc., hereinafter referred to as the petitioner, is a corporation organized and existing under the laws of the State of Ohio, with its office in Cincinnati. It filed its corporate income tax return for the taxable year ended December 31, 1956, with the district director of internal revenue in Cincinnati.Petitioner was incorporated in 1946 to do business as a bar and restaurant fixtures manufacturer and as an investor in real estate. After 1954, petitioner was solely engaged in the investment of real estate.61 In 1945 petitioner purchased improved real property at 112, 114, and 116 West Pearl Street, Cincinnati, Ohio, hereinafter referred to as the Pearl Street property. The six-story building was, in fact, composed of three connected buildings. The petitioner used the basement and the first floor of the building for several years in its fixtures business. Except for the renting of one floor to the Ohio Advertising Display Co. in 1948, the remaining portion of the building was unused until April 24, 1953.In addition to the Pearl Street152 property, the petitioner owned other parcels of real estate which it held solely for investment purposes.The fixtures business proved unprofitable and, in the latter part of 1950, remodeling was begun on the Pearl Street property to make it useful for other purposes. During the limited remodeling of the first floor, the petitioner applied for a permit to install a passenger elevator. This was refused by the building commissioner of the city of Cincinnati because the city intended to acquire the Pearl Street property for the construction of a highway. No more remodeling was done after the permit was refused.On February 2, 1952, petitioner entered into a contract with George D. O'Brien, a real estate broker, to obtain a lessee for the building at a rental of $ 10,000 per year. After George D. O'Brien was unable to secure an acceptable lease, the petitioner leased the top five floors to the Ohio Advertising Display Co. on April 24, 1953, for $ 500 per month, to be used as a warehouse. The lease was for a term of 3 years with the right to renew for an additional 2 years and covered certain chattels in the form of machinery and tools which were already located on the leased floors. 153 The machinery and tools were not used by the Ohio Advertising Display Co. but were to remain stored on the premises. The lease provided that the lessee was to make all repairs required of the interior and roof of the building, to insure the building and chattel property, and to install its own meters for gas and electricity. The only duties required of the petitioner as lessor were to keep the exterior of the building in repair and to repair damages caused by fire.In the early part of 1954 the petitioner sold its fixtures business to Axiotes, Inc., which rented the first floor and basement for $ 250 per month. After selling the fixtures business, the petitioner was engaged exclusively in real estate rentals, construction of real estate, and security investments.The Ohio Advertising Display Co. and Axiotes, Inc., continued to occupy the Pearl Street property until March 1956, when the city of Cincinnati asked them to vacate.The Pearl Street property was sold to the city of Cincinnati under threat of condemnation on July 16, 1956, for $ 151,000. Petitioner's 62 adjusted basis for the property was $ 28,083.47. The petitioner's gain on the sale of the property was $ 122,916.53. 154 In 1956 and 1957 the petitioner reinvested the proceeds from the sale of the Pearl Street property in the construction of a garden-type apartment development, known as Ponticos Panoramic Estates, on real property owned by the petitioner at 2301-2375 Montana Avenue, Cincinnati, Ohio. The advertising brochure for Ponticos Panoramic Estates describes the apartments as being furnished with heat, water, air conditioning, laundries, hot water heaters, central vacuum cleaning system, and well-equipped kitchens. Playgrounds, a recreation area, and a swimming pool were to be available for the tenants. Petitioner was to provide a janitor to empty waste cans, clean hallways, keep grounds, and clear sidewalks and streets of ice and snow.On its income tax return for 1956, the petitioner reported details of the sale of the Pearl Street property and that the proceeds were being reinvested in other real estate. The gain of $ 122,916.53 was treated as nonrecognizable. Respondent asserted that the proceeds were not reinvested in property "similar or related in service or use" and that the gain should be taxed as a long-term capital gain.OPINIONPetitioner first contends that its transaction 155 comes within the relief provisions of section 1033(a)(3)(A)1 by relying on a "de facto" condemnation at the time the Cincinnati building commissioner refused its application for a passenger elevator. This refusal, the petitioner asserts, prevented it from converting the Pearl Street property into an apartment building and therefore amounted to a condemnation. Under such conditions the petitioner would have satisfied the "functional test" since it would have used proceeds from the sale of an "apartment" building to construct other apartment buildings. There is no showing that the Cincinnati Building Commission had the power to condemn property or the authority to inform parties of 63 threats of condemnation. Moreover, the evidence here does not warrant a finding that the Pearl Street property was in fact being remodeled into an apartment building. Therefore, we conclude that no condemnation, de facto or otherwise, occurred at that time.156 Petitioner's alternative contention is that the "functional test" is not the correct test to apply to a taxpayer who is in the investment business. Respondent, on the other hand, urges that the "functional test" is the correct and only test applied by this Court in determining whether property is "similar or related" and that the petitioner has failed to meet this test.We cannot agree entirely with either party. Simply stated, the issue to be determined in this proceeding is whether the taxpayer investor's use of the premises or his lessee's use of the premises must meet the "similar or related in service or use" limitation. In the past, we have applied the "functional test" to the end use or service of the property whether it was used in the taxpayer's own business or whether it was leased or rented by the taxpayer to other persons to be used in their businesses or as residences. It is in the latter instance that several circuit courts have differed with our position.In Steuart Brothers, Inc., 29 T.C. 372">29 T.C. 372 (1957), which involved the equivalent provision of the Internal Revenue Code of 1939 (sec. 112 (f)), this Court held that the taxpayer157 was not entitled to nonrecognition of gain where the proceeds of the involuntary conversion of property, proposed to be used for a warehouse, were reinvested in property containing garages, service stations, and an automobile salesroom. The Court of Appeals for the Fourth Circuit, 261 F. 2d 580 (1958), reversed this decision on the ground that the "investment characteristics" of the two properties were sufficient to meet the provisions of the statute.Later, in Thomas McCaffrey, Jr., 31 T.C. 505">31 T.C. 505 (1958), we were again faced with the task of applying section 112(f) of the 1939 Code to investment property. We did not follow the Fourth Circuit in the Steuart case but held that the involuntary conversion of property used as a parking lot, and the reinvestment of the proceeds into stock of a corporation which held warehouse property for investment purposes, did not qualify for nonrecognition of gain. This opinion was affirmed by the Court of Appeals for the Third Circuit, 275 F. 2d 27 (1960), which agreed that the properties were not similar even though the taxpayers used the money invested in the158 old and the new property for the similar purpose of producing rental income.Following the McCaffrey case, we held property not to be "similar or related in service or use" in Loco Realty Co., 35 T.C. 1059">35 T.C. 1059 (1961), where a building rented to a shoe manufacturer was replaced by a building rented as a grocery warehouse; in Liant Record, Inc., 36 T.C. 224">36 T.C. 22464 (1961), where an office building was replaced by apartment buildings; and in Clifton Investment Co., 36 T.C. 569">36 T.C. 569 (1961), where an office building was replaced by stock in a hotel. In each of these cases the Court applied the "functional test," rejecting taxpayers' contentions that the "functional test" should not be followed where the property is held for investment purposes.In reversing us in Loco Realty Co. v. Commissioner, 306 F. 2d 207 (1962), the Court of Appeals for the Eighth Circuit, agreeing that there must be some restriction, said:that it is sufficient if, coupled with the leasehold characteristic of the taxpayer's properties, there is also a reasonable similarity in the leased premises159 themselves.The Court of Appeals for the Second Circuit, reversing us in Liant Record, Inc. v. Commissioner, 303 F. 2d 326 (1962), advocated the following criteria of similarity:a court must compare inter alia, the extent and type of the lessor's management activity, the amount and kind of services rendered by him to the tenants, and the nature of his business risks connected with the properties.In Clifton Investment Co. v. Commissioner, 312 F. 2d 719 (1963), the Sixth Circuit affirmed our determination that the replacement property was not "similar or related in service or use" to the converted property, but in so holding, rejected the "functional test" or "end-use test" applied by this Court. The Court of Appeals applied the "management activity test" as advocated by the Second Circuit court in Liant and found that although both properties were held for the production of rental income the activities required of the taxpayer by the hotel in the way of management, services, and relationship to its tenants varied materially from its operation of the office building. 2160 The "management activity test" of Liant was also followed by the Seventh Circuit Court in Pohn v. Commissioner, 309 F. 2d 427 (1962), reversing a Memorandum Opinion of this Court.The basic purpose of section 1033(a)(3)(A) undoubtedly is to allow the taxpayer to replace his property or to continue his investment without realizing gain where he is compelled to give up such property because of circumstances beyond his control. Congress did see fit, however, to limit this relief by requiring the two properties to be "similar or related in service or use." Because we think a taxpayer should not be able to receive the benefit of section 1033(a)(3)(A) and at the same time materially alter his type of business or nature of investment, there should be something more than mere "investment characteristics" in the two properties to qualify 65 for nonrecognition of gain. While several of the Courts of Appeals have rejected the application of the "functional test" to taxpayer lessors, they have substituted other tests, realizing that there should be some limitation.This petitioner cannot prevail whether we apply the "functional test" or the criteria161 stressed by the Courts of Appeals in Liant Record, Clifton Investment, and the other cases. Obviously, the "functional test" is not met here. And we think it is equally clear that petitioner cannot qualify for nonrecognition of gain under the criteria which require a comparison of the natures of the taxpayer's investments. In making such a comparison, the characteristics of the leased premises, the lessor's management activities, the amount and kind of services rendered to the tenants, the nature of the business risks connected with the properties, and any other factors that would be helpful in determining whether the taxpayer has reestablished himself in a business position reasonably similar to that which he occupied before the involuntary conversion occurred, should be considered.Here the facts do not support a conclusion that the petitioner has reestablished itself in a reasonably similar business position. On the contrary, they show that the nature of the petitioner's investment has changed materially. While both properties were held for investment purposes and were improved with multistoried buildings, the management activities required by each were different.The 162 Pearl Street property was leased primarily for storage purposes. The two tenants, one using the top five floors as a warehouse and the other using the basement and first floor primarily as storage space for the inventory of an inactive fixtures business, required little, if any, services from the petitioner.On the other hand, the replacement property required numerous services of various kinds on a more or less daily basis. Although there was no need for outside professional management or for a great increase in the number of employees, as in Clifton Investment, there was nevertheless a substantial increase in services of a nature required by residential tenants. Petitioner was in an inactive managerial position as to the replaced property and in an active managerial position as to the replacement property.Furthermore, the evidence shows that the petitioner has reestablished itself in a substantially better business position, considering the business risks and investment qualities of the two properties. S. E. Ponticos, president of the petitioner for the years involved, testified that plans to remodel the Pearl Street property to make it desirable rental property 163 were discontinued when it was learned that the property was to be condemned for purposes of constructing a highway. Attempts by a real estate broker to find a lessee for the building failed. S. E. Ponticos finally succeeded in leasing the top five floors as a warehouse 66 for the advertising company located next door and the basement and first floor to his son-in-law, doing business as Axiotes, Inc., to maintain a fixture business. He indicated that the building was not suitable for any other purposes. The proceeds from the sale of the Pearl Street property were reinvested in garden-type apartments located in a desirable suburban residential area of Cincinnati near other apartments owned by the petitioner.In view of these facts and circumstances, we conclude that the petitioner has reestablished itself in a business position that varies materially from its former position. The original property and the replacement property are therefore held to be not "similar or related in service or use" as required by section 1033(a)(3)(A).Decision will be entered for the respondent. MULRONEY Mulroney, J., dissenting: Since real property which was held by petitioner for investment164 was condemned and replaced by real property which was held by petitioner for investment, I would hold the two properties were "similar or related in service or use" within the meaning of section 1033(a)(3)(A), I.R.C. 1954. Capitol Motor Car Co. v. Commissioner, 314 F. 2d 469 (C.A. 6, 1963), reversing a Memorandum Opinion of this Court; Liant Record, Inc. v. Commissioner, 303 F. 2d 326 (C.A. 2), reversing 36 T.C. 224">36 T.C. 224; Steuart Brothers v. Commissioner, 261 F. 2d 580 (C.A. 4), reversing 29 T.C. 372">29 T.C. 372; Loco Realty Co. v. Commissioner, 306 F. 2d 207 (C.A. 8), reversing 35 T.C. 1059">35 T.C. 1059; and Pohn v. Commissioner, 309 F. 2d 427 (C.A. 7), reversing a Memorandum Opinion of this Court. Footnotes1. SEC. 1033. INVOLUNTARY CONVERSIONS.(a) General Rule. -- If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted -- * * * (3) Conversion into money where disposition occurred after 1950. -- Into money or into property not similar or related in service or use to the converted property, and the disposition of the converted property (as defined in paragraph (2)) occurred after December 31, 1950, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph: (A) Nonrecognition of Gain. -- If the taxpayer during the period specified in subparagraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock. * *↩2. But see Capitol Motor Car Co. v. Commissioner, 314 F. 2d 469↩ (1963), where the Sixth Circuit reversing a Memorandum Opinion of this Court, found improved property, which had been leased to an automobile agency, to a school, and then to a gas company, to be similar or related in service or use to vacant land upon which the lessee had contracted to build a motel.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622127/	JAMES E. CLAYTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentClayton v. CommissionerDocket No. 14907-91United States Tax CourtT.C. Memo 1993-157; 1993 Tax Ct. Memo LEXIS 159; 65 T.C.M. (CCH) 2371; April 12, 1993, Filed 159 Decision will be entered under Rule 155. James E. Clayton, pro se. For respondent: Karen Nicholson Sommers. GOLDBERGGOLDBERGMEMORANDUM OPINION GOLDBERG, Special Trial Judge: This case was heard pursuant to section 7443A(b)(3) and Rules 180, 181, and 182. All section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. Respondent determined a deficiency in petitioner's Federal income tax for tax year 1988 in the amount of $ 893 and an addition to tax for negligence under section 6653(a)(1) in the amount of $ 44.65. Respondent conceded at trial that the recomputation of petitioner's allowable miscellaneous itemized deductions was erroneous; respondent now agrees that the disallowance should be $ 86 rather than $ 1,667. The issues for decision are (1) whether petitioner undertook his farming activity with an actual and honest profit objective, and (2) whether petitioner is liable for the addition to tax for negligence. Petitioner resided in Apple Valley, California, when he filed his petition. In 1987, petitioner bought 4.88 acres of land in Fresno County, California. The property160 is located approximately 25 miles northeast of Clovis, California, on the western slope of the Sierra Nevada at an altitude of 2,000 feet. The property is suitable for farming, and farming is now petitioner's sole livelihood. In 1988, petitioner was employed as a sales manager by Duro-Test Corp. and worked on his property on weekends and some other occasions. He intends to build a home on the property, to plant fruit or almond trees and possibly a small vineyard. In order to make the soil ready for farming, petitioner has had to do extensive preparation, including repeated tilling and addition of amendments to the soil; these steps were necessary because cattle had been grazed on the land for many years. Petitioner referred to his observance of a Sabbath of the land, the custom of letting the land lie fallow, as prescribed in the Bible. Petitioner planted 60 eucalyptus trees of different varieties in 1988. In that year he deducted farming expenses of $ 4,306 on Schedule F of his Federal income tax return. Petitioner intended to sell the wood for firewood and the tops and branches to two power plants in the Fresno area as biomass for use in cogeneration of electric power. 161 All of petitioner's trees died back (the woody peripheral parts died) in 1989 due to excessively cold weather. Petitioner cut the trees as firewood for his own use and allowed them to resprout from the stumps. Approximately 30 percent resprouted. He planted no additional trees in 1989 or 1990 and continued to let the land lie fallow, due to personal problems. He poured a concrete slab and installed a metal storage building for his tractor and tools. Petitioner is a member of the Eucalyptus Improvement Association and is informed on the subject of eucalyptus growing in California. He holds a bachelor's degree from California State University, Fresno, where he studied biology, viticulture, and related subjects. He has worked for the National Forest Service as a fire prevention officer, for the National Park Service, and for the Bureau of Land Management. He was introduced to farming on his family's farm in Tennessee. Petitioner does not know how many trees he needs to plant to break even and kept no records of calculations of profit projections. Respondent determined that petitioner did not carry on his farming activity with a profit objective within the meaning of section 162 183. Petitioner contends that he conducted his farming with the objective of making a profit and, therefore, is entitled to deductions as claimed. Respondent's deficiency determination is presumed correct. Petitioner bears the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933). Section 183(a) provides, in pertinent part, that if an activity is not engaged in for profit, no deduction attributable to such activity shall be allowed except as otherwise provided in section 183(b). Section 183(b) separates deductions claimed with respect to an activity not engaged in for profit into two categories, i.e., those that are not dependent upon a profit objective and those which are so dependent. Under section 183(b)(1), the deductions which are not dependent upon a profit objective, such as taxes, are allowable according to their governing sections, but, under section 183(b)(2), the deductions which are dependent upon a profit objective are deductible only to the extent that the gross income from the activity exceeds the deductions allowable under section 183(b)(1). Section 183(c) defines an activity not engaged in for 163 profit as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." The test for allowing deductions is whether the taxpayer engaged in the activity generating the expenses with an actual and honest objective of making a profit. Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs. Although the taxpayer's expectation of profit need not be reasonable, there must be a good faith objective of making a profit. Allen v. Commissioner, 72 T.C. 28">72 T.C. 28, 33 (1979). The Supreme Court has stated that to be engaged in a trade or business, "the taxpayer must be involved in the activity with continuity and regularity and * * the taxpayer's primary purpose for engaging in the activity must be for income or profit." Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 35 (1987). The determination of whether the requisite profit objective exists depends upon all the surrounding facts and circumstances of 164 the case. Golanty v. Commissioner, 72 T.C. 411">72 T.C. 411 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax Regs. Greater weight is to be given to the objective facts than to the taxpayer's mere statement of intent. Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income Tax Regs.Section 1.183-2(b), Income Tax Regs., provides a list of relevant factors to be used in determining whether an activity is engaged in for profit. These factors include: (1) The manner in which the taxpayers carried on the activity; (2) the expertise of the taxpayers or their advisers; (3) the time and effort expended by the taxpayers in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayers in carrying on other similar or dissimilar activities; (6) the taxpayers' 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 taxpayers; and (9) any elements indicating personal pleasure or recreation. 165 Allen v. Commissioner, supra at 34. No one factor is conclusive. Thus we do not reach our decision by merely counting the factors in section 1.183-2(b), Income Tax Regs., that support each party's position. Dunn v. Commissioner, 70 T.C. 715">70 T.C. 715, 720 (1978), affd. without published opinion 607 F.2d 995">607 F.2d 995 (2d Cir. 1979), affd. on another issue 615 F.2d 578">615 F.2d 578 (2d Cir. 1980). On the basis of a consideration of these factors, we find that petitioner did not carry on his farming operation with the requisite profit objective. Factors in petitioner's favor are that he is knowledgeable about eucalyptus growing and has made a thoughtful investigation of the possibilities of economic demand for his product. He intends to farm the property rather than to hold it for capital appreciation. He is not engaging in farming as recreation. The essential fact which convinced us that petitioner lacked the requisite profit objective is that he was unable to explain how a profit was even a logical possibility at the present very limited scale of his operation. Petitioner deducted expenses166 of $ 4,306 from his farming activity. He planted only 60 trees in 1988; those died back due to extremely cold weather, and petitioner did not replant or expand his operation. Petitioner brought forth no evidence of a business plan or realistic profit projection, and we are unable to conceive of the possibility of his making a profit at this level of activity. Included in the information on eucalyptus growing which petitioner offered and which was received into evidence are figures showing expected yields. Petitioner expressed skepticism about some of these figures, stating that he felt the trees would be ready for harvest in 10 years rather than the 4 to 5 years stated in the literature. This literature contains income projections based on the assumptions that approximately 12 mature trees should yield one cord of wood and that the price of a cord of wood in 5 years would be $ 225. On these assumptions, petitioner could have expected his trees to yield 5 cords of wood and income from sales of firewood of $ 1,125. Sales of treetops to a power plant would have supplemented this income to some extent, and in 10 years the price of firewood would probably have been higher. It is167 clear, however, that petitioner could not have seriously contemplated making a profit from his farm while conducting his activity on this scale. Petitioner presented no evidence that he had taken steps necessary to ensure future success for the operation. Compare Cole v. Commissioner, T.C. Memo. 1992-51. Included also in petitioner's information on commercial growing of eucalyptus is the following paragraph, in answer to the question: "How far apart should the trees be planted?" The biggest mistake that the uninformed grower makes when planting Eucalyptus Camaldulensis is planting them too far apart. When planted far apart the trees develop too much side growth and branching, which is useless for firewood production (the tree wastes energy). The trees should be planted three feet apart on rows that are five feet apart. Each tree should have approximately fifteen square feet of growing area. On an acre of land you should be able to plant approximately three thousand trees.We cite this material not to suggest what petitioner could or should have done with his land, but as an indication of the intensity of land use which is recommended168 by the Eucalyptus Improvement Association. From this we conclude that petitioner was not attempting to cultivate eucalyptus on a commercial scale during the period relevant here. Under the facts before us, he has not established that he was conducting a business with a profit objective. We give other factors less weight, but they also call into question the existence of a profit objective at the level of activity which petitioner described. Petitioner worked hard on his farm but was able to devote limited time to it because he had a full-time job. Petitioner's trees all died back, but he did not replant, due to personal problems. The facts suggest that petitioner may have been in a start-up phase on his farm; he was experimenting to determine which types of eucalyptus would grow on his property and improving the soil by tilling and allowing it to lie fallow, but he was unable to give his farming activity the highest priority in the year in question and for 2 subsequent years. These facts indicate that the farm was in a preoperational phase. During 1988, petitioner was not operating his business with a view to making a profit at the level of activity which he described. For169 the reasons stated above, we hold that petitioner is not entitled to claim deductions for his farm losses for 1988. Respondent determined that petitioner is liable for an addition to tax under section 6653(a)(1) for negligence or intentional disregard of rules or regulations. Negligence under section 6653 means lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner has the burden of proving that respondent's determination of the additions to tax is erroneous. Rule 142(a); Luman v. Commissioner, 79 T.C. 846">79 T.C. 846, 860-861 (1982). We find, under the circumstances of this case, that petitioner was not negligent, but that he made a good faith error in his interpretation of the facts and law. Petitioner failed to understand the distinction between his expenses and expenses of a going concern which are incurred with the requisite profit objective and are currently deductible. Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622128/	MICHAELIS NURSERY, INC., A CALIFORNIA CORPORATION, RONALD J. MICHAELIS, TAX MATTERS PERSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMichaelis Nursery v. CommissionerDocket No. 21842-93United States Tax CourtT.C. Memo 1995-143; 1995 Tax Ct. Memo LEXIS 136; 69 T.C.M. (CCH) 2300; March 30, 1995, Filed 136 Decision will be entered for Respondent. For petitioner: Jeffrey P. Kane and Steven M. McClean. For respondent: William D. Reese. COHENCOHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent sent a notice of final S corporation administrative adjustment (FSAA) to Ronald J. Michaelis (petitioner) on August 9, 1993, for 1990 and 1991. The sole issue for decision is whether amounts received by Michaelis Nursery, Inc. (the corporation) from its customers in connection with the sale of trees should have been recognized as income in the year the payments were received or in subsequent years, when the trees were delivered. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. The corporation is a California corporation, organized in 1989. The corporation is a qualified S corporation within the meaning of section 1361. At the time the petition was filed, the principal place of business of the137 corporation was located in Porterville, California. At all relevant times, the corporation used the cash method of accounting. Petitioner is both the tax matters partner and owner of the corporation. Petitioner is also connected with another nursery, separate from the corporation, called "Michaelis Citrus Nursery, Inc." The corporation is engaged in the business of raising and selling citrus nursery stock. Some buyers from the corporation made purchases of citrus nursery stock during the calendar year 1990 for delivery during a later taxable year. Ordinarily, customers who made purchases of 500 trees or more during 1990 for delivery in a later year used a standard form contract, provided by the corporation, entitled "Nursery Sales Agreement" (the agreement). Customers who used the agreement received a discount from the corporation of $ 0.25 per tree, relative to other sales. When a buyer executed an agreement during the calendar year 1990, such buyer would, pursuant to the terms of the agreement, make an advance payment to the corporation at the rate of $ 2.00 per tree. The corporation did not recognize the advance payments from its customers as income until the trees were138 transferred to these buyers. On the front side of the agreement under the heading "Specific Terms", the agreement provided " Deposit Required. Balance of purchase price shall be due and payable once trees are received." The amount of the deposit was inserted when the agreement was executed. On the reverse side of the agreement under the heading "General Terms", the following reference to the deposit was made: 3. Seller [The corporation] will not be responsible for any delays in delivery or other nonperformance arising out of strikes, riots, war, invasion, fire, explosion, accident, frost, or other unusual adverse weather, acts of God, or any other matters which are beyond Seller's reasonable control. If Seller is unable to perform by reason of the events specified in this paragraph, all deposits previously made by Buyer will be refunded to Buyer, without interest. The refund of all deposits to Buyer shall constitute a full settlement of any liability of Seller to Buyer under the terms of this agreement.This provision contained the only reference in the agreement to the refund of a buyer's deposit. The second provision of the "General Terms" section provided139 that the "Seller [the corporation] will deliver healthy trees of good quality. No other express or implied warranties are made." When a customer requested the refund of a deposit, petitioner decided whether to honor the request. Petitioner never refused to return a deposit requested by a customer. He refunded the deposits, in order to maintain goodwill with the growers in the community, for customers who presented good reasons for canceling an order, such as death or insolvency, and for customers who simply changed their minds about an order. In some instances, a grower would ask that a check be sent for the refunded amount. In other instances, a grower would ask that the refund be applied to the grower's purchase of replacement trees (replants) or to another purchase from the corporation or to amounts owed to Michaelis Citrus Nursery, Inc.During 1990, buyers made advance payments of $ 282,960 to the corporation in conjunction with the execution of the agreements. The corporation did not recognize any of this amount as income in 1990. Respondent sent to petitioner an FSAA, treating the advance payments received by the corporation in 1990 as additional income to the corporation140 in 1990. Respondent also decreased the ordinary income of the corporation for 1991 by $ 28,934, representing the amount of deposits returned by the corporation to its buyers in 1991. OPINION The dispute between the parties concerns the appropriate characterization of the payments that the corporation received from its customers in 1990 for the purchase and delivery of citrus trees in a subsequent year. Respondent contends that the payments that the corporation received in 1990 for the delivery of trees in a subsequent year were advance payments of income includable in the gross income of the corporation for 1990. Petitioner maintains that the payments were refundable deposits and thus did not constitute income to the corporation when received. Gross income is defined in section 61(a) as "all income from whatever source derived," including compensation for services and gross income from business. An advance payment of income is includable in gross income in the year the advance payment is received. Schlude v. Commissioner, 372 U.S. 128 (1963); Oak Indus., Inc. v. Commissioner, 96 T.C. 559">96 T.C. 559, 563-564 (1991). A deposit, 141 on the other hand, is not includable in gross income when received. Indianapolis Power & Light Co. v. Commissioner, 857 F.2d 1162">857 F.2d 1162, 1165 (7th Cir. 1988), affg. 88 T.C. 964">88 T.C. 964 (1987), affd. 493 U.S. 203">493 U.S. 203 (1990); Oak Indus., Inc. v. Commissioner, supra at 564. Petitioner bears the burden of proving that the payments that the corporation received were deposits and not advance payments of income. Rule 142(a). The leading authority addressing the taxability of customers' deposits is the Supreme Court opinion in Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203">493 U.S. 203 (1990). In that case, the Supreme Court applied what has become known as the "complete dominion test" to determine whether customer deposits should be included in taxable income when received. Under the complete dominion test, the taxability of deposits: turns upon the nature of the rights and obligations that * * * [the taxpayer] assumed when the deposits were made. In determining what sort of economic benefits qualify as income, this Court has invoked various formulations. 142 It has referred, for example, to "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426, 431 (1955). * * [Id. at 209; emphasis added.]The Court held that deposits acquired by the taxpayer subject to an express obligation to repay were not within the complete dominion of the taxpayer and thus not taxable advance payments. Id. at 209. Both the Supreme Court in Indianapolis Power and this Court have held that control over deposits, unrestricted use of the funds, and nonpayment of interest are not dispositive factors in determining whether a taxpayer exercised complete dominion over deposits received or is obligated to repay the deposits. Id. at 209; Kansas City S. Indus. v. Commissioner, 98 T.C. 242">98 T.C. 242, 262 (1992); Oak Indus., Inc. v. Commissioner, supra at 567-568. Rather, the key to determining whether or not a taxpayer has "complete dominion" over deposits received is "whether the taxpayer has some guarantee that he will be allowed to keep the money." Commissioner v. Indianapolis Power & Light Co., supra at 210.143 Respondent maintains that the corporation had "complete dominion" over the payments received from buyers because the decision to grant a requested refund was a contingent, unilateral decision that was made by petitioner. In respondent's view, the corporation, not the buyers, controlled whether or not a deposit would be refunded. Under the agreements, the corporation had no express obligation to repay the growers their deposits unless the corporation was unable to perform because of "strikes, riots, war, invasion, fire, explosion, accident, frost, or other unusual adverse weather, acts of God, or any other matters which are beyond Seller's [the corporation's] control." Thus, respondent contends that, because the corporation had no express contractual or legal duty to return advance payments to its customers, the corporation had a "guarantee" that it could keep the payments. Respondent further maintains that the decisions of the corporation as to the cancellation and refunding of the payments were made in the complete discretion of petitioner on a case-by-case basis rather than in conformity with a long-continued refund policy. Petitioner testified that he agreed to refund advance144 payments to generate goodwill with the buyers. Respondent contends that this suggests that petitioner had discretion in deciding to refund a payment to a buyer. If, on the other hand, petitioner simply had been honoring a pre-existing obligation to refund the payments when he authorized refunds, his conduct would, according to respondent, have generated a negligible amount of goodwill. Despite the absence of an express provision in the agreements providing that the payments were refundable to the growers for any reason, petitioner argues that both the buyers and the corporation regarded the payments as fully refundable deposits. In petitioner's view, the conduct of the corporation and the growers demonstrates that the deposits were refundable at the discretion of the growers. Petitioner points to his uncontradicted testimony that petitioner had never denied a buyer's request for a refund as evidence of the corporation's long-continued policy of refunding deposits at the request of the growers. In addition, petitioner notes that the corporation consistently complied with the buyers' specific instructions for the disposition of a refund. Petitioner further maintains that the 145 conduct of the corporation and the growers, after the agreements were executed and prior to any controversy, is of primary importance in determining the appropriate construction of the agreements. Because petitioner had never denied a buyer's request to cancel a contract and to have the buyer's deposit refunded, he asserts that, under the agreements, the growers had a right to receive their deposits back, at their discretion. Petitioner cites Crestview Cemetery Association v. Dieden, 54 Cal. 2d 744">54 Cal. 2d 744, 356 P.2d 171">356 P.2d 171 (1960), as authority for his assertion. In Crestview, the Supreme Court of California applied the rule of "practical construction" to an ambiguous oral contract to determine the meaning and intent of the parties to the contract. Under the rule of practical construction, great weight is given to the acts and conduct of the parties with knowledge of its terms in construing the contract. Id., 54 Cal. 2d at 753. Petitioner's reliance on Crestview and the rule of practical construction is misplaced. See Eichman v. Fotomat Corp., 880 F.2d 149">880 F.2d 149 (9th Cir. 1989).146 Here, the agreements were, on their face, unambiguous, and petitioner has not argued that the terms of the agreement were ambiguous. In substance, petitioner is attempting to use his subsequent conduct in never denying a customer's request for a refund to add a new term to the agreements that would make the deposits refundable at a buyer's request. Petitioner's argument is unpersuasive. Under California law, the general rule for contract construction is that a contract should be interpreted to give effect to the mutual intention of the parties as it existed at the time of contracting. Cal. Civ. Code sec. 1636 (West 1985). The relevant intent is objective and is to be determined by the language of the contract and by the surrounding conduct and not by the contracting parties' subjective beliefs. Cal. Civ. Code sec. 1638 (West 1985); United Commercial Ins. v. Paymaster Corp., 962 F.2d 853 (9th Cir. 1992). Petitioner's testimony suggests that he may have intended to authorize the cancellation of an agreement and to refund a deposit whenever a buyer made such a request. Petitioner presented no evidence, however, that he expressed this intention 147 to any of the buyers at the time the agreements were executed. Under the plain language of the agreements, the buyers had a right to expect the corporation to "deliver healthy trees of good quality." In addition, by signing the agreements, the growers received a discount of $ 0.25 per tree relative to other customers. In the absence of evidence that petitioner communicated to the buyers that they had a unilateral right of cancellation, we cannot imply this additional right into the agreements. Petitioner has not met his burden of proof in demonstrating that there was a mutual intention of the parties to the agreements that the buyers had a right to an automatic refund of their deposits. We hold that the deposits received by the corporation in 1990 were advance payments of income constituting taxable income to petitioner when received. The corporation enjoyed "complete dominion" over these payments because it had no obligation to repay any amount to the buyers unless the corporation defaulted on its commitment to deliver the trees. Both the timing and the method of refunds were within the control of the corporation, not of the buyers, and therefore the corporation had a guarantee148 that, so long as it fulfilled its contractual obligation to deliver the trees, it had a right to keep the payments. In an advance-payment situation, the taxpayer's dominion over the money received is sufficient to justify inclusion of the amounts in the taxpayer's gross income because the taxpayer's right to retain the money is dependent solely upon the taxpayer's adherence to its contractual duties. Commissioner v. Indianapolis Power & Light Co., 493 U.S. at 209-211; Oak Indus., Inc. v. Commissioner, 96 T.C. at 572. It is not determinative that petitioner, on behalf of the corporation, chose to authorize refunds whenever a customer made such a request, because whether the deposits should be included in taxable income turns upon the nature of the rights and obligations of the corporation and the buyers at the time the deposits were received. Commissioner v. Indianapolis Power & Light Co., supra at 209. When the buyers made deposits with the corporation, they had no right to demand refunds, and the corporation had no obligation to repay the deposits to the buyers unless the corporation*149 was unable to deliver the trees. We need not address respondent's alternative contentions that the advance payments were not nontaxable loans or that the corporation received the payments in 1990 under a claim of right, because resolution of this case turns upon application of the complete dominion test as established in Commissioner v. Indianapolis Power & Light Co., supra. Because we have concluded that the corporation received taxable income in 1990 when it received the buyers' advance payments for the purchase of trees, the corporation must include those amounts in its gross income for that year. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622130/	JOSEPH H. MCNABB, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McNabb v. CommissionerDocket No. 94310.United States Board of Tax Appeals42 B.T.A. 444; 1940 BTA LEXIS 1001; July 31, 1940, Promulgated 1001 Held, determination by the respondent that stock was worthless in 1933 and not 1936, has not been overcome by the evidence, and the respondent's disallowance of loss deduction for 1936 is sustained. David W. Kahane, Esq., and Fred S. Johnson, C.P.A., for the petitioner. F. R. Shearer, Esq., and E. G. Sievers, Esq., for the respondent. HILL 444 The respondent determined an income tax deficiency of $4,453.31 for the year 1936, as the result of his disallowance of a deduction of $13,150 claimed as a loss sustained on certain bank stock alleged to have become worthless in that year. Petitioner assigns error in such determination. FINDINGS OF FACT. In 1930 the petitioner, an individual, residing at 950 Hill Road, Winnetka, Illinois, acquired by cash purchase 30 shares of stock in the Security Bank of Chicago at a total cost of $13,150. There were in all 7,000 shares outstanding. The owner of each share of Security Bank stock automatically owned one-half share of stock in the Second Security Bank of Chicago, whose 3,500 shares were held in trust for the benefit of stockholders of the Security Bank. Petitioner still holds the1002 30 shares of stock in the Security Bank and the 445 15 shares in the Second Security Bank, both of which banks are incorporated under the laws of Illinois, and are hereinafter referred to as the banks. In March 1933, as a result of Presidential proclamation, the two banks were closed in accordance with the general bank holiday and have never reopened for the purpose of doing business. For some months prior to that date there had been a heavy withdrawal of deposits, requiring the disposal of much of the liquid assets of both banks, and the borrowing of cash from the First National Bank of Chicago, as a result of which the Security Bank was indebted to the First National in the sum of $1,141.704.08, exclusive of interest; and the Second Security Bank owed the First National $825,000, exclusive of interest. On March 12, 1933, the directors of the two banks met at a special meeting to consider reopening after the moratorium. They decided that, although the book value of their assets showed sufficient convertible funds to pay off depositors, they would accept no further deposits. Further, they authorized the officers of the two banks to borrow cash from the First National1003 Bank in an amount sufficient to pay all depositors in full, and to pledge all the remaining assets, cash excluded, as security therefor. The assets consisted in the main of real estate pledged to secure loans. At the time of the loans the property was estimated to be worth twice as much as the cash advanced. The material provisions of the directors' resolution are as follows: WHEREAS, this Bank is not a member of the Federal Reserve System, and, although solvent, the character of its securities and assets does not justify any reasonable belief that, if this Bank should now apply for membership in the Federal Reserve System, it would be admitted to membership, or, if admitted to membership, that it could secure adequate credit from the Federal Reserve Bank of Chicago (in contemplation of said recent Federal legislation) and failing such admission to membership and the procuring of such credit, this Bank is not in a position to reopen on any basis of operation, either under Federal or State permission, which would offer any reasonable prospect of conserving its going value or assuring uninterrupted operation; and WHEREAS, in the opinion of the Board of Directors, it is for1004 the best interests of the bank and its depositors that this Bank cease to receive any further deposits, and that arrangements be made whereby all of the depositors of this Bank can at once be paid the full amount of their respective deposits; * * * The phrase "although solvent" was intended to mean that the anticipated value of the assets was sufficient to pay off the depositors. The following day the two loan agreements were executed. The First National Bank agreed that, upon repayment of the loans, it would return to each bank any remaining collateral. But the First National Bank had the right to liquidate all assets it received as "security", the liquidation expenses to be borne by the banks. 446 The First National took possession of all the assets and commenced to liquidate the same. On October 31, 1933, an appraisal was made of the banks' assets by G. C. Kiddoo, vice president of the First National Bank, which appraisal was embodied in a communication to McCloud, executive vice president of the First National Bank, bearing date of November 15, 1933. The appraisal figures were: Former value per booksEstimated recovery on appraisalSecurity Bank$3,646,019$1,554.246Second Security Bank2,435,1801,110,8511005 The liabilities of both banks exceeded the estimated recoveries on this date. In explanation of the appraisal the communication contained the following paragraph: The above figures are based on an estimated recovery on real estate mortgages and bonds of 40% of their book value, which is only a general estimate. The above figures also do not take into account the expense of liquidation including the fees which will be payable to the National Security Bank and fees of attorneys and other incidental liquidation expenses. It is probably a fair guess that the assets of these banks will fall short of liquidating for enough to cover their liabilities by $1,100,000, not taking into account assessment of the stockholders. This appraisal was not sent to the stockholders or made public in any other manner. Charles V. Clark, attorney for the banks at the time they closed, and James B. Forgan, chairman of the board of the banks, both claimed deductions on account of this worthless bank stock in 1933. These deductions were allowed by Commissioner. No detailed appraisement of these assets was, however, brought to petitioner's notice until early in 1936, when he received a circular1006 letter signed by the members of the stockholders' committee. This report showed the former book value to be misrepresentative of the actual value of the assets and, in conclusion, showed that the banks were clearly insolvent. The letter also offered to each shareholder a full release of his statutory double liability ( $150 per share) for one-sixth of that amount, or $25 per share. On December 31, 1936, petitioner paid the sum of $750 to the National Bank and obtained his full release. The banks have not yet been completely liquidated; both have maintained their corporate charters while in liquidation, but have not functioned as banks. The tax returns filed annually since 1933 have contained a statement to the effect that the banks are in liquidation. 447 In his income tax return for the calendar year 1936, petitioner deducted from his gross income the $13,150 cost of his 30 shares of Security Bank stock as a loss in a transaction entered into for profit, sustained by virtue of such shares becoming worthless in 1936. Petitioner had not previously claimed this as a loss in any tax return. The Commissioner disallowed this loss, holding that the stock was worthless1007 at a prior date. Petitioner's stock in the banks became worthless during 1933. OPINION. HILL: The issue presents a question of fact as to whether the bank stocks actually became worthless in the taxable year 1936, which presupposes that they had value during the years 1933-1936, or, whether such stock became worthless in a taxable year prior to 1936. A loss by reason of the worthlessness of stock must be deducted in the year in which the stock becomes worthless and the loss is thereby actually sustained. In , cited in , the Board reviewed many types of "identifiable events" which have in the past been considered as establishing the worthlessness of stock. Applying the principles of these two cases to the facts in the instant case, it is the Board's conclusion that the petitioner's bank stocks actually became worthless during 1933 and thus prior to the taxable year here involved. Here it is shown that the two banks were in an admittedly precarious position prior to the national bank holiday in March 1933. As was the condition in many other sections of the country, 1008 depositors were hastening to withdraw their accounts. The two banks had borrowed cash from the First National Bank in a sizable amount and in addition had converted a portion of the their more easily liquidated assets. The directors, in view of this situation, called a special meeting and decided not to reopen, but to endeavor to pay off all the depositors if possible. The resolution adopted at that meeting showed only too clearly that they believed the banks could not reopen. The subsequent pledge of all the banks' assets to the First National Bank in exchange for the further loan did not change the financial position of the banks, so far as the stockholders were concerned. The depositors were the only beneficiaries of this liquidation. It was only in view of the outside possibility of there being a surplus of collateral after the eventual pay-off of the creditors that the directors made a condition to the loan agreement that the First National would return to them all amounts received from liquidation more than sufficient to repay the loan. To avoid a determination that the stock became 448 worthless at that time, there must be a showing that, despite the loss of any1009 surplus liquidating value, there still remained a real potential value until the year 1936 through the continued existence of a reasonable expectation that the stock would become valuable. The banks did not continue to do any business after the bank holiday. Complete control of all their erstwhile assets was in the hands of the First National Bank, which assumed none of the liabilities of the banks. Further, all costs of liquidation were to be borne by the banks. The assets consisted of realty in and around Chicago; and it was common knowledge that values in realty had hit a new low at this time. The values of these assets as recorded on the books of the banks did not clearly and can not ever be said to reflect actual value. Cf. . As was later shown, by circular letter in 1936, the values per the books were grossly inflated. There was no basis for a reasonable expectation that the book values would ever clearly reflect the possible liquidating value of the assets. Hence, there was no reasonable expectation that the stockholders would ever realize anything on their shares, inasmuch as the depositors themselves1010 would require all the cash on hand at the banks after the final loan from the First National. Petitioner contends that a slow process of liquidation by the First National could be expected to realize a better price than an immediate liquidation in 1933 and that it therefore was not unreasonable to assume that a figure more nearly allied to that shown on the books of the banks might be realized. "It is just onceivable that cases might arise in which some realization could be had by the stockholders in the long future. As a practical matter, however, the business world never remotely considers that contingency. * " ; affirmed per curiam, . Furthermore, the primary assumption of petitioner's statement must be that the book figures reasonably reflected actual value; which assumption can not fairly be made. Thus, from the time efforts to liquidate the assets commenced and up to and including the year 1936, the lack of any reasonable prospect of the petitioner ever recovering anything on his stock remained the same. The element of notice, on which petitioner appears to rely, is of no materiality. 1011 Regardless of when the stockholders learn of the value of their stock, it is the date of worthlessness that is material. Admittedly, the rule is a harsh one. A fraudulently operated corporation might succeed in keeping the information from reasonably diligent shareholders for years, but this would not entitle them to a deduction in the year they discovered the fraud. The standard for judging worth under section 23(e) of the Revenue Act of 1936 has been interpreted *449 to be an objective one; not subjective. Hence, regardless of petitioner's opinion as to the reasonable possibilities in 1933, the facts of the matter disallow the conclusion reached by him at that time. . The Commissioner determined that worthlessness occurred in 1933. Not only has that determination not been refuted by the petitioner, but the evidence very strongly supports it. That determination and the evidence in the case entirely overcome any presumption of continuing worth of the stock through and after 1933. The disallowance of the claimed loss deduction is, therefore, sustained. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622132/	Ponca Tank Corporation v. Commissioner.Ponca Tank Corp. v. CommissionerDocket No. 4877-65.United States Tax CourtT.C. Memo 1967-177; 1967 Tax Ct. Memo LEXIS 82; 26 T.C.M. (CCH) 866; T.C.M. (RIA) 67177; August 30, 196782 Petitioner, which was engaged in the business of salvaging and restoring oil storage tanks, sold a number of oil tanks to Ponca Grain Corporation, a corporation formed to store grain. Petitioner performed much of the work of converting the oil tanks to grain storage tanks. Petitioner later acquired stock in Ponca Grain Corporation, which stock was thereafter sold at a substantial loss. Held: Petitioner has failed to prove that it acquired the Ponca Grain Corporation stock for a purpose other than investment, and therefore, the loss on its sale was a capital loss. Milton Zacharias, for the petitioner. James F. Hart, for the respondent. SIMPSONMemorandum Findings of Fact and Opinion SIMPSON, Judge: Respondent determined deficiencies in the petitioner's income tax of $28,886.58 for the taxable year ended June 30, 1960, and $16,061.55 for the taxable year ended June 30, 1963. The respondent's adjustment for the year ended in 1960 was the result of the elimination of a net operating loss reflected on the petitioner's return for the year ended in 1963. The only issue remaining for decision is whether a loss sustained by the petitioner on the sale of the stock of Ponca Grain Corporation is allowable as an ordinary loss or as a capital loss. Findings of Fact Some of the facts were stipulated, and those facts are so found. The petitioner was organized in the State of Oklahoma by Morris Dritch on July 1, 1958, for the purpose of engaging in the business of salvaging and restoring oil storage tanks. The petitioner84 filed its Federal income tax returns, using the accrual method of accounting, for its taxable years ended June 30, 1960, and June 30, 1963, with the district director of internal revenue at Oklahoma City, Oklahoma. Its principal place of business was Ponca City, Oklahoma, at the time the petition was filed in this case. On July 1, 1958, Morris Dritch transferred all of the assets and liabilities of his sole proprietorship, Ponca Tank, to the petitioner for $20,000 of its capital stock. Morris Dritch owned all of the outstanding stock of the petitioner from the date of incorporation until his death in December of 1962, and since that time, all of the petitioner's outstanding stock has been owned by the estate of Morris Dritch. Ponca Grain Corporation (Ponca Grain) was incorporated in the State of Oklahoma on August 15, 1958, with 175,000 shares of $1 par value common stock, for the purpose of receiving and storing grain. The common stock of Ponca Grain was originally issued 75,000 shares to Morris Dritch, 73,000 shares to M. F. Mulroy, and 2,000 shares to the sons of M. F. Mulroy. The petitioner paid $65,000 on August 7, 1958, and $10,000 on August 18, 1958, to Ponca Grain. This85 transaction was recorded on the books of the petitioner as a debit to accounts receivable, Morris Dritch, and a credit to cash with a notation that the payments were for stock in Ponca Grain. On June 30, 1960, Morris Dritch transferred his 75,000 shares of common stock in Ponca Grain to the petitioner. This transaction was recorded on the petitioner's books as a debit to "Investment Ponca Grain Co. Stock" and a credit to "Accounts Receivable-Morris Dritch" with this notation: "To set up purchase of Ponca Grain Co. stock erroneously charged to M. Dritch-Personal." At the time the petitioner and Ponca Grain were formed in 1958, the grain storage business was very profitable. Various types of facilities were needed, including converted oil tanks, to store Government grain. The process of converting oil tanks to grain storage facilities included removing sludge and foreign matter from the tanks, cleaning the tanks to make them safe for storage of grain, repairing leaks, and installing aeration and temperature detection systems and grain handling equipment. Shortly after the organization of Ponca Grain, the petitioner sold a number of oil storage tanks that it had purchased for about86 $93,000 to Ponca Grain at a price of about $139,000. On the tanks purchased by Ponca Grain from the petitioner, approximately two-thirds of the modification work was performed by the petitioner and one-third was performed by Ponca Grain. In such work performed by it, the petitioner attempted to maintain a gross profit margin of about 50 percent. The following schedule shows the total gross sales of the petitioner and its gross sales to Ponca Grain: Total Gross SalesPercentage ofFiscal YearReported onGross Sales toTotal Gross SalesEndedTax ReturnsPonca GrainMade to Ponca GrainJune 30, 1959$1,162,834.60$200,000.0017.2June 30, 1960360,566.63158,007.0643.8June 30, 1961953,092.9470,649.927.4June 30, 1962774,611.0238,786.495.0June 30, 1963230,849.9738,043.8016.5Totals$3,481,955.16$505,487.2714.5 The petitioner also had customers in Oklahoma, Kansas, and Texas. The president of Ponca Grain was M. F. Mulroy, who, in 1958, had over 50 years of experience in the grain business. M. F. Mulroy did not own any stock or have any interest in the petitioner. He purchased his stock in Ponca Grain as an investment87 and for the purpose of making money and had no interest in furthering the business of the petitioner. On April 20, 1963, the stockholders of Ponca Grain sold their stock to Business Counselors, Inc., for $1,000, of which $500 was paid to the petitioner. On the petitioner's books, the sale was recorded by a $500 debit to "Cash", a $74,500 debit to "Loss on Sale of Capital Assets", and a $75,000 credit to "Investment in Capital Stock". On its tax return for the taxable year ended June 30, 1963, the petitioner claimed an ordinary loss deduction of $74,500 for the loss on the sale of the Ponca Grain stock. Opinion The issue in this case is whether a loss of $74,500 sustained by the petitioner from the sale of Ponca Grain stock is allowable as an ordinary and necessary business expense under section 162 of the Internal Revenue Code of 19541 or as a business loss under section 165(a) or as a capital loss under section 165(f). The petitioner contends that it purchased a 50-percent interest in Ponca Grain to obtain an outlet for the profitable sale of a number of oil storage tanks it88 had acquired and also to develop a "captive customer" for materials and services incident to modification and conversion of the tanks. The petitioner argues that acquisition of a captive customer is a legitimate course of conduct in the operation of a business, and that therefore a loss resulting from the sale of stock of the captive customer should be treated as a business loss sustained in the pursuit of a normal business purpose. The petitioner relies upon a line of cases that have allowed an ordinary loss deduction on the sale of corporate securities where such securities were purchased by a taxpayer to assure a source of supply or materials necessary to the conduct of the taxpayer's business. See, e.g., Electrical Fittings Corporation, 33 T.C. 1026">33 T.C. 1026 (1960); Tulane Hardwood Lumber Co., 24 T.C. 1146">24 T.C. 1146 (1955); Western Wine & Liquor Co., 18 T.C. 1090">18 T.C. 1090 (1952). The petitioner believes that the rationale of that line of cases is sufficiently broad to cover the situation where corporate securities are purchased by a taxpayer to obtain an outlet for the sale of the taxpayer's products. Throughout its presentation of this case, the petitioner has assumed89 that it purchased the Ponca Grain stock in August of 1958 when Ponca Grain was organized. However, the record indicates that the Ponca Grain stock was owned by Morris Dritch until June 30, 1960, when the stock was then transferred to the petitioner. The petitioner's books, concerning the June 30, 1960, transfer of Ponca Grain stock from Morris Dritch to the petitioner, do contain the notation "To set up purchase of Ponca Grain Co. stock erroneously charged to M. Dritch-Personal", but this is not sufficient proof that the petitioner was either the owner of record or the beneficial owner of the Ponca Grain stock from August 1958 to June 30, 1960. The stock record book of Ponca Grain shows that its stock certificate No. 1 was issued to Morris Dritch on August 16, 1958, for 75,000 shares. The U.S. Corporate Income Tax Return filed by Ponca Grain for its taxable year ended July 31, 1959, listed Morris Dritch as owning 75,000 shares of common stock of Ponca Grain. M. F. Mulroy, president of Ponca Grain, testified that 75,000 shares of Ponca Grain stock were issued to Morris Dritch in 1958 and then transferred by Morris Dritch to the petitioner in 1960. And the petitioner's books for 195890 treated Morris Dritch as the owner of the Ponca Grain stock. In view of these facts, we find that the petitioner acquired the Ponca Grain stock on June 30, 1960; consequently, the determination of its purpose in acquiring such stock must be based upon an examination of the circumstances existing at that time. The cases on which the petitioner relies hold that if corporate securities are purchased not for investment purposes but for the purpose of acquiring inventory or materials necessary to the operation of the taxpayer's business, then the securities are not capital assets in the hands of the taxpayer. E.g., Electrical Fittings Corporation, supra; Tulane Hardwood Lumber Co., supra; Western Wine & Liquor Co., supra. The petitioner must show that it is entitled to an ordinary loss deduction, Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933), and in order to show this, the petitioner must prove that it acquired the Ponca Grain stock for some purpose other than as an investment. The record is completely inadequate as to the petitioner's purposes in acquiring the Ponca Grain stock. It is only in its arguments to the Court that the petitioner91 states that its purpose in purchasing the Ponca Grain stock was to acquire a captive customer for its products and services. The petitioner argues on brief that one of its purposes was to acquire a customer for the sale of its oil storage tanks. However, the record shows that the oil storage tanks were sold to Ponca Grain shortly after Ponca Grain was organized and that the petitioner did not acquire the Ponca Grain stock until June 30, 1960 - almost 2 years after the sale of the tanks. The petitioner argues that it also acquired the Ponca Grain stock so that it could make a profit on converting and servicing the oil storage tanks. Yet the petitioner's sales of products and services to Ponca Grain declined after Ponca Grain became a captive customer of the petitioner on June 30, 1960. About 70 percent of the petitioner's total gross sales to Ponca Grain took place in the less than 2 years before the petitioner acquired the Ponca Grain stock, and only about 30 percent took place in the 3 years after it acquired such stock. For these reasons, we conclude that the petitioner has failed to prove that it acquired the Ponca Grain stock for a purpose other than as an investment. Even if92 we considered that Morris Dritch acquired and held the stock for the petitioner so that it could be considered the beneficial owner of the stock from 1958 until it acquired legal ownership in 1960, still there is a failure of proof. Ponca Grain did make purchases from the petitioner, but there is no evidence that Morris Dritch purchased the stock to acquire such business. There is no evidence that the petitioner needed the Ponca Grain business in order to succeed. On the other hand, we know that M. F. Mulroy purchased the Ponca Grain stock to make a profit, and for all that we know, Morris Dritch may also have expected the investment to be profitable. Since Mulroy had no interest in the petitioner, his profit depended upon the success of Ponca Grain, and he could use his influence as president and as an owner of one-half of the stock (including that owned by his sons) to assure that success. Hence, even if we look at the acquisition as of 1958, the petitioner has failed to prove that the Ponca Grain stock was not purchased as an investment. Since the petitioner has failed to prove its purpose in acquiring the Ponca Grain stock, we need not decide whether the petitioner is correct*93 in its view that the rationale of the "source of supply" cases is sufficiently broad to apply to a situation where corporate securities are purchased to acquire a captive customer. Compare, Hagan v. United States, 221 F. Supp. 248">221 F. Supp. 248 (W.D. Ark. 1963), with Duffey v. Lethert, an unreported case ( D.C. Minn. 1963, 11 A.F.T.R.2d (RIA) 1317">11 A.F.T.R. 2d 1317). See also, Weather-Seal, Inc., T.C. Memo 1963-102">T.C. Memo. 1963-102. In order to reflect the agreement of the parties concerning other adjustments in the notice of deficiency, Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622133/	ROSEMONT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rosemont Co. v. CommissionerDocket No. 25439.United States Board of Tax Appeals18 B.T.A. 200; 1929 BTA LEXIS 2106; November 12, 1929, Promulgated 2106 Respondent's determination of the total cost of certain lots in a subdivision sustained for want of proof. E. S. Parker, Jr., Esq., and J. L. Elliott, C.P.A., for the petitioner. Bruce A. Low, Esq., for the respondent. GREEN 200 In this proceeding the petitioner seeks a redetermination of its income and excess-profits-tax liability for the year 1921, and its income-tax liabilities for the years 1922 to 1924, inclusive, for which years the respondent has determined deficiencies in the amounts of $2,215.30, $3,787.53, $2,673.38, and $1,323.53, respectively. The petitioner also seeks a redetermination of its income-tax liability for the year 1925, for which year the respondent has determined an over-assessment in the amount of $3,054.88. The question at issue is the cost which should be allocated to certain lots sold by the petitioner during the various years, which were in a tract of land acquired as a unit and later subdivided. FINDINGS OF FACT. The petitioner is a corporation organized in 1915 under the laws of the State of North Carolina, with its principal place of business at Charlotte in that State. At the time of its2107 organization, the petitioner acquired, at a cost of $110,000, a tract of land, hereafter referred to as the "Rosemont" property, located on the edge of the City of Charlotte. During the years 1915 to 1920, inclusive, the petitioner paid out as interest and taxes on the Rosemont property, the total amount of $38,712.87. At some time prior to the year 1921, the petitioner subdivided the Rosemont property into 19 blocks, which, for illustrative purposes, had substantially the following relative location on the tract: 191313132610141737111518204812161920Each of the above blocks was further subdivided into lots consisting of a total of approximately 392 lots. At the time of the purchase of the property, in 1915, the limits of the City of Charlotte ran through the property from the northeast corner of Block No. 1, through Blocks Nos. 6 and 7, to and through the southeast corner of Block No. 8. A street car line ran along the 201 northwest corner of Block No. 1, which block was also nearest to the center of population of the City of Charlotte and nearest to the business district, hospitals and schools. 2108 Block No. 19 was some five or six blocks to the southeast of Block No. 1 and ran down a deep ravine, making it less desirable than Block No. 1. The petitioner commenced the sale of lots during the year 1921 and made sales thereof during each of the years in question. The respondent determined that the total cost of the Rosemont property to the petitioner was the amount of $197,542.90, itemized as follows: Original cost of land$110,000.00Improvements:1922$27,582.30192313,065.6719242,440.69192544,454.2487,542.90Total cost197,542.90The respondent further determined that the above total cost of $197,542.90 should be allocated to the lots sold and unsold as follows: Lots sold during year - Cost1921$8,800.00192230,108.51192336,509.96192430,988.50192521,198.69127,605.66Lots remaining unsold at December 31, 192569,937.24Total cost197,542.90OPINION. GREEN: The parties have proceeded upon the assumption that the taxes for the year 1925 are in controversy. The respondent has proposed no deficiency for that year. Neither has he rejected claim in abatement for that year. We2109 must, therefore, on our own motion, dismiss the proceeding, as far as it pertains to the year 1925, for lack of jurisdiction. . As to the remaining years 1921 to 1924, inclusive, the question is as to the total cost of the lots sold during those years and the amount to be allocated to each lot as its cost. The respondent determined that the total cost of all the lots to the petitioner was $197,542.90, as set out in our findings. He further determined that $127,605.66 of the $197,542.90 represented the cost of the lots sold during the years 1921 to 1925, inclusive, and that the balance, or $69,937.24, represented the cost of the lots remaining unsold on December 31, 1925. 202 According to the schedules attached to the petition, the petitioner, at the time the petition was filed, contended that the total cost of the lots to it was $237,956.71, made up as follows: Original cost of land$110,000.00Improvements:1922$28,532.15192316,257.45192544,454.2489,243.84Interest and taxes (1915-1920)38,712.87Total cost237,956.71It further contended, as set out in the2110 schedules attached to the petition, that the total cost of $237,956.71 should be allocated to the lots sold and unsold, as follows: Lots sold during year - Cost1921$13,781.75192241,297.14192342,123.41192433,286.77192532,193.68162,682.75Lots remaining unsold at December 31, 192575,273.96Total cost of all lots237,956.71No evidence was offered as to the cost of improvements. The respondent's determination of the cost of improvements is, therefore, sustained. The respondent in his determination did not include, as a part of the cost of the lots sold, any portion of the amount of $38,712.87 representing interest and taxes paid on the Rosemont property during the years 1915 to 1920, inclusive. As already stated, the petitioner, in the schedules attached to its petition, contended that the full amount of $38,712.87 should be capitalized as a part of the cost of the property. In its brief, however, it concedes that such part of the $38,712.87 as it had allocated to the cost of the lots sold during the years 1921, 1922, and 1923 should be eliminated as representing a part of such cost, or, in other words, that on the lots sold during2111 the years 1921, 1922, and 1923, the cost should not include any amount paid for interest and taxes during the years 1915 to 1920, inclusive. See ; ; affd., ; and . On page 2 of its brief, the petitioner states: The respondent and the petitioner have agreed that the carrying charges totalling $38,712.87 shall be eliminated in computing the taxable gain on the sale of the lots for the years 1921, 1922 and 1923 and shall be included as it affects each lot in computing the taxable profit for the years 1924 and 1925. 203 The admission made by counsel for the respondent at the close of the hearing, was as follows: May it please your Honor, I want to make an admission of record, though, with reference to the carrying charges for 1924 and 1925. The respondent will admit that they may be included as part of the costs, but, of course, the allocation, the respondent contends, would be on the pro rata basis. As to those expenses for 1921 and 1922, it is the respondent's position2112 that the law has been well settled in , a decision by the District Court in New York, I believe. Now, in reference to the carrying charges in 1924 and 1925, Article 1561, Regulations 65, settles it as far as the Commissioner's position is concerned. In other words, they say they may be included as a part of the cost of the lot where they have not been deducted during the current year. Well, the proof here is very clear that they did not deduct it in the years in which they were paid. They had no income. They were not deducted on their books at that time. This admission is so ambiguous that we must disregard it altogether. It refers specifically to "carrying charges for 1924 and 1925" as to which there are no facts in the record, the only facts relative to any so-called carrying charges being that during the years 1915 to 1920, inclusive, the interest and taxes amounting to $38,712.87 were paid on the Rosemont property. The respondent's determination that the total cost of the property was $197,542.90 should not, therefore, be disturbed. See, also, 2113 . With respect to the allocation of the cost of the property to the lots sold during the taxable years, the evidence is likewise insufficient to prove that the respondent's allocation was erroneous. The respondent's determination was based upon a revenue agent's report. The report was admitted in evidence as petitioner's Exhibit No. 1. Therein, the agent stated that he used the cost that was shown on the petitioner's books. But there was testimony at the hearing to the effect that at that time the petitioner had made no allocation of cost to each separate lot, so we do not know how the cost used by the respondent was actually determined. Subsequent to the agent's examination, the petitioner employed a certified public accountant to ascertain the total cost of the property and to allocate to each separate lot a portion of such cost. The accountant's report was not placed in evidence. The petitioner was satisfied to rest with testimony to the effect that the lots in Block 1 were more valuable in 1915 than those in Block 19. But there is no evidence tending to show in dollars and cents the cost which should be allocated to2114 each separate lot sold during the years in question, nor is there any evidence as to the cost of each lot as determined by the respondent and in the absence of such evidence, we must give judgment for the respondent. There is another matter which we think should be mentioned, and that has to do with the selling price of the lots. It is not an issue in the case, and neither party makes any contention that the sales 204 price is in issue. But the petitioner sought to have the record show the exact location and sales price of each lot, which were facts not shown in the revenue agent's report. To this end it was stipulated at the hearing that the sales price of each lot, as set forth in the schedule attached to the petition, was correct. It was also agreed that the respondent's determination of the total sales was correct. Upon examination of the schedule, however, we find that there is a discrepancy of $100 between it and the respondent's determination of the total sales for the year 1921, and a like discrepancy of $512.81 for the year 1922. The record does not show what the respondent determined the sales to be for the years subsequent to 1922, and we are unable to make*2115 a comparison as to those years. But on account of the discrepancies already disclosed, we are unable to make a finding as to the selling price of each lot, together with its block location. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622134/	KENNETH V. HALL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHall v. CommissionerNo. 16655-81United States Tax CourtT.C. Memo 1982-356; 1982 Tax Ct. Memo LEXIS 391; 44 T.C.M. (CCH) 256; T.C.M. (RIA) 82356; June 23, 1982Kenneth V. Hall, pro se. Carol A. Szczepanik, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: Respondent determined deficiencies in petitioner's Federal income tax in the amount of $ 464.00 for 1977 and $ 157.00 for 1978. The issues we must decide are (1) whether petitioner had income from gambling winnings in 1977, (2) whether petitioner has substantiated gambling losses in excess of his winnings in 1977 within the meaning393 of section 165(d), 1 (3) whether petitioner is entitled to two dependency exemptions for his children in 1977 and one in 1978 pursuant to section 152(e), and (4) whether petitioner is entitled to head of household filing status in 1977. To facilitate the disposition of these issues, our findings of fact and opinion will be combined. None of the facts have been stipulated. The pertinent facts are set forth below. Issue 1. Gambling WinningsKenneth V. Hall is an individual who resided in Cleveland, Ohio, when he filed the petition in this case. He timely filed his 1977 and 1978 Federal income tax returns with the Internal Revenue Service Center at Cincinnati, Ohio. On December 11, 1978, Mr. Hall filed an amended return, Form 1040X, for calendar year 1977. On his amended return Mr. Hall reported race track winnings of $ 2,000 and losses of $ 4,000. He then deducted $ 2,000 of the loss against the winnings to produce a wash. No other items of income or deductions were reported on the amended return. In his statutory notice of deficiency, respondent394 disallowed the $ 2,000 loss deduction for lack of substantiation, thereby increasing petitioner's income by the amount of his winnings at the race track. In 1977 and 1978 petitioner was employed as a tool crib attendant at Cleveland Crane and Engineering. He also worked as a clerk at a local race track and frequently placed bets on horses. At trial petitioner testified that he had made a mathematical error on his amended return and that he had had "no winnings whatsoever" from gambling in 1977. On cross examination petitioner admitted that he had bet on a horse in 1977 that had placed or won. 2 Section 61 requires the inclusion of gambling proceeds in income. Petitioner has failed to satisfy his burden of proving respondent's determination incorrect. 3Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Accordingly, we uphold respondent's determination. 395 Issue 2. Substantiation of Gambling LossesOn his amended return petitioner claimed a deduction of $ 2,000 in gambling losses. Respondent disallowed the losses in full for lack of substantiation. Section 165(d) provides that gambling losses may be deducted only to the extent of gambling winnings. 4 Petitioner has the burden of proving he suffered the gambling losses he claimed which respondent disallowed. Mack v. Commissioner, 429 F.2d 182 (6th Cir. 1970), affg. a Memorandum Opinion of this Court; Stein v. Commissioner, 322 F.2d 78 (5th Cir. 1963), affg. a Memorandum Opinion of this Court. Section 1.6001-1(a), Income Tax Regs., requires taxpayers to keep records sufficient to establish the amount of gross income and deductions shown on their returns. This rule applies to wagering transactions. 5 Though petitioner may have sustained individual wagering losses over the course of the year, he has not presented sufficient evidence to establish the amount of such losses or his entitlement396 to the gambling loss deduction. Donovan v. Commissioner, 359 F.2d 64">359 F.2d 64 (1st Cir. 1966), affg. a Memorandum Opinion of this Court; Schooler v. Commissioner, 68 T.C. 867">68 T.C. 867 (1977). Therefore, we conclude that none of the claimed losses are allowable. Accordingly, respondent's determination is sustained. Issue 3. Dependency ExemptionsPetitioner and his former wife Mildred were divorced in 1971. Under the divorce decree Mildred was awarded custody of two of their four children, Kenneth, Jr., and Kelly. 6 Petitioner was ordered to pay $ 15.00 per week per child for child support plus necessary medical and dental expenses. The decree did not specify that petitioner would be entitled to the dependency exemptions, nor did petitioner and his former wife execute an agreement to that effect. In 1977 petitioner claimed both children as dependents on his tax return; in 1978 he claimed only Kenneth, Jr. Respondent disallowed all three exemptions.397 Section 152(e) provides specific rules in the case of divorced or separated parents for determining which parent is entitled to the dependency exemption allowed by section 151(e) with respect to children born of that marriage. Section 152(e)(2)(B) establishes a $ 1,200 per child minimum that the noncustodial parent must pay in order to be considered for the deduction in the absence of a written agreement between the parties or provision in the decree of divorce or separate maintenance allocating the deduction to the noncustodial parent. Once this threshhold requirement has been satisfied, the burden shifts to the custodial parent or, in his or her absence, to respondent to clearly establish that the custodial parent contributed more to the support of the child or children than the noncustodial parent did. In the instant case, petitioner, the noncustodial parent, has not demonstrated that he paid $ 1,200 per child during the years before the Court. He produced no probative evidence on this issue. The divorce decree provided for payments398 of $ 780 per child. Petitioner testified that each year at tax time he and his wife would decide who would take the exemptions for the children. Although he testified he gave his former wife $ 50 per week for child support, his testimony was uncorroborated. 7We conclude that petitioner has failed to establish that he contributed the required minimum amount of $ 1,200 to Kenneth, Jr.'s support in 1977 and 1978 and Kelly's support in 1977. Consequently, we need not address the question whether respondent clearly established that Mildred provided more support for Kenneth, Jr. and Kelly than petitioner did. Issue 4. Filing StatusPetitioner filed as a head of household in 1977. At trial he testified that he maintained an apartment where his children visited on weekends*399 and vacations. Section 1(b) provides that to be entitled to use head of household filing rates, a taxpayer must satisfy the definitional requirements of section 2(b). First, he must be unmarried at the close of the taxable year and, second, he must maintain a home which is the principal place of residence of at least one of his children. The record clearly shows that in 1977 none of petitioner's children resided with him. Accordingly, he is not entitled to file as a head of household in 1977. Manning v. Commissioner, 72 T.C. 838 (1979). Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, and in effect during the years in issue.↩2. Similarly, petitioner admitted that he had wagering proceeds in 1977 in his petition to this Court for the redetermination of his 1976 Federal income tax liability. T.C. Summary Opinion 1980-258. ↩3. After trial of the current case petitioner submitted to the Court, over respondent's objection, a purported tally of his wins and losses at the race track between May 1 and September 17, 1977. This document has no probative value because respondent had no opportunity to cross examine the petitioner on the figures listed, nor is there any proof the record was made contemporaneously with the races. However, we note petitioner listed a total of $ 2,180 in winnings for the four and one-half month period covered on the tally sheet.↩4. Section 165(d). Wagering Losses. -- Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.↩5. As noted in footnote 3, in support of his claim petitioner submitted after trial a xerox copy of a purported tally of wins and losses from May 1 through September 17, 1977, which we have not considered.↩6. The other two children, Judith and Kimberly, were placed under the jurisdiction of juvenile court. Their support is not in issue here.↩7. The Court has not taken into consideration a xerox copy of a purported receipt from petitioner's former wife which petitioner submitted to the Court following the trial over respondent's hearsay objection. However, we note that the receipt verifies the support payments ordered in the divorce decree which total only $ 780 per child per year, well below the minimum required in section 152(b)(2)(B).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622135/	Superior Valve and Fittings Company, Petitioner, v. Commissioner of Internal Revenue, RespondentSuperior Valve & Fittings Co. v. CommissionerDocket No. 31164United States Tax Court18 T.C. 931; 1952 U.S. Tax Ct. LEXIS 111; August 29, 1952, Promulgated 111 Decision will be entered under Rule 50. Excess Profits Tax -- Section 722 (b) (4) Relief -- Constructive Earnings. -- Petitioner was organized and commenced business in 1938 and its business did not reach, by the end of 1939, the earning level it would have reached had it commenced business two years earlier. Held, relief should be granted. Amount of constructive average base period net income determined. Sidney B. Gambill, Esq., for the petitioner.A. W. Dickinson, Esq., for the respondent. Arundell, Judge. ARUNDELL931 The respondent has denied the petitioner's claims for refund asserted in applications for relief from excess profits tax for the calendar years 1941 to 1945, inclusive. He has also determined deficiencies in excess profits tax for the years 1943 and 1944 in the respective amounts of $ 11,512.71112 and $ 9,160.61, the payment of which was deferred under Code section 710 (a) (5).932 The petition alleges error in the disallowance of claims for relief, in which relief was claimed under the provisions of Code section 722, subsections (a) and (b) (4). The specific questions for decision are whether the petitioner is entitled to the use of the push-back rule of section 722 (b) (4) and, if so, what is the amount of its constructive average base period net income.FINDINGS OF FACT.The petitioner is a corporation organized under the laws of Pennsylvania on April 18, 1938. Its principal office is in Pittsburgh, Pennsylvania. It commenced business on April 18, 1938.The petitioner's Federal income tax returns for all periods here involved were filed with the collector of internal revenue at Pittsburgh, Pennsylvania. It kept its books and filed its returns on the accrual method of accounting and on the calendar year basis. The petitioner filed timely applications for relief under section 722 of the Internal Revenue Code for the years 1941 to 1945, inclusive.The petitioner was organized by John S. Forbes, who became its president and general manager. Prior to the organization113 of the petitioner, Forbes had been treasurer of Kerotest Manufacturing Company (hereinafter called Kerotest) and was responsible for its sales in connection with commercial refrigeration and air conditioning. During the time that Forbes was with Kerotest, he had developed and patented a so called diaphragm packless valve for use in commercial refrigeration equipment, which valve was thereafter used by Kerotest.In September 1937, Forbes applied for a patent on an improved diaphragm packless valve. A patent was granted to Forbes on January 24, 1939. This patent relates particularly to a valve designed to be used where fluids at high pressure are to be controlled and particularly fluids which are difficult to confine, such as refrigerant gases and light hydrocarbon gases.The principal advantage of the packless valve over the packed valve previously in use was that the packless valve could be dismantled and repaired without closing the flow of the refrigerant and without having leakage into the space occupied by the refrigeration unit. Prior to the organization of the petitioner, Kerotest was the only company that manufactured a packless valve. The valve invented by Forbes and 114 on which he obtained a patent was competitive with the valve manufactured by Kerotest but sufficiently different so as not to result in infringement.Upon incorporation of the petitioner, $ 60,000 was paid in in cash for preferred stock. Forbes turned in to the petitioner his interest in his application for a patent in exchange for 2,400 shares of common 933 stock with a par value of $ 1 per share. There was no change in the capitalization of the petitioner during the base period years. The petitioner did not manufacture its valves but purchased parts from various suppliers and assembled them into complete units for sale.The petitioner added other items to its packless valves, which included valve parts, check valves, compressor valves, manifolds, filters, and tools.Forbes was a leader in the refrigeration valve industry and in 1939 he was president of the Refrigeration Equipment Manufacturers Association, which was the leading trade association of the refrigeration industry.When the petitioner commenced business, it had no backlog of orders. Its principal difficulty in the beginning was making inroads on the established companies and selling to refrigeration manufacturers115 who were purchasing from other suppliers. The petitioner's first orders were small as customers were unwilling to switch completely from established suppliers until the petitioner's new valve was tested and proven. The petitioner was at a disadvantage in making its purchases of parts inasmuch as in the beginning its purchases were comparatively small. The petitioner's first quarters were in a basement with floor space approximately 100 feet by 175 feet. In the spring of 1940 it moved its plant to larger premises.During the period that Forbes was with Kerotest, he had acquired many acquaintances in the commercial refrigeration field. Among these were persons connected with Commonwealth Brass Corporation, which was the petitioner's largest supplier. Commonwealth extended to the petitioner substantial amounts of credit in order to help the petitioner get started in business. The petitioner's purchases from Commonwealth in 1938 amounted to $ 40,065.20, of which it owed $ 26,198.56 at the end of the year. In 1939, the petitioner's purchases from Commonwealth amounted to $ 109,344.49, of which it owed $ 56,210.70 at the end of the year.The petitioner's business was subject to 116 seasonal fluctuations. The commercial refrigeration business picks up about the first of March each year and a seasonal upswing continues on through the summer months. It then tapers off in the fall months of the year. Sales of commercial refrigerators and commercial refrigerator equipment during the taxable years lagged approximately one month behind the seasonal cycle of the petitioner's sales. The petitioner's sales and sales of commercial refrigerators and commercial refrigerator equipment by quarters, with adjustment for a one month lag, and the ratio of the petitioner's sales to the combined refrigerator sales for 1938 and 1939 were as follows: 934 Petitioner's salesYear and lagged quarterAmount1938:June, July, & Aug$ 10,082Sept., Oct., & Nov17,0311939:Dec. 1938, Jan., & Feb28,816Mar., Apr., & May50,911June, July, & Aug56,292Sept., Oct., & Nov43,358Combined salesRatiopetitioner'ssales toYear and calendar quarterAmountcombinedsales1938:3d Quarter$ 9,946,119.001014th Quarter6,654,509.002561939:1st Quarter8,093,998.003562d Quarter13,675,785.003723d Quarter9,230,863.006104th Quarter7,445,824.00582117 The commercial refrigerating equipment sales for the years 1938 and 1939 of 16 companies, including such items as water coolers, ice cream cabinets, bottle beverage coolers, milk coolers and cooling cabinets, commercial evaporators, and condensing units and condensers were as follows:19381939January$ 1,578,144$ 1,059,981February2,153,4011,346,683March3,742,5772,489,980April4,502,4882,951,230May4,020,5073,160,973June3,506,8492,801,425July2,416,0322,037,494August1,969,4501,593,378September1,579,0141,251,544October1,109,0011,336,277November948,4871,008,352December1,231,5041,402,165$ 28,757,454$ 22,439,482The monthly average of sales of durable goods stores in the United States for the years 1936 to 1939, inclusive, were as follows, in millions of dollars:1936193719381939816907734865The indices of industrial production of all manufacturers in the United States, adjusted for seasonal variations, for the years 1935 to 1939, inclusive, on the basis of the average for those years being 100 per cent, are as follows:193587193610419371131938871939109Monthly variations for 1939January101February101March101April99May100June103July105August109September115October122November125December126118 935 The total sales of members of the Commercial Refrigeration Manufacturers Association for the years 1936 to 1939, inclusive, were as follows:1936193719381939$ 14,198,170$ 16,704,025$ 14,505,345$ 16,006,988The above sales, reduced to percentages and using sales for 1939 as 100 per cent, result in the following percentage relationship:PercentageYearTotal salesrelationship1939$ 16,006,988100.000193814,505,34590.618193716,704,025104.35 193614,198,17088.7 The following are statistics as to the petitioner's sales, expenses and income for 1938 and 1939:April 18, 1938,toCalendar yearDec. 31, 1938 1939Sales$ 35,865.41 $ 185,124.22 Gross profit12,306.13 69,505.61 Expenses31,620.08 69,554.50 (19,313.95)(48.89)Other income257.90 59.84 Net income (or loss)(19,056.05)10.95 The petitioner's excess profits credits, under the invested capital method of computation, and without application of Internal Revenue Code section 722, for the years 1940 to 1945, inclusive, were as follows:YearAmount1940$ 4,992.0019415,378.9519427,726.5219438,198.92194414,091.88194515,014.16119 The petitioner's excess profits net income and net income before Federal taxes for the years 1940 to 1945, inclusive, were as follows:Net incomeExcess profitsbeforeYearnet incomeFederal taxes1940$ 3,077.98$ 3,077.98194145,566.9045,541.50194281,762.7881,265.921943139,085.29138,469.971944141,938.02140,984.70194582,924.7882,162.21936 The petitioner's tax liabilities for the years 1940 to 1945, inclusive, without the application of section 722 of the Code, were as follows:DeclaredYearIncome taxvalue excess-profitsExcess profitstaxtax1940$ 457.08NoneNone19419,372.05None$ 12,309.5719423,179.45$ 83.5561,766.4519433,297.57None86,369.1319446,204.26None87,680.6019456,532.96None49,513.58The petitioner's average base period net income is an inadequate standard of normal earnings because the petitioner commenced business during the base period and its business did not reach by the end of the base period the earnings level which it would have reached if the petitioner had commenced business two years before it did so. The sum of $ 19,000 would be a fair and just120 amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based on a comparison of normal earnings and earnings during the excess profits tax years involved in this proceeding.The petitioner, pursuant to the provisions of Internal Revenue Code section 710 (a) (5), deferred payment of excess profits taxes for the years 1943 and 1944 in the respective amounts of $ 11,512.71 and $ 9,160.61.OPINION.In this proceeding the petitioner seeks relief from excess profits taxes for the years 1941 to 1945, inclusive, by reason of the provisions of Internal Revenue Code section 722 (a) and 722 (b) (4).The petitioner commenced business in April 1938, which is within the base period and which is one of the qualifying factors enumerated by the statute. Rand Beverage Co., 18 T. C. 275. It is clear to us that base period net income for the 1 year and 9 months that the petitioner operated in that period does not reflect normal operating results for the entire base period. From the first period of operations -- some nine months in 1938 -- to its first full year -- 1939 -- the petitioner's121 business went from a deficit of some $ 19,000 to a break-even point. This, together with the testimony of witnesses, establishes to our satisfaction that the earning level of the petitioner's business would have been greater at the end of 1939 than it was if the petitioner had commenced business two years before it did. Section 722 (b) (4); Victory Glass, Inc., 17 T.C. 381">17 T. C. 381.The respondent takes the position that the petitioner does not qualify for relief on the ground that by the end of the base period it 937 had reached the normal level of sales that it would have attained on two additional years of operation. We have set forth in the findings the figures on which this position is based. The principal figures are those showing the ratio of the petitioner's sales to the combined sales of commercial refrigerators and other commercial refrigeration equipment, by quarters, in 1938 and 1939. These figures show a steady progression of the ratio from the beginning of business in 1938 through the third quarter of 1939. From the third to the fourth quarters, the ratio sloughed off from .00610 per cent to .00582 per cent. This difference in ratio122 is only .00028 which we think is too small a difference to negative the petitioner's evidence on this point. We accordingly hold that the petitioner has met the qualifying factors of section 722 (b) (4).The parties seem to be in agreement as to the method of reconstruction, if the petitioner is entitled to use a constructive average base period net income. They agree that in making a reconstruction, two steps are necessary and proper: (1) determination of the normal level of earnings for the year 1939; (2) reflecting back such normal earnings over the base period years by the application of a proper index. The determination of the amount of normal earnings for 1939 is the most serious difference between the parties.The petitioner's evidence consists in part of a mathematical projection of the volume of petitioner's sales in the seven quarters that it was in business in 1938 and 1939. Other evidence consists of the testimony of a former employee of the petitioner, and of a present officer who was not connected with the petitioner in the base period. To the sales figures thus arrived at, the petitioner applies a profit ratio of 10 per cent and then applies to that figure a business123 index and produces a resultant figure of $ 35,489.29 as being a proper constructive average base period net income. The respondent, while not conceding that the right to reconstruction has been established, suggests that the proper starting point is to regard as normal sales an amount determined by applying to combined refrigeration sales for 1939 the petitioner's third quarter ratio of .00610 per cent. To this he then applies 3.65 per cent, which is the average ratio of earnings to sales of two corporations which the respondent says were competitors of the petitioner. To this figure, the respondent applies a business index and arrives at a constructive average base period net income of $ 7,800.We cannot accept without qualification the proposed reconstruction of either party. The petitioner's mathematical projection has as its basis too short a period of time to reflect the normal fluctuations to be expected in business operations, particularly in the case of a new, competitive, and seasonal business. A former employee, while employed by the petitioner was not in a position of sufficient responsibility 938 in connection with sales to warrant giving full weight to his 124 sales and profits predictions. The respondent's figures we think do not adequately reflect the rate of growth of the petitioner's business in relation to the refrigeration industry or the profit margin that could reasonably be anticipated. It is our conclusion on this point that the petitioner's reconstruction is too high and the respondent's is too low to reflect normal earnings to be used as the basis for an excess profits tax credit.We have recognized, as provided by the respondent's regulations, that no exact criteria can be prescribed for a reconstruction under section 722, Danco Co., 14 T. C. 276, 288, and that what that section calls for is a prediction and an estimate of what earnings would have been under assumed circumstances, an approximation where an absolute is not available and not expected. Victory Glass, Inc., supra, at p. 388. "The statute does not contemplate the determination of a figure that can be supported with mathematical exactness." Danco Co., 17 T. C. 1493. In our appraisal of the evidence, we have given consideration, among other things, to the facts that the 125 petitioner started business in 1938 which is recognized in all business statistics as a year of business recession, that it started from scratch with no backlog of orders, that it was in a competitive field, that it operated on credit for its materials, that it was managed by a man who was well and favorably known in the industry, and that despite its handicaps it moved steadily forward in its field of the commercial refrigeration industry. Upon consideration of the evidence offered by both parties, it is our conclusion that had the petitioner commenced business 2 years before it did, it would have reached an earning level of $ 20,000 by the end of the base period. We also think that the index represented by sales of members of the Commercial Refrigerator Manufacturers Association is a proper one to be applied for the purpose of back-casting 1939 earnings. See section 35.722-2, Regulations 112; Treasury Department Bulletin on Section 722, part V, subpart II (C) (4). We have set forth that index in the findings of fact. Its application to a 1939 earnings level of $ 20,000 produces a result of approximately $ 19,000 which we hold should be used as the petitioner's constructive average126 base period net income for the purpose of computing its excess profits credit for the years involved in this proceeding.The petition in these proceedings alleges error on the part of the respondent in determining that the parts of 1943 and 1944 excess profits taxes, as to which payment was deferred, constitute deficiencies. The respondent's answer denies error in this respect. Consequently, the pleadings frame an issue as to whether the respondent properly determined the amounts of the deferred payments to be deficiencies. We have held that in such cases as we have here, where there has been 939 a deferment, and claims for relief have been rejected, the amount deferred constitutes a statutory deficiency. Tribune Publishing Co., 17 T.C. 1228">17 T. C. 1228. On authority of that case, the issue framed by the pleadings is decided for the respondent.After the above findings of fact and opinion were written but before promulgation thereof, counsel for the parties filed a supplemental stipulation of facts with respect to the issue as to the respondent's determination of deficiencies for the years 1943 and 1944. Three exhibits were filed with the supplemental127 stipulation. One is a copy of a letter dated June 4, 1948, written by an officer of the petitioner to the collector, with which was transmitted petitioner's check in the amount of $ 20,673.32 to cover the amounts of excess profits taxes as to which payment had been deferred ($ 11,512.71 for 1943 and $ 9,160.61 for 1944). The letter contained a request that the collector credit the $ 20,673.32 "to our company in your No. 9 -- Suspense Account, until our claims under Section 722 are decided." The second exhibit is a copy of the company's check, payable to the order of the collector. The third is a collector's certificate of assessments and payments with respect to the petitioner, which certificate shows the amounts of $ 12,591.04 and $ 8,082.28 (total $ 20,673.32) for the years 1943-1944 entered in Account 9-D.In these proceedings the petitioner deferred the payment of a portion of its excess profits tax for each of the years 1943 and 1944. The amounts so deferred, we have held above, constitute deficiencies. In 1948 when the petitioner sent to the collector its check in an amount equal to the tax deferred for the 2 years, it requested that the amount transmitted be entered in128 the collector's suspense account and the collector did so. Apparently no assessment of the deferred amounts has been made. It would appear from the record that the amount sent to the collector in 1948 was sent by the petitioner and accepted by the collector as a deposit rather than as a payment of tax. Such deposits, it has been held, are payments in escrow and not payments of tax. Rosenman v. United States, 323 U.S. 658">323 U.S. 658. In this posture of the proceedings, it must be held that the taxes deferred, which the respondent determined were deficiencies, were not paid prior to the date of the mailing of the respondent's notice of deficiencies, which notice also contained respondent's denial of the petitioner's claims under section 722. Accordingly, we have jurisdiction to redetermine the deficiencies determined by the respondent.In view of the disposition that we had made of the issue as to relief under section 722, the issue as to the determination of deficiencies for 1943 and 1944 based on the deferments of excess profits tax payments for those years may not be of any importance in the final disposition of these proceedings. In any event, it is129 a matter that *940 can be determined in connection with the computations that must be made under Rule 50 of the rules of this Court.Reviewed by the Special Division.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622136/	JAMES E. MAHON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMahon v. CommissionerDocket No. 4537-85.United States Tax CourtT.C. Memo 1987-449; 1987 Tax Ct. Memo LEXIS 446; 54 T.C.M. (CCH) 439; T.C.M. (RIA) 87449; September 8, 1987. 446 P and his wife, W, filed separate returns for 1981. On such returns, they each reported one-half of P's income. Held:(1) Income earned by P and reported on W's return is taxable to P; and (2) P is not liable for additions to tax for negligence under sec. 6653(a), I.R.C. 1954. James E. Mahon, pro se. Dahil Goss, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined a deficiency of $ 19,378.22 in the petitioner's Federal income tax for 1981, an addition to tax of $ 968.91 under section 6653(a)(1) of the Internal Revenue Code of 1954, 1 and an addition447 equal to 50 percent of the interest on the underpayment under section 6653(a)(2). After concessions, the issues remaining for decision are: (1) Whether the petitioner understated his income when he and his wife filed separate returns and each reported one-half of his income; and (2) whether the petitioner is liable for the additions to tax for negligence or intentional disregard of rules and regulations under section 6653(a)(1) and (2). FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioner, James E. Mahon, maintained his legal residence in Alexandria, Virginia, at the time he filed his petition in this case. He filed his individual Federal income tax return for 1981 with the Internal Revenue Service Center in Memphis, Tennessee. On such return, he elected the "married filing separate return" status. The petitioner retired from the United States Air Force as a colonel in 1967. In 1977, the petitioner wrote a letter to the AFAFC/RPT to have his retirement checks made payable to him and his wife. In part, such letter read: 448 I desire that the check for my Air Force retirement pay be written to indicate my wife, Mary H. Sunny and me as joint payees. Specifically, I desire that it read: Mary H. Sunny and James E. Mahon. The sole purpose to be served is to make a symbolic recognition of the service which she has rendered alongside me as a partner and comrade-in-arms for more than thirty years. Both overseas and stateside, during my years of active duty, and even now in the time of my retirement she has zealously labored for the accomplishment of all of those ends implicit and explicit in my oath of office. She is completely dedicated to the protection of the Constitution of the United States from all enemies, foreign and domestic. There is no desire nor intent to affect in any way the distribution of the retirement pay. At the moment it is payed by allotment to our joint bank account, to which either or each of us has full access. If she survives me, then the provisions of RSFPP or SBP will apply. During 1981, the petitioner was employed as a manager by two corporations. Each of such corporations provided him with a Form W-2 in his name. Such forms indicated that the petitioner had wage income449 of $ 42,110.86 during 1981. In addition, he received retirement pay of $ 28,651.56. The petitioner's wife, Mary H. I. Sunny, was known as Mary H. Mahon from the time of her marriage in the 1940s until 1977. In 1977, she decided to stop using the petitioner's last name because her research indicated that the custom of a wife adopting the last name of her husband was built on a custom of slavery. She never had her last name legally changed from Mahon to Sunny. For 1980, the petitioner's wife attempted to have the IRS address all correspondence to her as Mary H. I. Sunny. She testified that the IRS refused to allow her to pay the Mahon's tax bill using the name Mary H. I. Sunny. Over the course of several months, there were numerous letters and telephone calls between the petitioner's wife and the IRS. She even tried to contact Roscoe L. Egger, the Commissioner of the IRS at that time, to settle the dispute concerning her use of her maiden name. Finally, the IRS levied against the petitioner's wages for certain joint tax liabilities. The IRS released the levy 1 day after it was instituted. As a result of this experience, the petitioner and his wife decided to file separate450 returns for 1981. On his return for 1981, the petitioner included in income one-half of his retirement pay, one-half of all his wages, and one-half of his wife's retirement pay. He received two exemptions, one for himself and one for being 65 or over. The petitioner attached to his return for 1981 a "Declaration of Policy for Income Tax Payment." Such declaration was signed by the petitioner and his wife and, in relevant part, read as follows: We herewith declare, as partners, that the total taxable monies indicated on the attached Forms W-2, (or photo copies thereof) are joint income, equally shared, and the withheld taxes are jointly and equally paid, although the W-2s were issued in only one of our names [James E. Mahon]; we announce that the net proceeds were deposited in our joint Virginia Nat'l. Bank NOW Acct. * * and the interest thereon, together with any/all other income, is reported in our separate individual income tax reports, Form 1040.The petitioner's wife also filed an individual return for 1981, on which she reported the other one-half of their income. In his notice of deficiency, the Commissioner determined that, for 1981, the petitioner failed to451 report approximately one-half of his wage and retirement income. In addition, the Commissioner disallowed a bad debt deduction, which he has since conceded. Finally, he determined that the resulting understatement of income was due to negligence or intentional disregard of rules and regulations under section 6653(a)(1) and (2). OPINION The first issue for decision is whether the petitioner understated his income when he and his wife filed separate returns and each reported one-half of the petitioner's wage and retirement income. The Commissioner determined that the petitioner understated his income by failing to report one-half of his wage and retirement income. The petitioner bears the burden of proving that the Commissioner's determination is erroneous. Rule 142(a), Tax Court Rules of Practice and Procedure.2At trial, the petitioner stated that he and his wife had always thought of themselves as a team and that he felt that she earned one-half of his income as a member of that team. The petitioner stated that the declaration accompanying his 1981 return is evidence of these beliefs. 452 Therefore, the petitioner contends that he correctly reported his income for 1981. One of the primary principles of our income tax system is that income should be taxed to the one who earns it. Commissioner v. Culbertson,337 U.S. 733">337 U.S. 733, 739-740 (1949). Attempts to subvert this principle by deflecting income away from the true earner to another entity by means of contractual agreements are generally not recognized for Federal income tax purposes, despite their validity under State law. 3United States v. Basye,410 U.S. 441">410 U.S. 441, 448 (1973); Lucas v. Earl,281 U.S. 111">281 U.S. 111 (1930). The proper taxpayer is the one who has the ultimate control over the earning of income rather than the person or entity who ultimately receives the income. Wesenberg v. Commissioner,69 T.C. 1005">69 T.C. 1005, 1010-1011 (1978); American Savings Bank v. Commissioner,56 T.C. 828">56 T.C. 828, 839 (1971). For purposes of a joint return, the husband and wife are treated as a single taxpayer. See sec. 6013(d)(3); sec. 1.6013-4(b), Income Tax Regs. However, when spouses file separate returns, they are generally treated as separate and distinct taxpayers in453 a manner similar to unmarried taxpayers. Stokby v. Commissioner,26 T.C. 912">26 T.C. 912 (1956); Hunt v. Commissioner,47 B.T.A. 829">47 B.T.A. 829, 840 (1942); Perine v. Commissioner,22 B.T.A. 201">22 B.T.A. 201, 204 (1931); Vayssie v. Commissioner,8 B.T.A. 587">8 B.T.A. 587 (1927). In Lucas v. Earl, supra, the taxpayer, a lawyer, entered into a contract with his wife which provided that future property acquired by either spouse would be treated as belonging equally to both. The taxpayer earned salary and fees, of which one-half was paid to his wife pursuant to the contract. The question presented was whether the taxpayer was required to include in his gross income the entire amount of the salary and fees, or only the one-half retained by him. The Supreme Court held that, 454 regardless of its effect as a matter of contract law, the assignment of income was ineffective under the Federal income tax to shift income to the assignee. 281 U.S. at 241. The entire amount of the petitioner's wages and retirement income was reportable by him on his return for 1981. The payments of such income were made to the petitioner in return for services performed by him. The petitioner chose to report such income on a separate return, rather than on a joint return as he and his wife had done in prior years. Therefore, regardless of the petitioner's belief that his wife was instrumental in his receiving such income, such income was solely reportable by and taxable to the petitioner. For this reason, we sustain the Commissioner's determination concerning the deficiency as modified by his concession. The final issue for decision is whether the petitioner is liable for the additions of tax for negligence or intentional disregard of rules and regulations under section 6653(a). Paragraph (1) of section 6653(a) provides for an addition to tax of 5 percent of the underpayment where an underpayment of tax is due to negligence or intentional disregard of rules455 and regulations. See Richardson v. Commissioner,72 T.C. 818">72 T.C. 818 (1979). Paragraph (2) of section 6653(a) provides for an addition to tax of an amount equal to 50 percent of the interest payable on the portion of the underpayment attributable to negligence or intentional disregard of rules and regulations. The petitioner bears the burden of proving that he is not liable for such additions to tax. Rule 142(a); Luman v. Commissioner,79 T.C. 846">79 T.C. 846, 860-861 (1982). Since 1977, the petitioner and his wife have been attempting to have her known as "Mary H. I. Sunny," and in 1981, she had several discussions with the IRS seeking to have her recognized as Mary H. I. Sunny for tax purposes. They became frustrated and confused over how to achieve their objective. It is clear that, irrespective of what name is used by the petitioner's wife for Federal income tax and other purposes, the petitioner is responsible for reporting the income earned by him. Nevertheless, in view of their frustration and confusion, we have concluded that their filing separate returns for 1981 and the petitioner's reporting of only one-half of his income was not due to negligence or456 intentional disregard of rules and regulations. Therefore, the petitioner is not liable for the additions to tax under section 6653(a). Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during 1981. ↩2. Any reference to a Rule is to the Tax Court Rules of Practice and Procedure. ↩3. We observe that the rule that each spouse may report one-half of community income in a separate return is an exception to the general rule that income is taxed to the one who earns it. See Poe v. Seaborn,282 U.S. 101">282 U.S. 101↩ (1930). Virginia is not a state with community income. 3 Mertens, Law of Federal Income Taxation, sec. 19.02, chap. 19, p. 9 (1981 rev.).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622137/	WILLIAM A. YOUNG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentYoung v. CommissionerDocket No. 11948-79.United States Tax CourtT.C. Memo 1981-109; 1981 Tax Ct. Memo LEXIS 635; 41 T.C.M. (CCH) 1069; T.C.M. (RIA) 81109; March 9, 1981. 635 In 1977, P received income. He claimed that under a vow of poverty, he had transferred such income to the Life Science Church, and that, as a result, he was exempt from the Federal income tax. Held, P failed to prove that the Life Science Church existed, or that, if it existed, such church was not P's alter ego, or that P donated his income to such church; and therefore, P was not exempt from the Federal income tax. Held, further, P was liable for an addition to tax under sec. 6653(a), I.R.C. 1954, since he failed to show that the underpayment of tax was not due to negligence or to intentional disregard of rules and regulations. William A. Young, pro se. Diane Lynn Fox, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined a deficiency of $ 10,975.22 in the petitioner's Federal income tax for 1977. He also determined an addition to tax of $ 548.76 under section 6653(a) of the Internal Revenue Code of 1954. The only issues to be decided are whether the petitioner is exempt from the Federal income tax because he executed a document in which he purported to donate636 his income to a church, and whether the petitioner is liable for the addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations. FINDINGS OF FACT The petitioner, William A. Young, resided in Elkhart, Ind., when he filed his petition in this case. He filed his Federal income tax return for 1977 with the Internal Revenue Service. On his income tax return, Mr. Young claimed that he had taken a vow of poverty and that, as a result, he was exempt from the Federal income tax. He attached to his return an executed copy of a document in which he purported to make an irrevocable gift of all his property and income to the Life Science Church, The Order of Almighty God 1806. In his notice of deficiency, the Commissioner determined that the petitioner had received gross income of $ 32,359.84 in 1977, that he was liable for Federal income tax on such income, and that he was also liable for an addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations. OPINION We must decide first whether the petitioner was exempt from the Federal income tax in 1977. In support of his claim that he was exempt, the637 petitioner relies entirely on his "vow of poverty"--his purported transfer of income to the Life Science Church. In essence, he seeks a charitable contributions deduction equal to the amount of his income. However, the petitioner has the burden of substantiating such deduction (Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933)), and he has failed to carry his burden. First, he has wholly failed to show that the Life Science Church existed. Except for the document purporting to transfer the petitioner's income, there is no evidence, including testimony, to show that such church existed in any manner. Second, even if an entity named the Life Science Church did exist, the petitioner has not shown that such entity possessed any of the usual indicia of a church, such as a congregation, a building, a creed, or a liturgy. If the church did not possess any of these indicia, it is possible that such church was merely the alter ego of the petitioner; if so, contributions to such church were not deductible. 1 Finally, if the church existed, the petitioner has not shown that he made any actual contributions to it. 638 Under the circumstances, we conclude that the petitioner was taxable on the gross income received by him in 1977. In his notice of deficiency, the Commissioner determined that the petitioner received income of $ 32,359.84 in 1977, and since the petitioner has not shown such determination to be incorrect in any manner, we sustain such determination. The only other issue is whether the petitioner was liable for an addition to tax under section 6653(a). That section provides for an addition to tax when an underpayment of tax is due to negligence or to intentional disregard of rules and regulations. The petitioner has the burden of showing that he is not liable for the addition to tax. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 791-792 (1972). Here, the petitioner introduced no evidence to show that he exercised due care in preparing his tax return for 1977 or that he did not intentionally disregard rules and regulations. Without such evidence, we are bound to approve the Commissioner's determination. Decision will be entered for the respondent. Footnotes1. See Lynch v. Commissioner,T.C. Memo. 1980-464↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622138/	PETER A. JOHNSON AND CLAIRE P. LYON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentJohnson v. CommissionerDocket No. 15585-90United States Tax CourtT.C. Memo 1991-645; 1991 Tax Ct. Memo LEXIS 696; 62 T.C.M. (CCH) 1629; T.C.M. (RIA) 91645; December 26, 1991, Filed 696 Decision will be entered under Rule 155.Peter A. Johnson and Claire P. Lyon, pro se. Ronald F. Hood, for the respondent. TANNENWALD, Judge. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined a deficiency in and additions to petitioners' Federal income tax for 1986 as follows: Additions To TaxDeficiency1Sec. 6653(a)(1)(A) Sec. 6653(a)(1)(B)Sec. 6661$ 24,790.00$ 1,240.00$ 6,198.00The main issue for decision is whether petitioners, having elected to liquidate Peter A. Johnson Associates, Inc. (PAJA), under section 333 may revoke, amend, or escape the consequences of that election. If this issue is resolved in favor of respondent, then the issues involving the applicability of sections 6653(a)(1)(A) and (B) and 6661 will have697 to be decided, as will the issue relating to petitioners' claim of certain offsets. FINDINGS OF FACT Some of the facts have been stipulated and are so found; the stipulation and the accompanying exhibits are incorporated herein by reference. Petitioners, Peter A. Johnson (Johnson) and Claire P. Lyon (Lyon), husband and wife, were residents of Hanover, New Hampshire, at the time their petition was filed. They filed a joint Federal income tax return on the cash basis for 1986 with the Internal Revenue Service Center, Andover, Massachusetts. PAJA is a management consulting firm through which Johnson rendered consulting services. At all pertinent times, all of PAJA's issued and outstanding shares were owned by Johnson, Lyon, and the Peter A. Johnson Associates, Inc. Pension Trust (Pension Trust). Johnson is also a certified public accountant. Through PAJA, Johnson consulted on a full-time basis until 1985. At that time, he accepted a full-time position with the Dartmouth-Hitchcock Medical Center in New Hampshire. As a result, Johnson was no longer as available to render consulting services. A shareholder resolution authorizing the liquidation of PAJA under section 333 was adopted698 on December 28, 1986. Form 966, Corporate Dissolution or Liquidation, was completed by Johnson in his capacity as president of PAJA on December 28, 1986. At the same time, Forms 964, Election of Shareholder Under Section 333 Liquidation, were signed by the three PAJA shareholders. Forms 966 and 964 were filed by Johnson with the Internal Revenue Service Center in Andover, Massachusetts, on December 31, 1986. At the same time that the Forms 964 and 966 were prepared and filed, Johnson prepared balance sheets of PAJA for the periods ending June 30, 1986, and December 28, 1986, respectively. Each of the balance sheets disclosed retained earnings of $ 96,311.33. Johnson completed and filed a Form 1120-A Federal corporate income tax return for PAJA for the year ending June 30, 1986, with the Internal Revenue Service Center, Andover, Massachusetts, on January 8, 1987. The balance sheet of PAJA for the period ending June 30, 1986, was reflected on that return. At the same time, Johnson prepared a Form 1120 for PAJA for the short tax year ending December 28, 1986. It was not filed with the Internal Revenue Service Center, Andover, Massachusetts, until February 2, 1988. 2 No balance699 sheet was included in that return but was furnished to respondent on or about April 6, 1988; it showed retained earnings of $ 96,311.33. After reserving $ 18,000 for tax liabilities of PAJA, cash distributions in liquidation were made to PAJA shareholders on December 28, 1986, as follows: Johnson$ 64,607.32Lyon63,232.69Pension Trust9,622.37In addition to the foregoing, the following checks payable to PAJA were deposited in petitioners' personal bank account on January 8, 1987: (1) Check dated December 22, 1986, from Collier, Shannon, Rill & Scott, in the amount of $ 2,400.00, (2) Check dated October 21, 1986, from the U.S. Treasury in the amount of $ 2,240.08, (3) Check dated October 28, 1986, from Spriggs, Bode & Hollingsworth in the amount of $ 2,287.00. On March 26, 1987, there was deposited700 in petitioners' personal bank account a check, dated March 18, 1987, from Spriggs, Bode & Hollingsworth, payable to PAJA, in the amount of $ 6,727.00 in payment of services during the period November 1, 1986, through March 10, 1987. In May 1988, petitioners received a check from the U.S. Treasury Department payable to PAJA in the amount of $ 6,661.64, representing a tax refund. The check was returned by Johnson to the Internal Revenue Service on July 10, 1988. On their 1986 tax return, petitioners reported only the total of the amounts received from PAJA on December 28, 1986, i.e., $ 127,840.01, as proceeds from the sale of PAJA stock. The return contained no reference to the liquidation. Following PAJA's liquidation, Johnson continued to provide consulting services in his individual capacity and reported his consulting activities on Schedule C of petitioners' tax returns. Consulting income received in 1987 was deposited directly into petitioners' joint checking account. PAJA's bank account was closed on January 23, 1987. The 1985 and 1986 Federal income tax returns of both PAJA and petitioners were audited by the Internal Revenue Service. As a result of the audit, on April701 6, 1988, Johnson filed an amended Form 966 seeking to revoke the original section 333 election in favor of a liquidation under section 331. PAJA was reincorporated in February 1991. OPINION The principal issue before us is whether the proceeds received by petitioners on the liquidation of PAJA should be taxable, in part, as ordinary income and, in part, as long-term capital gain as provided in section 333 or entirely as long-term capital gain under section 331. Resolution of this issue turns upon the effect to be given to documents which appear to constitute an election under section 333 and actions to implement those documents. Petitioners assert that: (1) The section 333 election can be revoked or amended; (2) if the election cannot be revoked or amended, the election was defective; and (3) the reincorporation of PAJA in 1991 voided the election. Respondent disputes petitioners' contentions, asserting the irrevocable nature of a section 333 election under that section and the regulations thereunder. Sec. 1.333-2(b)(1), Income Tax Regs.3702 Section 331, which governs complete liquidations in general, provides in part as follows: SEC. 331. GAIN OR LOSS TO SHAREHOLDERS IN CORPORATE LIQUIDATIONS (a) Distributions In Complete Liquidation Treated As Exchanges. -- Amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.If the stock is a capital asset, as is the case herein, gain recognized in a section 331 liquidation is capital gain. Section 333, which originated as section 112(b)(7) of the Revenue Act of 1938, ch. 289, tit. 1, 52 Stat. 487, was enacted to facilitate the liquidation of personal holding companies. 4703 Under section 333, 5 qualified electing shareholders avoid recognition of gain on shares owned at the time the plan of liquidation was adopted with certain exceptions. One exception, which is involved herein, is that gain recognized under section 333 is treated as a dividend, i.e., ordinary income, to the extent that the corporation has accumulated earnings and profits. 704 Amendment or Revocation of ElectionPetitioners initially argue that the PAJA shareholders' election to liquidate under section 333 is subject to amendment or revocation for the following reasons: (1) The election was based on a mistake of fact, (2) the number of shares subject to the election was erroneously reported, (3) amendments to Form 966 are permitted, and (4) principles of fairness and equity warrant a revocation of the election. This Court has consistently refused to allow taxpayers to escape the consequences of a section 333 election where their election was based on assumptions that later proved to be incorrect. Cohen v. Commissioner, 63 T.C. 527 (1975), affd. without published opinion 532 F.2d 745">532 F.2d 745 and 532 F.2d 747">532 F.2d 747 (3d Cir. 1976); Estate of Meyer v. Commissioner, 15 T.C. 850">15 T.C. 850 (1950), revd. on this issue 200 F.2d 592">200 F.2d 592 (5th Cir. 1952). 6 Our opinions have recognized the distinction between a mistake of fact and a mistake of law but have concluded that, in each of these cases, there was a mistake of law. 705 Petitioners endeavor to come within the exception provided in Meyer's Estate v. Commissioner, 200 F.2d 592">200 F.2d 592 (5th Cir. 1952), revg. 15 T.C. 850">15 T.C. 850 (1950), claiming the election to liquidate PAJA emanated from a mistake of fact, namely that, at the time of liquidation, they believed the earnings and profits of PAJA to be zero rather than $ 96,311.33, the correct figure. In Meyer's Estate v. Commissioner, supra, the taxpayer-shareholders sought to rescind an election to liquidate a corporation under section 112(b)(7) of the Internal Revenue Code of 1939. The parties in that case had stipulated that, prior to making the election, the shareholders "relied on the earned surplus" as shown in the books of the corporation and the reports of the auditors, who were certified public accountants -- a figure which subsequently turned out to be erroneous because of a failure to take into account a carryover of earned surplus in a prior reorganization. While recognizing that "there is, under settled law, no election without full knowledge of the facts," this Court held that the taxpayers had failed to demonstrate a lack of knowledge in respect of the correct706 earned surplus of the corporation at the time of liquidation, emphasizing that they had been directly involved in the earlier reorganization. 15 T.C. at 868. Under these circumstances, we concluded that the stipulation as to reliance was not determinative and that the taxpayer had made a mistake of law. The Court of Appeals for the Fifth Circuit interpreted the phrase "relied upon" to connote reliance in good faith without knowledge of the true facts and concluded that the stipulation constituted an agreement by respondent that the taxpayer had made an excusable mistake of fact. Meyer's Estate v. Commissioner, 200 F.2d at 596-597. Petitioners' reliance on Meyer's Estate is misplaced. Leaving aside the fact that we have never agreed with the reasoning in Meyer's Estate, 7 the facts of that case are readily distinguishable from those involved herein. Of critical importance is the fact that respondent has not stipulated any lack of knowledge on petitioners' part concerning the earnings and profits of PAJA. To the contrary, respondent has repeatedly asserted that petitioners had knowledge of the correct earnings and profits at the time707 of the adoption of the plan of liquidation.The corporate Federal income tax return of PAJA for the year ending June 30, 1986, was completed at or about the same time as the: (1) Stockholder Resolution declaring the shareholders' intention to liquidate PAJA under section 333, (2) Form 966, Corporate Dissolution or Liquidation, and (3) Form 964, Election of Shareholders Under Section 333 Liquidation, for each PAJA shareholder. The corporate Federal income tax return of PAJA for the short period ending December 28, 1986, was in Johnson's possession at the time of the election and reflected earnings and profits of $ 96,311.33. Such uncontradicted708 evidence makes it difficult to believe that Johnson was ignorant of those earnings at the time the election papers were filed. We conclude that, at or prior to the time of the shareholders resolution to liquidate and the filing of Forms 964 and 966, petitioners knew or should have known of PAJA's $ 96,311.33 in earnings and profits at the time of liquidation. Under these circumstances, it cannot be said that petitioners, who have the burden of proof, Rule 142(a), have demonstrated that their election was made "without full knowledge of the facts" so as to enable them to obtain the benefits of Meyer's Estate v. Commissioner. See 200 F.2d at 595. Such being the case, petitioners' mistake rests upon an erroneous conception of the application of section 333, i.e., a mistake of law. Petitioners next point to the inaccurate reporting of the ownership of PAJA shares. PAJA's three shareholders, Johnson, Lyon, and the PAJA Trust in fact owned 51, 49, and 8 shares, respectively, in December 1986. The Forms 964 filed with the IRS, however, indicated shareholder ownership of 47, 46, and 7 shares, respectively. Petitioners contend that this was a mistake of fact entitling709 them to revoke the election. We disagree. The fact of the matter is that all shareholders of PAJA made the election. That there were inaccuracies as to the number of shares owned by each electing shareholder is irrelevant. In any event, it does not constitute a mistake of fact sufficient to relieve petitioners of the consequences of their election. Another theory on which petitioners seek to revoke the election focuses on the instructions accompanying Form 966, which provide in part as follows: If the resolution or plan is amended or supplemented after Form 966 is filed, file an additional Form 966 within 30 days after the amendment or supplement is adopted. The additional form will be sufficient if you show the date the earlier form was filed and attach a certified copy of the amendment or supplement and all other information required by Form 966 and not given in the earlier form.Petitioners contend that, by permitting amendment or supplementation of the plan of liquidation, the instructions allow a taxpayer to liquidate the corporation under an entirely different section. Petitioners misconstrue the instructions' purpose. The instructions simply provide that 710 in the event the plan of liquidation is amended or supplemented, an amended Form 966 should be filed disclosing any such modifications to the plan. They do not permit revocation of the election under one section in favor of an election under another. Finally, petitioners ask us to consider notions of fairness and equity. Although fairness and equity are indeed important considerations in appropriate circumstances, they have no bearing upon the validity or revocability of petitioners' election. The most that can be said is that petitioner simply made an unfortunate mistake, blame for which lies with them and cannot be excused based on notions of fairness and equity. Moreover, as we have stated previously, in respect of another type of election, "Even if we were inclined to determine that petitioner was entitled to such equitable relief, we would be powerless to grant it, for as we have previously stated, this Court does not have equity jurisdiction." Atlantic Veneer Corp. v. Commissioner, 85 T.C. 1075">85 T.C. 1075, 1084 (1985), affd. 812 F.2d 158">812 F.2d 158 (4th Cir. 1987). PAJA Shareholder's Election Under Section 333 is InvalidPetitioners ask us to consider711 various circumstances surrounding the election which they contend are fatal to its validity: (1) All shares of PAJA were not subject to the election; (2) Supplemental reporting requirements of section 333 were not complied with; (3) 80 percent of the shareholders did not elect under section 333; (4) PAJA was not dissolved under State law; (5) Liquidation of PAJA did not occur within one calendar month; (6) Clients of PAJA were not informed of its liquidation; (7) Bylaws of PAJA prohibited the payment of dividends; and (8) Forms 966 and 964 were not filed within the 30-day period following adoption of the plan of liquidation. The reasons presented in (1) and (2) are merely procedural errors and do not affect the election's validity. Petitioners' inaccurate reporting of shares owned by the electing shareholders was corrected and, in any event, is not material. The fact that only 100 shares instead of 108 shares were specified in the Forms 964 is irrelevant in view of the fact that all the shareholders executed the form. See supra page 13. Moreover, 100 shares is more than 80 percent of the 108, so that, in any event, the percentage of ownership requirement of section712 333 was met. Given the fact that Forms 964 were previously filed, failure thereafter to file copies with petitioners' personal return likewise has no material effect upon the election's validity. Evidence of an "affirmative intent" on the part of the taxpayer to make the election is controlling. Atlantic Veneer Corp. v. Commissioner, 85 T.C. at 1082-1083. This Court has repeatedly emphasized that procedural errors do not affect the validity of an election under the tax laws where the taxpayer substantially complied with the reporting requirements. American Air Filter Co. v. Commissioner, 81 T.C. 709">81 T.C. 709, 719 (1983) and cases cited thereat. That it is petitioners, rather than respondent, who seek to avoid the election does not prevent the application of this principle; if anything, the "substantial compliance" doctrine is more applicable under such circumstances. The shareholders' resolution to liquidate under section 333, the filing of Forms 964 and 966, and the checks written to make the cash distributions all indicate a clear intention to liquidate PAJA. Petitioners substantially complied with the provisions of section 333 and are bound713 by the election. Petitioners also argue that the 80-percent requirement of section 333(c)(1) was not satisfied because Lyon, owning 49 of 108 shares, agreed to the election based on an incomplete knowledge of the relevant facts. They contend that, as a result of erroneous advice from Johnson, Lyon based her decision to liquidate PAJA under section 333 upon a mistake of fact. Although Lyon was a shareholder of PAJA, she relied totally upon Johnson to manage the affairs of the corporation, including her ownership interest therein. Johnson acted on her behalf throughout the liquidation process, making the election, completing the necessary forms, and distributing the corporate assets. The degree of control which Johnson exercised over Lyon's shares and PAJA leads us to conclude that her shares, ignoring technical legal ownership, should be treated as his shares insofar as the election under section 333 is concerned. Petitioners, who have the burden of proof, Rule 142(a), have not persuaded us that Lyon's single statement that she considered her husband an expert because he was a certified public accountant entitles her to be accorded the same status as that of the taxpayers in 714 Meyer's Estate v. Commissioner, supra, who relied on the advice of an independent accountant. We are satisfied that Lyon's shares were properly included in the computation of electing shareholders, thus satisfying the 80-percent requirement of section 333(c)(1). Petitioners further argue that the election is invalid due to PAJA's failure properly to liquidate under State law, because there were no meetings of the board of directors or stockholders, the articles of dissolution were not filed with the Maryland authorities, and creditors were not notified during the period specified in section 333. These arguments are totally without merit. State law is simply not controlling in respect of the issue of what constitutes a liquidation for Federal tax purposes. Frelmort Realty Corp. v. Commissioner, 29 B.T.A. 181">29 B.T.A. 181, 187-189 (1933) (citing Burnet v. Harmel, 287 U.S. 103">287 U.S. 103, 77 L. Ed. 199">77 L. Ed. 199, 53 S. Ct. 74">53 S. Ct. 74 (1932), and Guild v. Commissioner, 19 B.T.A. 1186">19 B.T.A. 1186 (1930)). The regulations under section 333 reflect this view. See sec. 1.333-1(b)(2), Income Tax Regs., which provides: (2) If a transaction constitutes a distribution in complete liquidation within715 the meaning of the Code and satisfies the requirements of section 333, it is immaterial that it is otherwise described under the local law. [Emphasis added.]Whether there was a liquidation is a question of fact, and we are satisfied that the actions taken herein provide sufficient substance to satisfy us that PAJA was in fact liquidated. See Shull v. Commissioner, 291 F.2d 680">291 F.2d 680, 684 (4th Cir. 1961), revg. on other grounds 34 T.C. 533">34 T.C. 533 (1960); Kennemer v. Commissioner, 96 F.2d 177">96 F.2d 177, 178 (5th Cir. 1938), affg. 35 B.T.A. 415">35 B.T.A. 415 (1937); Alameda Realty Corp. v. Commissioner, 42 T.C. 273">42 T.C. 273, 281 (1964). Petitioners' assertion that the section 333 election is invalid because PAJA's clients were not informed of the liquidation is equally without merit as is their claim that a provision in PAJA's bylaws prohibiting the payment of dividends renders the section 333 election invalid. Petitioners further argue that the requirements of section 333 that all assets be distributed in one calendar month was not met because some assets were distributed after December 31, 1986. Petitioners point to payments716 set forth in our findings of fact, reflected in checks payable to PAJA. See supra pages 4-5. Three of those checks were dated in 1986, and petitioners have failed to offer any evidence that they were not in Johnson's possession before December 31 of that year. We therefore conclude that these checks were the equivalent of cash distributed in liquidation of PAJA within the month of December 1986; the fact that they were not deposited in petitioners' personal bank account until January 1987 is irrelevant. An indeterminate amount of the check dated, received, and deposited in petitioners' personal bank account in March 1987 apparently represented payment for PAJA's services in November and December 1986. In any event, we are satisfied that any such de minimis payment and its distribution were part of the winding up process and that, to the extent that it represented an amount due PAJA, it was simply payment on an account receivable which was constructively distributed to PAJA's shareholders in December 1986. As far as the U.S. Treasury tax refund check is concerned, we think that, even if we accept petitioners' contention that it was constructively received despite its return717 to the IRS, this too was a de minimis amount representing payment of an account receivable constructively distributed to petitioners in December 1986. 8 Cf. Estate of Meyer v. Commissioner, 15 T.C. 850">15 T.C. 850, 864 (1950), revd. on other grounds 200 F.2d 592">200 F.2d 592 (5th Cir. 1952). Petitioners' reliance on Siegel v. United States, 464 F.2d 891 (9th Cir. 1972), and Osenbach v. Commissioner, 17 T.C. 797 (1951), affd. 198 F.2d 235">198 F.2d 235 (4th Cir. 1952), is misplaced. Siegel involved the application of the assignment of income doctrine in order to determine whether a corporation or its shareholders should718 be taxed on the item involved and, in no way, involved the timing of a distribution in liquidation. Osenbach involved whether amounts received by shareholders subsequent to the liquidation of the corporation should be treated as ordinary income or capital gain; it similarly did not involve the timing of a distribution in liquidation. Petitioners' final argument for invalidating the election focuses on what they contend is an untimely filing of Forms 964 and 966. They assert that the decision to liquidate PAJA was made in November of 1986, that the filings of Forms 964 and 966 were not made within 30 days, and were therefore untimely with the result that the election was invalid. However, the evidence clearly establishes December 28, 1986, as the date of adoption of the plan of liquidation. Therefore, the filings were timely and the election valid. Reincorporation of PAJAIf it is determined the election was valid, petitioners present an alternative argument, namely that the election was rendered void when PAJA reincorporated in 1991. Here again, the authorities which petitioners cite in support of their position miss their mark. Telephone Answering Service Co. v. Commissioner, 63 T.C. 423">63 T.C. 423 (1974),719 affd. without published opinion 546 F.2d 423">546 F.2d 423 (4th Cir. 1976), Rev. Rul. 60-50, 1 C.B. 150">1960-1 C.B. 150, and Rev. Rul. 76-429, 2 C.B. 97">1976-2 C.B. 97, all involved the validity of a liquidation which was accompanied by an almost simultaneous reincorporation. This is a far cry from the situation herein where over 4 years elapsed between the liquidation and reincorporation. Cf. Pridemark, Inc. v. Commissioner, 345 F.2d 35">345 F.2d 35 (4th Cir. 1965); Kennemer v. Commissioner, 96 F.2d at 178-179. Petitioners' contention is without merit. Additions To TaxFor purposes of section 6653(a), negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances; petitioners have the burden of proof. Birth v. Commissioner, 92 T.C. 769">92 T.C. 769, 770 (1989). They have failed to carry their burden. Indeed, our conclusion that Johnson, and therefore petitioners, knew or should have known that PAJA had earnings and profits points to the conclusion that they should have realized that the amounts they received were required, to that extent, 720 to be reported as dividend income under section 333. Their failure to do so is compounded by the fact that Johnson was a certified public accountant. Moreover, their negligence is further reflected in their failure to disclose, on their 1986 return, that the amounts reported as the proceeds from a "sale" of PAJA stock were distributions in liquidation as required by section 1.333-6, Income Tax Regs. Under such circumstances, we hold that respondent's determinations of additions to tax under section 6653(a)(1)(A) and (B) are sustained. 9Section 6661(a) imposes an addition to tax of 25 percent of the amount of any underpayment attributable to a substantial understatement of income tax. In determining if there is a substantial understatement of income, the amount of the understatement is reduced by the portion of the understatement which is attributable to: (1) The tax treatment of any item if there is or was substantial authority for such 721 treatment, or (2) any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return. Sec. 6661(b)(2)(B). In light of our discussion, see supra pages 10-13, it is clear that the opinion of the Court of Appeals for the Fifth Circuit in Meyer's Estate v. Commissioner, supra, falls far short of satisfying the substantial authority requirement. Likewise, the mere labeling in petitioners' 1986 return of the amounts received in liquidation as having been received from the "sale of PAJA stock" is woefully inadequate to satisfy the disclosure requirement. We hold that respondent's determination as to the additions to tax under section 6661 is sustained. OffsetsPetitioners seek to offset any liability which may be imposed upon them by this Court by a 1991 payment of $ 23,000 and by claimed increased withholdings in 1987, 1988, and 1989. As to the $ 23,000, respondent has indicated that it will be taken into account in assessing any deficiency based upon our decision herein. As to the claimed withholdings in subsequent years, those years are not before the Court, and we 722 have no jurisdiction in respect thereto. Beyond this, it appears that the bulk of those withholdings were used to pay petitioners' reported tax liabilities for those later years. Moreover, to the extent that the withholdings resulted in a claim by petitioners that they were entitled to refunds, there is no evidence that such refunds were not in fact made. * * * The record herein reflects a sad scenario of error by petitioners based upon a fundamental mistake by Johnson as to the impact of an election under section 333 and his desperate efforts to nullify or avoid the effects of that election, efforts which served only to confuse rather than clarify the situation. While we do not share respondent's sinister interpretation of those efforts, it is clear to us that, under the circumstances herein, petitioners cannot escape the consequences of the established principle that: Oversight, poor judgment, ignorance of the law, misunderstanding of the law, unawareness of the tax consequences of making an election, miscalculation, and unexpected subsequent events have all been held insufficient to mitigate the binding effect of elections made under a variety of provisions of the Code. 723 * * [Estate of Stamos v. Commissioner, 55 T.C. 468">55 T.C. 468, 474 (1970).]In order to enable certain technical adjustments to be made in the computations, Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code as amended and in effect for 1986, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩. 50 percent of the interest due on the deficiency. ↩2. We note that while the Form 1120-A for the period ending June 30, 1986, contained a Dec. 28, 1986, date of signature, the Form 1120 for the period ending Dec. 28, 1986, contained no date of signature.↩3. The regulation provides that the election "cannot be withdrawn or revoked," with exceptions not relevant herein. A predecessor regulation under sec. 112(b)(7) of the Internal Revenue Code of 1939, containing substantially the same language, see Regs. 111, sec. 29.402-1, was held valid in Estate ofMeyer v. Commissioner, 15 T.C. 850">15 T.C. 850, 865-867 (1950), affd. on this issue 200 F.2d 592">200 F.2d 592, 596↩ (5th Cir. 1952).4. See S. Rept. 627, 78th Cong., 1st Sess. 48-49 (1943), 1944 C.B. 973">1944 C.B. 973. The provisions and objectives of section 112(b)(7) were carried over to the 1954 Code through the enactment of section 333. See S. Rept. 1622, 83d Cong., 2d Sess. 48, 256 (1954). Section 333↩ was subsequently repealed by the Tax Reform Act of 1986, Pub. L. 99-514, sec. 631(e)(3), 100 Stat. 2085, 2273, effective for liquidations occurring after Dec. 31, 1986.5. SEC. 333. ELECTION AS TO RECOGNITION OF GAIN IN CERTAIN LIQUIDATIONS. (a) General Rule. -- In the case of property distributed in complete liquidation of a domestic corporation (other than a collapsible corporation to which section 341(a) applies), if -- (1) the liquidation is made in pursuance of a plan of liquidation adopted, and (2) the distribution is in complete cancellation or redemption of all the stock, and the transfer of all the property under the liquidation occurs within one calendar month,then in the case of each qualified electing shareholder (as defined in subsection (c)) gain on the shares owned by him at the time of the adoption of the plan of liquidation shall be recognized only to the extent provided in subsections (e) and (f). * * (c) Qualified Electing Shareholders. -- For purposes of this section, the term "qualified electing shareholder" means a shareholder (other than an excluded corporation) of any class of stock (whether or not entitled to vote on the adoption of the plan of liquidation) who is a shareholder at the time of the adoption of such plan, and whose written election to have the benefits of subsection (a) has been made and filed in accordance with subsection (d), but -- (1) in the case of a shareholder other than a corporation, only if written elections have been so filed by shareholders (other than corporations) who at the time of the adoption of the plan of liquidation are owners of stock possessing at least 80 percent of the total combined voting power (exclusive of voting power possessed by stock owned by corporations) of all classes of stock entitled to vote on the adoption of such plan of liquidation, * * ** * * (d) Making and Filing of Elections. -- The written elections referred to in subsection (c) must be made and filed in such manner as to be not in contravention of regulations prescribed by the Secretary. The filing must be within 30 days after the date of the adoption of the plan of liquidation. (e) Noncorporate Shareholders. -- In the case of a qualified electing shareholder other than a corporation -- (1) there shall be recognized, and treated as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913, such earnings and profits to be determined as of the close of the month in which the transfer in liquidation occurred under section (a)(2), but without diminution by reason of distributions made during such month; but by including in the computation thereof all amounts accrued up to the date on which the transfer of all property under the liquidation is completed; * * *↩6. See also Goldman v. Commissioner, a Memorandum Opinion of this Court dated Oct. 25, 1950. To the same effect, see Raymond v. United States, 269 F.2d 181">269 F.2d 181 (6th Cir. 1959); Cockrell v. United States, 58-1 U.S. Tax Cas. (CCH) P 9159">58-1 U.S. Tax Cas. (CCH) P9159↩, 1 A.F.T.R.2d (RIA) 394 (N.D. Tex. 1957).7. We have applied the rule of Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970), and followed the reversal of our decision in Estate of Meyer v. Commissioner, 15 T.C. 850">15 T.C. 850 (1950), leaving open the question whether we would otherwise follow that reversal. See DiAndrea, Inc. v. Commissioner, T.C. Memo 1983-768">T.C. Memo 1983-768↩ notes 17 and 18.8. Respondent has not asserted any increased deficiency based upon the inclusion of these items and/or the 1986 checks in petitioners' 1986 income as amounts received in the liquidation of PAJA. Nor has respondent disputed petitioners' assertion that both categories of items were reported by petitioners as ordinary income in their 1987 return.↩9. Cf. Langer v. Commissioner, T.C. Memo 1990-268↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622139/	Inez V. Ballantine, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentBallantine v. CommissionerDocket No. 12102-77United States Tax Court74 T.C. 516; 1980 U.S. Tax Ct. LEXIS 119; June 4, 1980, Filed 119 Rules 36 and 53, Tax Court Rules of Practice and Procedure. -- Respondent mailed a motion to strike to the Tax Court 45 days after a copy of the petition was served on him. On the same day, he also mailed to the former address of petitioners' counsel a copy of the motion filed with the Court, which was returned by the post office. Almost immediately after its return to his office, respondent remailed a copy of his motion with amended certificate of service to petitioners' counsel at his correct address. Held: Despite the inconsequential delay in serving a copy of the motion upon petitioners' counsel, the motion was timely mailed to the Court, and thus, timely filed with the Tax Court as required by sec. 7502, Rules 21, 22, and 36, Tax Court Rules of Practice and Procedure. Furthermore, it is in the complete discretion of the Court to allow pleadings, other than petitions and notices of appeal, to be filed out of time. Petitioners' motion to dismiss the case or, in the alternative, to dismiss respondent's motion to strike, denied.Rules 40 and 52, Tax Court Rules of Practice and Procedure. -- Par. 4(e) of the petition alleged that the Commissioner erred in failing120 to issue a letter to petitioners in accordance with sec. 7605(b) as requested by petitioners on several occasions. Respondent issued notices of deficiency based upon his available information without further examining petitioners' books. Held: Par. 4(e) of the petition fails to state a claim upon which relief can be granted. Rose v. Commissioner, 70 T.C. 558">70 T.C. 558 (1978); United States Holding Co. v. Commissioner, 44 T.C. 323">44 T.C. 323 (1965), followed. Respondent's motion to strike par. 4(e), granted. Lee N. Koehler and Leslie A. Winter, for the petitioners.R. Dale Eggleston, for the respondent. Dawson, Judge. Cantrel, Special Trial Judge. DAWSON; CANTREL517 OPINIONThis case was assigned to Special Trial Judge Francis J. Cantrel, pursuant to the provisions of section 7456(c) 2122 and Rules 180 and 181, 3 for the purpose of conducting the hearing and ruling on respondent's motion to strike and petitioners' cross motion to dismiss. 4 After a review of the record, we agree with and adopt his opinion which is set forth below.OPINION OF THE SPECIAL TRIAL JUDGECantrel, Special Trial Judge: In his statutory notices, respondent determined Federal income tax deficiencies and additions to tax under section 6651(a) as follows:TaxableSec. 6651(a)Petitionersyear endedDeficiencyaddition to taxInez v. BallantineDec. 31, 1973$ 817,730$ 204,433Robert A. Ballantine andInez v. BallantineDec. 31, 1974303,9650Robert A. Ballantine, Inc.June 30, 19745,9140June 30, 19759,0400B & I Leasing Corp.Aug. 1, 197416040On January 30, 1978, respondent filed a "Motion to Strike," wherein he seeks to have stricken from the petition the assignment of error contained in paragraph123 4(e) because it fails to state a claim upon which relief can be granted, pursuant to Rules 40 and 52; respondent also moved, in this same pleading, to strike the allegations of fact contained in paragraphs 5(k-4) through 5(u-4) because they are irrelevant and immaterial. On March 7, 1978, petitioners, pursuant to Rule 53, filed a "Motion to Dismiss" the case or, in the alternative, to dismiss respondent's motion to strike, because respondent failed to timely move with respect to the petition or to file an answer under Rule 36.On March 15, 1978, a hearing was held on both parties' motions in Baltimore, Md., at which time petitioner filed a 518 "Memorandum in Opposition to Respondent's Motion to Strike." On May 1, 1978, respondent filed, with the leave of the Court, a "Reply to Petitioners' Memorandum in Opposition to Respondent's Motion to Strike." In this memorandum, respondent advises that he has no objection to the allegations of paragraphs 5(k-4) through 5(u-4) remaining as part of the petition since those allegations could conceivably have some relevancy with respect to the issue of whether respondent's deficiency determinations are incorrect, arbitrary, and excessive, 124 i.e., they may be relevant in regard to the assignment of errors contained in paragraphs 4(a) through 4(c) of the petition. 5 On May 4, 1978, petitioners filed, with the leave of Court, a "Supplemental Memorandum in Opposition to Respondent's Motion to Strike." On June 1, 1978, respondent filed, with the leave of the Court, a "Reply to Petitioners' Supplemental Memorandum in Opposition to Respondent's Motion to Strike."If petitioners' motion to dismiss the case or, in the alternative, dismiss respondent's motion to strike is granted, respondent's motion would become moot. Accordingly, we will first consider the facts and issues pertaining to petitioners' motion to dismiss. The following facts, which are derived from the pleadings and evidence submitted at the hearing, are undisputed.Petitioners Robert A. Ballantine and Inez V. Ballantine are husband and wife with 125 legal residence at 2814 Fox Hound Road, Ellicott City, Md. Their returns for the periods involved herein were filed with the Internal Revenue Service Center at Philadelphia, Pa. Petitioner Robert A. Ballantine, Inc., is a Maryland corporation with its principal office at Box 393, Route No. 2, Dorsey Road, Hanover, Md. Petitioner B & I Leasing Corp. is a Maryland corporation with its principal office at 2814 Fox Hound Road, Ellicott City, Md. The returns for both corporations for the periods involved herein were filed with the Internal Revenue Service Center at Philadelphia, Pa.The petition herein was sent by mail postmarked December 8, 1977, received and filed by the Tax Court on December 9, 1977, and a copy thereof was served on respondent by the Clerk of the Court on December 12, 1977. On Thursday, January 26, 1978 (45 days after the petition was served on respondent), counsel for 519 respondent sent by certified mail to the Clerk of the Court the motion to strike accompanied by a certificate of service certifying that a copy of the motion to strike was mailed to counsel for petitioners, Lee N. Koehler, at 305 West Chesapeake Avenue, Suite 420, Towson, Md. 21204. A copy126 of the motion to strike along with a copy of the hereinbefore-mentioned certificate of service was mailed by respondent on January 26, 1978, to Lee N. Koehler in an envelope addressed to the aforementioned West Chesapeake Avenue address. The motion to strike which was mailed to the Tax Court was received and filed by the Court on Monday, January 30, 1978. The copies of the motion to strike and certificate of service mailed to petitioners' counsel on January 26, 1978, were returned by the post office to respondent on or about January 31, 1978, marked "Return to Sender, No Such Address." On February 6, 1978, respondent mailed a copy of the motion to strike, a copy of an amended certificate of service, and an explanatory cover letter to petitioners' counsel in an envelope correctly readdressed to 905 Mercantile-Towson Building, 409 Washington Avenue, Towson, Md. 21204. Respondent also mailed on February 6, 1978, an amended certificate of service, a copy of the explanatory letter to petitioners' counsel, and an explanatory letter to the Clerk of the Tax Court.Petitioners' counsel's correct address at the Mercantile-Towson Building is listed on the petition and on petitioners' "Request127 for Place of Trial." The West Chesapeake Avenue address, to which respondent originally mailed a copy of his motion to strike, was the previous address of petitioners' counsel and was listed on the notices of deficiency and the power of attorney attached to petitioners' tax returns.Petitioners moved, pursuant to Rule 53, to dismiss this case or, in the alternative, dismiss respondent's motion to strike on the grounds that respondent failed to timely move or answer with respect to the petition as required by Rules 36 and 54. 6Rule 36(a) provides that, "The Commissioner shall have 60 days from the date of service of the petition within which to file an answer, or 45 days from that date within which to move with respect to the petition." Under Rule 22, "Any pleadings or other papers to be filed with the Court must be filed with the Clerk in 520 Washington, D.C." Rules 21(a) and 50(f) require that all motions be served on each of the parties to the case other than the party who filed it. The manner in which all papers filed with the Court are to be served on the other parties is provided in Rule 21(b) as follows:RULE 21. SERVICE OF PAPERS(b) Manner of Service: (1) General128 : All petitions shall be served by the Clerk. All other papers required to be served on a party shall also be served by the Clerk unless otherwise provided in these Rules or directed by the Court, or unless the original paper is filed with a certificate by a party or his counsel that service of that paper has been made on the party to be served or his counsel. For the form of such certificate of service, see Form 13, Appendix I. Such service may be made by mail directed to the party or his counsel at his last known address. Service by mail is complete upon mailing, and the date of such mailing shall be the date of such service. * In the circumstances here present, respondent was required to move with respect to the petition within 45 days from the service of the petition upon him. Rules 22, 36(a), and 54. Timely mailing of the motion constitutes a timely move with respect to the petition. Sec. 7502; 129 see also Rule 21(b). It is undisputed that respondent sent the motion to strike by certified mail to the Clerk of the Court in Washington, D.C., on January 26, 1978, 45 days after being served with a copy of the petition. Since the motion to strike was timely mailed to the Clerk of the Court within 45 days, respondent timely moved with respect to the petition. The delay in serving a copy of the motion filed with the Court upon petitioners' counsel, as a result of the original mailing to the attorney's former address, did not prevent timely filing of the motion by mail with the Clerk of the Tax Court as required by the Rules and did not prejudice petitioners.Furthermore, it is in the complete discretion of this Court in the interest of justice to allow pleadings to be made out of time. Rule 25(c); 7Dixon v. Commissioner, 60 T.C. 802">60 T.C. 802, 804 (1973); Estate of Quirk v. Commissioner, 60 T.C. 520">60 T.C. 520 (1973); Board of Tax Appeals v. United States ex rel. Shults Bread Co., 37 F.2d 442">37 F.2d 442 (D.C. Cir. 1929), cert. denied 281 U.S. 731">281 U.S. 731 (1930). We were not called upon in this130 case to invoke such discretion, since respondent's motion was, in fact, timely filed. Moreover, no 521 prejudice resulted from respondent's inadvertent delay in serving a copy of his motion upon petitioners' counsel. Respondent timely mailed the motion to strike to the Clerk of the Court and, in good faith, mailed a copy to petitioners' counsel at his former address, which was listed on the notices of deficiency. Upon discovering his error, respondent quickly sent a copy of his motion to the correct address of petitioners' counsel, filed an amended certificate of service with the Court, and mailed explanatory letters to the Court and petitioners' counsel. Under such circumstances, petitioners' motion to dismiss will be denied.Next, we address the facts and issues pertaining to respondent's motion to strike. Since respondent has no objection131 to the allegations of fact in paragraphs 5(k-4) through 5(u-4) of the petition, the remaining issue is whether paragraph 4(e) should be stricken from the petition for failure to state a claim upon which relief can be granted. Rules 40 and 52.In accordance with Rule 34(b), paragraph 4 of the petition sets forth the assignments of error which petitioners allege to have been committed by respondent in his deficiency determinations. 8 Paragraphs 4(a) through 4(c) contain numerous subparagraphs which include several allegations that the Commissioner's deficiency determinations are incorrect, arbitrary, and excessive. Paragraph 4(e) of the petition alleges the following as an independent assignment of error:133 4(e) The Commissioner erred in failing to issue a letter to Petitioners in accordance with the Internal Revenue Code sec. 7604(b) [sic], 9 as requested by Petitioners on several occastions [sic].In accordance with Rule 34(b), paragraph 5 of the petition sets forth the alleged facts on which petitioners base the assignments 522 of error supporting their case. Subparagraphs 5(k-4) through 5(u-4), which respondent objected to in his original motion, are statements of fact132 concerning the extent and duration of an audit of petitioners' records by a revenue agent, petitioners' refusal to execute "Slush Fund Affidavits," the revenue agent's request for further access to petitioners' books and records, petitioners' refusal to grant further access to their books without the issuance of a second examination letter under section 7605(b), respondent's refusal to issue a second examination letter, and respondent's issuance of notices of deficiency without further inspection of petitioners' books.Respondent has moved, pursuant to Rules 40 and 52, to strike the assignment of error in paragraph 4(e) because it fails to state a claim upon which relief can be granted. 10135 See 2 L. Casey, Federal Tax Practice, sec. 7.19 (1979 Cum. Supp. at 85). For the purposes of this motion, we must construe the alleged facts in the way most favorable to petitioners and assume the allegations in their petition are true. The theory of this motion is that even if the allegations in the petition are true, the assignment of error contained in the petition fails to state a cause of action and, as a matter of law, no justifiable controversy is presented for decision. See Baker v. Commissioner, 23 T.C. 161">23 T.C. 161, 162 (1954); Wilson Athletic Goods Mfg. Co. v. Commissioner, 2 T.C. 70">2 T.C. 70, 72523 (1943). 11 Assuming petitioners' allegations are true, we must decide whether the erroneous failure of respondent to issue a second examination134 letter under section 7605(b), as alleged in paragraph 4(e), entitles petitioners to any relief.The following facts are alleged by petitioners in their petition. A revenue agent conducted an audit of the books and records of petitioners during the period from August 8, 1975, through February 10, 1977. During October of 1976, the agent delivered "Slush Fund Affidavits" to petitioners with a request that the affidavits be executed. On the advice of legal counsel, petitioners, relying on their Fifth Amendment constitutional rights, declined to execute the affidavits. Following petitioners' refusal to execute the affidavits, the revenue agent requested further access to petitioners' books and records on February 10, 1977. On the advice of legal counsel, petitioners refused to grant136 respondent further access to their books and records without the issuance of a second examination letter in accordance with section 7605(b). Respondent issued a summons for petitioners' books and records in May of 1977; petitioners resisted the summons and continued to insist on the issuance of a second examination letter under section 7605(b). Without having further inspected petitioners' records, respondent issued the notices of deficiency to petitioners on the basis of information available to him.Petitioners, citing Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935), and Reineman v. United States, 301 F.2d 267">301 F.2d 267 (7th Cir. 1962), contend that the Court can grant two kinds of relief for respondent's failure to issue a second examination letter under section 7605(b): (1) Set aside respondent's notices of deficiency as null and void or (2) deny the presumption of correctness ordinarily given to respondent's notices of deficiency because they are excessive and arbitrary. Respondent contends that a failure to issue a second examination letter, in the absence of arbitrary and excessive deficiency determinations, does not entitle petitioners137 to any relief. We agree with respondent.Section 7605(b) provides as follows:No taxpayer shall be subjected to unnecessary examination or investigations, 524 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, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.Reineman v. United States, supra, cited by petitioners to support their contentions that the present notices of deficiency are null and void, is inapposite. There, the notice of deficiency was based on a second examination, without notice to the taxpayer and without the taxpayer's consent. In the case at bar, there was no second examination, and as a result, no violation of section 7605(b). In cases having facts substantially similar to those here in question, we found there was no second examination and, thus, no violation of section 7605(b). See United States Holding Co. v. Commissioner, 44 T.C. 323">44 T.C. 323 (1965); Rose v. Commissioner, 70 T.C. 558">70 T.C. 558 (1978). 12139 In these cases, respondent138 requested the taxpayers' records for a second examination. The taxpayers, relying on the section 7605(b) written notice requirement, refused to grant respondent access to their records, and respondent subsequently issued notices of deficiency without having further inspected the taxpayers' books. The taxpayers asserted that respondent's noncompliance with section 7605(b) rendered the notices of deficiency void, or if not void, at least arbitrary, thereby placing the burden of proof on respondent. We held in these cases that there was no second examination and thus no section 7605(b) violation. Following our decisions in United States Holding Co. v. Commissioner, supra, and Rose v. Commissioner, supra, we can grant no relief to petitioners' allegation that respondent erred in failing to issue petitioners a second examination letter under section 7605(b). Accordingly, respondent's motion will be granted, and paragraph 4(e) of the petition will be stricken, for it fails to state a claim upon which relief can be granted. 13525 The case of Helvering v. Taylor, supra, cited by petitioners, supports their position that respondent's notices of deficiency will be denied their presumption of correctness if petitioners can show them to be arbitrary and excessive. Respondent admits that if petitioners show that the notices of deficiency are arbitrary140 and excessive, the burden of proof will be shifted. The numerous legal memoranda submitted by petitioners clearly indicate that their claim that respondent erred in failing to issue a second examination letter is inextricably entwined with the assignments of error and allegations of fact contained in paragraphs 4(a) to (c) and 5 of the petition that respondent's notices of deficiency are arbitrary and excessive. Paragraph 4(e) of the petition is really an allegation of fact supporting petitioners' claim that respondent's determinations are arbitrary and excessive, not an independent assignment of error. These same facts, however, relating to respondent's failure to issue a second examination letter as requested by petitioners are fully set forth in paragraph 5, and accordingly, our order to strike paragraph 4(e) will not prejudice petitioners in any way.Finally, petitioners' request for attorney's fees will be denied. This Court is without jurisdiction to award attorney's fees to petitioners. Key Buick Co. v. Commissioner, 68 T.C. 178">68 T.C. 178 (1977), affd. 613 F.2d 1306">613 F.2d 1306 (5th Cir. 1980); Kolom v. Commissioner, 71 T.C. 235">71 T.C. 235 (1978).141 In accordance with the foregoing,An appropriate order will be issued. Footnotes1. The joindered petition filed herein also includes the following parties: Robert A. Ballantine and Inez V. Ballantine; Robert A. Ballantine, Inc.; and B & I Leasing Corp.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩3. All rule references herein are to the Tax Court Rules of Practice and Procedure.↩4. Since these are pretrial motions involving 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 the present circumstances. This conclusion is based on the authority of the "otherwise provided" language of that Rule.5. However, respondent reserved his right to later contest the relevancy or materiality of the allegations contained in pars. 5(k-4) through 5(u-4).↩6. Rule 54↩ provides, in part, that, "Motions must be made timely, unless the Court shall permit otherwise."7. Rule 25(c)↩ Enlargement or Reduction of Time: Unless precluded by statute, the Court in its discretion may make longer or shorter any period provided by these Rules. * 8. Rule 34(b) Content of Petition in Deficiency or Liability Actions: The petition in a deficiency or liability action shall contain * : * * *(4) Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency or liability. The assignments of error shall include issues in respect of which the burden of proof is on the Commissioner. Any issue not raised in the assignment of errors shall be deemed to be conceded. Each assignment of error shall be separately lettered.(5) Clear and concise lettered statements of the facts on which petitioner bases the assignments of error, except with respect to those assignments of error as to which the burden of proof is on the Commissioner.↩9. Petitioners intended sec. 7605(b)↩; this is a typographical error which they corrected in their subsequent memorandums.10. RULE 40. DEFENSES AND OBJECTIONS MADE BY PLEADING OR MOTIONEvery defense, in law or fact, to a claim for relief in any pleading shall be asserted in the responsive pleading thereto if one is required, except that the following defenses may, at the option of the pleader, be made by motion: (a) lack of jurisdiction; and (b) failure to state a claim upon which relief can be granted. If a pleading sets forth a claim for relief to which the adverse party is not required to file a responsive pleading, he may assert at the trial any defense in law or fact to that claim for relief. If, on a motion asserting failure to state a claim on which relief can be granted, matters outside the pleadings are to be presented, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 121, and the parties shall be given an opportunity to present all material made pertinent to a motion under Rule 121.RULE 52. MOTION TO STRIKEUpon motion made by a party before responding to a pleading or, if no responsive pleading is permitted by these Rules, upon motion made by a party within 30 days after the service of the pleading, or upon the Court's own initiative at any time, the Court may order striken from any pleading any insufficient claim or defense or any redundant, immaterial, impertinent, frivolous, or scandalous matter. In like manner and procedure, the Court may order striken any such objectionable matter from briefs, documents, or any other papers or responses filed with the Court.↩11. See also Hennik v. Commissioner, T.C. Memo. 1957-11; Galindos v. Commissioner, T.C. Memo. 1955-89↩. These cases involved motions to dismiss the entire petition for failing to state a cause of action; the same principles apply to respondent's present motion to dismiss part of the petition for failing to state a claim upon which relief can be granted.12. See also Kolom v. Commissioner, 71 T.C. 235">71 T.C. 235 (1978); Pleasanton Gravel Co. v. Commissioner, 64 T.C. 510">64 T.C. 510, 527-528 (1975), affd. per curiam 578 F.2d 827">578 F.2d 827 (9th Cir. 1978); Wall v. Commissioner, T. C. Memo. 1978-369↩.13. We note that even if a second examination is conducted, cases support the position that the mere failure of the Commissioner to comply with sec. 7605(b) will not render the notice of deficiency invalid. Collins v. Commissioner, 61 T.C. 693">61 T.C. 693 (1974); Rife v. Commissioner, 41 T.C. 732">41 T.C. 732, 751 (1964); Field Enterprises, Inc. v. United States, 172 Ct. Cl. 77">172 Ct. Cl. 77, 348 F.2d 485">348 F.2d 485 (1965); Mangone Co. v. United States, 73 Ct. Cl. 239">73 Ct. Cl. 239, 54 F.2d 168">54 F.2d 168 (1931); Kroh v. United States, an unreported decision ( D. Kan. 1972, 31 AFTR 2d 73↩-473, 73-1 USTC par. 9141).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622140/	ESTATE OF NATHANIEL COLE, Deceased, MARIA COLE DEVORE, Executrix, et al. 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Estate of Cole v. CommissionerDocket Nos. 1745-71, 1759-71, 1760-71.United States Tax CourtT.C. Memo 1973-74; 1973 Tax Ct. Memo LEXIS 213; 32 T.C.M. (CCH) 313; T.C.M. (RIA) 73074; March 29, 1973, Filed 213 Harry Margolis for the petitioners. Sheldon M. Sisson and Richard H. Gannon, for the respondent. SCOTT MEMORANDUM OPINION SCOTT, Judge: Respondent determined deficiencies in petitioners' income taxes for the calendar years 1960 through 1964 as follows:DocketPetitionerYearDeficiency1745-71Estate of Nathaniel Cole, Deceased, Maria Cole Devore, Executrix1961$145,803.76196265,806.371963188,479.781964493,9533501759-71Estate of Nathaniel Cole, Deceased, Maria Cole Devore, Executrix, and Maria Cole Devore, Surviving Spouse196067,419.391760-71Maria Cole Devore1961145,803.76196265,806.371963188,479.771964493,953.49Some of the issues raised by the pleadings have been disposed of by the parties, leaving for our decision the following: (1) Whether amounts paid by Capitol Records, Inc., to Associated Arts, N.V. (AA), a Netherlands Antilles corporation, in excess of the amounts paid by AA to Nathaniel Cole (Cole) in the years 1961 through 1964, constitute income of Cole which he attempted to assign to AA, and in the alternative, whether these amounts are properly allocable under section 482, I.R.C. 1954, 2214 to Cole in order to prevent evasion of tax or to clearly reflect Cole's income. 3(2) Whether the total income earned and expenses incurred by a Panamanian Corporation, Presentaciones Musicales S.A. (PMSA) in the years 1961 through 1964 from foreign personal appearance tours made by Cole under the auspices of PMSA and tape recordings of such appearances constitute a portion of Cole's income and expenses because of PMSA's being a mere sham, and in the alternative, whether the total income earned and expenses incurred by PMSA from Cole's foreign personal appearance tours and tape recordings of such tours are properly allocable to Cole under section 482 in order to prevent evasion of tax or to clearly reflect Cole's income. (3) Whether the distribution to the Coles in 1961 of the proceeds from the sale of property by their wholly owned subchapter "S" corporation (Channel Land Company) reduces the basis of their stock to 215 the extent that the distribution exceeds the corporation's current and accumulated earnings and profits. (4) Whether the legal fees and accounting costs incurred by Channel Land Company in 1961 were ordinary and necessary business expenses of the corporation or were a cost of the Coles' acquisition of Channel's stock or of Channel's selling its corporate property. (5) Whether Cole's basis in K.C. Records, Inc., a wholly owned subchapter "S" corporation properly includes certain loans in the amount of $26,500 by third parties to the corporation which were guaranteed by Cole, thereby entitling Cole to deduct net operating 4 losses of the corporation in this additional amount in 1964 or in the alternative is the loss of K.C. Records, Inc., an ordinary business loss of Cole.(6) Whether Cole suffered a deductible loss in 1963 of the $35,000 he contributed of $130,000 used by a partnership in which Cole was a partner to purchase rights to a television series, "Emilio," which rights became worthless in 1963. (7) Whether Kell Cole Productions, a subchapter "S" corporation wholly owned by the Coles is entitled to deduct as a production expense in 1963 the amount of $91,000 paid to Great 216 Western Entertainers (GWE), a corporation which was a member of the partnership which purchased rights to "Emilio" but otherwise unrelated to Cole, under a contract whereby GWE assigned 75 percent of the rights in the television series, "Emilio," to Kell Cole and guaranteed to Kell Cole a profit of $5,000 a week for 30 weeks on Kell Cole's show, "Sights and Sounds," in return for all profits of Kell Cole on "Sights and Sounds" in excess of $150,000. (8) Whether Cole or Kell Cole Productions, his wholly owned subchapter "S" corporation, may deduct as a commission paid or as an ordinary and necessary business expense in 1961, 1962, or 1963, an amount of $60,000 paid to General Artists Corporation (GAC) because of Cole's guarantee of an advance in that amount by GAC to Kell Cole Productions for the production by Kell Cole of "I'm With You."All of the facts have been stipulated. We find the facts together with the exhibits as stipulated, and these facts are a part of this opinion to the same extent as if recited herein. We will set forth herein in summary form only those facts which are necessary for an understanding of this opinion. 4217 Maria Cole Devore is the widow of Nathaniel Cole and the executrix of his estate. Maria and Nathaniel Cole filed a joint Federal income tax return for the taxable year 1960 with the district director of internal revenue, Los Angeles, California. Nathaniel Cole filed Federal income tax returns for the taxable years 1961, 1962, 1963, and 1964 with the district director of internal revenue, Los Angeles, California, and Maria Cole filed separate Federal income tax returns for the taxable years 1961, 1962, 1963, and 1964 with the district director of internal revenue, Los Angeles, California. In their separate returns for the years 1961 through 1964 Nathaniel and Maria Cole each reported income and claimed deductions on the basis of community property. Maria Cole Devore resided in Los Angeles, California at the time of the filing of each of her petitions in this case and each of the petitions she filed as executrix of Nathaniel Cole's estate. Nathaniel Cole, popularly known as Nat "King" Cole, was one of the outstanding entertainers of this century. Although Nathaniel Cole 218 is now deceased, he will be referred to herein as petitioner since the issues herein deal primarily with his professional activities and Nathaniel and Maria Cole will be referred to as petitioners. Petitioner's rise to the top of the entertainment world began in 1942 when he signed a recording contract with the then newly established company, Capitol Records, Inc. Sources of his income other than recording royalties included receipts from songwriting and personal appearances. Issues (1) and (2) In late 1959, Norman Granz, a prominent jazz music promoter, proposed to petitioner's agent, Carlos Gastel, that petitioner make a tour through Western Europe in the spring of 1960 under Granz's auspices. Petitioner agreed to make the tour. A lawyer representing Granz informed petitioner's attorney that a Panamanian corporation was the preferred vehicle for promoting such a tour since it would not do business in the United States and would not be subject to United States taxation. Accordingly, a Panamanian corporation, Presentaciones Musicales S.A. (hereinafter referred to as PMSA) was incorporated on March 7, 1960. The original capitalization of PMSA was $10,000 of which $5,100 came 219 from a Panamanian corporation wholly owned by Granz, Record Manufacturing S.A., and $4,900 came from petitioners. The stock actually issued went 51 percent to Record Manufacturing S.A., 24.5 percent to Maria Cole, and 24.5 percent to Nathaniel Cole. On March 15, 1960, petitioner entered into an employment agreement with PMSA providing for payment by PMSA to petitioner at the rate of $8,500 per week for personal appearances outside the United States. The agreement provided for petitioner's services on a 3-week tour of Europe during April of 1960 with PMSA having an option to extend the tour for an additional 2 weeks. During April 1960 petitioner toured Western Europe for PMSA for 20 days and was paid at the rate of $8,500 per week by PMSA. Petitioner during this tour made an appearance in England which was taped jointly by PMSA and ATV, a British corporation which operates a commercial television network and engages in other entertainment activities. The tape was owned one-half by PMSA and one-half by ATV. PMSA employed Norman Granz as its representative to handle petitioner's European tour and paid him $2,000 per week for 3 weeks. PMSA also supplied and paid for the orchestra, 220 transportation, promotional salaries and expenses, and all other tiems required for the tour. The tour was not successful and PMSA had a net operating loss from the tour of $8,388.40. Petitioner employed the General Artists Corporation to serve as his booking agent for personal appearance tours in the United States. This corporation also served as agent for PMSA when petitioner appeared anywhere under his contract with PMSA. Early in 1961, petitioner toured the Orient for PMSA for approximately 3 weeks. Petitioner was paid $25,000 for that tour which was at the rate of $8,500 per week. Petitioner made one Canadian appearance for PMSA thereafter in 1961 and was paid at the rate of $8,500 per week for a total of $10,000. All payments were net to petitioner. On the tour of the Orient, PMSA employed a tour manager, Yempuku, who also acted as booking agent in the Orient. On behalf of PMSA, Yempuku paid transportation, housing, advertising and promotion, and all agents' fees in connection with the tour. From tours made by petitioner and tapes made by him, PMSA had total gross receipts of $90,735.41 in 1961 and expenses of $60,710.49. Of the profit of $30,024.92 the amount of $13,000 221 came from PMSA's one-half interest in a television tape that petitioner had made in England in 1960. The total profit to PMSA from activities petitioner engaged in for it in 1961 was $17,024.92. The only activity of petitioner on behalf of PMSA in 1962 was a trip to Mexico.Petitioner was paid on this tour at the rate of $8,500 per week for a total of $12,000. PMSA paid $3,000 in Mexican taxes and a small amount of travel and incidental expenses of the trip. PMSA had a small operating loss from this tour in 1962. Petitioner went both to England and Australia for PMSA in 1963. The tours together took 4 weeks and petitioner was paid at the rate of $8,500 per week, receiving a total of $34,747.65. The gross receipts from the two tours to PMSA were $98,338.06. PMSA supplied transportation and housing, promotion, paid Australian income tax, and otherwise took all of the producer's risks. Yempuku once again acted for PMSA as promoter and booking agent and on both tours PMSA paid agent's fees in the United States. Expenses other than petitioner's salary came to just over $50,000 and PMSA showed a profit of slightly less than $14,000. PMSA received in 1963 an additional sum of $5,600 222 from a tape that had been made by petitioner sometime previously. No payment was made to petitioner in connection with this tape since petitioner had been compensated at the time he appeared. PMSA did pay agent's fees and a small amount of transfer expenses totaling slightly more than $1,200 in connection with this tape. The profit from this tape was a little less than $4,200. There were no further performances by petitioner for PMSA prior to his death in February 1965. In 1964, PMSA received $4,200 from the rerun of the television tape which produced $5,600 in 1963. The net profit to PMSA from this tape in 1964 was slightly over $3,200. During the years 1960 through 1963 petitioner made personal appearances in the United States in a tour entitled, "Sights and Sounds" for weekly compensation of $6,000. On April 28, 1960, petitioner transferred his 24.5 percent ownership of PMSA to a trust he created for the benefit of his wife, Maria Cole. On the same day Maria Cole transferred her 24.5 percent ownership of PMSA to another trust created for the benefit of petitioner. The trustee of both trusts was the Arawak Trust Co., Ltd., a large Bahamian trust company. Petitioner, 223 in the trust he created for Maria Cole, reserved the right to change the trustee to another corporate trustee. In 1963 petitioner did change the trustee of the trust to the Aruba Bonaire Curacao Trust Co., Ltd. (ABC), another Bahamian trust company, the directors of which included two prominent Netherlands Antilles lawyers who had arranged a number of contracts between Netherlands Antilles corporations and American artists, writers, entertainers, and motion picture and television producers. The profitability of such contracts to Netherlands Antilles corporations resulted to a large extent from the fact that the tax treaty between the United States and the Netherlands was extended in 1955 to the Netherlands Antilles. Soon after the trusts of which the PMSA stock was the corpus were created, counsel for the trustee advised the trustee that petitioner should have no interest as beneficiary in a trust that could profit from the earnings of a corporation which employed petitioner. Thereupon, Arawak Trust Co., acting as trustee, sold for $5,000 the PMSA stock which belonged to the trust of which petitioner was a beneficiary to the trust which petitioner had created for the benefit 224 of his wife, Maria Cole. The $5,000 price which was paid in August of 1960 was based on a projection made by Norman Granz. PMSA was managed entirely by Granz during all of the period in which his solely owned corporation, Record Manufacturing S.A. held 51 percent ownership of PMSA, that is, from March 1960 until August 1961. During this period petitioner made the planned tour of western Europe and the tour of the Orient in early 1961. Conflicts among petitioner, Granz, and the Arawak Trust Co. over travel arrangements, disputed charges, and other like items led to a proposal by the Arawak Trust Co. to buy the shares of PMSA held by Record Manufacturing S.A., and a proposal by Granz to buy out the PMSA shares held by the Arawak Trust Co. as trustee. The conflicts were resolved when PMSA redeemed the stock held by Record Manufacturing S.A. in August 1961 for $5,100. Petitioners on their 1960 return and on their separate returns for 1961 through 1964 reported the $8,500 a week payments received by petitioner from PMSA but reported no other income from the tour and tapes made by petitioner under his contract with PMSA. Respondent in his notice of deficiency to each petitioner 225 increased that petitioner's reported income for the years 1961 through 1964 in connection with the tours and tapes in the following amounts with the explanation as quoted: It is determined that the items of gross income as identified in the following year by year tabulation were all earned by you in connection with your activities in the trade or business of being a professional entertainer. Since these items of gross income to the extent indicated below were not reported in your income tax returns for the years in which earned, your taxable income is increased accordingly. Activity1961ReportedCorrectedIncreasesJapan tour$25,000.00$50,000.00$25,000.00Manila, Phillipines[sic]-0-10,000.0010,000.00CBS-TV Tape (Wild is Love)-0-6,000.006,000.00CBC-Canada10,000.0020,000.0010,000.00Totals$35,000.00$86,000.00$0$51,000.001962Restaurant Senorita, Mexico12,000.0015,000.003,000.001963BBC-TV-0-5,600.005,600.00Australia1,449.8810,990.809,540.92England25,000.0052,347.2627,347.26Orient8,297.7735,000.0026,702.23Totals$34,747.65$103,938.06$0$69,190.411964BBC-TV Re-run-0-$4,200.00$4,200.00The parties have stipulated that "if respondent prevails 226 on the PMSA issue, $11,000 shall be added to petitioners' income for 1964." Respondent increased petitioners' income as reported in 1960 by $5,600 designated "European Tour, English TV appearance," and $5,024.20 designated "New Victoria Theatre - London, England" with an explanation in substance the same as the explanation given for the increases for the years 1961 through 1964. On July 26, 1960, Associated Arts N.V. (AA) was incorporated under the laws of the Netherlands Antilles for the purpose of exploitation of the television tape made by petitioner in England in 1960. PMSA and ATV each owned 50 percent of the stock of AA. ATV continued to own 50 percent of the stock of AA until the middle of 1962 when it sold its AA stock for approximately $25,000 to another Netherlands Antilles corporation, World Minerals N.V. Petitioners had no ownership rights in nor any rights, power, direction or control over World Minerals N.V. World Minerals N.V. was managed by persons associated with the two lawyers who were officers of ABC. Capitol Records, Inc. (Capitol) was established in 1942 by Glenn Wallichs and several associates. Wallichs built Capitol into the third largest recording 227 company in the world within 20 years. Petitioner entered into his first contract with Capitol in 1942 and from that time earned substantial sums from and for Capitol. Effective April 1, 1951, contracts between petitioner and Capitol provided for deferred compensation. Under the deferred compensation provisions of these contracts, petitioner received a fixed amount each year as royalties and the excess of the royalties earned by petitioner over the amount to be disbursed to him by Capitol was retained by Capitol in its general fund to be paid to petitioner at the rate of $50,000 per year commencing April 1, 1962.On April 1, 1962, the deferred compensation earned by petitioner but held by Capitol was approximately $1 million. Although the interest which could be earned from this sum was sufficient to enable Capitol to pay petitioner the sum of $50,000 per year without invading the corpus earned by petitioner in earlier years, Capitol was under no obligation to pay petitioner an amount in excess of retained earnings and that only at the rate of $50,000 a year until the total amount of such retained earnings without interest was exhausted. Petitioner's contract with Capitol expired 228 on April 1, 1961, but under the contract Capitol had an option to renew the contract for the period April 1, 1961 to March 31, 1962. Petitioners and their representatives knew the amount of the deferred compensation earned by petitioner and held by Capitol. They made some attempts prior to 1960 to obtain for petitioners greater benefits under the Capitol deferred compensation contract than return of the retained earnings at the rate of $50,000 a year. Prior to March of 1961, Capitol indicated to petitioner that it would exercise its option to retain petitioner's services until March 31, 1962, if the contract between them was not renewed. In discussions between representatives of Capitol and petitioner early in 1960, the representatives of Capitol stated that Capitol would make no adjustment in the then existing deferred-compensation provisions of the contract which it had with petitioner and would not increase the royalty of 5 percent to petitioner in a new contract. Although petitioner's representatives had offers from all the major recording companies to contract for petitioner's services upon the expiration of his contract with Capitol at royalties of from 10 to 12 percent, 229 petitioner refused to meet with any of the other companies because of his personal relationship with Wallichs. On the advice of his representatives, petitioner in the latter part of 1960 agreed that a company might be created to make his records provided the records were distributed by Capitol. The possibility of such an arrangement had been explored by petitioner's representatives at the time that PMSA, AA, and the trusts administered by the Arawak Trust Co. were coming into existence. At the time AA was created it was not contemplated by petitioner's representatives that it could be used to assist in solving the problem of increasing the amount petitioner would realize from his deferred compensation held by Capitol. In November 1960 petitioner authorized his representatives to investigate a possible deferred compensation contract between him and AA with more favorable terms than he was receiving from Capitol. An agreement between petitioner and AA was reached within a month and Capitol was informed of the agreement. At that time, Capitol's yearly gross receipts from petitioner's records were averaging between $4 and $5 million. As soon as Capitol was informed of the agreement 230 between petitioner and AA, representatives of Capitol sought threeway negotiations with petitioner and AA. These three-way negotiations resulted in contracts between Capitol and AA and between petitioner and AA and between Capitol and petitioner with respect to certain payments to be made by Capitol to AA.The agreement, dated January 1, 1961, between Capitol and AA provided that AA would provide artists to Capitol and would pay for the cost of producing master recordings in exchange for receiving from Capitol full title and possession of all master recordings of artists presently under contract to AA and of artists who would become under contract to AA in the future. The master recordings to be received by AA included both those produced before and after January 1, 1961. AA gave Capitol the full and exclusive right to exploit the artistic works of the artists under contract to AA. In exchange for these rights, Capitol would pay AA a royalty of 5 percent with respect to masters recorded prior to 1961 and 6 percent for masters recorded after 1960, except as modified by any specific artist contract as long as the contract was effective and for so long thereafter as Capitol utilized 231 AA's master records. 5In addition 232 Capitol would pay AA a 4 percent royalty with respect to masters recorded after 1960 plus fixed amounts of $25,000 per month for the period January 1, 1961, to June 31, 1961, and $12,500 per month from July 1, 1961, to June 30, 1962. The additional 4 percent royalty was to terminate as of January 1, 1966, and the amount of the additional royalties and fixed monthly payments by Capitol to AA was not to exceed $400,000 for the 5-year period nor $200,000 for any Capitol fiscal year. The second agreement resulting from the three-way negotiations of December 1960 was a contract entered into between petitioner and AA dated February 20, 1961. This contract was to run for petitioner's life. The contract contained provisions that AA would have title to all masters of petitioner's recordings made under the contract. The provisions of the contract for payment by AA to petitioner were that commencing when petitioner's contract with Capitol expired as of March 31, 1962, AA would pay him $50,000 a year for life or for 25 years whichever were longer. This payment was to be made whether or not petitioner performed under his contract with AA. Petitioner in addition was to be paid $500 per minute 233 of recording time with a guarantee by AA to petitioner of 100 minutes of recording time a year for at least 3 years. The contract further provided that petitioner "shall not receive less United States dollar income then [he] would have received had the present Capitol Records, Inc. contract continued unchanged," provided AA continued to "show a profit of twenty-three per cent." The contract further provided that petitioner be paid $100,000 as additional one-time consideration. Under the contract petitioner assigned to AA all claim to compensation from recordings made except under his contract with AA and his rights in his deferred royalty contract with Capitol. The contract also contained provision for payments to petitioner for obtaining other artists for AA. Cole had sought to obtain from Capitol a contract substantially equivalent to that he obtained from AA but Capitol refused to enter into such a contract with Cole. On June 13, 1961, AA and Capitol entered into a specific artist contract covering the recording services of petitioner. The specific artist contract consitutes, in conjunction with the earlier agreements between Capitol and AA and petitioner and AA, a contract 234 for petitioner's services as a recording artist.This specific artist contract included a provision for payments due by Capitol to petitioner under his deferred compensation contract with Capitol to be made to AA and all other payments due by Capitol to Cole to be made to AA with Cole's express approval shown by his approval affixed to the agreement. During the years 1961, 1962, 1963, and 1964, Capitol's gross income on petitioner's records averaged between $4 and $5 million. AA requested Capitol to physically transfer all of the Cole master recordings Capitol held to the Netherlands Antilles in accordance with the terms of the agreement of January 1, 1961, between Capitol and AA. Some of these masters were moved to the Netherlands Antilles.As contemplated by the specific artist contract of June 13, 1961, between Capitol and AA, Capitol retained possession and control of petitioner's deferred compensation account as accumulated by it up to and including March 31, 1962. On November 4, 1964, AA, because of a change in the tax treaty between the United States and the Netherlands, offered to return to Capitol the custody of all of petitioner's master records in return for Capitol's 235 relinquishing to AA the then balance of petitioner's deferred compensation fund of $871,717.13 in lieu of paying the amount to AA at the rate of $50,000 a year. This was agreed upon and Capitol paid AA the sum of $871,717.13 by the end of 1964. In addition to its contract with petitioner, AA had employment contracts with a number of other entertainers. It was also the sole stockholder of a heavy machinery leasing company and had financial interests in a publishing company, a mortgage lending company, a shopping center, and other enterprises. For the years 1961 through 1964, inclusive, the gross income received by AA in connection with its employment contract with petitioner constituted only 5 percent of its gross income from all sources. At the end of 1964, AA sold all of its contracts covering individual artists, writers, entertainers, and investors, including its contract with petitioner, to another Netherlands Antilles corporation, Koningsplein N.V. This latter corporation was wholly owned by one of the lawyers who was a director of ABC. Earlier in 1964 Koningsplein had purchased all of the stock of PMSA for $90,000.Petitioner did not have any ownership rights, or any 236 right, power or direction over, or any interest in Koningsplein, at any time. Petitioner never was aware that AA sold its contract with petitioner to Koningsplein since at the time of the sale petitioner was hospitalized with terminal cancer and he died 2 months thereafter in February 1965. Respondent in his notice of deficiency to each petitioner increased or decreased petitioner's income from record royalties during the years 1961 through 1964 by the excess or deficit of the amounts paid by Capitol to AA over the amounts petitioners reported as having been received from AA with the following explanation: It is determined that you understated or (overstated) record royalties constructively received from Capitol Records, Inc. in your income tax returns for the years 1961, 1962, 1963 and 1964 by the amounts of $203,171.46, $ (29,961.69), $175,298.19 and $1,192,286.58, respectively. Taxable income is increased or (decreased) accordingly. Respondent's primary position with respect to the inclusion in petitioners' income of amounts received by PMSA in the years 1961 through 1964 and the inclusion in their income of the amounts paid by Capitol to AA in excess of the payments by AA to 237 petitioners during these same years is that the amounts were in substance petitioner's earnings and therefore includable in his taxable income under section 61. 6Respondent contends that PMSA was a sham which served no purpose other than collecting amounts earned by petitioner 238 and disbursing these amounts in payment of petitioner's expenses. In our view, the record does not support respondent's contention. PMSA supplied orchestral support, booking agents, and transportation for petitioner and paid petitioner $8,500 a week for his personal appearances whether or not a profit resulted from those personal appearances. In fact in 1960 PMSA suffered a loss from petitioner's European tour. The arrangement petitioner had with PMSA was comparable to his arrangements for personal appearances in the United States except that he received greater weekly compensation. Whether or not a corporation is a viable entity and warrants recognition for tax purposes or is a mere sham or dummy corporation is a factual determination. See Shaw Construction Co., 35 T.C. 1102">35 T.C. 1102 (1961) aff'd. 323 F. 2d 316 (C.A. 9, 1963). We find that PMSA was a viable corporation bearing entrepreneurial risk. Contrary to respondent's assertion, PMSA was contractually obligated "to furnish at no expense to Cole, a basic musical group and orchestra support for Cole's talents, such musical group and orchestral support being satisfactory to Cole." PMSA assumed risk on the Oriental tour made by 239 petitioner in 1961 when it employed a tour manager who contracted for transportation, housing, advertising and promotion in connection with the tour.Similar expenses were incurred by PMSA for petitioner's tour of Australia in 1963. We conclude that PMSA was not a sham or an "incorporated pocketbook" as respondent contends. Respondent further contends that even if PMSA was a valid taxable entity and not a mere sham, petitioner assigned his income to PMSA and is taxable on that income under the rule of Lucas v. Earl, 281 U.S. 111">281 U.S. 111 (1930). As we stated in American Savings Bank, 56 T.C. 828">56 T.C. 828, 839 (1971): * * The well-seasoned case of Lucas v. Earl, 281 U.S. 111">281 U.S. 111 (1930), and its progeny have caused the proposition that income is taxed to the person who earned it to become an axiom of tax law. The more difficult question, often shrouded in confusion, is the determination of who, in fact, is the real earner of the income. * * * In resolving a dispute over the identity of the true earner of income, we look to who controls the earning of the income. * * * While petitioner was the generator of whatever revenue PMSA might receive, PMSA paid petitioner a weekly salary of $8,500 for his services. 240 Whether or not PMSA earned a profit was, in our view, dependent on what efforts it made to sell tickets to the shows and on whether it could obtain the services required to produce its shows at a sufficiently low cost.The record shows that petitioner was not the person who made the arrangements for these services or sold the tickets. The activities of PMSA and not petitioner determined whether PMSA would make a profit. Accordingly we find that PMSA and not petitioner earned the income and incurred the losses in connection with the foreign tours of petitioner during the years in issue. Respondent's primary contention with respect to inclusion in petitioner's income of the amounts paid by Capitol to AA in excess of the amount paid by AA to Cole is that these sums were due to petitioner and even though petitioner attempted to assign these amounts due him to AA, the amounts are taxable to him under section 61. The payments made by Capitol to AA during the years 1961 through 1964 consisted of the following items: 1. The yearly payment of $50,000 made by Capitol to AA during the years here in issue under the three-way contracts of Capitol-Cole-AA. Capitol was obligated to pay Cole, 241 beginning at the termination of Cole's contract with Capitol, $50,000 a year of the deferred royalties which Capitol was holding until the entire amount of those royalties without any interest thereon was consumed. Since these royalties approximated one million dollars when the contract between Cole and Capitol was terminated, Capitol was required under the contract to pay to Cole $50,000 a year for 20 years to exhaust these deferred royalties. Under the Cole-Capitol-AA agreement, AA agreed absolutely to pay to Cole $50,000 a year for life or for 25 years, whichever was the longer period. In effect, in return for this agreement, Cole directed Capitol to pay the $50,000 a year due to him by Capitol for a 20-year period to AA. Considering this agreement as a whole, it is clear that the $50,000 a year for the 20 years that Capitol would be required to pay Cole was no more than a payment by Capitol to Cole through AA. The guarantee by AA to Cole of $250,000, or possibly more, in excess of the amount AA would receive from Capitol was consideration running to Cole from AA for Cole's changing his contract from Capitol to AA. If there is any assignment of income in connection with 242 the $50,000 in the years here in issue, it would not increase petitioner's reportable income under respondent's determination since the record shows that the $50,000 paid by Capitol to AA was paid by AA to Cole in each year here in issue and was reported by petitioners. 2. Under Capitol's contract with Cole, Capitol was obligated to pay to Cole, beginning upon the date of the termination of the contract (March 31, 1962), royalties of 5 percent on records, sold by Capitol after the termination of its contract, which were made from master recordings made by Cole prior to the termination of the contract. It is obvious that these royalties were also tied in with the ownership of and the rights to the master recording. Under the three-way contract, Capitol had agreed to turn over the masters made by Cole during the entire time Cole was under contract with Capitol to AA and on all records thereafter made from these masters and sold by Capitol to pay AA the 5 percent royalty which Capitol would have been required to pay to Cole had the three-way Cole-Capitol-AA agreements not been entered into. The record shows that Cole had no ownership of the masters which he made while under contract 243 with Capitol and Capitol's agreement to turn these masters over to AA was part of the consideration for AA's agreeing to Capitol's distribution of the Cole records to be made by Cole while under contract to AA. However, Cole did have an interest in the masters which in our view was a property interest. He had a right to a 5 percent royalty on all records made from these masters which were sold. In our view if Capitol had assigned the masters to another record manufacturer if that manufacturer produced and sold records from the masters Cole would have been entitled to the 5 percent royalty. However, neither Capitol nor an assignee of Capitol was required to produce and sell records from the masters and, if they did not, no royalties were due to Cole. At the date of the three-way Cole-Capitol-AA agreements there was no amount due Cole as royalties on records sold after the termination of the Cole-Capitol contract.It is respondent's contention that Cole, in effect, assigned income due him by Capitol to AA and that under Lucas v. Earl, supra, this income should be taxable to Cole. In our view respondent has confused assignment of income which will be earned by the future personal 244 efforts of a taxpayer or income to which a taxpayer has a fixed right with the assignment of a contractual right. Stated in terms of Lucas v. Earl, supra, what petitioner here has assigned is the "tree" and not merely the "fruits." This contractual right which Cole had to royalties on records made under his contract with Capitol was assigned by Cole to AA in the three-way Cole-Capitol-AA agreements. Therefore, as Capitol made records from masters recorded by Cole prior to March 31, 1962, royalties were paid by Capitol to AA pursuant to the Cole-Capitol-AA agreements. The assignment by Cole to AA of his royalty rights from master records he had already made was part of the consideration for Cole's entire contract with AA. This contract included in addition to the guarantee of $250,000 of income in excess of the amount Cole would have received as deferred royalties from Capitol, $100,000 cash for entering into the contract and a payment of $500 a minute for recording time with a $50,000 minimum guarantee during the first 3 years. The contract between AA and Cole also contained miscellaneous benefits to Cole such as commissions on earnings from works of other artists that Cole obtained 245 for AA and a guarantee that Cole would not be paid less than he would have been paid had his contract with Capitol continued so long as AA made a 23 percent profit. The royalties here involved were not royalties to which Cole had an unrestricted right but rather royalties to which Cole had a contractual right if and when Capitol distributed records made from master recordings which Cole had made while under contract to Capitol. In Wood Harmon Corp. v. United States, 311 F.2d 918">311 F. 2d 918, 921-922 (C.A. 2, 1963), the Court analyzed the cases dealing with the assignment of income as follows: In the tax lawyer's primer are the cases of Lucas v. Earl, 281 U.S. 111">281 U.S. 111, 50 S.Ct.241, 71 L. Ed. 731">71 L.Ed. 731 (1930); Helvering v. Horst, 311 U.S. 112">311 U.S. 112, 61 S. Ct. 144">61 S.Ct. 144, 85 L. Ed. 75">85 L.Ed. 75 (1940); Helvering v. Eubank, 311 U.S. 122">311 U.S. 122, 61 S. Ct. 149">61 S.Ct. 149, 85 L. Ed. 81">85 L.Ed. 81 (1940), and Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, 61 S. Ct. 759">61 S.Ct. 759, 85 L. Ed. 1055">85 L.Ed. 1055 (1941). In Lucas v. Earl, the Supreme Court held that the breadwinner could not shift the incidence of the income tax on his future personal earnings merely by contracting to pay part of them to his wife. In Horst, the Court held that the taxpayer who retained the ownership of a bond but gave 246 an interest coupon to his son was taxable on the interest collected by his son. In Eubank, the taxpayer was liable for the income tax on renewal commissions earned by him as an insurance agent, the right to collect which had been assigned to another. In Harrison v. Schaffner, the Court held that a voluntary assignment by the income beneficiary of a trust of a percentage of the succeeding year's trust income was an anticipatory assignment of income which remained taxable to the assignor. The philosophy underlying these cases is that the taxpayer has performed services or has a vested interest in property which gives him an unrestricted claim to compensation or income therefrom; the exercise of the unfettered power to dispose of that income is deemed analogous to its enjoyment or realization, resulting in a tax upon the assignor rather than upon the assignee who receives the income in fact. [5] [5] It has been stated that "the rule applicable to an anticipatory assignment of income applies when the assignor is entitled at the time of the assignment to receive the income at a future date and is vested with such a right." Cold Metal Process Co. v. Commissioner, 247 F. 2d 864, 873 (6th Cir. 1957)247 (emphasis in original). As the Court in Wood Harmon Corp., supra, so clearly pointed out in its footnote to the statement we quoted, the rule applicable to an assignment of income applies when the assignor is entitled at the time of assignment to the income at a future date and is vested with such a right. In clear distinction to this type of case are those cases such as James F. Oates, 18 T.C. 570">18 T.C. 570 (1952), aff'd. 207 F. 2d 711 (C.A. 7, 1953), and Ernest K. Gann, 31 T.C. 211">31 T.C. 211 (1958), where the income which respondent was contending had been assigned were amounts which would become due only upon the happening of future events and the taxpayer had assigned his contractual right to such payments if and when they became due under the contract in return for some immediate or deferred payment. As we pointed out in Ernest K. Gann, supra, in order for a taxpayer to have constructively received income, such income must be actually available to him and he merely refuses to accept it himself, or if the case involves assignment, assigns the right to receive it to another. Where, as in the instant case, the amount is not due or subject to the taxpayer's demand but will only arise upon the 248 occurrence of a future event, the income is not constructively received by a taxpayer and an assignment of the contractual rights is not an assignment of income but of a contractual right. In our view the royalties, if any, on records made from master recordings made by Cole while under contract to Capitol were the income of AA from property it acquired from Cole for adequate consideration. 3. Part of the payments made by Capitol to AA during the years here in issue were on records made by Cole for AA under his contract with AA, which records were distributed by Capitol under Capitol's agreement with AA and a 6 percent royalty plus an extra 4 percent to a limited amount paid by Capitol to AA on the records so distributed. It is obvious that at the time of the Cole-AA-Capitol three-way agreement, Cole had no income rights of any type with respect to records to be made for AA, except to be paid by AA at the rate of $500 a minute of recording time for records so produced. The clear inference from the record is that Cole was so paid under his contract with AA and reported the amount which he received from AA under this Contract in his income tax returns for the years in which he received 249 the payments. At the time Cole entered into the contract with AA, he had no income rights with respect to records which he would make for AA. Those records were to belong to AA. Cole was being paid for his recording time and had no interest in the records produced. Here, as in the case of Fontaine Fox, 37 B.T.A. 271">37 B.T.A. 271 (1938), the taxpayer had a contract with a corporation to do creative work for that corporation for a stated fee, the work to belong to the corporation. The corporation in its own business transaction disposed of the creative work done for it by its employee. Cole was paid at an amount agreed upon between him and AA for making records for AA and AA owned those records and chose to permit distribution of them by Capitol for a stated royalty. It could have been that the $500 a minute of recording time paid by AA to Cole for making the master records would have exceeded the royalties which AA received from Capitol. Had this been the financial result of the contract, AA would nevertheless have been obligated to make the $500 per minute of recording time payments to Cole. There was no contractual arrangement existing between Cole and Capitol with respect to master 250 recordings made after March 31, 1962, and therefore Cole had no present or future earnings with respect to these records to assign to AA. Fontaine Fox, supra. Cole was paid by AA for his work in making the recordings and the recordings were the property of AA. 4. The final item of payment by Capitol to AA which respondent contends should be included in petitioner's income under the philosophy of Lucas v. Earl, supra, is the $871,717.13 which was the amount of the balance of the Cole deferred royalties held by Captiol as of November 4, 1964, and which Capitol on that date paid to AA after negotiations between the two of them. At the time of the negotiations between AA and Capitol, the record shows that Cole was in the hospital with terminal lung cancer from which he died in February 1965, and had no part in or knowledge of the negotiations which transpired between Capitol and AA concerning the payment on November 4, 1964, of the $871,717.13 by Capitol to AA. In our view, the record is unmistakably clear that these negotiations between Capitol and AA were entirely in connection with Capitol's desire to obtain custody of Cole's master recordings and AA's being willing to transfer 251 the master records to Capitol in return for Capitol's paying to it the $871,717.13 in a lump sum instead of at the rate of $50,000 a year until the sum was exhausted, which was Capitol's only obligation under the then existing Capitol-AA-Cole agreements. Cole, under his agreement with Capitol had no right to obtain the $871,717.13 except at the rate of $50,000 per year. This right he had transferred to AA when the three-way Capitol-AA-Cole agreement was entered into in 1961. AA owned the masters made by Cole under his contract with it. Cole had no ownership of the master records made by him while under contract to Capitol. AA had obtained these master records under the Capitol-AA-Cole agreements entered into in 1961. Possession of the master records was valuable to Capitol and apparently particularly so in the light of Cole's physical condition in late 1964. The acceleration of the payment of the $871,717.13 to AA by Capitol was in consideration for Capitol's receiving the master records. We conclude that the $871,717.13 paid by Capitol to AA in 1964 is not includable in petitioner's income. While we have analyzed in detail the basis of our conclusion that there was no 252 assignment by Cole to AA of income owing to him from Capitol with respect to each category of income, we consider it appropriate to note other differences in the facts here present and the facts generally present in cases involving assignment of income. The record here is clear that neither Cole nor AA had any financial interest in Capitol. Likewise, the record shows that Cole had, at the time of entering the contract and during the subsequent years here in issue, no direct interest in AA. Half of the AA stock was owned by an entity totally unrelated to Cole and the other half was owned by PMSA, a corporation the stock of which was owned by a trust created by Cole for the benefit of his wife and children. 7 While the beneficiaries of the trust were the natural objects of Cole's affection and it could well be said that for this reason, in effect, in considering an assignment of income issue Cole should be considered as if he were the owner of PMSA stock, the fact still remains that even indirectly Cole only had a one-half interest in AA. The record also shows that AA had many interests and that its receipt of amounts from Capitol in connection with the Capitol-Cole-AA agreements 253 was a relatively small percentage of its income, being in the years here in issue on an average of approximately 5 percent. While none of these facts would warrant a conclusion that there was no assignment of income by Cole to AA, had Cole actually assigned his earnings to AA, these facts mitigate against the reasonableness of a conclusion that Cole would assign to AA except for adequate consideration any amounts due him. Cole reported in his tax returns for the years here in issue the payments he received from AA under his contract with AA. In an amendment to his answer in Docket Nos. 1745-71 and 1960-71, respondent alleges the following: 7. IN FURTHER SUPPORT of the determination that petitioner had additional income from royalties and professional performances, the respondent alleges: (a) In the statement attached to the statutory notice of deficiency 254 issued to petitioner, it is stated that income from Capitol Records royalties was constructively received and that certain income from professional performances was earned.(b) In the alternative: Royalty income was deflected to Associated Arts, N.V. Income from performances outside the United States was directed to Presentaciones Musicales, S.A. The petitioner during the taxable years 1961 through 1964 also controlled Associated Arts, N.V. and Presentaciones Musicales, S.A. The amounts determined in the statutory notice were also a proper allocation under section 482 of the Internal Revenue Code of 1954. Petitioner contends that the issue under Section 482 is not properly before us since in order for respondent to rely upon section 482, he must inform the taxpayer to this effect in the statutory notice of deficiency. Petitioner in the alternative contends that respondent bears the burden of proof with respect to any section 482 reallocation because it is "new matter" raised in the answer as contemplated by Rule 32. Petitioner further in the alternative contends that he and neither PMSA nor AA were subject to common control within the meaning of section 482. We need not 255 decide any of these issues since in our view assuming that the section 4828 issue is properly raised, that petitioner and PMSA and AA were subject to common control, and that we may hold section 482 inapplicable only if petitioner provesits application to be unreasonable, arbitrary, or capricious [See Pauline W. Ach, 42 T.C. 114">42 T.C. 114, 126 (1964), aff'd. 358 F. 2d 342 (C.A. 6,1966), certiorari denied 385 U.S. 899">385 U.S. 899 (1966)] the facts here are sufficient to sustain this burden of petitioner. Section 1.482-1(b) (1), Income Tax Regs. provides: 256 The purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled taxpayer, the true taxable income from the property and business of a controlled taxpayer. * * The standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer. The facts here show that petitioner's business transactions with PMSA during the years 1961 through 1964 were conducted at arm's length. Although a trust created by petitioner owned originally 49 percent and later all of the stock of PMSA, the corporation was managed when petitioner made his employment contract with it by the equitable owner of the 51 percent interest in PMSA, and the inference from the record is that petitioner's negotiations with the management of PMSA were arm's length. In reaching this conclusion we note that petitioner was guaranteed a salary of $8,500 per week for his tour of the Orient in 1961 and the same salary for his tours of Mexico, England, and Australia in 1962 and 1963. During these same years, petitioner was active in a tour of the United States257 entitled "Sights and Sounds" in which he was paid $6,000 per week for essentially the same services for which he was paid $8,500 per week on foreign tours by PMSA. If petitioner wished to shelter his income earned on foreign tours from United States taxation, he would have arranged to be paid an artificially low salary. Respondent makes no contention that petitioner's salary from "Sights and Sounds" was other than adequate for the services rendered even though it was paid by a related company. On the basis of this record, we find that petitioner's salary from PMSA was equal to or greater than the salary he would have earned from a noncontrolled corporation for similar services. See L. E. Shunk Latex Products, Inc., 18 T.C. 940">18 T.C. 940, 956 (1952). Accordingly, we find that with respect to petitioner's transactions with PMSA during the years 1961 through 1964, a reallocation of income under section 482 was unnecessary and was unreasonable, arbitrary, and capricious. Respondent contends that those payments made by Capitol to AA with respect to royalties on records recorded by Cole should be reallocated to petitioners under the provisions of section 482. Petitioner contends not only that 258 Cole did not have the requisite control over AA for the application of section 482 but also that his dealings with AA were at arm's length. As we have stated above, the purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer. Section 1.482-1(b) (1), Income Tax Regs.The parties in this case stipulated as follows with respect to petitioner's contract with AA: Cole had sought to obtain from Capitol in the first instance a contract substantially equivalent to that which Cole ultimately obtained from AA. Capitol could have entered into such an agreement but Capitol refused to do so. It was on this basis that Cole entered into an agreement with AA rather than with Capitol. In our view this stipulation is tantamount to a stipulation that petitioner offered to deal with a totally unrelated party on the same basis that he dealt with AA. There is no suggestion in this record that petitioner had any financial interest in Capitol and the clear inference from the record as a whole is that he had no such financial interest. Under petitioner's contract with AA he obtained a $50,000 259 a year payment for life or 25 years whichever were longer as compared to the 20 years during which he would receive $50,000 a year from Capitol under his deferred compensation contract. Petitioner received a $100,000 one-time payment and for at least 3 years a $50,000 guarantee on a $500 a minute recording time basis. Of course, petitioner was in a position to earn substantially more than $50,000 a year on the recording time basis if he recorded in excess of 100 minutes a year. In our view the evidence is sufficient to show the application of section 482 to petitioner's contract with AA to be unreasonable and arbitrary. We therefore hold section 482 inapplicable to petitioner's contract with AA.Issues (3) and (4) Petitioner purchased all of the stock of the Channel Land Company, a California corporation (Channel) on October 10, 1960, for $130,000. Less than 2 months later, Channel elected to be taxed as a small business corporation. Channel's sole asset was a parcel of land. Its basis in this land was $61,112.85. Channel sold this land on April 21, 1961, for $130,000 in cash. The expenses of the sale were $706.75 which was included by Channel in its $61,112.85 basis of 260 the land. Channel distributed to petitioners the $130,000 receipt from the land sale. Channel had no accumulated earnings and profits at the time of the sale. Channel's only earnings and profits during the taxable year were from the sale of its land. Petitioners reported a "pass-through" long-term capital gain of $68,180.40 9 on their 1961 tax returns in connection with the sale of this land. Petitioners also reported on their 1961 returns that their Channel stock was worthless and claimed a $130,000 long-term capital loss. The stock of Channel was worthless after its sole asset had been sold and the proceeds of that sale distributed to petitioners. Petitioners' attorney and accountant provided professional services in connection with petitioners' acquisition of the stock of Channel. They also provided professional services for Channel during the year in which petitioners owned Channel, and particularly they provided services with respect to the sale of the parcel of land. Channel had legal fees of $4,728.15 and accounting fees of $1,000 during the period it was owned by petitioners, which Channel 261 deducted as an ordinary and necessary business expense in 1961, its last year of operation. Petitioners on their tax returns treated the $5,728.15 as an ordinary loss on their ownership of Channel. Respondent in his notice of deficiency disallowed that amount of the reported long-term capital loss from the worthlessness of the Channel stock which exceeded $68,180.40. Respondent in his deficiency notice determined that the $5,728.15 was costs of petitioners' acquisition of Channel stock or Channel's sale of the land and therefore in effect should have reduced the gain on the sale of the land or have been a part of petitioners' basis in the Channel stock. The tax consequences of the distribution of the $130,000 to petitioners by Channel is governed by section 301. Inasmuch as Channel had earnings and profits of only $68,180.40, only that amount constitutes a dividend to petitioners, section 316(a), and this dividend was properly treated as long-term capital gain by petitioners. Section 1375(a). The remainder of the distribution, the amount of $61,819.60, is to be applied against and reduce the adjusted basis of petitioners' Channel stock. Accordingly, immediately following the 262 distribution, petitioners had received long-term capital gain of $68,180.40 and held stock with an adjusted basis of $68,180.40.The Channel stock was worthless after the distribution. Accordingly petitioners suffered a loss of $68,180.40 within the purview of section 165(g) which treats such loss as a loss from the sale or exchange of a capital asset. In summary, petitioners' long-term capital gain of $68,180.40 is reduced by their long-term capital loss of the same amount. We sustain respondent's determination on this issue. With respect to the legal fees and accounting costs incurred by Channel during the period in which Cole owned the stock of Channel, petitioners have not presented sufficient evidence to show that these expenses were other than costs related to the acquisition by petitioners of the Channel stock or the disposition of the land by Channel. 10 The evidence indicates that the reason for the existence of Channel was to facilitate the sale of the 38 acres of land and that the expenses incurred during its final period of existence, that is when Cole was the owner of its stock, were solely directed to enabling the corporation to sell the property. There is no 263 breakdown of the fees connected with Cole's acquisition of the Channel stock and the legal fees and accounting expenses connected with the sale of the land. However, neither amount was an ordinary and necessary business expense but was costs incurred in acquiring a capital asset and in selling property. Therefore the amounts constituted a capital loss. Petitioners' contention that respondent's determination with respect to the loss on the worthlessness of the Channel stock is dependent upon a law which was not in existence at the time of the transaction is not correct. Though not referred to specifically, petitioners apparently allude to section 1378 which applies to a subchapter "S" corporation in certain cases where the corporation has over $25,000 per year in net long-term capital gain. While section 1378 applies 264 only to taxable years of electing small business corporations beginning after April 14, 1966 [Sec. 2(a), Pub. L. 89-389 (Mar. 8, 1966)], all of the sections which govern the tax consequences of petitioners' Channel transactions in 1960 and 1961 were effective as of January 1, 1958 [Sec. 64(a), Pub. L. 85-866 (Sept. 2, 1958)]. Issue (5) K.C. Records was incorporated in the State of California in February 1962. It employed recording artists, manufactured records, and distributed records. Petitioner was never employed by K.C. Records although he owned 60 percent of its shares when the company was formed. K.C. Records elected to be taxed as a small business corporation. At the end of its first fiscal year, January 31, 1963, the other stockholders of K.C. Records sold their shares in the corporation to petitioner for a nominal sum.As of the first of the fiscal year beginning February 1, 1963, petitioner had contributed the amount of $916.91 to the capital of K.C. Records. During the fiscal year that ended January 31, 1964, petitioner contributed an additional $15,000 to this corporation's capital, giving him a total basis in his K.C. Records stock of $15,916.91. During that 265 same fiscal year, K.C. Records suffered a net operating loss of $41,571.76. K.C. Records did not have sufficient assets to pay its liabilities at any time during the fiscal year ending January 31, 1964. During that fiscal year, two loans from World Entertainers Ltd., totaling $20,000, were arranged by petitioner. These loans were $5,000 and $15,000, respectively, and the amounts went directly from World Entertainers to K.C. Records. The loans were made on petitioner's guarantee, and notes were executed after the loans were made by K.C. Records with petitioner's guarantee. The total of $20,000 was ultimately repaid by petitioners directly to World Entertainers, Ltd.Petitioners owned 50 percent of Crestview Music Corp., 50 percent of Sweco Music Corp., and 50 percent of Comet Music Corp. During its fiscal year ending January 31, 1964, K.C. Records received $3,000 from Crestview, $2,500 from Sweco, and $1,000 from Comet. Each of these amounts was shown on the books of the lenders as loans to petitioner and was ultimately repaid by petitioners to each of the companies.Respondent contends that petitioners are entitled to deduct in 1964 only $15,916.91 11 as a net operating 266 loss of their subchapter "S" corporation, K.C. Records, Inc. Petitioners contend that they are entitled to deduct the full net operating loss of $41,571.76 because K.C. Records was indebted to petitioners in the fiscal year in issue for loans made to K.C. Records by other corporations owned in part by petitioners and for a loan from World Entertainers, Ltd. that was made on petitioner's sole credit, and that petitioners in fact repaid all of the obligations. Under section 1374 of subchapter "S" each person who is a shareholder of the subchapter "S" corporation is allowed as a deduction from his gross income, for the taxable year in which the taxable year of the corporation ends, an amount equal to his portion of the corporation's net operating loss. Each shareholder's 267 portion of the net operating loss is his pro rata share of the corporation's net operating loss, but section 1374(c) (2) places the following limitation on a shareholder's portion of net operating loss: (2) Limitation. - A shareholder's portion of the net operating loss of an electing small business corporation for any taxable year shall not exceed the sum of -(A) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of the shareholder's stock in the electing small business corporation, determined as of the close of the taxable year of the corporation (or, in respect of stock sold or otherwise disposed of during such taxable year, as of the day before the day of such sale or other disposition), and (B) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of any indebtedness of the corporation to the shareholder, determined as of the close of the taxable year of the corporation (or, if the shareholder is not a shareholder as of the close of such taxable year, as of the close of the last day in such taxable year on which the shareholder was a shareholder in the corporation). Both 268 parties agree that the adjusted basis of petitioners' stock in K.C. Records as of the close of the taxable year of the corporation ending January 31, 1964, without considering amounts advanced to K.C. Records by World Entertainers, Sweco Music, Comet Music, and Crestview Music, was $15,916.91. Respondent contends that petitioner's guarantee of K.C. Records' indebtedness did not constitute "any indebtedness of the corporation to the shareholder." We agree with respondent that a guarantee of an indebtedness to a corporation by a shareholder is not an indebtedness of the corporation to the shareholder, within the meaning of section 1374(c) (2) (B), even though such shareholder may be primarily liable on indebtedness of a corporation to a third party. Joe E. Borg, 50 T.C. 257">50 T.C. 257 (1968). Until such time as a shareholder pays the indebtedness of the corporation on which he is the guarantor or comaker, there may be a liability of the shareholder to the lender but not a debt of the corporation to the shareholder. See Joe E. Borg, supra, and Milton T. Raynor, 50 T.C. 762">50 T.C. 762 (1968). With respect to the loans to K.C. Records by World Entertainers, it is clear that petitioner was a guarantor and 269 K.C. Records was not indebted to petitioner but rather to World Entertainers. There is no evidence that petitioner paid the obligation of K.C. Records to World Entertainers during K.C. Records' taxable year ended January 31, 1964, thereby causing K.C. Records to become indebted to petitioner by subrogation. Accordingly, petitioner cannot include as a portion of the net operating loss of K.C. Records any portion of K.C. Records' indebtedness to World Entertainers. Ruth M. Prashker, 59 T.C. 172">59 T.C. 172 (1972). Even though Sweco, Comet, and Crestview entered the amounts advanced to K.C. Records in their account books as loans to petitioner, there is no evidence that K.C. Records was indebted to petitioner for these advances rather than to Sweco, Comet, and Crestview. The evidence is not sufficient to show that Cole was other than a guarantor of the advances by Sweco, Comet, and Crestview of K.C. Records, and there is no evidence that petitioner paid the obligations of K. C. Records to Sweco, Comet, and Crestview during K.C. Records' taxable year ended January 31, 1964. Petitioners contend in the alternative that if they are not allowed to include as a portion of the net operating loss of 270 K.C. Records that portion representing loans guaranteed by petitioner, then they should be allowed the loss of K.C. Records for their taxable year 1964 as an ordinary business deduction. Petitioners contend that petitioner was engaged in the music business so extensively that his ownership of K.C. Records should come within the standard of his ownership of the company being his business. Petitioners contend that under these circumstances and considering the amount of K.C. Records' loss in its fiscal year 1964, the guarantee of the loans becomes a business loss in the ordinary sense and should be allowed. Respondent states that in order for petitioners to receive an ordinary deduction for petitioner's guarantee of these loans, petitioners must establish that the dominant motivation for petitioner's executing the guarantees was in furtherance of a trade or business of promoting record corporations rather than in furtherance of petitioner's interest in K. C. Records as an investor. United States v. Generes, 405 U.S. 93">405 U.S. 93 (1973). From the record we conclude that petitioners have failed to establish that petitioner's relationship with K.C. Records was other than as an investor. Cf. 271 Whipple v. Commissioner, 373 U.S. 193">373 U.S. 193 (1963). There is no evidence that petitioner guaranteed these loans for any other reason than to protect his position as an investor in K.C. Records. Accordingly, petitioner, when he paid the creditors of K.C. Records because of his guarantee of its loans, suffered a nonbusiness loss which cannot be offset against ordinary income. Section 166(d) (1) (B). Also, petitioners have presented no evidence that payment of the obligations of K.C. Records to World Entertainers, Sweco, Comet, or Crestview occurred during petitioners' calendar year 1964, the year in which petitioners claimed the deduction. Accordingly, respondent's determination with respect to this issue is sustained.Issues (6) and (7) Al Baron and Steve Brody were television script writers. One of their scripts entitled, "Emilio," a comedy, was written for a proposed television series. Baron and Brody entered into an employment agreement with AA on May 10, 1961. Under the terms of this agreement, Baron and Brody assigned, among other things, their copyright to "Emilio" to AA. In addition, Baron and Brody agreed to participate, on AA's behalf, in five television or movie productions 272 over the next 10 years. The compensation under the contract for Baron and Brody was deferred payments of $12,000 per year beginning 12 years later, that is, May 1, 1973. In the fall of 1961 a contract was entered into between Baron and Brody, AA, and the American Broadcasting Company, the latter being one of the three principal television networks in the United States. The contract provided for the American Broadcasting Company to put up all of the money necessary to produce a pilot film of "Emilio," to undertake to sell the pilot film when produced, and to finance the series which it was hoped would follow. The obligations of the American Broadcasting Company were contingent upon the availability of the actor Buddy Hackett to pay the leading role in "Emilio." The contract further provides for AA to make available Baron and Brody as producers and directors of the pilot and the series. The American Broadcasting Company was to pay Baron and Brody for these 47 services directly. The contract further provided for a percentage participation in the profits of the entire project to be retained by AA. AA subsequently disposed of all its rights to the percentage participation under its 273 contract with the American Broadcasting Company to a joint venture which eventually consisted of PMSA, petitioner, Leo Branton (petitioner's lawyer) and Great Western Entertainers (GWE). AA received the amount of $130,000 for these rights. PMSA retained one-half of the rights outside the United States and the other participants in the joint venture shared pro rata in one-half the rights outside the United States and all of the United States' rights. The participants' contributions were as follows: GWE - $80,000; Branton - $15,000; petitioners - $35,000. PMSA contributed no money but undertook certain responsibilities for distribution of the series outside the United States. During all of November and December of 1961, an intensive effort was made to sign a contract with Buddy Hackett to play the lead in "Emilio." Buddy Hackett was in particular demand at the end of 1961 and his services were not obtained by AA. Similar efforts were directed toward other actors but none of the actors who were willing to play the role met the approval of the American Broadcasting Company. The American Broadcasting Company withdrew from the project in November of 1962. The partnership obtained 274 an extension of its rights to produce "Emilio" until August of 1963 but could not obtain financing by that date.While Baron and Brody received no money directly attributable to "Emilio," they did receive payments on their contracts from AA over a period of several years in excess of $45,000. The sums received from AA by Baron and Brody were a consequence of their entire contracts with AA which included "Emilio" and all other activities in which Baron and Brody played any part under their AA contract. One of the participants in the joint venture which purchased the rights to "Emilio" from AA, GWE, was a corporation formerly known as Great Western Builders. On April 9, 1962, GWE entered into a joint venture with Kell-Cole Productions. Kell-Cole Productions was a California corporation which petitioners had acquired in August 1960. It reported its taxable income on a calendar year basis and elected to be taxed as a small business corporation for the year 1961 and subsequent years. GWE's contribution to its joint venture with Kell-Cole was its interest in "Emilio," that is eight-thirteenths of the United States' rights and eight-thirteenths of one-half of the non-United States' 275 rights in "Emilio." GWE further guaranteed to Kell-Cole a profit on "Sights and Sounds" of $5,000 per week for 30 weeks. Kell-Cole Productions assigned the profits, if any, of the Kell-Cole road show production of "Sights and Sounds" in excess of $150,000 to GWE. The profit above $150,000 which GSE was to receive and did receive was after all overhead and expenses incurred in the production had been paid and after petitioner had been paid $6,000 per week for his services.Both the "Emilio" partnership interest and the "Sights and Sounds" project were speculative on April 9, 1962. The "Emilio" partnership interest ultimately proved to be worthless.A final partnership return was filed for the year 1963 showing a loss of $80,000 for GWE, $15,000 for Branton, and $35,000 for petitioners. "Sights and Sounds" proved to be successful and Kell-Cole paid $91,000 to GWE, which on its Federal tax returns reported $91,000 as income and $80,000 as a loss. Kell-Cole Productions deducted the $91,000 it paid to GWE on its 1963 tax return filed under the provisions of Subchapter "S". Respondent in his notice of deficiency determined that the $130,000 abandonment loss incurred in 1963 in connection 276 with the acquisition of television rights to "Emilio" in which petitioners participated was not incurred in a transaction entered into for profit and accordingly disallowed petitioners' claimed loss of $35,000 representing their distributive share of the joint venture loss on "Emilio." Respondent in his notice of deficiency further determined that the payments made by petitioners' wholly owned subchapter "S" corporation, Kell-Cole Productions, to GWE in the year 1963 were not incurred in a transaction entered into for profit and the claimed deduction was disallowed. Since Kell-Cole Productions was a subchapter "S" corporation respondent increased petitioners' income as reported by the $91,000 disallowed as a deduction as a production cost to Kell-Cole. Respondent contends that the money which petitioner paid to AA for an interest in "Emilio" constituted nothing more than petitioner's making a deposit in a foreign savings account. Respondent again asserts that petitioner controlled AA and the funds which petitioner paid to AA were subject to petitioner's bidding. Petitioners attack respondent's interpretation of the agreed upon facts and contend that "it is a strange savings 277 account that belongs 50 percent to a total stranger." The resolution of this issue depends upon the relationship of AA and petitioner. Petitioner was under an exclusive contract to AA and an irrevocable trust of which he was grantor held all of the shares of PMSA which owned 50 percent of the shares of AA. However, AA was far more than a mere vehicle for promoting Cole's financial interests. AA had interests in other entertainers and also in the construction industry, and in publishing and in shopping centers. AA sold its rights to the percentage participation in profits in "Emilio" to a partnership at a time when "Emilio" was a most speculative investment. Respondent relies on Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935), arguing that the substance rather than form of the transaction between petitioner and AA with respect to "Emilio" should control. In our view, petitioners have shown by a preponderance of the evidence that their share of the "Emilio" partnership loss constituted a real loss in the amount claimed. The evidence as a whole shows that AA under the management of persons unrelated to petitioner was lessening its entrepreneurial risk with respect to "Emilio" by selling 278 the percentage participation interests to the partnership. Petitioner elected to purchase an interest in the "Emilio" partnership for $35,000 and when it became a worthless investment in 1963, petitioners suffered a real loss. The money which petitioner had paid to AA was not subject to his bidding in any manner whatsoever. Respondent in his brief contends that the agreement between GWE and Kell-Cole was nothing more than a subterfuge to permit GWE to recover the losses it incurred in investing in "Emilio." Respondent states his argument as follows: The plan, in form, was to have GWE join the Kell-Cole production of "Sights and Sounds" and share in the profits. * * * * * * The only reason apparent for the entire arrangement was to convert the return of a foreign deposit with Associated Arts to a domestic deduction for Kell-Cole.A deduction may not be claimed for the obligation owed by another person. Deputy v. Du Pont, 308 U.S. 488">308 U.S. 488, 23 AFTR 808 (1940). This argument of respondent does not comport with the stipulated facts. The stipulated facts show that GWE was a corporation whose sole owner had no direct or indirect interest of any kind in Kell-Cole or any other of petitioner's 279 enterprises. The stipulation specifically states: GWE and Kell-Cole productions entered into a joint venture on April 9, 1962. GWE contributed to the joint venture the interest of GWE in the Emelio [sic ] partnership in which the partners were PMSA, GWE, Cole and Branton. * Kell Cole Productions contributed to the joint venture a contingent but assigned participation in the profits, if any, of the Kell Cole road show production of "Sights and Sounds". GWE was to receive and did receive a share of the profits after all overhead and expenses incurred in the production had been paid and after Cole had been paid $6,000 per week for his services. Both the Emelio [sic ] partnership interest and the "Sights and Sounds" project were speculative on April 9, 1962. The Emelio partnership interest ultimately proved to be worthless. "Sights and Sounds" was successful and Kell Cole paid GWE $91,000. * * In our view the stipulation clearly shows that GWE and Kell-Cole two unrelated entities, entered into a joint venture with respect to projects which were both speculative at the time. It happened that one of the ventures was successful and one unsuccessful. The $91,000 which Kell-Cole 280 paid in 1963 to GWE was the profit above the $5,000 a week for 30 weeks which GWE had guaranteed to Kell-Cole as a profit on "Sights and Sounds" and was GWE's part of the profit from "Sights and Sounds." It may have been that the amount should more properly have been shown on a joint venture return of the joint venture between GWE and Kell-Cole as GWE's part of the profit rather than by being deducted by Kell-Cole on its return. Apparently the $91,000 was deducted on Kell-Cole's return though the record is not specifically clear on this point. However, the $91,000 was GWE's income and not income of Kell-Cole. Therefore, we hold that respondent improperly increased petitioners' income by this $91,000 which he determined petitioner's subchapter "S" corporation, Kell-Cole received in 1963. Issue (8) General Artists Corporation (GAC) is one of the largest agency firms in the entertainment world and it acted as booking agent for petitioner. It was a common practice for GAC to make loans without interest to entertainers it represented, including petitioner."I'm With You," a proposed Broadway musical promoted by petitioner and produced by Kell-Cole Productions needed additional 281 funds in November 1960 and both GAC and Capitol Records initially refused to advance or invest any funds. Petitioner informed GAC that if GAC would make an investment in "I'm With You" he would guarantee GAC against loss. Capitol Records then agreed that it would advance $60,000 for "I'm With You" and it did so. The understanding was that GAC would repay Capitol the $60,000 and GAC did so. Kell-Cole Productions, a Subchapter S corporation wholly owned by petitioner, executed a promissory note on July 27, 1961 in the amount of $60,000 payable to GAC. Petitioner guaranteed the payment of the promissory note. This note replaced a prior agreement of November 15, 1960, pursuant to which GAC was to receive 10 percent of petitioner's record royalties until it had recovered the $60,000. "I'm With You" was abandoned in 1962. Sixty Thousand Dollars was paid to GAC by four checks: a check for $5,000 in early 1961; a Kell-Cole Productions' check for $15,000 dated January 1, 1962, and two personal checks from petitioners for $20,000 each, dated May 22, 1963 and December 30, 1963. 12 The $60,000 advanced by 54 Capitol for the production "I'm With You" had been used in the unsuccessful attempt 282 to produce "I'm With You." Kell-Cole Productions deducted in 1961, 1962, and 1963 as "commissions paid" the payments made by its checks or petitioners' checks to GAC in payment of the $60,000 note given by Kell-Cole Productions to GAC. Respondent disallowed as deductible business expenses of Kell-Cole the payments made on the GAC note by Cole and Kell-Cole. These disallowances increased petitioners' income from its subchapter S corporation in the years 1961, 1962, and 1963. Respondent contends that the transaction involving GAC was nothing more than a loan by GAC to Kell-Cole and that the repayments of the loan by Cole and Kell-Cole, Cole's wholly-owned subchapter S company, are not deductible. Respondent's contention is logical and correct. Kell-Cole's expenditure of the $60,000 should be and insofar as this record shows is reflected in its profit and loss account in connection with its business operations, which included 283 its unsuccessful attempt to produce "I'm With You." The repayment of the borrowed funds to GAC would not affect its profit and loss account. In fact, the loss of the $60,000 should properly be otherwise deducted by Kell-Cole and to allow it to also deduct the repayment of the loan would give Kell-Cole a double deduction for the $60,000. A repayment of borrowed funds is not a deductible expense.The record shows that the advancement of the $60,000 by GAC was a loan to Kell-Cole and not an investment by GAC in "I'm With You." GAC demanded assurances that it would be repaid its full $60,000, no more and no less. GAC did not intend to assume any risk and the evidence as a whole shows that it did not. We sustain respondent's determination with respect to this issue. Decisions will be entered under Rule 50. Footnotes1. Cases of the following petitioners are consolidated herewith: Estate of Nathaniel Cole, Deceased, Maria Cole Devore, Executrix, and Maria Cole Devore, Surviving Spouse, docket No. 1759-71, and Maria Cole Devore, docket No. 1760-71. ↩2. All references are to the Internal Revenue Code of 1954. 3. For the year 1962 Cole's income as reported was reduced by respondent by $29,961.69. Respondent made this adjustment apparently for the reason that payments in this year by Associated Arts, N.V. (AA) to Cole exceeded the payments by Capitol Records, Inc., to Associated Arts, N.V. in 1962. ↩4. The stipulation of facts consists of 80 pages of narrative and 107 joint exhibits, some of which are contracts, trust agreements, or other lengthy documents. 5. A master record has great value because it is the physical asset required to make duplicate copies for sale to the public. While there is no specific statement in the stipulation with respect to the value of previously made and newly recorded masters from the same artist, the inference from the dealings between Capitol and AA is that the old masters made by Cole became much more valuable when it became apparent in 1964 that he would not recover from his illness with lung cancer.It would appear that while Cole was able to make new recordings, the old records did not produce comparatively for Capitol much revenue. The parties stipulated that "Capitol's gross on Cole records was averaging, during the years at issue between four and five million dollars, and the six per cent royalty was averaging between $200,000 and $250,000." Since AA was paid a 6 percent royalty only on recordings made by Cole after the effective date of the Cole-AA contract, it appears that only a small portion of Capitol's sales during the years here in issue was from master recordings made by Cole while under contract to Capitol on which Capitol paid only a 5 percent royalty. ↩6. While the parties have stipulated that there were in many instances Federal income tax advantages to many large corporations as well as to authors, artists, and other individuals in transacting business through Netherlands Antilles corporations, we consider it worth noting that when the trust created by Cole for his wife and children sold its PMSA stock for $90,000 in 1964, Cole had no remaining even indirect interest in either PMSA or AA. Therefore, Cole never received even indirectly the benefits of amounts received by either PMSA or AA from exploitation of his work except from the salary and other payments which he received from these corporations and reported on his Federal income tax returns in the years here in issue and whatever gain resulted to the trust he had created from its sale of the PMSA stock, a minor amount compared to the amounts of income respondent contends Cole assigned to PMSA and AA. ↩7. The parties have stipulated as follows with respect to the trust which held the PMSA stock: Arawak acted both as a trustee and as a company manager. When acting as a trustee, Arawak acted at all times and in all respects with full fidelity and integrity to its fiduciary responsibilities under the governing trust documents, * * * ↩8. Sec. 482, I.R.C. 1954 provides that : In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. ↩9. This figure was stipulated but differs from the figure on the returns. ↩10. While respondent's position is that these expenses were a part of the cost of the acquisition by petitioners of their stock or of the sale of the land by Channel, he treats the items in the notice of deficiency as an additional capital loss with the same substantive result. Petitioners on their tax returns had in effect treated the item as an ordinary loss. ↩11. Respondent determined in his statutory notice of deficiency that petitioner's basis in his K.C. Records, Inc. stock plus the loans made by him to K.C. Records totaled $6,000 in 1963 and zero in 1964. The issue for our decision involves only the year 1964 and respondent now contends that the sum of petitioner's basis in the K.C. Records stock plus his basis in loans extended to K.C. Records is $15,916.91 in that year. ↩12. There is no showing why petitioners instead of Kell-Cole made these payments and no contention is made by petitioners that they sustained a loss as a guarantor of Kell-Cole's note or that Kell-Cole was unable to repay them the $40,000 paid by their checks. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622141/	George W. Van Vorst, Petitioner, v. Commissioner of Internal Revenue, RespondentVan Vorst v. CommissionerDocket No. 2837United States Tax Court7 T.C. 826; 1946 U.S. Tax Ct. LEXIS 71; September 23, 1946, Promulgated 71 Decision will be entered under Rule 50. Petitioner was one of two managing partners in a partnership in California in which his wife and five others were members. Petitioner had a 28.80086 per cent interest, his wife a 2.46253 per cent interest. The managing partners drew compensation for their services and the rest of the profits were distributable to all the partners according to their capital interests. Petitioner's interest was derived from his stockholdings in a predecessor corporation, some of which was his separate property, some was community property acquired before July 29, 1927, and some was community property acquired after that date. Held, the partnership arrangement did not transmute into separate property that part of petitioner's investment which was previously community property; held, further, the amount drawn by petitioner for services and his profits attributable to his community investment acquired after July 29, 1927, are divisible community income, and profits attributable to remainder of investment are taxable to petitioner. Ralph Kohlmeier, Esq., for the petitioner.Earl C. Crouter, Esq., for the respondent. Arnold, Judge. ARNOLD 72 826 This proceeding involves deficiencies in income tax of the petitioner for the years 1939, 1940, and 1941, determined in the respective amounts of $ 6,273.09, $ 7,343.98, and $ 26,546.46. The sole issue is what portion of petitioner's share of the earnings of C. B. Van Vorst Co. was community income, divisible between petitioner and his wife upon their returns. The facts are in part stipulated and in part found from the evidence presented.FINDINGS OF FACT.Upon petitioner's marriage in 1922 he was owner of 93 shares of stock in the Western Furniture Manufacturing Co., a corporation. On November 1, 1924, he bought two additional shares with money 827 which he had earned. On February 25, 1926, he bought another share from salary or money in the bank and placed it in his wife's name. On August 29, 1928, 2 1/2 shares inherited by petitioner from his father were placed in his wife's name. On January 20, 1929, he acquired 10 shares, which were paid for from salary and taken in his own name. On August 28, 1929, petitioner acquired another 29 1/2 shares as a result of inheritance from his father. On January 21, 1930, 8 shares were purchased with rental money which 73 was petitioner's separate property, and the shares were placed in the name of petitioner's wife. After January 21, 1930, 134 1/2 shares were held in petitioner's name and 11 1/2 shares were in his wife's name.Petitioner's motive in placing shares in his wife's name was to give her the right to participate in discussions among the stockholders concerning the business, the major part of the stock being held by members of petitioner's family.The corporation manufactured bedroom and dining room furniture and also operated a mattress factory. In 1928 the name of the corporation was changed to C. B. Van Vorst Co. In 1930 the corporation participated in a merger under the name of Furniture Corporation of America, as a consequence of which the stock held by petitioner and his wife was surrendered and 146 shares of stock in the merged corporation were issued, all in the name of petitioner.On or about January 1, 1933, the mattress factory which had been operated by the corporation known as Western Furniture Co., or C. B. Van Vorst Co., was withdrawn from the merger and restored to the former stockholders, who surrendered their stock in the Furniture Corporation of America. These stockholders74 were George W. Van Vorst, the petitioner; his wife, Lucia Ann Van Vorst; his mother, Nellie B. Van Vorst; his sister, Helen Carraher; her husband, K. F. Carraher; petitioner's sister, Ruth C. Gray; her husband, L. S. Gray; and Sue M. Geldermann. These individuals, as partners, then commenced the operation of the factory under the firm name of C. B. Van Vorst Co. and carried on the business of manufacturing mattresses and box springs for the wholesale trade.The partnership agreement was oral and was to the effect that petitioner and Carraher would run the business for the benefit of all the partners.The original assets of the partnership consisted of machinery, equipment, and inventory of a furniture manufacturing business, the value of which on January 1, 1933, was $ 66,271.89.The interests of the partners in the capital of the partnership were in proportion to their stockholdings in the corporation prior to the merger in 1930.Petitioner held a 26.9 per cent interest and his wife, Lucia Ann Van Vorst, held a 2.3 per cent interest in the partnership. On or about 828 June 19, 1936, the partnership purchased and retired the interest of Sue M. Geldermann and adjusted the proportionate75 interests of the remaining partners so that petitioner's interest thereafter was 28.80086 per cent and the interest of Lucia Ann Van Vorst, his wife, was 2.46253 per cent.The total partnership income, the salaries and distributive shares of petitioner, and the amounts of his withdrawals during the years 1933 through 1941 were as follows:YearPartnershipPetitioner'sPetitioner'sPetitioner'sincomesalaryprofitswithdrawals1933$ 63,205.18$ 7,500$ 12,967.19$ 7,500.00193426,702.509,0002,340.9710,614.00193548,251.609,0008,137.6812,228.00193697,126.6210,50022,009.2415,456.05193793,202.8412,00020,795.0420,064.241938129,707.2512,00031,020.6136,480.761939173,245.5112,00042,983.9944,257.001940138,486.0212,00032,972.9618,912.211941302,575.0724,00073,319.8121,600.65The total assets of the partnership increased from $ 66,271.89 at the beginning of 1933 to $ 287,672.48 at the end of 1938, to $ 317,294.56 at the end of 1939, to $ 462,000.18 at the end of 1940, and to $ 583,962.25 at the end of 1941. The increase resulted primarily from the retention in the business of some of the profits. 76 The business was managed from 1933 through the taxable year by petitioner and K. F. Carraher. Pursuant to the agreement of all the partners, petitioner and Carraher drew fixed amounts as compensation for their services and the remaining profits after deduction of this compensation were allocated to the members of the partnership in proportion to their interests. Petitioner performed the services of buying cotton, handling the finances of the business, and attending to matters of personnel, correspondence, and collections. Carraher bought ticking and attended to sales and to the styling of mattresses.Partnership information returns of income were filed for the taxable years showing the computation and distributive shares of each member and stating as to petitioner and Carraher the portion of their capital investments deemed to be community capital and separate capital and including a computation of their distributive shares of the profits deemed to be separate income and community income.Petitioner and his wife filed separate returns, each reporting the amount shown on the partnership as his or her separate income, together with one-half of the amount there shown as community 77 income.Petitioner and his wife made no agreement prior to or during the taxable years to change any of their community property invested in the business to separate property of one or the other or to change separate property to their community property.829 OPINION.During the taxable years 1939, 1940, and 1941 C. B. Van Vorst Co. was a partnership in which seven individuals, including petitioner and his wife, held distributive interests. It was stipulated that petitioner's interest was 28.80086 per cent and his wife's interest was 2.46253 per cent. Petitioner was one of the managing partners and drew compensation for his services in addition to his distributive share of the profits. The partnership returns of income for the taxable years included a computation of the portions of the petitioner's distributive share of the profits deemed to be separate income and community income.The petitioner and his wife filed separate returns. The petitioner's returns reported the amount shown on the partnership returns as his separate income, together with one-half of the amount there shown as community income of petitioner and his wife.The respondent determined that the petitioner's78 entire distributive share of the profits, as well as the amount drawn by him as salary, was taxable to the petitioner and determined deficiencies for the taxable years accordingly. The petitioner contests this determination.The issue is what portion, if any, of the petitioner's distributive share of the partnership income, including salary, is community income of petitioner and his wife, divisible between them upon their returns.In several cases in California in which a husband and wife had equal shares in a partnership and other partners were involved, the Board of Tax Appeals held that the shares of the husband and wife in the profits were taxable to them equally and not entirely to the husband, L. S. Cobb, 9 B. T. A. 547; Elihu Clement Wilson, 11 B. T. A. 963; Charles Brown, 13 B. T. A. 981; and E. L. Kier, 15 B. T. A. 1114. As stated in the Brown case, this was on the theory that the interests of the wives constituted their separate property.In G. C. M. 9825 (1931), X-2 C. B. 146, the General Counsel of the Bureau of Internal79 Revenue expressed an opinion as to the proper method of reporting income from a partnership business where the share of a husband or shares of a husband and wife, domiciled in California, are involved. Where both the husband and wife in California are members of the same partnership, the opinion was expressed that they are taxable in their individual capacity, the same as other members of a partnership and that no attempt should be made to apportion the partnership profits on any basis except the percentage of interest of each member.The respondent seeks to apply in this case the rule stated in G. C. M. 9825, taking the view that the capital contributions of a husband and wife in California to a partnership are, by virtue of the partnership agreement, necessarily the separate property of each contributor. 830 However, this proposition was rejected in McCall v. McCall (1934), 2 Cal. App. (2d) 92; 37 Pac. (2d) 496. In that case a husband and wife who owned land as community property contributed it to a partnership venture with the husband's two brothers and their wives. Title was placed80 in a corporate trustee. The husband bought out the other partners, except his wife. The wife sued for divorce and contended that the partners' interests were transmuted into separate property by the partnership agreement and resulting conveyance, and that she owned a one-sixth share as separate property and a community interest in the interests held by her husband. The lower court held that the property was community and was to be divided equally. The California District Court of Appeal for the Fourth District sustained the lower court, saying: * * Community property invested by one of the spouses in a partnership enterprise with another remains community property. Hulsman v. Ireland, 205 Cal. 345">205 Cal. 345; 270 Pac. 948. There can be no difference in this respect where both husband and wife enter into such a partnership venture with other parties, investing their community property therein. Such an interest in a partnership is not a new kind of property, but takes its character, as separate or community, in accordance with how and when it was acquired. While a husband and wife may by agreement change their community property81 into separate property, no such agreement appears in this partnership agreement in so far as the land put into the partnership by these parties is concerned. * * In our opinion, this partnership agreement worked no such a transmutation as that contended by the appellant with reference to the property of which these parties are now the equitable owners, and the same remained community property if such it was at the time it was turned over to the partnership.The Supreme Court of California denied a hearing on further appeal.The contention of the respondent is contrary to the community property laws of California as interpreted by the state courts. We must conclude, therefore, that if any part of the capital investment of petitioner in the partnership was previously community property, it was not transmuted into his separate property by virtue of the partnership agreement. See Rucker v. Blair, 32 Fed. (2d) 222.In Glenn M. Harrington, 21 B. T. A. 260, the Board held that under the statute requiring a partner in computing his net income to include his distributive share of partnership income, the entire share of82 a husband or wife partner in California is taxable to the partner, regardless of whether it is community or separate income. However, the Circuit Court of Appeals for the Ninth Circuit took a contrary view in Black v. Commissioner (1940), 114 Fed. (2d) 355, saying with reference to the corresponding provision of the Revenue Act of 1934:In view of the language of the statute, we are not disposed to interpret it as meaning that the entire amount of income distributable to a partner is taxable to him, even though half of it is owned by his wife. The better interpretation of the provisions referred to would seem to be that, in cases involving community income, 831 the tax is imposed on the individual partner to the extent only of his ownership of the income.Also, it appears from G. C. M. 9422, X-1 C. B. 245, 249, that the Commissioner does not agree with the theory of the Harrington case.Since we are unable to agree with the respondent's contention that in California a partner's interest becomes his separate property as a consequence of a partnership agreement, we are required to ascertain by other means the83 identity, as separate or community income, of petitioner's distributive share, including the amount received as compensation for services.In determining what part of the income derived from a business venture in California is community income and what part is separate income, the California courts have stated that it is one of the fundamental principles of the community property system that whatever is acquired through the toil or talent of either spouse belongs to the community. In re Pepper's Estate, 158 Cal. 619">158 Cal. 619; 112 Pac. 62. Where a husband is engaged in a business in which his separate capital and his personal services are contributing to the profits, that part of the profits attributable to the capital investment is his separate income and that part attributable to his personal services is community income, the allocation to be determined from all the circumstances. Pereira v. Pereria, 156 Cal. 1">156 Cal. 1; 103 Pac. 488.In G. C. M. 9825, supra, in prescribing a rule for determining the credit allowable for earned income in cases where84 a husband is a member of a partnership in California, a formula was given for computing the portions of the husband's share attributable to his capital investment, on the one hand, and his services, on the other, allocating the profits in the ratio which a certain per cent return on the capital bears to an assumed reasonable salary allowance. The use of this formula was approved in Clara B. Parker, 31 B. T. A. 644, and it was applied in J. Z. Todd, 3 T. C. 643; remanded by the Circuit Court of Appeals for the Ninth Circuit, 153 Fed. (2d) 553. See J. Z. Todd, 7 T. C. 399. See also Herbert L. Damner, 3 T. C. 638, and Lawrence Oliver, 4 T.C. 684">4 T. C. 684.The petitioner contends that this formula should be applied here in order to determine what part of petitioner's share of the profits of the partnership is attributable to his services and what part is attributable to his capital investment.In this case seven partners, closely related by blood or marriage, contribute capital, and they share in profits in proportion85 to their contributions. Two of these, petitioner and Carraher, perform services and receive as compensation therefor amounts agreed to by all the partners, which amounts are first deducted from the profits. By agreement of the partners the remaining profits are then allocated to 832 the seven in proportion to their capital interests. The share of these profits allocated to petitioner and Carraher is the same, in proportion to their investments, as that allocated to the five partners who perform no services. The partners have agreed among themselves upon the amounts which are to be allowed the managing partners as compensation for their services and upon the portion of the profits to be allocated to all the partners as a return on the invested capital. They have followed this practice consistently during all the years from 1933. It is clear from these facts that the amount of profits withdrawn by petitioner as "salary" is attributable to his services and the amount otherwise allocated to him as his distributive share is based upon and is attributable to his capital investment. See Shea v. Commissioner, 81 Fed. (2d) 937. Any resort to 86 the formula outlined in G. C. M. 9825, supra, and used in Clara B. Parker, supra, is unnecessary where, as here, the determination may readily be made from the partnership arrangement as disclosed by the practice of the partners.The amount petitioner drew as compensation for his services constitutes community income of petitioner and his wife, divisible between them upon their returns.We have decided that the petitioner's distributive share, other than the amount drawn as compensation for services, is attributable to the capital investment in his name. His original contribution in 1933 amounted to $ 17,827.14 and was in part separate property and in part community property. His interest was acquired through and takes its character from his earlier investment in the Western Furniture Co., a corporation. He owned 93 shares of stock in that company at the time of his marriage and acquired 29 1/2 shares by inheritance, all of which constituted his separate property. He acquired 11 1/2 shares, which were placed in his wife's name and, presumably, were gifts to her. No question is raised concerning the profits attributable87 to these shares, which have been treated as the separate property of petitioner's wife. He bought in his own name 2 shares in 1924 and 10 shares in 1929 from salary saved. The presumption is that these 12 shares, paid for from salary, which is community income, are community property and no facts are shown to overcome that presumption. Income attributable to California community property acquired after July 29, 1927, is divisible community income. Income attributable to community property acquired before July 29, 1927, is not divisible community income, but is taxable to the husband even though the income is earned after that date. Hirsch v. United States, 62 Fed. (2d) 128; Merten's Law of Federal Income Taxation, sec. 19.04. It follows that any income attributable to the 10 shares petitioner acquired in 1929 (after July 29, 1927) is divisible community income; while that attributable to the two shares acquired in 1924 833 (prior to July 29, 1927) is taxable to petitioner, as is also, of course, any income attributable to the 122 1/2 shares which constituted his separate property.The interests of the partners in the partnership as established88 in 1933 were based upon their stockholdings in the corporation as they existed in 1930 at the time of the merger. Petitioner's interest of 26.9 per cent in 1933 was derived from his former holdings of 134 1/2 shares of stock, of which 122 1/2 were his separate property, 2 were community property acquired before July 29, 1927, and 10 were community property acquired after that date. While a change occurred in the actual percentages upon the withdrawal of one partner in 1936, and petitioner's share in the succeeding partnership became 28.80086 per cent, it does not appear that this represented an acquisition of property by the petitioner which might be presumed to be community property. Rather it seems that the proportionate interests of the continuing partners remained the same with respect to each other and the one partner's interest was eliminated. For purposes of computing the distributions in percentages, the figures representing the interests of the remaining partners were all increased proportionately. Petitioner's relative proportions of separate or community property were not changed by this transaction.Petitioner's total capital investment in the business increased substantially89 from 1933 to 1941. Part of the profits were left in the business and it becomes necessary to determine the character of this part of the investment. Under California decisions it is presumed, in the absence of evidence to the contrary, that money for the maintenance of the family is drawn from community funds before there is an encroachment upon separate income. In re Tompkins Estate, 123 Cal. App. 670">123 Cal. App. 670; 11 Pac. (2d) 886; Huber v. Huber, 167 Pac. (2d) 708. The amounts withdrawn by petitioner are, therefore, to be considered as having been drawn from the community income to the extent thereof, any excess being drawn from separate income.In our findings we have shown for the years 1933 to 1941, both inclusive, the gross partnership profits before deduction of partners' salaries, and the petitioner's salary, his share of the distributive profits, and his withdrawals. For each of these years the petitioner's salary was divisible community income. In 1933 10/134.5 of petitioner's share of the distributive profits was also divisible community income, the remainder of his share of the profits90 being taxable to petitioner. Since his withdrawals are presumed to be first from the community profits, the effect is that in any year when the community profits were withdrawn and part of the separate profits were left in the business, the separate property part of petitioner's capital investment increased, while the community property part did not, and as a result the 834 proportions of community and separate property in his capital investment were changed. This in turn will affect the computation of the portions of his distributive profits in the following year attributable to community capital and to separate capital.It will therefore be necessary to make a computation, beginning with 1933 and continuing through 1941, to ascertain the separate and community parts of petitioner's capital investment and from that to determine the amount of his profits in the taxable years attributable to the separate and to the community capital. The amount of the divisable community income and of the income taxable to petitioner as separate income or as income from community property acquired before July 29, 1927, can then be determined for the taxable years.Decision will be entered91 under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622142/	AHMET ERTEGUN and IOANA ERTEGUN, Et al., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Ertegun v. CommissionerDocket Nos. 3830-71, 3831-71, 3868-71, 3908-71.United States Tax CourtT.C. Memo 1975-27; 1975 Tax Ct. Memo LEXIS 345; 34 T.C.M. (CCH) 122; T.C.M. (RIA) 750027; February 13, 1975, Filed Alfred D. Youngwood,Mark M. Weinstein, and George P. Felleman, for the petitioners. Stanley Goldberg and E. Noel Harwerth, for the respondent. QUEALYMEMORANDUM FINDINGS OF FACT AND OPINION QUEALY, Judge: Respondent determined deficiencies in the income tax of petitioners in the following amounts: Taxable YearDocket No.Petitionerand PeriodDeficiency 3830-71Ahmet Ertegun and1967$ 79,273.43Ioana Ertegun3831-71Gerald Wexler and196766,235.02Shirley Wexler3868-71Nesuhi Ertegun and196744,290.81Belkis Ertegun3908-71Atlantic Records Sales6/1/67 toCo., Inc.11/30/6719,023.39$ 208,822.65As a result of concessions by the parties, the sole issue for our determination is whether for the fiscal year ended May 31, 1967, Atlantic Records Sales Co., Inc. (hereinafter "Atlantic") is entitled to accrue, either as an offset against gross sales pursuant to section 451 2 or as a deduction347 from gross income pursuant to section 461, a 10 percent record return allowance permitted on sales of single records to its regular distributors. The resolution of such question as to Atlantic, a duly elected subchapter S corporation under section 1372, for its fiscal year ended May 31, 1967, shall be determinative of whether the individual petitioners, who were shareholders therein for such period, are entitled to account for such accrual in computing their respective shares of the corporation's "undistributed taxable income" for such period. If we find that Atlantic is not entitled to accrue such allowance for the period in question, either as an offset to gross sales or as a deduction from gross income, an appropriate adjustment will be made in the taxable income of Atlantic for the taxable period ended November 30, 1967. FINDINGS OF FACT Some of the facts have been stipulated. Such stipulations and the exhibits attached thereto are incorporated herein by this reference. Petitioners in docket No. 3830-71 are Ahmet Ertegun and Ioana Ertegun, husband and wife, 348 whose legal residence at the time of the filing of the petition herein was New York, New York. They filed a timely joint Federal income tax return for the taxable year 1967 with the district director of internal revenue, Manhattan District, New York. Petitioners in docket No. 3831-71 are Gerald Wexler and Shirley Wexler, husband and wife, whose legal residence at the time of the filing of the petition herein was East Marion, New York. They timely filed their joint Federal income tax return for the taxable year 1967 with the district director of internal revenue, Brooklyn District, New York. Petitioners in docket No. 3868-71 are Nesuhi Ertegun and Belkis Ertegun, husband and wife, whose legal residence at the time of the filing of the petition herein was New York, New York. They timely filed their joint Federal income tax return for the taxable year 1967 with the district director of internal revenue, Manhattan District, New York. Ioana Ertegun, Shirley Wexler, and Belkis Ertegun are petitioners in their respective cases solely by reason of their filing joint Federal income tax returns for the calendar year 1967 with their respective husbands. All subsequent references to "individual349 petitioners" shall refer to Ahmet Ertegun, Gerald Wexler, and Nesuhi Ertegun, collectively. Petitioner in docket No. 3908-71 is Atlantic, a corporation organized under the laws of the State of New York and having its principal place of business in New York, New York. During the period in question, Atlantic was a duly elected subchapter S corporation under section 1372 through its fiscal year ended May 31, 1967. It was dissolved on December 1, 1967. Atlantic filed a Federal U.S. Small Business Corporation income tax return for the taxable year ended May 31, 1967 and a regular Federal corporate income tax return for the taxable period ended November 30, 1967 with the district director of internal revenue, Manhattan District, New York. Atlantic was on the accrual method of accounting for Federal income tax purposes. At all times pertinent herein, Atlantic had 8,872 shares of common stock issued and outstanding. Individual petitioners Ahmet Ertegun, Gerald Wexler, and Nesuhi Ertegun collectively owned all of such stock in the amounts of 3,741 shares, 2,957 shares, and 2,174 shares, respectively. 3350 As of November 30, 1967, the individual petitioners had sold all of their Atlantic common stock to Atlantic Recording Corp., a corporation organized under the laws of the State of Delaware, and a member of an "affiliated group" of corporations of which Warner Bros.-Seven Arts, Inc., was the "common parent" as defined in section 1504. As of such time, Atlantic's election as a small business corporation terminated pursuant to section 1372(e)(3). Atlantic was engaged in the business of selling phonograph records at wholesale, consisting of both 45 rpm singles (hereinafter sometimes referred to as "singles") and 33 rpm albums (hereinafter referred to as "albums"). Atlantic sold regularly only to approximately 58 distributors, 41 of whom were considered to be its "regular distributors." The remaining 17 distributors were post exchanges, mail order houses and exporters. During the period in question, Atlantic granted to its "regular" distributors a 3 percent discount on the sales price of albums. The customers who were mail order houses, military post exchanges or exporters did not receive the reduction. The 3 percent discount was based on the amount of net purchases made by the351 distributors for each calendar quarter and was granted prior to the invoices being paid in full. The credits based on the 3 percent discount were issued to distributors 2 to 3 weeks after the end of such period and were used to offset the next remittance. The discount was not dependent on any future purchases nor was any future action on the part of the distributors required. In addition to the 3 percent discount on album purchases, Atlantic also granted its regular distributors a 10 percent record return allowance on the purchases of single records. The invoice on the sales of singles stated that no merchandise was returnable "without written authorization from this office." The amount of singles a distributor was permitted to return under the 10 percent allowance was computed at the end of each calendar quarter and was based upon the net purchases of single records during such period. The authorization for the return of the records was then issued, generally within 2 to 3 weeks after the end of the quarter. The singles returned by the distributors were sent directly to Atlantic's factory, at which time the company would issue a credit memorandum for use against future remittances. 352 The 10 percent allowance enabled the distributors to obtain a full rebate up to the 10 percent limit on those singles which were wortheless or could not be sold. The benefit of the allowance to Atlantic was that it effected a reduction in its net sales to distributors, a figure which was used to determine royalty payments to its recording artists. The returned singles were generally scrapped by Atlantic. If a distributor wanted to return more singles than permitted by the quarterly authorization, he would have to negotiate the return of the excess singles with Atlantic. In the event that a customer did not have enough single records on hand to take full advantage of the return allowance, he was allowed to purchase singles with Atlantic labels from jobbers and use them for purposes of the return allowance. 4The singles returned by the distributors did not have to be records purchased in the period to which the 10 percent allowance would apply. No attempt was353 made by Atlantic to coordinate the records returned with the individual purchases by its regular distributors. On purchase of singles, the entire amount of the invoice would be due on the tenth day of the month following the month of purchase. Atlantic provided for a 2 percent cash discount for prompt payment of bills. Atlantic did not reduce its sales by the amount of this discount until such time as the payments were timely made and the discount earned. 5On its books, Atlantic accounted for the sale of its singles and the 10 percent return allowance on such sales in the following manner. At the time of the sale, the full invoice price of the records was debited to its accounts receivable and credited to its sales account. At the end of the quarter or fiscal period, Atlantic computed the 10 percent allowance due its distributors and made an accrual entry to its sales returns and allowances account to that extent. The company simultaneously354 made entries reducing its royalty expense based on such accrual. As of the first day of the next quarter or fiscal period, Atlantic credited its sales returns and allowances account and debited its accounts receivable in the above amount, thereby reversing the prior accrual entry. When the credit memorandums were subsequently issued to the distributors reflecting receipt of the single records at its factory, Atlantic debited its return and allowances account again and reduced its accounts receivable to that extent. The same procedure was followed by Atlantic with respect to its 3 percent discount. As of its fiscal year ended May 31, 1967, Atlantic had a debit balance in its returns and allowances account with respect to its 3 percent discount and 10 percent allowance in the amounts of $48,531 and $241,584, respectively. These balances represented discounts or allowances on purchases by distributors in April and May of 1967. On June 1, 1967, Atlantic made reversing entries of the above debit balances. On their respective joint Federal income tax returns for the calendar year 1967, the individual petitioners included in their gross income their respective shares of the "undistributed355 taxable income" of Atlantic for the period ended May 31, 1967 pursuant to section 1373(b). Such "undistributed taxable income" reflected the reduction by Atlantic to its sales income on account of the accruals made for the 3 percent discount and the 10 percent allowance for such period. In his notice of deficiency to each of the individual petitioners, respondent increased the taxable income of Atlantic by the balance in the account for sales returns and allowances attributable to the 3 percent discount and 10 percent allowance as of May 31, 1967. This effectively increased each petitioner's ratable share of Atlantic's undistributed taxable income. Due to a concession by respondent, only the propriety of the accrual by Atlantic of the 10 percent allowance is now in issue. The parties have agreed and stipulated that if an adjustment to Atlantic's undistributed taxable income for its fiscal year ended May 31, 1967 is mandated, a corresponding adjustment shall be made to the taxable income of Atlantic for the period ended November 30, 1967. OPINION The sole question for our determination is whether for its fiscal year ending May 31, 1967, Atlantic is entitled to accrue, either356 as an offset to its gross sales or as a deduction from gross income, a 10 percent record return allowance on sales of single records to its regular distributors. Through prearrangement with its regular distributors, Atlantic uniformly granted a 10 percent record return allowance on all purchases of single records. The amount of single records each distributor was permitted to return was based upon the number of single records purchased by the distributor as of the end of a calendar quarter. An authorization for the return of records was issued to the distributor within 2 to 3 weeks after the end of the quarter. To receive credit under the authorization, however, the distributor was required to return the singles directly to Atlantic's factory. On receipt of the records at its factory, Atlantic would issue a credit memorandum to the distributor for use against future remittances. At the end of a quarter or fiscal period, Atlantic would account for the 10 percent allowance on its books by debiting its sales returns and allowances account by the amount of the return authorization granted for that period. On the first day of the next quarter or fiscal period, it made the normal reversing357 entries. When the records were delivered to its factory, a credit memorandum was issued to the distributor and the books adjusted accordingly. 6As of its fiscal year ended May 31, 1967, Atlantic had a debit balance in its sales returns and allowances account in the amount of $241,584. This balance related to sales made during the months of April and May of 1967. Atlantic argues that since its liability for such allowance was fixed and certain as of the end of this period, it was entitled to accrue this amount as an offset to gross sales. Respondent, on the other hand, contends such amount cannot be accrued either as an offset to gross sales or as a deduction from gross income since Atlantic's liability on account of such allowance was contingent and indeterminable as of the end of this period. Whether we view the issue before us as one of inclusion or one of deduction, the result is the same. No accrual may be allowed on account of the 10 percent record return allowance for the period in question. Atlantic kept its books and computed its taxable358 income on the accrual method of accounting for the period in question. The regulations under section 451 provide that where a taxpayer is on the accrual basis of accounting, income is includable in gross income in the taxable year in which "all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy." See section 1.451-1(a), Income Tax Regs. See also Spring City Co. v. Commissioner,292 U.S. 182">292 U.S. 182 (1934), and Security Mills Co. v. Commissioner,321 U.S. 281">321 U.S. 281 (1944). A similar rule exists under section 461 with respect to determining the proper taxable year in which an accrual basis taxpayer may claim deductions from gross income.7 See also United States v. Anderson,269 U.S. 422">269 U.S. 422 (1926). 359 Atlantic contends that pursuant to section 451, it was entitled to offset its gross sales for its fiscal year ended May 31, 1967 by the 10 percent return allowance granted its regular distributors on such sales. In support of its position, Atlantic argues that its 10 percent record return allowance merits the same treatment as the "price discounts" involved in Pittsburgh Milk Co.,26 T.C. 707">26 T.C. 707 (1956). See also Atzingen-Whitehouse Dairy, Inc.,36 T.C. 173">36 T.C. 173 (1961). In that case, petitioner was in the business of selling milk and related dairy products at the wholesale and retail levels. Petitioner sold milk at a discount below the list price fixed by the Milk Control Commission. The amount of the discount was agreed upon orally between petitioner and its customer as a result of the illegality of such arrangement. On its books, the petitioner accounted for its milk sales at the list price as fixed by law and deducted its price discounts as advertising expenses. This Court held that petitioner had the right to receive from its customers only the list price less the discount orally agreed upon. As such, petitioner was permitted to report its sales of360 milk at net prices. The issue of whether petitioner would have been able to deduct such discounts from gross income was never reached. The facts of our case are distinguishable from those in Pittsburgh Milk Co.,supra. During the period in question, Atlantic always had the right to collect the full purchase price from its regular distributors on the sales of single records. This right was in no way affected or diminished by Atlantic subsequently issuing authorizations for the return of 10 percent of the singles sold during such period. Indeed, under the payment plan in effect, the full purchase price on these singles were due and owing before any return authorization was issued with respect to such records. 8 It so recorded each sales transaction on its books, in addition to computing its 2 percent cash discount on that basis. Furthermore, the return authorizations issued to its distributors after the end of each quarter merely represented a right to return361 single records at full credit up to a specified limit. To receive credit under the authorization, the distributor was required to return the single records directly to Atlantic's factory. The price discounts in Pittsburgh Milk Co.,supra, were not contingent upon some subsequent event. They were uniformly granted at the time of the sale without any requirement of future performance. This Court analogized the discounts involved to "trade discounts" which we have always recognized as proper reduction against gross sales. See also American Cigar Co.,21 B.T.A. 464">21 B.T.A. 464 (1930), affirming 66 F. 2d 425 (C.A. 2, 1933). The 10 percent allowance involved herein can in no way be compared to the discounts in Pittsburgh Milk Co.,supra, or general trade discounts. At the outset, Atlantic charged the distributors the full price (less 2 percent for prompt payment) contingent only upon the return of wholly unrelated merchandise. The 10 percent allowance in question was not a discount on current sales, but only a measure of how many obsolete records petitioner would accept for credit. Atlantic had no liability for the 10 percent362 return allowance until the actual return of single records to its factory. Atlantic's liability did not and could not arise until after the taxable period in question. As such, it could not, ipso facto, have any effect on the sales made during such period. This situation is to be distinguished from the 3 percent discount given by Atlantic on the sales of its albums, the accrual of which against gross sales respondent apparently now concedes. For the same reason as cited above, Atlantic is also not permitted to accrue the debit balance in its sales returns and allowances account as a deduction from its gross income. Atlantic's liability on account of its 10 percent record return allowance was never irrevocably fixed or certain until the single records were actually returned to the factory. Since this event did not occur until after the period in question, no accrual on account thereof may be permitted. It is firmly established that a reserve for future or contingent liabilities cannot be deducted. 9Lucas v. American Code Co.,280 U.S. 445">280 U.S. 445 (1930). 363 Atlantic contends that during the period in question, all the distributors eligible for the 10 percent allowance took maximum benefit thereof. However well this may be, the fact remains that Atlantic's liability with respect to such allowance was contingent upon the actual return of the singles to its factory, an event occurring subsequent to the period in question. Furthermore, its claim that the distributors always took full advantage of the allowance for each quarter is not adequately substantiated on the basis of the record before us. The arrangement entered into between Atlantic and its regular distributors may be best described as "sale or return" contract, subject to a 10 percent limitation. This Court has consistently held that an accrual for anticipated returns in this situation is not permissible, either as an offset against gross sales or as a deduction from gross income. 10In accordance with the above, Decisions will be entered under Rule 155.Footnotes1. The cases of the following petitioners are consolidated herewith: Gerald Wexler and Shirley Wexler, docket No. 3831-71; Nesuhi Ertegun and Belkis Ertegun, docket No. 3868-71; and Atlantic Record Sales Co., Inc., docket No. 3908-71. ↩2. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩3. In terms of percentage, the stock ownership of the individual petitioners in Atlantic was 42.17 percent, 33.33 percent, and 24.50 percent, respectively.↩4. Single records purchased from jobbers would cost the distributor between 5 and 15 cents each. He would then return the records to Atlantic for a credit of 38.5 cents each, the regular wholesale price of a single.↩5. The same 2 percent cash discount was equally applicable to the purchase of albums. Atlantic had a 30-60-90 day payment plan in effect for its albums, with the initial payment due on the tenth day of the month following the month of purchase.↩6. The sales return and allowance account was debited and the accounts receivable credited in the amount of the credit memorandum.↩7. The regulations under sec. 461 provide, in pertinent part, as follows: § 1.461-1 General rule for taxable year of deduction. (a) General rule-- * * (2) Taxpayer using an accrual method.↩ Under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy. * * * While no accrual shall be made in any case in which all of the events have not occurred which fix the liability, the fact that the exact amount of the liability which has been incurred cannot be determined will not prevent the accrual within the taxable year of such part thereof as can be computed with reasonable accuracy. * * *8. Payments on the purchase of singles were due on the tenth day following the month of purchase. The return authorization was not generally issued until 2 to 3 weeks after the end of the quarter.↩9. As part of the 1954 Code, Congress enacted sec. 462 which permitted taxpayers to deduct reserves for estimated expenses. The principal requirement of the statute was that the estimated expense be attributable to the income of the taxable year and that the Treasury was satisfied that the amount of the expense could be estimated with reasonable accuracy. Upon further reflection, however, Congress realized that the Treasury would suffer substantial losses as a result of taxpayers switching to the reserve method in the transition year. Consequently, sec. 462 was repealed retroactively in 1955 by Pub. L. No. 74, 84th Cong., 1st Sess., sec. 1(b).↩10. See J.J. Little & Ives Co., Inc., T.C. Memo. 1966-68;Scott Krauss News Agency, Inc.,T.C. Memo. 1964-171↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622144/	ROBERT H. TRIMBLE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTrimble v. CommissionerDocket No. 33438-87United States Tax CourtT.C. Memo 1989-419; 1989 Tax Ct. Memo LEXIS 417; 57 T.C.M. (CCH) 1256; T.C.M. (RIA) 89419; August 14, 1989David C. Allie and Paul J. Coselli, for the petitioner. Ana G. Cummings and Richard T. Cummings, for the respondent. WHALENMEMORANDUM FINDINGS418 OF FACT AND OPINION WHALEN, Judge: This case is before the Court to decide cross motions to dismiss for lack of jurisdiction. Respondent's motion says that the Court lacks jurisdiction because petitioner filed his petition more than 90 days after the mailing of the notice of deficiency, contrary to the requirements of section 6213(a). 1 Petitioner's motion says that respondent did not mail a valid notice of deficiency in accordance with section 6212 and he is therefore barred from assessing tax deficiencies and additions to tax against petitioner for taxable years 1976 through 1981. In the alternative, petitioner's motion says that this petition is timely because petitioner filed it within 90 days after receiving the notice of deficiency. As a preliminary matter, we note respondent took the position at trial that the issue for decision is whether the notice of deficiency was mailed on April 11, 1986, and that evidence of receipt or nonreceipt of the notice is not relevant and should be excluded from the record. Respondent made continuing objection to the introduction of all such evidence and the Court took419 his objection under advisement. On brief, respondent objects to certain findings of fact proposed by petitioner concerning his alleged failure to receive the subject notice as irrelevant and formally reserves his objection to the admissibility of the evidence relied upon as the basis for such proposed findings. We hereby overrule respondent's objection. FINDINGS OF FACT Some of the facts have been stipulated, and are so found. The Stipulation of Facts filed by the parties, and the exhibits attached thereto, are incorporated herein by this reference. Petitioner Robert H. Trimble is a medical doctor who is self-employed as a radiologist. He resided at 3017 Amherst, Houston, Texas 77005 ("Houston address"), at the time the petition was filed and at all times pertinent to this case. He executed Forms 872-A (Special Consent to Extend the Time to Assess Tax) for taxable years 1978, 1979, 1980 and 1981. He did not execute such a form for taxable year 1976 or 1977, but the period of limitations on assessment for each such year was nevertheless extended by reason of net operating loss and investment credit carrybacks from 1979. On February 14, 1986, he filed with respondent Forms420 872-T (Termination of Special Consent to Extend the Time to Assess Tax) for taxable years 1978 through and including 1981. By reason of such action, the period of limitations on assessment for the taxable years at issue was due to expire on May 19, 1986, 90 days from respondent's receipt of the Forms 872-T. The notice of deficiency at issue in this proceeding is dated April 11, 1986. In it, respondent determined the following deficiencies in and additions to petitioner's Federal income tax: Additions to tax under sectionsYearDeficiency6653(a)(1)6653(a)(2)6621(c)1976$ 6,848.30 $ 342.42 197745,666.222,283.31 197852,635.802,631.79 197955,259.402,762.97 198069,543.693,477.18 198165,222.813,261.14 *The notice of deficiency was prepared by respondent's Examination Division in Houston, Texas in accordance with the routine procedures of that office for the preparation and mailing of such notices. Those procedures normally culminate in United States421 Postal Service Form 3877 (Acceptance of Registered, Insured, C.O.D. and Certified Mail), which respondent retains in his files as proof that one or more notices of deficiency were mailed on a particular date by certified mail to specified taxpayers at the addresses shown on the form. Among the records maintained by respondent's Examination Division in Houston, Texas, is a Form 3877 which states that on April 11, 1986, ten envelopes were delivered to the Westheimer Station of the United States Postal Service for mailing by certified mail. According to the Form 3877, one of the envelopes, bearing certified mail number 16656, was addressed to petitioner's Houston address and contained a notice of deficiency issued to petitioner for taxable years 1976 through 1981. On September 4, 1986, respondent mailed to petitioner statements of tax due for taxable years 1976, 1977, 1978, 1979, 1980 and 1981. Petitioner received such statements shortly thereafter. Petitioner's attorney, David C. Alley, Esquire, contacted respondent and on July 15, 1987, obtained a copy of the notice of deficiency. Petitioner filed this petition with the Court 544 days after the mailing date of the notice of422 deficiency. OPINION The crux of this case is whether respondent mailed the notice of deficiency to petitioner's Houston address on April 11, 1986. If we find that he did, then the case must be dismissed for lack of jurisdiction because the petition was not filed with this Court within 90 days thereafter as required by section 6213(a). E.g., Zenco Engineering Corp. v. Commissioner, 75 T.C. 318 (1980), affd. without published opinion 673 F.2d 1332">673 F.2d 1332 (7th Cir. 1981); Cataldo v. Commissioner, 60 T.C. 522 (1973), affd. per curiam 499 F.2d 550">499 F.2d 550 (2d Cir. 1974). If we find that he did not, then petitioner argues that the case must be dismissed on the ground that the notice of deficiency is not valid and cannot serve as the basis of a valid assessment. In these circumstances, we have jurisdiction to determine whether the notice of deficiency is valid and, in effect, to decide on what ground we lack jurisdiction. Shelton v. Commissioner, 63 T.C. 193">63 T.C. 193 (1974); Pyo v. Commissioner, 83 T.C. 626">83 T.C. 626 (1984); Brannon's of Shawnee, Inc. v. Commissioner , 69 T.C. 999">69 T.C. 999 (1978). In support of423 his motion, respondent relies on Postal Service Form 3877 to prove that the notice of deficiency was mailed to petitioner on April 11, 1986. The Form 3877 introduced by respondent is dated April 11, 1986, and contains: the initials of respondent's employee, a 90-day notice clerk, Ms. W. Diane Roscoe, who prepared the form ("dr"); petitioner's name and his Houston address; the certified mail number of the notice addressed to petitioner ("16656"); a notation of the six taxable years covered by the notice addressed to petitioner ("7612, 7712, 7812, 7912, 8012, 8112"); the total number of pieces of mail listed by respondent (10); the total number of pieces received at the Post Office (10); the signature of the Postal Service employee who accepted the mail (Mr. Willie Dunn); and the postmark, "April 11, 1986." Form 3877 represents direct evidence of both the fact and the date of mailing of the statutory notice of deficiency. See Magazine v. Commissioner, 89 T.C. 321">89 T.C. 321, 327 note 8 (1987); Traxler v. Commissioner, 63 T.C. 534">63 T.C. 534, 536 (1975); Hill v. Commissioner, T.C. Memo. 1988-198; Madsen v. Commissioner, T.C. Memo. 1988-179;424 Dorff v. Commissioner, T.C. Memo 1988-117">T.C. Memo. 1988-117. In the absence of contrary evidence, Form 3877 is sufficient to establish that the notice was properly mailed to a taxpayer. United States v. Zolla, 724 F.2d 808">724 F.2d 808, 810 (9th Cir. 1984), cert. denied 469 U.S. 830">469 U.S. 830 (1984); United States v. Ahrens, 530 F.2d 781">530 F.2d 781, 784 (8th Cir. 1976); Cataldo v. Commissioner, supra at 524. In further support of his motion, respondent introduced evidence to show the routine procedures used in preparing and mailing notices of deficiency in Houston, Texas and evidence to show that such procedures were followed in this case. See Cataldo v. Commissioner, supra at 524. Respondent called as a witness respondent's 90-day notice clerk who prepared the subject Form 3877, Ms. Roscoe. She testified about the procedures for preparing and mailing notices of deficiency which respondent's Houston Office followed during April 1986. Ms. Roscoe explained that notices were sent to her after they had been typed and proofread. She proofread them and compared each one with the taxpayer's administrative file. She then made425 the requisite number of copies and date-stamped each notice. She typed Postal Service Form 3877, including the names and addresses of the persons to whom notices were to be mailed, and verified that the information thereon corresponded to the appropriate information on each notice of deficiency. She then placed the original and one copy of each notice in an envelope for mailing to the taxpayer, and stamped each envelope in the lower right-hand corner with a "Certified Mail" stamp. She put the envelopes in numerical sequence. She sealed each envelope and bundled the envelopes together with the Postal Service Form 3877. The bundle of envelopes and Form 3877 were then delivered to the mail room at respondent's Houston Office. The fact of delivery to respondent's mail clerk was recorded on a departmental log. The appropriate page from the departmental log was introduced into evidence. The entry for April 11, 1986, shows the certified mail number of the first and last envelope listed on Form 3877 ("16648"and "16657"), the number of pages comprising Form 3877 ("1"), the initials of the person who transferred the bundle to the mail room ("C.P."), and the initials of the mail room clerk426 who received it ("M.H."). The person who transferred the notices to the mail room on April 11, 1986, and whose initials appears on the log, is Ms. Christine Peterson. The mail room clerk whose initials appear on the log is Mr. Mark Hoppe. Respondent called Mr. Hoppe as a witness. He testified that he usually checked the certified mail numbers on the Form 3877 with the corresponding numbers on each envelope in the bundle before he signed the log. He would then deliver the bundle to the Post Office. The Post Office clerk who handled the statutory notices on April 11, 1986, was Mr. Willie Dunn. Petitioner called Mr. Dunn as a witness. He testified that it was his practice to count the envelopes and to check the certified mail numbers on Form 3877 with the corresponding numbers on each envelope in the bundle which accompanied Form 3877. After satisfying himself that the envelopes corresponded with the Form 3877, he would write the total number of items included in the bundle on the Form 3877, circle the number, stamp the Form 3877 with an official postmark, and initial it. Mr. Hoppe further testified that Form 3877 bearing the official postmark would be returned to respondent's427 mail room, where it would be checked by a supervisor and returned to the typing unit. According to Ms. Roscoe, information concerning the fact of mailing of each notice, including the date of mailing, would then be recorded in respondent's two computer systems. She testified that respondent's computer systems reflect the issuance of a notice of deficiency to petitioner on April 11, 1986. Petitioner makes two alternative arguments. First, he argues that this case should be dismissed because the evidence is not sufficient to prove that a valid notice of deficiency was properly mailed by respondent on April 11, 1986. Petitioner does not advance any reason to conclude that the notice is invalid, other than his contention that it was not mailed on April 11, 1986, and he attempts to prove that fact as an inference from various factors, principally his claim that he did not receive it. Simply put, petitioner's first argument is that he never received the notice of deficiency and, therefore, it must not have been properly mailed. Second, he argues that this case should not be dismissed because the petition was filed within 90 days from the date on which his attorney received it, and428 it is, therefore, timely. We disagree with both arguments. Petitioner begins his first argument with the assertion that he never received the notice of deficiency or any other article sent by respondent by certified mail on April 11, 1986, whereas he did receive statements of tax due dated September 4, 1986, which were sent by regular mail. He then points to the facts that respondent's file does not contain the envelope with the notice of deficiency allegedly sent to petitioner and that the Postal Service has no record of delivery of the notice. He asserts that such "proof of the failure of a letter to reach its destination raises a corresponding presumption that it was never mailed." Petitioner relies on this so-called presumption of nonmailing, together with his assertion that respondent's procedures for mailing notices of deficiency do not exclude the possibility of error, as a basis to infer "that Respondent and his employees have acted negligently, and that their negligence resulted in the failure to properly send the Notice to the Petitioner." Petitioner further argues that even if respondent is not at fault, the notice of deficiency should nevertheless be declared invalid429 because the fault lies with the Postal Service, "a sister agency of Respondent," and that is a "far fairer and more equitable" result. At the outset, we note that the statute requires respondent to send the notice of deficiency by certified mail or registered mail, section 6212(a), and in the case of an income tax deficiency, provides that the notice of deficiency "shall be sufficient," "if mailed to the taxpayer at his last known address." Section 6212(b)(1). The statute does not require delivery by the Commissioner or actual receipt by the taxpayer; the Commissioner's notice sent by registered or certified mail to the taxpayer's last known address is valid and sufficient, whether or not it is actually received. King v. Commissioner, 857 F.2d 676">857 F.2d 676, 681 (9th Cir. 1988), affg. 88 T.C. 1042">88 T.C. 1042 (1987); Keado v. United States, 853 F.2d 1209">853 F.2d 1209, 1212 (5th Cir. 1988); United States v. Ahrens, supra at 785; Monge v. Commissioner, 93 T.C. (July 12, 1989); Frieling v. Commissioner, 81 T.C. 42">81 T.C. 42, 52 (1983). In effect, if the notice is properly mailed, the statute places the risk of nondelivery on the taxpayer. 430 Section 6212(b). We further note that respondent bears the burden of proving that the date on which the deficiency notice was mailed is more than 90 days before the date on which petitioner filed his petition in this Court. Pietanza v. Commissioner, 92 T.C. 729">92 T.C. 729, 736 (1989); August v. Commissioner, 54 T.C. 1535">54 T.C. 1535, 1536 (1970). The record contains ample evidence, consisting of Form 3877 and testimony about respondent's procedures for mailing notices of deficiency, to establish that the subject notice was mailed on April 11, 1986. Indeed, as we recently noted, the rule is well-settled that proof of a properly mailed document creates a presumption that the document was actually received by the addressee, absent contrary proof of irregularity. Estate of Wood v. Commissioner, 92 T.C. 793 (1989). Petitioner's first argument is that his failure to receive the notice creates a "corresponding presumption that it was never mailed." However, this so-called presumption of nonmailing is not a "corresponding" presumption at all but is directly contrary to the presumption which normally obtains in this situation. See generally 29 Am. Jur. 2d431 § 198 (1967). In effect, petitioner simply asks the Court to turn the statute on its head. His first argument is clearly contrary to section 6212(b)(1). It disregards the fact that the statute places the risk of nondelivery of a notice of deficiency on the taxpayer. E.g., Monge v. Commissioner, supra; Muller v. Commissioner, T.C. Memo 1989-332">T.C. Memo. 1989-332. Moreover, we are unable to agree with the factual premise of petitioner's first argument that the notice failed to reach its destination, petitioner's Houston address. The record does not bear this out or warrant an inference that the notice was not properly mailed by respondent. Certainly, the fact that the Postal Service has "no record of delivery" of the letter bearing certified mail number 16656 does not do so. To the contrary, "no record of delivery" means only that there is an absence of such a record and not necessarily that the article was not delivered or offered for delivery. While petitioner testified that he did not personally receive the notice, his testimony is not inconsistent with our conclusion that delivery of the notice was attempted at petitioner's Houston address but was refused by petitioner's432 tenant, Mr. John F. Wendt. Mr. Wendt testified that he refused to accept delivery of certified letters addressed to petitioner "numerous times since 1978." Mr. Wendt's testimony on this point was confirmed by a mail carrier who stated that Mr. Wendt refused delivery of certified letters from the Internal Revenue Service. In any event, the point is that petitioner's failure to receive the notice does not reasonably raise an inference that respondent failed to properly mail it. In further support of his position that the Court should infer that the notice was not mailed, petitioner attacks the procedures of the Houston Examination Division as comprising a system in which mistakes can be and are made in mailing notices of deficiency. Petitioner points to the facts: that Ms. Roscoe, who was responsible for the preparation of the Form 3877, had only 2-3 weeks of experience as the notice clerk and was still in training at the time she prepared the notice of deficiency to petitioner; that three other taxpayers who were sent notices on the same day did not file petitions with this Court; that respondent's mail room occasionally changed procedures; that Messrs. Hoppe and Dunn, who handled433 the certified mails, did not check the names and addresses on the Form 3877 against the envelopes in which the notices were sent; and that petitioner allegedly did not receive the notice of deficiency but received statements of tax due in September. Petitioner also notes that respondent did not offer any witness in a position superior to Ms. Roscoe. Based on these factors, petitioner argues that there is sufficient evidence to show that respondent did not properly mail the notice of deficiency. He admits that he relies in substantial part on circumstantial evidence and "natural inference." We do not find petitioner's circumstantial evidence sufficient to establish that respondent failed to follow his standard procedures in preparing and mailing the subject notice of deficiency to petitioner, nor do we believe that such factors necessarily or even "naturally" lead to the inference that a mistake was made. Ms. Roscoe's inexperience as a 90-day notice clerk hardly suggests that she made a mistake in this case. She worked under the close supervision and direction of an experienced notice clerk. Her work was invariably checked and her comparison of names and addresses on the Form434 3877 to the envelopes was double checked by a different person. No errors were allowed on the Form 3877. She testified that no errors were ever found in her work as a notice clerk in the Houston Examination Division. The fact that three of the nine other taxpayers whose names appear on the Form 3877 for April 11, 1986, did not file petitions is not probative of a mistake in the mailing of the notices to such taxpayers, much less to petitioner. There is no evidence that any of the three taxpayers failed to receive a notice of deficiency, and there are many other reasons why a taxpayer would choose not to petition this Court. Changes in respondent's mail room procedures do not necessarily indicate that an error was made. The fact that the mail room clerk and the postal clerk did not check the names and addresses on the Form 3877 against the names and addresses on the envelopes containing the notices does not lead to the inference that petitioner's name or address was wrong. The names and addresses had already been checked and double-checked in the typing notices unit. We believe that the procedures followed by Messrs. Hoppe and Dunn, each of whom checked the certified mail435 numbers, were sufficient to ensure correct and proper mailing of statutory notices. The fact that Ms. Roscoe's supervisors did not testify proves nothing. Ms. Roscoe was the person who actually prepared and mailed petitioner's notice of deficiency. Testimony from her supervisors was not necessary to explain and establish respondent's procedures under which notices of deficiency were mailed by respondent's Houston Examination Division in April, 1986. If petitioner deemed it necessary, he could have called the supervisors as witnesses. There is no evidence that petitioner attempted to do so. The present case is virtually indistinguishable from Barrash v. Commissioner, T.C. Memo 1987-592">T.C. Memo. 1987-592, which also involved the taxpayers' claim that notices of deficiency mailed by the Houston Examination Division had not been received and were invalid. In that case, the Postal Service had no record of delivery nor was the notice of deficiency returned to the Commissioner as undeliverable or refused. In support of his motion to dismiss the petition as untimely, the Commissioner also relied on Form 3877 and evidence of his standard procedures for handling statutory notices. The436 taxpayers in that case presented no evidence directly contradicting the testimony of witnesses who had participated in the routine preparation and mailing of the notices of deficiency, or the result of such procedures reflected on the Form 3877. Accordingly, we held that the Commissioner properly mailed the statutory notices pursuant to section 6212(a). In this case, petitioner has also failed to present any credible evidence that the mailing of statutory notices did not occur as indicated on the Form 3877. Accordingly, we find and hold that respondent mailed the notice to petitioner at his Houston address on April 11, 1986. Before turning to petitioner's second argument, we note that respondent urges us to draw a "bright line" for these cases by ruling that the introduction of Form 3877 creates an "irrebuttable presumption" that a notice of deficiency was mailed as stated on the form. Respondent seeks thereby to obviate the need of proving anew in each case the procedures for processing and mailing notices of deficiency. While we understand the burden placed on respondent, we reject any such bright line. The well-established principle is that Form 3877 is sufficient to establish437 the mailing of statutory notices, in the absence of contrary evidence. United States v. Zolla, supra at 810; United States v. Ahrens, supra at 784; Cataldo v. Commissioner , supra.A taxpayer should not be foreclosed from introducing contrary evidence because, even though respondent's standard procedures may be designed to minimize the risk of error and to ensure proper handling and mailing of the statutory notices, the possibility of human error always exists and there can be extraordinary circumstances under which a bare Form 3877 is not sufficient to prove the mailing or even the existence of a statutory notice. See Pietanza v. Commissioner, supra.Petitioner's alternative argument is that his petition is timely because he filed it within 90 days after actual receipt of the notice of deficiency by his attorney. Petitioner notes that he had absolutely no control over the mailing or delivery of the subject notice and argues that it would be unfair for the Court to punish him for not receiving it. He claims that the Postal Service must have mishandled it, and that, if anyone has to bear the438 burden of such mishandling, it should be the Internal Revenue Service, a sister branch within the United States government, not him. As authority, petitioner relies on four cases, Estate of McKaig v. Commissioner51 T.C. 331">51 T.C. 331 (1968); McPartlin v. Commissioner, 653 F.2d 1185">653 F.2d 1185 (7th Cir. 1981); Kennedy v. U.S., 403 F. Supp. 619">403 F. Supp. 619 (W.D. Mich. 1975) affd. 556 F.2d 581">556 F.2d 581 (6th Cir. 1977); Tangren v. Mihlbachler, 522 F. Supp. 701">522 F. Supp. 701 (D. Colo. 1981). The facts of this case bear no similarity to the unusual facts presented in the cases cited by petitioner. In this case, as discussed above, respondent properly mailed a valid notice of deficiency on April 11, 1986. Under the statute, it is the mailing date of the notice of deficiency which starts the running of the 90-day period for filing a petition for redetermination in this Court. Section 6213(a). We are not at liberty to measure the 90-day period from a later date, such as when the taxpayer receives the notice, nor are we at liberty to extend the 90-day period or to consider a petition filed beyond that time. E.g., Axe v. Commissioner, 58 T.C. 256">58 T.C. 256, 259 (1972).439 Because the Commissioner mailed a valid statutory notice of deficiency on April 11, 1986, and petitioner failed to file a petition within 90 days thereafter, respondent's motion to dismiss must be granted and petitioner's motion to dismiss must be denied. To reflect the foregoing, An appropriate order will be entered. Footnotes1. All section references are to the Internal Revenue Code.↩. 50 percent of the interest due on the underpayment. *120 percent of the interest due on the underpayment.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622145/	Agency of Canadian Car and Foundry Company, Limited, Petitioner, v. Commissioner of Internal Revenue, RespondentAgency of Canadian Car & Foundry Co. v. CommissionerDocket Nos. 83825, 83826United States Tax Court39 T.C. 15; 1962 U.S. Tax Ct. LEXIS 59; October 3, 1962, Filed 59 Decisions will be entered for the respondent. 1. Payments on Mixed Claims Commission Award -- German Bonds to Fund Payments. -- Held, bonds issued in 1953 by the Federal Republic of Germany to the Government of the United States of America, payable serially each year beginning in 1953 and ending in 1978, are not capital assets in the hands of the taxpayer within the provisions of section 1232(a), 1954 Internal Revenue Code, notwithstanding the fact that the net amount of the funds derived from the payment of the bonds on maturity are paid over ratably to holders of awards of the Mixed Claims Commission, United States and Germany, by the United States Treasury Department. Held, further, that amounts received in the taxable years by the petitioner from the Treasury Department in respect of its award, out of the proceeds of the bonds which matured in the taxable years, which were paid to the United States and deposited in the German special account for payment ratably to award holders, constitute ordinary income and not amounts received on retirement of capital assets in the hands of the taxpayer within the meaning of section 1232(a)(1).2. Petitioner, on the accrual basis, 60 adopted the view, when it filed its Federal income tax returns and New York corporation franchise tax returns for 1955, 1956, and 1957, that payments received in those years in respect of its award from the Mixed Claims Commission represented a return of capital and not income; it computed and accrued the amount of the State franchise tax on that basis; and it deducted such amounts of State franchise taxes in its Federal returns. In 1961, petitioner voluntarily filed amended Federal and State returns reporting the award payments as long-term capital gains and increased amounts of State franchise taxes resulting from the reporting of additional income in the amended New York corporation franchise tax returns. Held, that the additional State franchise taxes for 1955, 1956, and 1957 are accruable and deductible only in 1961, the taxable year in which petitioner admitted liability for tax in respect of a part of the payments on the Mixed Claims Commission award. Gunderson Bros. Engineering Corp., 16 T.C. 118">16 T.C. 118, followed. George E. Cleary, Esq., and Walter S. Rothschild, Esq., for the petitioner.Theodore E. Davis, Esq., and Lionel Savadove, Esq., for the respondent. Harron, Judge. HARRON 16 The respondent determined deficiencies in income tax for the years 1954-1957, inclusive, as follows:Docket No.YearDeficiency838251954$ 55,853.58838251955155,219.18838251956125,352.70838261957125,032.43Petitioner received a Mixed Claims Commission award in 1939 under a claim against Germany for sabotage losses sustained in 1917. During the taxable years, petitioner received payments from the United States Treasury Department with respect to the award. The questions for decision are: (1) Whether the payments on the award received in the taxable years qualify as capital gain under section 1232(a)(1) of the 1954 Code, or are taxable as ordinary income. (2) Whether petitioner, an accrual basis taxpayer, 62 is entitled to deduct in 1955, 1956, and 1957 additional New York corporation franchise taxes for those years which it reported and paid in 1961.FINDINGS OF FACT.Some of the facts have been stipulated. They are found as stipulated; the stipulations are incorporated herein by this reference.Petitioner is a New York corporation which was incorporated in 17 1915; its principal office is in New York City. Its returns for the taxable years were filed with the director of internal revenue for the District of Lower Manhattan. Petitioner keeps its books and files its returns on an accrual method of accounting.Issue 1. -- On January 11, 1917, petitioner's plant and factory at Kingsland, New Jersey, was completely destroyed by explosions and fires. Prior thereto petitioner's principal business was the production of munitions for sale to Allied Governments during World War I. The destruction of the Kingsland plant gave rise to a claim of the petitioner against the Government of Germany for damages resulting from sabotage, which was duly filed in 1924 by the United States on behalf of the petitioner with the Mixed Claims Commission, United States and Germany. The Commission63 was established pursuant to the agreement of August 10, 1922, between the United States and Germany to determine the amounts to be paid by Germany in satisfaction of Germany's financial obligations to the United States Government and its nationals for losses and damages sustained during World War I, as provided for under the Treaty of Berlin concluded between the two Governments on August 25, 1921.In due course, the Mixed Claims Commission entered an award in petitioner's favor on October 30, 1939. The decision of the Commission was that the German Government was liable to the United States Government, on behalf of petitioner, for damages for losses sustained at Kingsland, and that under the Treaty of Berlin, the German Government was obligated to pay the United States, on petitioner's behalf, the sum of $ 5,871,105.20 with interest from January 31, 1917, to the date of payment, at the rate of 5 percent per annum. The decision of the Commission was final and binding upon the two Governments.Although petitioner's claim was presented to the Mixed Claims Commission by a representative of the United States, of necessity, and the title of the proceeding was "United States of America64 on behalf of Agency of Canadian Car and Foundry Company, Limited, Claimant v.Germany," petitioner engaged and paid its own attorney, Amos J. Peaslee, who actively participated throughout the proceedings.The Congress enacted the Settlement of War Claims Act of 1928 on March 10, 1928 (Pub. L. 122, ch. 167, 45 Stat. 254), which was later amended by the Act of March 3, 1933, and the Act of August 6, 1947. (Pub. L. 426, 72d Cong., 2d Sess., ch. 210; Pub. L. 375, 80th Cong., 1st Sess., ch. 506.) This Act made provisions inter alia for the settlement of certain claims of American nationals against Germany and, in general, it created the system under which the awards of the Mixed Claims Commission would be paid. It provided that the Secretary of State should certify to the Secretary of the Treasury the 18 awards made by the Mixed Claims Commission; it created a German special deposit account in the Treasury into which there would be deposited all funds specified and from which there would be disbursed all payments authorized, including payments on account of the certified awards of the Mixed Claims Commission. The Secretary of the Treasury was authorized to make payments65 out of the German special deposit account in accordance with such regulations as he deemed necessary. Such Act also provided that there should be deducted from each payment out of the special deposit account an amount equal to one-half of 1 percent thereof as reimbursement for the expenses incurred by the United States in respect of the payments. The Act as amended established certain priorities of payments out of the special deposit account. It also authorized the Secretary of the Treasury to pay out of the special deposit account an amount equal to the principal of each certified Mixed Claims Commission award, plus the interest accruing thereon up to January 1, 1928; and to pay simple interest at the rate of 5 percent per annum beginning January 1, 1928, on the unpaid balances, until paid, of the total sum of each award on January 1, 1928, arrived at by adding the interest accrued to that date to the amount of the individual awards.Under the provisions of the Settlement of War Claims Act of 1928, referred to above, the Mixed Claims Commission award on petitioner's claim in the amount of $ 5,871,105.20 accumulated 5-percent interest each year from January 31, 1917, to January66 1, 1928, in the amount of $ 3,204,980.03; the accumulated interest was added to the principal amount of the award resulting in a total principal sum of $ 9,076,085.23; after January 1, 1928, 5-percent interest per year then accrued on the principal sum of $ 9,076,085.23.On June 23, 1930, the United States and Germany concluded another treaty providing for the final discharge of obligations of Germany to the United States in respect of awards of the Mixed Claims Commission and the costs of the United States Army of occupation. This agreement provided inter alia for the funding of Germany's obligations under the awards of the Mixed Claims Commission. Germany issued to the United States bonds of Germany in amounts believed sufficient to pay all of the awards made and to be made by the Commission, and interest thereon, to the United States and its nationals. The 1930 German bonds were held in the German special deposit account. Germany agreed to pay in satisfaction of its obligations under the awards of the Commission, plus interest, the sum of 40,800,000 reichsmarks for the period September 1, 1929, to March 31, 1930, and the sum of 40,800,000 reichsmarks per annum from April67 1, 1930, to March 31, 1981. As evidence of this indebtedness, Germany issued to the United States bonds dated September 1, 1929, in the total amount of 40,800,000 reichsmarks, maturing March 31, 1930, 19 and additional bonds in the total amount of 40,800,000 reichsmarks maturing serially on March 31 and September 30 in each succeeding year until March 31, 1981. The obligations of Germany were to end as soon as all of the payments contemplated by the Settlement of War Claims Act of 1928 were completed and the bonds not then matured evidencing such obligations were then to be canceled and returned to Germany. All of the bonds were to be paid at the Federal Reserve Bank of New York in funds immediately available in gold coin in an amount in dollars equal to the amount due in reichsmarks at a prescribed exchange rate.In 1933, Germany defaulted on its bonds issued pursuant to the 1930 agreement. In fact, no payments were made to the United States on account of these bonds after 1933.In 1952 a conference was held in London which dealt with the external debts of Germany owed to the United States and other Allied Governments, including the indebtedness of Germany for awards made68 by the Mixed Claims Commission, United States and Germany, payment of which was in default. A representative of the United States Treasury reported that the amounts due to private claimants under the awards as of December 31, 1951, totaled $ 103,758,733.03.The Federal Republic of Germany agreed to assume the prewar external debt of the German Reich. The London Debt Settlement Conference discussed inter alia the means to be adopted to deal with the defaulted Mixed Claims bonds issued by the German Government pursuant to the agreement of June 23, 1930, on which only three installments had been paid.At the London conference an agreement relating to Germany's indebtedness for awards made by the Mixed Claims Commission on behalf of nationals of the United States was signed by the Federal Republic and the United States, which became effective on September 16, 1953. It provided in general as follows: The Federal Republic agreed to pay to the United States $ 97,500,000 in 26 annual installments, in lawful currency of the United States, at the Federal Reserve Bank of New York for the credit in the general account of the Treasurer of the United States beginning on April 1, 1953, through69 April 1, 1978. Five installments were to be paid in the amount of $ 3 million; 5 in the amount of $ 3,700,000; and 16 in the amount of $ 4 million. In the event any installment was not paid on the due date, such installment was to bear interest of 3 3/4 percent per annum until paid. The total payment of $ 97,500,000 was to be made by the Federal Republic "on behalf of those nationals of the United States, or their successors or assignees, on whose behalf awards of the Mixed Claims Commission, United States and Germany have heretofore been entered which amounts have not been fully satisfied."20 As evidence of its obligations under the 1953 agreement, the Federal Republic issued 26 bonds; they were dated January 1, 1953; they matured and became payable serially on the first day of April in 1953 and each year thereafter including 1978; each bond was made payable in dollars to the Government of the United States at the Federal Reserve Bank of New York; the bonds on their face recited as the consideration for the Federal Republic's agreement to make payment of the bonds the mutual covenants contained in the agreement of September 16, 1953, and stated that the bonds were issued70 pursuant to that agreement; each bond stated that if the bond was not paid on its due date, interest on the face amount would be paid from such date until the date of payment at the rate of 3 3/4 percent per year. The bonds did not have any interest coupons attached. The form of the bonds is incorporated herein by this reference. The bonds were signed for the Federal Republic of Germany by appropriate officers of the Federal Republic.The bonds were delivered to the Secretary of the Treasury of the United States at the Treasury Department in Washington, D.C. Upon receipt thereof, the United States Government canceled and delivered to the Federal Republic the 24 1930 bonds of Germany which were in default having maturity dates of September 30 of 1931 through 1942, and March 31 of 1932 through 1943.Under the agreement of September 16, 1953, the United States agreed to apply all of the payments made by the Federal Republic in reduction of the remaining indebtedness of Germany in respect of awards of the Mixed Claims Commission made on behalf of nationals of the United States; and settlement of the indebtedness of Germany in respect of the awards of the Mixed Claims Commission to71 the United States on its own behalf was to be deferred until the final general settlement envisaged in another agreement, the Agreement on German External Debts, signed in London on February 27, 1953. Thus, all of the payments of the Federal Republic under its bonds dated January 1, 1953, were to be applied by the United States in reduction of the awards to United States nationals, except for the fee of one-half of 1 percent which the United States was authorized to deduct from each payment to an award holder by section 2(e) of the Settlement of War Claims Act of 1928.The Federal Republic paid the United States the first five installments of $ 3 million, each, the principal amounts of five of its bonds due on the first of April in 1953 through 1957. The receipts were deposited in the German special deposit account in the Treasury.At some time during the fiscal year ended June 30, 1955, the Treasury Department received from the Department of Justice, the sum of $ 701,974.86, which represented a part of the residue of retained 21 German property seized by the United States during World War I and held by the Alien Property Custodian. This sum was deposited in the German special72 deposit account in the Treasury under authorization given to the Secretary of the Treasury by section 4(a) of the Settlement of War Claims Act of 1928. According to the Annual Report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30, 1955, page 101, the payments into the German special deposit account of the $ 3 million installment paid by the Federal Republic on April 1, 1955, and the sum received from the Department of Justice made possible a further distribution of 6 percent to holders of Mixed Claims awards, which distribution was made on account of interest accrued on the awards.With respect to the loss which petitioner sustained when its Kingsland plant was destroyed in 1917, petitioner took a loss deduction of $ 2,799,324.77 in its Federal income tax return for 1917. This deduction was fully offset by the income reported in the return.Between October 30, 1939, when the Mixed Claims Commission made the award to the United States in behalf of petitioner of $ 5,871,105.20, and January 10, 1941, petitioner did not receive any payment on account of the award chiefly because of litigation relating to its and other awards which was73 pending in Federal courts.On January 10, 1941, the first payment on the award was made to petitioner out of the German special deposit account by the Treasury Department in the amount of $ 6,474,238.37, less the one-half of 1-percent service charge, $ 32,371.19, or the net sum of $ 6,441,867.18.The balance due on petitioner's award as of January 1, 1928, was $ 9,076,085.23, representing the principal amount of the award plus accrued interest thereon up to January 1, 1928, which at that time was added to the principal amount under a provision of the Settlement of War Claims Act. This payment was made on the "principal account" in petitioner's award account in the German special deposit account and reduced the unpaid balance thereof to $ 2,601,846.86 as of January 10, 1941.As of the same date, the balance due in the "interest account" in petitioner's award account in the special deposit account was $ 5,910,645.09, representing interest accrued on the "principal account" from January 1, 1928, to January 10, 1941.As of April 5, 1941, and October 15, 1941, payments of $ 130,092.34 and $ 109,644.20, respectively, were made to petitioner on its award. (The net amounts after the deduction74 of the service charge were $ 129,441.88 and $ 109,095.98.) These payments were credited to the "principal account" in petitioner's award account reducing the unpaid balance thereof to $ 2,362,110.32 as of October 15, 1941. As of that 36 date the balance of the accrued "interest account" in the award account was $ 6,006,289.70.The Settlement of War Claims Act established certain priorities in payments out of the German special deposit account, and that certain payments on account of Mixed Claims Commission awards would represent payments in reduction of principal, and other payments would represent payments in reduction of interest accrued on principal. For example, under the Act the Secretary of the Treasury was authorized to pay to award holders of the third class, in which category was petitioner's award, up to but not more than 80 percent of the amount of principal (principal plus interest to January 1, 1928).Petitioner was advised by the Treasury that the payment made as of October 15, 1941, completed the payments to it in reduction of principal in the principal account portion of its award account. Thereafter, all of the payments to petitioner, under the Settlement75 of War Claims Act, as amended, were stated to represent payments in reduction of the interest accrued on principal in the principal account.Petitioner received further payments from the Treasury out of the German special deposit account in 1947, 1948, 1952, and 1953. All of these payments were designated as part payment of accrued interest on the award pursuant to provisions of the Settlement of War Claims Act of 1928, as amended.In April of 1954, 1955, 1956, and 1957, petitioner was advised by the Treasury Department that by reason of the receipt from the Federal Republic of Germany of the current year's annual installment payment under the 1953 agreement, the Secretary of the Treasury, under the provisions of the Settlement of War Claims Act of 1928, as amended, had authorized payments to it "on account of the interest" on its award. Petitioner was advised, further, that in accordance with the Act of August 6, 1947, Public Law 375, amending the Settlement of War Claims Act, the payment of the distributions would, "for the purpose of further accruals of interest only," reduce the principal balance upon which interest would accrue. The net amounts, after taking into account expenses76 properly allocable thereto, received by petitioner out of the German special deposit account in the taxable years 1954-1957, were as follows:1954$ 251,751.011955307,682.391956245,198.811957240,554.87The amounts paid to the petitioner out of the German special deposit account in the years 1954-1957, inclusive, represented its share 23 of the installment payments made by the Federal Republic of Germany to the United States under the 1953 agreement, in retirement of its bonds numbered 2, 3, 4, and 5, which became due in those years; except that a part of the amount which petitioner received in 1955 represented its share of the distribution to award holders of the sum of $ 701,974.86 received in 1955 by the Treasury Department from the Department of Justice, representing funds derived from a part of the residue of German property held by the Alien Property Custodian.In its Federal income tax return for 1954, petitioner reported the net amount received from the Treasury out of the German special deposit account as long-term capital gain. In its returns for 1955, 1956, and 1957, petitioner reported the net payments received in 1955, 1956, and 1957 as returns77 of capital. In determining the deficiencies for the taxable years, the respondent held that the amount received in each year in respect of the award of the Mixed Claims Commission constitutes ordinary income; he included in the taxable income of each year the entire net amount received in respect of the award of the Mixed Claims Commission.Issue 2. -- The statutory notices of deficiency which give rise to these proceedings were mailed on July 28, 1959, and October 2, 1959, and the petitions were timely filed thereafter on October 26, 1959.In its petitions, the petitioner claimed that the payments received in the taxable years in respect of the Mixed Claims Commission award were taxable for Federal income tax purposes as long-term capital gains under section 1232 of the 1954 Code. Petitioner did not claim in its petitions that the receipts represented a return of capital.In its original Federal income tax returns for 1955, 1956, and 1957, petitioner took the position that the payments received in those years in respect of the award represented a return of capital and, accordingly, no part thereof was included in taxable income.In its original reports for the New York corporation78 franchise tax for 1955, 1956, and 1957, petitioner did not include in income any part of the amounts received in respect of the awards, but reported the receipts as return of capital. Petitioner reported and paid corporation franchise taxes as follows:YearNew York franchise tax1955$ 264.921956870.6419571,390.17Petitioner deducted the above amounts of New York corporation franchise taxes in its original Federal income tax returns for 1955-1957, inclusive. The deductions were allowed by the respondent.On or about February 1, 1961, petitioner voluntarily filed for the years 1955, 1956, and 1957 amended Federal income tax returns in 24 which it reported the net amounts received in those years out of the German special deposit account as long-term capital gains. Also, petitioner took deductions for additional New York corporation franchise taxes on the basis of the inclusion in income, for the purposes of that tax, of the entire net amount received in each year in respect of the awards because under the New York corporation franchise tax law no distinction is made between ordinary income and capital gain. The amounts of the deductions for increased corporation79 franchise taxes which were taken in the amended Federal income tax returns are as follows:YearAdditional franchise taxes1955$ 16,103.57195612,614.81195712,583.97In amendments to its petitions in these proceedings, the petitioner made claims for deductions for additional New York corporation franchise taxes for 1955, 1956, and 1957 in the amounts above stated.Also, on or about February 1, 1961, petitioner voluntarily filed amended New York corporation franchise tax reports for 1955, 1956, and 1957, giving as the reason the following explanation: "These amended reports are filed in accordance with requirements necessitating such filings whenever amended federal returns are filed." In the amended New York franchise tax returns, petitioner included in taxable income the entire net amount received in each year on account of the award because under New York law no distinction is made between ordinary income and capital gain. However, in so reporting such income the following explanation was given in the amended corporation franchise tax reports: "Net long-term capital gains -- Amounts received on account of retirement of German Federal Government bonds (less expenses80 applicable thereto) previously reported as return of capital." The additional income reported served to increase the New York corporation tax and petitioner paid the additional tax for each year on or about February 1, 1961. The following schedule shows the total corporation franchise taxes reported in 1961 in the amended New York returns; the amounts of the taxes reported originally in the returns for 1955, 1956, and 1957; and the additional amounts of taxes reported and paid in 1961:New York Corporation Franchise TaxTax due perTax paid perAdditionalYearreturns filedorginaltax paidin 1961returnsin 19611955$ 16,368.49$ 264.92$ 16,103.57195613,485.45870.6412,614.81195713,974.141,390.1712,583.9725 OPINION.Issue 1. -- The facts in these cases are substantially the same as in Richard T. Graham, 36 T.C. 612">36 T.C. 612, affd. 304 F. 2d 707 (C.A. 2, 1962). Petitioner contends, however, that it has proved that the holders of awards of the Mixed Claims Commission, United States and Germany, including itself, were the beneficial owners of the bonds of the Federal Republic81 of Germany, issued in 1953, and other facts which it alleges were not established in the Graham case; that the Graham case is, therefore, distinguishable and not controlling; that there was retirement at maturity of some of the German bonds in the taxable years which resulted in petitioner's realization of capital gains within the provisions of section 1232(a)(1) of the 1954 Internal Revenue Code1 with respect to the payments received by petitioner on its award. An essential part of petitioner's argument is the contention that the 1953 bonds were in registered form within the meaning of section 1232(a)(1). Petitioner refers to the form of the bonds, which on their face were promises to pay the Government of the United States of America on behalf of those nationals of the United States holding unpaid awards of the Mixed Claims Commission; they were not bearer bonds or in negotiable form; and by reference to the terms of the 1953 agreement with the Federal Republic, no transfer of the bonds was contemplated. Petitioner argues that the fact that award holders did not directly hold the German bonds and hence were not the registered holders of record is irrelevant because, 82 according to petitioner's proposition, the United States held the bonds as trustee or fiduciary for the benefit of the award holders, and it is alleged that "a bond does not lose its character as a registered bond merely because the registered holder is a broker, agent, nominee or fiduciary, rather than the beneficial owner."83 Respondent contends that the application of section 1232(a)(1) is limited to bonds and other evidences of indebtedness "which are capital assets in the hands of the taxpayer," and he refers to the general definition of holder as "one in possession of the instrument and entitled to maintain an action at law on it." 8 Am. Jur., Bills and Notes, sec. 335. He argues that even assuming that holders of Mixed Claims Commission awards are the beneficiaries of the German bonds, 26 their situation is not different from that of beneficiaries of a trust, the trustee of which owns and holds bonds. He takes issue with petitioner on the point that for the purposes of section 1232(a)(1) it is of critical importance that bonds and other evidences of indebtedness are held by someone other than the beneficiaries of the proceeds. Respondent relies upon the Graham case which he regards as controlling and indistinguishable.The petitioner is an original award holder. Unlike Graham, petitioner did not acquire by purchase an interest in an award entered in behalf of another, and in that sense petitioner is not claiming that it acquired a capital asset.Under the 1953 agreement, the Federal84 Republic of Germany assumed the obligation of the former Government of Germany on the unpaid awards, and interest thereon, which had been entered by the Mixed Claims Commission in favor of the United States on behalf of its nationals, and in so doing the Federal Republic agreed to pay to the United States the negotiated sum of $ 97,500,000 in 26 annual installments. The payments received by the petitioner on account of its award in the taxable years from the Treasury Department were partial payments of its award, the indebtedness of the Federal Republic.The Graham case holds that amounts received in payment of indebtedness under an award of the Mixed Claims Commission cannot be treated as capital gain within the limited scope of section 1232(a)(1) because, first, the payment of an obligation cannot be considered as an amount "received in exchange" of a capital asset, Fairbanks v. United States, 306 U.S. 436">306 U.S. 436; Bingham v. Commissioner, 105 F. 2d 971; and, second, a Mixed Claims Commission award (which gives rise to the debt) is not "issued" by a "government or political division thereof."Petitioner does not 85 dispute the correctness of the above holding in the Graham case.The problem here is whether in these cases, the taxpayer has established certain facts relating to its alleged interest in the 1953 German bonds, which were not established in the Graham case, so as to require reaching a different result upon the basis of a contention which was not presented to this Court in the earlier case, but was presented for the first time on appeal from this Court's decision. That contention is that the sums received by petitioner in the taxable years were received on the retirement of bonds issued by the Government of the Federal Republic of Germany, that the bonds were issued in registered form, and that for the purposes of section 1232(a)(1), the petitioner and the rest of the award holders were the "beneficial owners" of the bonds when they were issued in 1953 by the Government of the Federal Republic.27 All of petitioner's evidence has been fully considered, but it constitutes merely argumentative material which must be regarded as immaterial in the face of the paramount fact that the 1953 bonds were payable to the Government of the United States and none was payable to petitioner. 86 None of the bonds evidenced a right of ownership by any award holder.The record here shows that at the London debt conference, there was some discussion about the alternative procedure of the German Government's issuance of bonds made payable to the individual holders of awards, but the award holders believed that issuance of the bonds to the Government of the United States was preferable. The new bonds were so issued and were held by the United States.The installments paid by the Government of the Federal Republic to the United States represented payments on the remaining indebtedness of Germany of $ 97,500,000, in respect of the awards, and as each annual installment was paid to the United States, that part of the indebtedness, represented by a bond issued in 1953, was discharged. Each bond evidenced a part of the negotiated amount of the German debt which was payable to the United States on behalf of those nationals of the United States, on whose behalf awards of the Mixed Claims Commission had been entered in proceedings instituted by the United States, on which interest had accrued. As the United States received the annual installment payments from the German Government, 87 it handled such funds under the directions and authorizations set forth in the Settlement of War Claims Act of 1928, as amended; that is to say, in accordance with the provisions of a Federal statute. Thus, although under the 1953 agreement with the Federal Republic of Germany, the Government of the United States agreed to "apply the payments made by the Federal Republic * * * in reduction of the remaining indebtedness of Germany in respect of awards of the Mixed Claims Commission" made on behalf of nationals of the United States, the United States did so under the provisions of a law enacted by the Congress of the United States which governs the administration by the Treasury Department of the German special deposit account and disbursement of funds to and among all of the individual holders of awards.Nothing in the record before us, in our opinion, serves to distinguish these cases, in principle, from the Graham case, or to require a conclusion other than that made by the Court of Appeals in its affirmance of this Court's decision, namely, that the payments made to an award holder by the Treasury Department were not in retirement of bonds, but were payments made on account88 and in respect of an award.The analysis of what is involved in the Treasury Department's payments to award holders which we believe is necessitated by the whole statutory scheme of the Settlement of War Claims Act of 1928, as 28 amended, inevitably leads to recognizing that the payments received by petitioner in the taxable years out of the German special deposit account represented payments of accrued interest on its award and were not to the petitioner amounts received on the retirement of bonds. See Edna S. Ullman, 34 T.C. 1107">34 T.C. 1107, 1109. In fact, each payment involved here was designated by the Treasury Department as a payment made on account of interest on petitioner's award which had been accrued but not paid prior to the specific payment. Furthermore, petitioner received from the Treasury on January 10, 1941, a payment of over $ 6,474,000, and the Treasury advised petitioner that additional payments in April and October of 1941 of over $ 200,000 completed the payments on account of principal, and thereafter all payments by the Treasury were payments in reduction of the interest accrued on principal, which was in accordance with a system of89 priorities in payments which had been established by the Settlement of War Claims Act, as amended. See Estate of Adolf Kuttroff, 38 T.C. 824 (1962).The foregoing must be considered in the light of the status of section 1232(a)(1) which is "a carefully limited exception" (Graham v. Commissioner, supra) to the general rule that the payment of an obligation cannot be a "sale or exchange" of a capital asset which could result in capital gain. Graham v. Commissioner, supra. Petitioner's carefully devised contentions, if approved, would broaden the scope of section 1232(a)(1) in a manner and to an extent which clearly would be far beyond the intendment of the Congress in making the carefully limited exception to the general rule which is made by section 1232(a)(1).There is no merit to petitioner's general contention that the payments it received in the taxable years from the Treasury out of the German special deposit account were "amounts received by the holder on retirement of such bonds," within the meaning and intent of section 1232(a)(1). Since it cannot be concluded that petitioner was a "beneficial owner" of any of the 1953 German90 bonds, or parts thereof, it is unnecessary to decide whether the 1953 German bonds were issued in registered form. Even if the bonds can be said to have been issued in registered form, such conclusion would not be helpful to the petitioner in view of the conclusions reached above.Consideration has been given to the testimony of petitioner's chief witness expressing an opinion about the interests in the 1953 bonds of petitioner and the other award holders, as well as to other opinions included in some reports. But the issue involves determining whether the provisions of section 1232(a)(1) are applicable and in construing the intendment and meaning of the statute this Court must make the ultimate conclusion. In so doing it is not required to adopt the opinions and conclusions presented by witnesses. The award holders were beneficiaries of the awards and of the 1953 agreement between 29 the United States and the Federal Republic of Germany, but they did not acquire ownership of the bonds.The petitioner has failed to establish any distinction in the facts or in principle between these cases and the Graham case.It is concluded that the amounts received in the taxable years91 from the Treasury Department do not represent amounts received in exchange for bonds issued by a government which were held by petitioner as capital assets within the provisions of section 1232(a)(1). The respondent correctly determined that the payments received are taxable as ordinary income.Issue 2. -- The question under this issue is whether the petitioner properly may accrue in each of the years 1955, 1956, and 1957 the amounts of additional New York corporation franchise taxes which resulted from its voluntarily filing on February 1, 1961, amended franchise tax reports for those years in which petitioner elected to report as income from capital gains the net amounts received in each year on account of the award. Petitioner claims a deduction in each of the above years for the additional franchise tax.The respondent contends that under the facts the only year in which the additional franchise taxes for 1955-1957, inclusive, can be accrued and, therefore, deducted for Federal income tax purposes is 1961. He relies on Gunderson Bros. Engineering Corp., 16 T.C. 118">16 T.C. 118, 125-127; and Rev. Rul. 57-105, 1 C.B. 193">1957-1 C.B. 193.92 It is held that petitioner, an accrual taxpaper, cannot accrue in 1955, 1956, and 1957, for the purpose of the claimed deductions, the additional amounts of State corporation franchise tax. The claimed deductions are, therefore, not allowable in the particular taxable years. The reasoning of the Gunderson case applies and is controlling.Petitioner did not concede until 1961 that there should be included in taxable income for the purposes of the New York franchise tax the net amount received in each year in respect of the award and that consequently it was liable for additional franchise tax. Petitioner did not accrue the taxes in question on its books in 1955, 1956, and 1957. The additional tax which petitioner now seeks to accrue and deduct in each of the years in question was not the result of innocent error or oversight on its part. Rather, petitioner's failure to accrue the full amount of the State franchise tax in those years and to claim deductions therefore in its original Federal income tax returns was due to the then view of the petitioner that the payments received on account of the award in each year represented a return of capital. Petitioner in its original93 New York franchise tax reports, in effect, denied that its income for each year was greater than was reported and, by the same token it denied, in effect, that its liability for the franchise tax was any greater than was reported and paid for each year. It is of no consequence that there was no dispute or litigation between petitioner and 30 the State tax authorities over the matter in or before 1961, and that petitioner "voluntarily" filed amended State returns in which it conceded that its income for each of the years and the franchise taxes were larger than originally reported. It was not until 1961 that petitioner acknowledged its additional franchise tax liability and until then petitioner was in effect denying any greater tax liability than it had accrued in each of the years involved and reported originally. See also Globe Tool & Die Manufacturing Co., 32 T.C. 1139">32 T.C. 1139, where it was held that an accrual taxpayer could not deduct as accrued liabilities additional payments on account of the Massachusetts corporation excise tax in years prior to payment or other acknowledgment of liability.Consideration has been given to petitioner's suggestion94 that the holding in the Gunderson case is inconsistent with the conclusions in H. E. Harman Coal Corporation, 16 T.C. 787">16 T.C. 787, on other issues, modified 200 F. 2d 415; and Gulf States Utilities Co., 16 T.C. 1381">16 T.C. 1381. We have reexamined the cited cases and are satisfied that the reasoning of the Gunderson case is correctly to be applied here and that the conclusions reached in the cited cases are not inconsistent with the reasoning in the Gunderson case.Decisions will be entered for the respondent. Footnotes1. Sec. 1232, I.R.C. 1954, provides in part:(a) General Rule. -- For purposes of this subtitle, in the case of bonds, debentures, notes, or certificates or other evidences of indebtedness, which are capital assets in the hands of the taxpayer, and which are issued by any corporation, or government or political subdivision thereof -- (1) Retirement. -- Amounts received by the holder on retirement of such bonds or other evidences of indebtedness shall be considered as amounts received in exchange therefor (except that in the case of bonds or other evidences of indebtedness issued before January 1, 1955, this paragraph shall apply only to those issued with interest coupons or in registered form, or to those in such form on March 1, 1954).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622146/	Gary Seraydar v. Commissioner.Seraydar v. CommissionerDocket No. 6095-66.United States Tax CourtT.C. Memo 1968-184; 1968 Tax Ct. Memo LEXIS 116; 27 T.C.M. (CCH) 889; T.C.M. (RIA) 68184; August 20, 1968. Filed Lynn W. Fromberg, 19 W. Flagler, Miami, Fla., for the petitioner. James B. Morgan, for the respondent. HOYTMemorandum Findings of Fact and Opinion HOYT, Judge: Respondent determined deficiencies in income tax for the following years and in the following amounts. YearDeficiency1961$595.721962404.451963125.001964381.94The above deficiencies were determined by respondent in his statutory notice of deficiency and computed after certain117 adjustments were agreed to by petitioner. At trial, petitioner conceded the years 1963 and 1964, thus leaving for our adjudication only the years 1961 and 1962. The sole issue presented herein is the same for both years, that is, whether petitioner is entitled to deductions for personal exemptions for his three minor children for the taxable years 1961 and 1962. Findings of Fact Those facts which were stipulated and the exhibits attached are found accordingly, and incorporated herein by this reference. Petitioner's individual income tax returns for the taxable years 1961 and 1962 were timely filed with the district director of internal revenue at Brooklyn, New York. At the time the petition was filed in this case, petitioner was a resident of Coral Gables, Florida. Gary Seraydar, petitioner herein, and his former wife, Rose, are the parents of three minor children, Joan Gail, Diane Lynn, and Charles Joseph, whose ages in 1961 were 11, 10, and 7, respectively. Gary and Rose owned a house in Brooklyn, New York, as tenants by the entirety, where they lived together with their three children from 1956 until March 4, 1962. Gary was employed during 1961 and part of 1962 at a118 photoengraving company in New York City. His total wages for 1961 were $12,502.61, and for 1962 $5,846.84. Rose was also employed during those years; her take-home pay was approximately $50 per week. She and Gary had a joint savings account in which she sometimes deposited her salary; she withdrew all of the funds from this account, of an unspecified balance at an unspecified time, sometime in 1961 or 1962. In 1961, during the first half of the year, up until about June 15, 1961, Gary usually gave Rose an allowance of $85 per week for the family's food, clothing, and household expenses. By mid-June, however, the domestic feud between Rose and Gary prevented their further cooperation on mundane household matters, so Gary stopped giving Rose a household allowance. Thereafter, he himself bought food and other household items for the family at the local market at an unspecified or estimated cost. By the fall of that year, however, even these few necessary items were not being provided; so Rose petitioned the Kings County Supreme Court for an order for temporary alimony and support. On October 5, 1961, the court granted Rose's petition for child support and ordered petitioner to pay Rose119 $45 per week for support of the three children. Thereafter petitioner made childsupport payments to Rose which, in 1961, totaled, however, only $175 in lieu of the total of more than $500 ordered by the court for that year. Gary sent two of his children to day camp during the summer of 1961 at a total cost of $185. He also, from time to time, gave the children an allowance of about $5 per week, and made payments for medical services for the children for that year in the amount of $25. Gary, Rose, and the three children occupied the house in Brooklyn during the entire year of 1961. During the year, Gary made the following payments in connection with that house: 890 Mortgage payments$1,020.00Utilities566.28Property taxes255.00Repairs29.18Fire insurance42.23In 1962 Rose brought an action in the Supreme Court of Kings County, New York, for a separation from petitioner, alleging abandonment and failure of petitioner to support Rose and the children. By an order of that court dated March 4, 1962, petitioner and Rose were legally separated, and Gary terminated his residency at the Brooklyn house. The court found that Gary had failed and refused120 to provide money for food and clothing for Rose and the children since June 15, 1961, for about four weeks in March of 1961, and for other periods of time in earlier years going back to 1958. Petitioner was ordered to pay $50 per week to support the children. In spite of the court's order, petitioner thereafter did not comply. He made childsupport payments in varying amounts during 1962 totaling only $1,320, approximately one-half of the yearly total ordered. Petitioner was also ordered to pay the mortgage installments on the house in Brooklyn, New York, and to pay the property taxes and utility bills. This, by his own admission on the witness stand, he also thereafter failed to do. During 1962 Gary paid only the first three months mortgage payments totaling $255. After the separation order he made no further mortgage payments. He also paid the premium of $42.23 due for fire insurance for the house. During 1962 petitioner bought clothing which he estimated cost about $100 for the children. He also testified that he paid a department store bill of $250 for the children's clothing. Gary claimed that he gave the children an allowance of $5 each time he saw them in 1962, approximately121 once a week. However, he did not see them regularly or frequently after June of 1962. Gary was hospitalized in the middle part of 1962, and fell further in arrears on his payments. As a result, he was put in jail on December 13, 1962, where he remained for 182 days, approximately six months. The reason for his being jailed was his failure to make the support and other payments ordered by the court in March of that year. In 1963 he resumed weekly support payments to Rose on June 21, apparently a short time after his release from jail. However, again he was too little and too late. The payments varied in amount from $15 to $50, and for the year totaled only $710. Ultimate Finding of Fact Petitioner did not contribute over onehalf of the total support of his three children in 1961 or 1962. Opinion The question presented is whether petitioner is entitled to deductions for personal exemptions for his three minor children for 1961 and 1962 under section 151(a) and (e)(1).1 Section 152(a) defines the term dependent as a son or daughter of the taxpayer over half of whose support was received from the taxpayer. The burden of proof is on the petitioner to prove not only his own122 expenditures in support of each child for each year in issue, but also that those amounts exceeded one-half of the total support provided in each instance. ; . Although petitioner need not conclusively prove the exact or precise total cost of the support for each child in each year, he must provide us with evidence establishing that the amounts he provided exceeded one-half of the total support. . At the outset of the first year in issue, 1961, petitioner was apparently supplying his wife with some funds to keep up the household. By mid-year, however, petitioner stopped giving Rose household funds of any kind. He then attempted to make what he regarded as necessary purchases himself. Apparently, however, all he supplied were some groceries which he brought to the home. This was apparently on an irregular and erratic basis as the domestic strife and difficulties continued. There is no evidence of the cost of these groceries furnished after mid-June nor can we123 say how long this system continued. Obviously, by early fall the situation was less than satisfactory, and in early October of 1961 Rose filed a petition in court for temporary alimony and child support. On October 5th the court ordered Gary to pay 891 child support of $45 per week for the three children. As our findings reflect, however, Gary did not comply with this order. Instead of contributing the regular weekly amount of $45 as ordered, he paid a total of only $175 thereafter in that year. In an action for legal separation brought by Rose in early 1962 against Gary in the Kings County Supreme Court on grounds of abandonment and failure to support Rose and the infant children of the marriage, the court found that Rose was legally entitled to the relief sought. Petitioner was represented by counsel in that action and after hearings on February 28, 1962 and March 1, 1962, in which testimony was taken and at which the parties appeared by their respective lawyers, the court found that Gary had not supported his wife or children since June 15, 1961, that he had not supported them for four weeks in March of that year, and for various other periods in 1960 and also in 1958. Petitioner124 was ordered to pay $50 per week for the support of his three children, custody of whom was given to Rose, and to make other payments with respect to the family home, exclusive possession of which, with all its furnishings, was also awarded to Rose. As our findings reflect, Gary did not comply with these orders of the court. In June of 1962, Gary was hospitalized and ceased making all payments as ordered. Whether or not he had been meeting his court-ordered support obligations prior to this time is not clear in the record, it being stipulated merely that during the entire year he made support payments in the total amount of $1,320. In December of that year the court ordered Gary to jail on account of his failure to abide by the orders of court. Respondent has denied the deductions for personal exemptions taken by Gary on his individual income tax returns for his three children in 1961 and 1962, and his determination is presumptively correct. On the record presented, we must conclude that petitioner has not carried his burden of proof to show that the support he furnished for the children constituted more than half of the total amount expended for their support in 1961 or 1962. Sec. 125 152(a); . Petitioner urges on brief that he provided support for the children of $3,402 in 1961, and $2,008 in 1962. He contends that Rose used her own wages for herself and not for the children, that he was their sole supporter, and that even if Rose contributed to the children's support she could not have given more than $700. The record before us, however, does not establish any accurate picture of total child support or petitioner's contribution thereto. While we can vaguely approximate petitioner's contributions as reflected in our findings, we believe that the statute requires more than mere vague approximations. Only a few of Gary's contributions were pinned down to definite figures, the rest were left hovering; we cannot draw reliable or trustworthy totals from cloudy approximations. Petitioner must not only establish his contributions to child support, but he has the burden of showing total support for them. Petitioner here actually made no real attempt to establish any total support figure, and introduced no substantial evidence to show the nonexistence of support from other sources. 126 Obviously, Rose, who was employed in both years, made some substantial contribution in each year; yet we have no evidence pointing toward any actual amount. We have only petitioner's flat assertion that he was the sole support of his children in 1961 and up until March of 1962, which, in the light of the entire record, we find unbelievable. The record establishes that Rose was regularly employed during 1961 and 1962, and earned net take-home pay in excess of $2,600 per year. She also had a savings account which had been jointly held with Gary and from which she withdrew all of the funds; the amount in this account is not disclosed by the record. In addition, Rose had relatives in the area of her home who could have assisted her in supporting her children during the difficult times of domestic strife in the Seraydar household. While petitioner testified that it was "highly improbable" that she obtained funds from these sources, and that he, Gary, had been the children's sole supporter except for a maximum of $750, which Rose might have supplied in 1961, we cannot accept these general, flat and rather vague assertions in toto as sufficient to meet petitioner's burden of proving total127 support. We must conclude the entire record is devoid of evidence sufficient to establish even a reasonable approximation of the total support furnished the three children in either year before us. Petitioner argues that the record shows that he spent $2,255 in 1961, and $1,830 in 1962, to support his children, exclusive of 892 lodging which he allegedly also provided for them at his expense. However, as our findings reflect, we are not willing to accept petitioner's unsubstantiated general recollections as to precise sums as sufficient to establish them to the penny. Likewise, as our further discussion will indicate, we cannot categorize all of the amounts allegedly paid by petitioner as child-support payments; while some of them might be so recognized, such as the utilities, property taxes, insurance, etc., as lodging expense for the children, if properly prorated or allocated to the children's use, others, such as mortgage payments, cannot be, and there is no adequate showing that what petitioner contributed to pay certain expenses was the total for the various lodging expense items in question. While we agree with petitioner's contention that he need not show precise totals128 to overcome his burden, we must hold that he has failed to accomplish even the minimum requirement of introducing sufficienyt evidence to justify the conclusion that he contributed over one-half the support for his children during either of the years in question. As we stated in Edward J. Pillis, 47 @T.C. 707, 709 (1967), affirmed per curiam, (C.A. 4, 1967), more than a mere minimal amount of evidence is necessary to overcome the presumptive correctness of respondent's determination that petitioner did not surpass the required one-half level. Except for two cancelled checks supporting three mortgage payments made in March of 1962, and an insurance premium paid in February of 1962, no receipts, supporting documents or other evidence of any claimed support payments were offered to substantiate petitioner's general estimates and recollections, which were not convincing, patently inflated and less than candid. Even those amounts allegedly contributed by petitioner which appear from the evidence to be reasonably precise, cannot be sustained on closer examination. For instance, it has been stipulated that Gary met mortgage obligations on the Brooklyn house of129 $1,020 in 1961; and other evidence shows similar payments of $255 in 1962. Petitioner urges that a part of those payments, prorated to the number of people living in the house, should be credited to the support contributed by him. Although the argument might appear tenable at first blush, we have held that the fair rental value of lodging furnished, and not the mortgage payments made with respect to the property in which the lodging was furnished is the proper measure of the amount of support furnished by the owner of the property. ; . Petitioner herein has made no showing at all in regard to the fair rental value of the premises. This Court has held that where no evidence is brought to light concerning the fair rental value of the lodging, petitioner fails in his burden of proof. . The March 1962 court order which legally separated Gary and Rose awarded her exclusive possession of the Brooklyn house and its furnishings, as well as ordering petitioner herein to pay interest and amortization due on the mortgage. We noted in ,130 that the right to use and possession of the premises is the factor to be considered in measuring who furnished the lodging and thus who contributed the support therefor. It is not the amount paid in mortgage payments that is determinative of lodging support, but rather who actually furnished the residence at its fair rental value. (D.C.Ore., 1968). Gary has claimed contributions for lodging support of the mortgage payments made during 1961 and the first three months of 1962. The house was owned jointly by Gary and Rose as tenants by the entirety and during 1961 and up until March 4, 1962, they thus shared the right to its use and possession. After March 4, 1962, Rose alone bank account at the Valley National held that right awarded her by court order. Before that date, when both parents of the children occupied the home and permitted the children to live there with them, each would be considered as furnishing one-half of the lodging for the children. After that date, we could allow none of the lodging to petitioner since Rose thereafter had the sole right to possession of the home. The fact that Gary made mortgage payments is not*131 controlling on this point; the right to use and possession is the controlling element. We thus cannot consider for purposes of this case that petitioner has established either the value of lodging furnished his children or that he is entitled to include in his support contribution any amount for lodging, measured by the amount of mortgage payments he allegedly made in the years in issue. 893 As indicated previously on this record, we must conclude and hold that petitioner has failed in his burden of proof. He has not introduced sufficient evidence showing us that he contributed over one-half of the total support of his three minor children during either of the years in issue. Since petitioner has failed to meet this burden of proving error in respondent's determination of deficiencies, Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622147/	APPEAL OF FIDELITY UNION TRUST CO., EXECUTOR, ESTATE OF CHARLOTTE R. BUTTERWORTH.Fidelity Union Trust Co. v. CommissionerDocket No. 5433.United States Board of Tax Appeals6 B.T.A. 125; 1927 BTA LEXIS 3596; February 10, 1927, Promulgated 3596 The Commissioner was not in error when he reduced the amount of a deduction claimed under section 403(a)(2) of the Revenue Act of 1921, for previously taxed property, by the amount allowed as a part of a deduction under section 403(a)(3) of the same Act for charitable bequests, where the petitioner has failed to show that the funds in the amount of the reduction derived from the sale by the decedent's executor of a part of the previously taxed property were not necessary to the payment of the charitable bequests under the will. Daniel L. Campbell, Esq., for the petitioner. J. C. Swayze, Esq., for the Commissioner. MURDOCK 125 This appeal is from the determination of a deficiency in estate tax amounting to $557.81, arising out of a reduction by the Commissioner of a deduction claimed under section 403(a)(2) of the Revenue Act of 1921. The reduction was based on the contention that part of the value of the property so deducted had already been allowed as a deduction under section 403(a)(3) of the Act. FINDINGS OF FACT. The petitioner, a New Jersey corporation, is the duly qualified executor of the estate of Charlotte R. Butterworth, who3597 died January 22, 1923, a resident of Summit, N. J. John F. Butterworth, her husband, died May 27, 1921, and the estate tax has been paid on behalf of his estate. That part of the will of Charlotte R. Butterworth, deceased, which is pertinent hereto, is as follows: FIRST: I direct the payment of all may just debts, funeral and testamentary expenses as soon as convenient after my decease. SECOND: I give and bequeath to my sisters, Anna B. Duryee, Mary O. Duryee and Amy C. Duryee, or such of them as survive me, all my jewelry, wearing apparel, household goods and household furnishings. THIRD: I give and bequeath (a) to my faithful housekeeper, Margaret Leonard, the sum of Five Hundred Dollars; and (b) to my faithful former housekeeper, Maria McClaury, the sum of Two Hundred and Fifty Dollars. FOURTH: I give and bequeath to the Bishop of the Diocese of Newark, New Jersey, all my theological books for use in the Diocese or in Missionary Districts. FIFTH: I give, devise and bequeath to my sisters, Anna B. Duryee, Mary O. Duryee and Amy C. Duryee, or such of them as survive me, my house and lot known as No. 61 de Forest Avenue, Summit, New Jersey. SIXTH: I give and bequeath3598 to the Overlook Hospital at Summit, New Jersey, and to the hospital of this Diocese, "St. Barnabas Hospital, Newark, 126 New Jersey," each the sum of Fifteen Thousand Dollars, with which to endow a bed in each hospital - one bed to be known as the "John F. Butterworth Memorial," and the other as the "Charlotte R. Butterworth Memorial." SEVENTH: I give and bequeath to George F. Butterworth and Helen A. Butterworth, brother and sister of my late husband, John F. Butterworth, such amount as I may receive from the estate of my said husband, less Fifteen Thousand Dollars given to one of the aforesaid hospitals, share and share alike. EIGHTH: Should my said brother-in-law, George F. Butterworth, predecease me, then and in that event I give the share that he would have receuved had he survived, to his issue per stirpes. Should said Helen A. Butterworth predecease me, then and in that event I give and bequeath the amount she would have received had she survived, to George F. Butterworth, or if he be dead to his issue per stirpes. NINTH: I direct my executors hereinafter named, or the survivors or survivor of them, to convert the remainder of my estate, both real and personal, 3599 into money, and to distribute the same among my brother, sisters, and the issue of my [deceased] brothers in the same manner as if I had died intestate thereto. The gross estate of Charlotte R. Butterworth, deceased, amounted to $190,416.06, of which $56,436.12 represented property which she had received under the will of her husband, which had formed a part of his gross estate situate in the United States, and which was in the form of securities and had been found intact in a separate safe deposit box in the Summit Trust Co. of Summit, N.J., marked "Estate of John F. Butterworth." The petitioner kept these securities separate from the other assets of the decedent, Charlotte R. Butterworth, and sold certain of them for $15,239 in cash. It transferred the remainder of these in kind to George F. Butterworth and Helen A. Butterworth, and in addition paid them in cash $239, the excess over $15,000 realized from the above sale. The proceeds of the sale were mingled with other funds of the decedent which had been realized from the sale of other securities. From these funds were paid the two legacies of $15,000 each to the hospitals mentioned in paragraph "Sixth" of the will. 3600 All of the devises and legacies were paid and the transfers required by the will were made. Charges against the estate amounting to $9,701.83 were paid. No part of the property received from the estate of the husband was used to pay these charges. The petitioner claimed the following deductions under section 403(a) of the Revenue Act of 1921: 1. Charges against estate$9,701.832. Property identified as taxed within five years56,436.123. Charitable bequests30,000.004. Exemption for resident decedents50,000.00Total146,137.95127 The Commissioner allowed all of these deductions as claimed, except the one for property identified as taxed within five years, which he reduced to $25,007.27. At the hearing he admitted that this figure should be increased in the amount of $14,761, but contended that $15,239 of the deduction claimed by the petitioner had already been allowed as a deduction under charitable bequests, inasmuch as the petitioner had failed to prove the contrary. OPINION. MURDOCK: Section 403(a)(2) of the Revenue Act of 1921 is as follows: SEC. 403. That for the purpose of the tax the value of the net estate shall3601 be determined - (a) In the case of a resident, by deducting from the value of the gross estate - * * (2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent where such property can be identified as having been received by the decedent from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. This deduction shall be made in case of the estates of all decedents who have died since September 8, 1916. The Commissioner, in his calculation of the deduction3602 to be allowed under the above portion of the Act, had authority to limit that deduction to the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and to the extent that the value of such property was included in the decedent's gross estate. In other words, the value of such previously taxed property for the purpose of determining the deduction can not be greater than the amount at which it was included in the decedent's gross estate and can not be greater than the amount at which it was valued in determining the gross estate of the prior decedent, but should be as large as the lesser of the two amounts above mentioned. The respondent admits by the pleadings that the value of this property was included in the gross estate of the decedent to the extent of $56,436.12. Yet, in the calculation of the deficiency, it is apparent that the value of $55,007.27 was used, and, as is indicated in his brief, this figure was used because it represented the value of the previously taxed property as of the date of the decedent's death. 128 It is apparent, therefore, that some mistake has been made which3603 must be corrected under Rule 50; either the gross estate of this decedent should be reduced in the amount of $1,428.85, or the deductions under section 403(a)(2) of the Revenue Act of 1921, as allowed by the Commissioner in the determination of the deficiency, should be increased in the amount of $1,428.85. Section 401 of the Revenue Act of 1921 imposes a tax equal to a percentage of the value of the net estate (determined as provided in section 403) upon the transfer of the net estate of this decedent. Section 403 provides that the value of the net estate shall be determined in the case of a resident by making certain deductions from the gross estate. We are concerned only with the question of an alleged double deduction which the Commissioner claims is contrary to a portion of the proviso in section 403(a)(2), "Provided, That this deduction shall be allowed * * only to the extent that the value of such property is * * * not deducted under paragraphs (1) or (3) of subdivision (a) of this section." Paragraph (1) allows a deduction of administration expenses and certain other charges and losses, and paragraph (3) allows a deduction of charitable bequests or devises and certain3604 other devises and bequests of a similar nature. The Commissioner admits that "the value of such property" was not deducted under paragraph (1), and that the deduction of $9,701.83 was proper, but claims that to the extent of $15,239 "the value of such property" was deducted under paragraph (3) and he therefore has reduced the deduction under paragraph (2) in that amount. We are convinced that the excess of $239 realized from the sale of the securities from the husband's previously taxed estate was turned over to the husband's brother and sister to pay the balance of the bequest under paragraph "Seventh" of the will, that no part of it was used to pay the bequest under paragraph "Sixth" of the will, and that no part of the value of it was deducted under section 403(a)(3). Therefore the deductions under section 403(a)(2) as allowed by the Commissioner should be further increased by this amount. But we are unable to say from the record that the full amount of the $15,000 realized from the sale of securities from the estate of the husband was not required to pay one of the $15,000 legacies to the hospitals, because we do not know how much of the gross estate represented the value3605 of property disposed of in the specific devise and specific legacies under paragraphs "Second," "Fourth," and "Fifth" of the will. Paragraph "Second" of the will was what is termed a specific bequest or legacy, and could only be satisfied by the petitioner delivering 129 the specific things therein individualized and mentioned to the persons named. Paragraphs "Fourth" and "Fifth" were similar and could only be satisfied in the same way. We know that of the decedent's gross estate about $134,000 represents the value of property other than that received from her husband's estate. But we do not know the value of decedent's jewelry, wearing apparel, household goods and household furnishings, of her theological books, and of her house and lot, known as No. 61 de Forest Ave., Summit, N.J., all of which she specifically disposed of in her will. Suppose that those items had a value of $119,000. Then only $15,000 would have been available from her own property to pay a part of the $30,000 bequeathed to the two hospitals and it would have been necessary to use the $15,000 realized from the sale of the husband's securities to complete the payment of the $30,000 just mentioned. 3606 If it had been absolutely necessary to use $15,000 realized from the sale of the husband's securities to pay one-half of the charitable bequests, we can not say that the Commissioner was in error when he reduced the total deductions claimed under section 403(a)(2) by $15,000, for the reason that he had already allowed a deduction represented by this $15,000 in the deductions for charity under section 403(a)(3), since, to the extent of $15,000, the value of such previously taxed property was thus deducted under paragraph (3) of subdivision (a) of this section. We can see no distinction between this case and the case of a decedent whose gross estate was $115,000, consisting of a house and lot worth $100,000, and securities worth $15,000, the latter received from her husband, whose estate had been taxed within five years, where the decedent by her will devised her house and lot to her sister and gave $15,000 to charity, and then claimed a deduction of $15,000 as a charitable bequest under section 403(a)(3) and $15,000 as a deduction on account of previously taxed property under section 403(a)(2), and which latter claimed deduction we would deny for the reason that it was a double3607 deduction and represented value of previously taxed property already deducted under paragraph (3) of section 403(a). It may well be that the items listed above to which we have given an assumed value of $119,000 were worth much less and that, instead of a fund of $15,000, there was a fund of $80,000 or $90,000 available from her own property to pay the charitable bequests, but we have no proof of the real facts in this particular, and consequently we must approve the Commissioner's determination in regard to the item of $15,000. 130 The corrected deductions are, therefore: 1. Charges against estate$9,701.832. Property identified as taxed within five years41,436.12Or (to be determined under Rule 50)40,007.273. Charitable bequests30,000.004. Exemption for resident decedents50,000.00We are not attempting to decide what the proper deductions under this section would be had it been shown that there was money or property of the decedent available to pay this bequest to charity, exclusive of any money received from the estate of the prior decedent, and exclusive of any property required to satisfy the specific bequests under the will. 3608 It is not unlikely that we would have had this situation before us had we been given the real facts in this case. But, due to faulty pleadings or a failure of proof, we are unable to find any facts save those set out above. The petinent part of the petition is as follows: In paragraph 5 we find: The facts upon which the taxpayer relies as the basis of its appeal are as follows: The gross estate of Charlotte R. Butterworth amounted to over One Hundred and Ninety Thousand Dollars of which amount, Fifty-six Thousand Four Hundred Thirty-six Dollars and Twelve Cents represented what she received under the will of her husband who predeceased her and whose estate was taxed within five years previous to her death and the amount so received by her was, therefore, exempt under the law. The total debts and expenses of the administration of her estate were less than Nine Thousand Dollars and it is evident there was ample estate of her own in the residuary thereof to pay said debts and administration expenses and, further, to satisfy all specific legacies and devises and leave a considerable residuary. (Italics ours.) The answer "admits the facts alleged therein3609 (except the amount of debts and administration expenses which is $9,701.83 instead of less than $9,000 as alleged * * )." In the first place an argumentative phrase, "it is evident," is used instead of a straightforward and unqualified allegation, "there was." Overlooking this point, we next note that the term "residuary" is twice used in the same sentence referring to two quite different things, neither of which is the residuary estate of the decedent in the sense that that term refers to the residue after the payment and satisfaction of all legacies and devises, specific, demonstrative, and general. The first time the petitioner used the term it apparently referred to that part of the gross estate of the wife, exclusive of any property received from the estate of the husband, before the deduction of her debts, expenses, legacies and devises of all kinds. The 131 second time it used the term it apparently referred to that part of her gross estate, exclusive of any property received from the estate of the husband, after all debts, administration expenses, and specific legacies and devises had been deducted, but Before any demonstrative or general devises or*3610 legacies, if any, had been deducted. Admitting the petitioner's allegation, but not knowing the amount or value of this fund or part of her estate, we are unable to say whether or not it was sufficient to pay the general bequests made in the "Third" and "Seventh" paragraphs of the will and also to pay more than $15,000 of the $30,000 bequeathed to the two hospitals. There was no testimony in regard to this point, the return is not in evidence, the deficiency letter does not clarify the situation, we know nothing of what transpires in the Bureau of Internal Revenue in regard to any case, and there is nothing else to relieve the petitioner from the failure of proof caused by its own loose, inaccurate, uncertain, and confusing pleading. Judgment will be entered on notice of 15 days, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622148/	Mountain State Steel Foundries, Inc. v. Commissioner.Mountain State Steel Foundries, Inc. v. CommissionerDocket No. 69987.United States Tax CourtT.C. Memo 1959-59; 1959 Tax Ct. Memo LEXIS 181; 18 T.C.M. (CCH) 306; T.C.M. (RIA) 59059; March 31, 1959Robert P. Smith, Esq., 815 Fifteenth Street, Northwest, Washington, D.C., and Dorothea Baker, Esq., for the petitioner. W. Ralph Musgrove, Esq., for the respondent. LEMIRE Memorandum Findings of Fact and Opinion The respondent determined deficiencies in income tax of petitioner for the taxable years ended June 30, 1951, 1952, 1953, and182 1954, in the amounts of $20,660.32, $43,065.13, $42,692.80, and $14,676.73, respectively. The issues are: (1) Whether the amounts paid by petitioner on the Miller obligations in each of the respective taxable years constitute deductible interest payments; (2) Whether petitioner is liable for the surtax imposed by section 102 of the 1939 Code; (3) Whether the cost of certain replacements and additions to machinery and buildings in each of the taxable years are deductible as ordinary expenses, or are capital expenditures subject to depreciation, and; (4) Whether the amounts of $7,879.08, $7,308.68, and $5,766.08, constitute excessive additions to the reserve for bad debts for the taxable years ended June 30, 1952, 1953, and 1954, respectively. Certain auxiliary questions are (a) whether the net income, subject to excess profits tax for the years ended June 30, 1951, 1952, and 1953, should be increased by reason of the above adjustments in the issues 1 to 4, inclusive, and (b) the correct net operating loss sustained in the year ended June 30, 1955, for carry-back purposes to the taxable year ended June 30, 1954. Findings of Fact Petitioner is a West Virginia corporation with183 its principal place of business at Parkersburg, West Virginia. Its principal business is the manufacture of steel castings. Its income tax returns for the taxable periods involved were filed with the district director of internal revenue at Parkersburg, West Virginia. Petitioner is the successor of a partnership composed of the Stratton and Miller families, each having a 50 per cent interest. The Stratton family consisted of Harold F. Stratton, his sister, Marguerite Stratton Nobles, and two nephews. The Miller family consisted of Ben Miller, his wife, Edna, and two daughters, Jacqueline M. Cauthorn, and Jane S. Miller. Ben Miller died in 1945, and his wife and two daughters succeeded to his interest in the partnership. On July 1, 1947, the business was incorporated under the name of the Mountain State Steel Foundries, Inc. In exchange for the partnership assets and the assumption of its liabilities, 2,000 shares of the par value of $100 per share were issued as follows: SharesHarold F. StrattonPresident250Marguerite S. NoblesSecretary-Treas-urer250Mark E. StrattonVice President250Robert S. Nobles2nd Vice Presi-dent250Edna W. Miller500Jacqueline M. Cauthorn250Jane S. Miller250184 The board of directors consisted of Harold F. Stratton, Marguerite S. Nobles, and Edna W. Miller, until the latter resigned on the sale of her stock. Other than serving as director, Edna took no active part of the business. Edna and her two daughters felt they should have more security than dividends from an operating foundry. Edna held some conferences with Harold Stratton about selling either the plant or the stock. In 1948, Harold gave an option to a broker to purchase the stock at $850 per share. The option was not exercised. Harold let it be known that the plant or the stock was for sale at a price of $750 a share. Some interested parties examined the plant but made no counteroffers. At a stockholders' meeting held on the 8th day of August 1950, Edna stated that she had been discussing with George M. Nicholson, the possibility of the purchase by the corporation of the stock held by her and her daughters, the basis of a reasonable cash payment, and the payment of the remainder with interest over a period of years, and he had advised that he had also discussed the matter with representatives of the company. It was moved and seconded that Nicholson be authorized and instructed185 to pursue the negotiations and report the results at the adjourned meeting of the stockholders to be held on September 11, 1950. Nicholson was a certified public accountant and had made out the corporation and the individual tax returns of some of the stockholders. At the adjourned stockholders' meeting held on September 11, 1950, the president stated an agreement had been reached with the Miller interests for the purchase of their stock by the company. On motion of Edna, the directors and officers were authorized to purchase the 1,000 shares of capital stock owned by the Miller interests on the basis of the payment of $450,000 on the following terms: Edna W. Miller, 500 shares, $30,000 cash and a note for $195,000, payable with interest at 4 per cent at the rate of $6,000 each six months beginning April 1, 1951, and continuing until the principal and interest are paid as set forth in a schedule of payments attached thereto. V. J. Miller Cauthorn, 250 shares, $10,000 cash and a note for $102,500 payable with interest at 4 per cent at the rate of $2,500 each six months beginning April 1, 1951, and continuing until the principal and interest are paid as set forth by schedule of186 payments attached thereto. A similar provision was made with respect to the 250 shares owned by Jane S. Miller. The corporation's note for the respective amounts above set forth was executed and delivered to each seller. The notes were secured by certificates of stock of the petitioner in the same number of shares that each owner had surrendered. The notes contained a provision that during their existence the petitioner would limit its dividend payments, and also an acceleration clause effective at any time after April 1, 1961. A schedule of payments of principal and interest was attached to each note. The payments of principal and interest was to continue in the case of Edna until April 1, 1977, and the payments on the other two notes were to continue until April 1, 1994. The total contingent interest liability on the three notes is in the amount of $351,069.56. The 1,000 shares of petitioner's capital stock redeemed in September 1950, was carried on the asset side of the corporation's balance sheet as Treasury stock at $450,000. Petitioner's surplus, per books, on July 1, 1950, was $132,527.53. In its returns for the taxable years ended June 30, 1951 to 1954, inclusive, 187 petitioner claimed a deduction as representing interest payments on the three promissory notes given in connection with the aforesaid redemption of the amounts of $11,969.99, $15,757.00, $15,504.77, and $15,242.37, respectively. The respondent disallowed the entire amount claimed for each year as not constituting a proper deduction. Petitioner has failed to show that the aforesaid amounts claimed as deductions constitute "interest" within the purview of section 23(b) of the Internal Revenue Code of 1939. In the deficiency notice the respondent disallowed deductions for business expenses of the amount of $754.24, and the amount of $2,847, claimed in the respective taxable years ended June 30, 1951 and 1952. By virtue of the respective concessions of the parties, the appropriate adjustments may be made under Rule 50. For the taxable year ended June 30, 1953, the respondent disallowed the amount of $11,917.73 claimed as ordinary and necessary expenses for repairs. The items involved are as follows: Repairs to officers' property$ 266.25Heater171.63Grinder motor260.60Hand tool131.50Hand tool226.38Temporary partition289.60Shore roof and construction ofwall984.92Repair to metal storage building817.84Repair to metal storage building1,681.35Repair roof on foundry2,025.00Replace part of foundry roof ad-dition to and replacement ofoffice building2,910.82Replacing office building floor647.40Stairway to overhead cranes314.44Total$11,917.73188 Petitioner concedes the item of $266.25 representing repairs to officers' property. Respondent concedes error as to the following items: Heater$171.63Grinder motor260.60Hand tool131.50Hand tool226.38Total$790.11 The amount of $314.44, representing stairway to overhead cranes was a repair constituting an ordinary and necessary expense. The remaining items, totalling $10,546.93, are capital improvements subject to depreciation. In the deficiency notice the respondent disallowed as business expenses in the taxable year ended June 30, 1954, the amount of $5,154.60, consisting of the following items: Materials and supplies$ 203.85Miscellaneous and general ex-pense2,293.45 Repairs2,657.30Total$5,154.60Respondent concedes error as to the item of $203.85, representing the cost of a resistor bank motor. In the taxable year ended June 30, 1954, the petitioner expended the sum of $2,283.45 * to replace electrical wiring in and around the foundry, and the amount of $2,657.30 to repair the moulding machine which had originally189 cost $4,000 to $5,000. The expenditures agrgregating $4,940.75 are capital improvements. In the deficiency notice, the respondent disallowed as additions to petitioner's bad debt reserve, the following amounts: F/y June 30, 1952$7,879.08F/y June 30, 19537,308.68F/y June 30, 19545,766.08On July 1, 1947, petitioner took over the partnership bad debt reserve in the amount of $9,477.69. Petitioner added credits to its reserve for bad debts account, representing the collection of debts previously charged off, and charged off bad debts for the years ending June 30, 1948, 1949, and 1950, the amounts as follows: F/y endedCredits toJune 30ReserveCharge-offs1948$475.95$170.551949724.611950161.23357.91Petitioner's accounts receivable at close of year, additions to reserve (per return), charge-offs, and balance of bad debt reserve were in the respective amounts as follows: Year endingAccounts receivableAdditions perCharge-6/30close of yearreturnsoffsBalance1951$120,856.910$1,147.99$ 7,492.611952109,369.89$7,879.081,314.6014,136.941953118,015.177,308.68022,760.22195492,169.365,766.08261.8828,264.42190 Petitioner has failed to show that the respondent's disallowance of any additions for the taxable years ended June 30, 1952, 1953, and 1954, was an abuse of his discretion. For the taxable years ended June 30, 1951 to 1954, inclusive, the net income of petitioner (per returns), and the dividends paid were as follows: F/y endedNet incomeDividends6/30reportedpaid1951$129,267.80$15,0001952141,172.1410,0001953158,235.0610,000195410,266.730Petitioner's earned surplus (per books), unadjusted for income taxes paid, income taxes paid, and the corrected earned surplus, are as follows: SurplusIncomeCorrectedF/y endedpertaxesearned6/30bookspaidsurplus1951$223,597.37$72,101.17$151,496.201952277,992.7976,634.05201,158.741953360,234.4089,637.51270,596.891954278,687.322,341.79276,345.53Petitioner's net income, accrued income taxes, and the section 102 undistributed net income as determined by the respondent were as follows: CorrectedAccruedSection 102F/y endednetincomeundistributed6/30incometaxesnet income1951$141,787.38$ 79,853.12$46,932.261952167,110.91105,508.5251,602.391953191,678.07124,596.2557,081.82195433,640.6710,713.5622,927.11191 In determining the section 102 undistributed net income for each of the taxable periods involved, the respondent took into consideration only the actual dividends paid. If the payments of so-called interest made in the taxable years in question are recognized as additional distributions in the nature of dividends, the corrected section 102 undistributed net income would be as follows: Additional Dis-Corrected sec-tributions intion 102 undis-F/y endedthe nature oftributed net6/30dividendsincome1951$11,969.99$34,962.27195215,757.0035,845.39195315,504.7741,577.05195415,242.377,684.74In the fiscal year ended June 30, 1952, petitioner made investments in the stock of United States Steel Co. and Standard Oil of New Jersey in the amount of $41,147.50. These stocks were sold in 1955. The surtax brackets of the individual shareholders of the petitioner for the calendar years 1951 to 1954, inclusive, were as follows: 1951195219531954Harold F. Stratton60%54%54%47%Marguerite S. Nobles35%38%42%34%Mark E. Stratton43%48%48%43%Robert S. Nobles30%38%42%38%192 If one-fourth of the section 102 undistributed net income as found herein, was distributed to each of petitioner's stockholders, their respective gross income as reported would be increased in each of the taxable years 1951 to 1954, inclusive, by the following amounts: 1951195219531954$8,740.59$8,961.35$10,394.26$1,921.18The redemption of the 1,000 shares of its capital stock in September 1950, was not in furtherance of the petitioner's business. Petitioner was availed of during the fiscal years ended June 30, 1951, 1952, 1953, and 1954, for the purpose of preventing the imposition of surtax upon its shareholders through the medium of permitting earnings and profits to accumulate instead of being divided and distributed. On its income tax return for the fiscal year ended June 30, 1955, petitioner claimed a deduction of the amount of $14,969.36, representing alleged interest payments on the promissory notes delivered in connection with the redemption of the 1,000 shares of its capital stock in September 1950. Opinion LeMIRE, Judge: The first issue involves the propriety of respondent's action in disallowing the amounts193 of $11,969.99, $15,757, $15,504.77, and $15,242.37, paid by petitioner in the fiscal years ended June 30, 1951 to 1954, inclusive, and claimed as deductions representing interest payments on the three promissory notes executed and delivered in connection with the redemption of 1,000 shares of its capital stock, constituting 50 per cent of its issued and outstanding shares. Section 23(b) of the 1939 Code provides for a deduction of "All interest paid or accrued within the taxable year on indebtedness * ." The section is designed to permit of the deduction of genuine interest on a genuine indebtedness. Charles L. Huisking & Co., Inc., 4 T.C. 595">4 T.C. 595, 600. Petitioner is a West Virginia corporation and under the corporation laws of that state a corporation is prohibited from using its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of the capital stock of the corporation. West Virginia Code 1955, section 3051. In the annotations under section 3051 of the West Virginia Code, it is stated that the language of the section was patterned after the provisions of the Delaware Corporation law, and most of the cases194 cited are Delaware authorities. In Acker v. Girard Trust Co., et al., 42 Fed. (2d) 37 (CA-3), involving an agreement of a corporation to repurchase its own shares, the court, in construing the Delaware law prohibiting the use of corporate funds to purchase its own shares where such use impaired its capital, held that the agreement was unenforceable. In United Thacker Coal Co. v. Peyton Lumber Co., et al., 15 Fed. Supp. 40, the court in construing section 3051 of the West Virginia Code held that a purchase by a corporation of its own stock which impaired its capital stock was ultra vires and void. In Ashman, et al. v. Miller, et al., 101 Fed. (2d) 85, in construing the Delaware statute, the court stated that the language of the section permitted only the use of the surplus of the corporation for the purpose of acquiring its own capital stock. Cf. Jarroll Coal Co., Inc. v. Lewis, et al., 210 Fed. (2d) 578, which involved a construction of the West Virginia statute here in question. As of June 30, 1950, the capital stock of petitioner consisted of 2,000 shares of the par value of $100 per share. Petitioner's surplus as shown195 on the balance sheet at that time was $132,527.53. The agreement to redeem 50 per cent of its issued and outstanding shares at a price of $450 per share, or an aggregate consideration of $450,000, caused an obvious impairment of petitioner's capital stock. Petitioner contends that as its fixed assets had appreciated in value by approximately $1,000,000, the purchase did not impair its capital stock. We find no merit in such contention. We think the term "surplus" must be taken to exclude unearned surplus or that represented by mere appreciation in value. In Edward v. Douglas, 269 U.S. 204">269 U.S. 204, 214, it is said: " * * The word 'surplus' is a term commonly employed in corporate finance and accounting to designate an account on corporate books * * . The surplus account represents the net assets of a corporation in excess of all liabilities including its capital stock. This surplus may be 'paid-in surplus,' as where the stock is issued at a price above par. It may be 'earned surplus,' as where it was derived wholly from undistributed profits. Or it may, among other things, represent the increase in valuation of land or other assets made upon a revaluation of the company's196 fixed property * * ." In LaBelle Iron Works v. United States, 256 U.S. 377">256 U.S. 377, 393, sustaining valuations at cost, the court said: " * * There is a logical incongruity in entering upon the books of a corporation as the capital value of property acquired for permanent employment in its business and still retained for that purpose, a sum corresponding not to its cost but to what probably might be realized by sale in the market. It is not merely that the market value has not been realized or tested by sale made, but that sale cannot be made without abandoning the very purpose for which the property is held, involving a withdrawal from business so far as that particular property is concerned. * * " In the instant case, there has been no revaluation, but merely some expert opinion testimony that the value of the plant was in excess of $1,000,000. It is well settled that one who seeks the benefit of a statute must bring himself clearly within the terms of the statute which grants the deduction. New Colonial Ice Co., Inc. v. Helvering, 292 U.S. 435">292 U.S. 435; 197 Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590. Petitioner has the burden of showing that there is a valid and legal obligation existing giving rise to a genuine indebtedness. Petitioner contends that the promissory notes given in redemption of its own shares created a valid and binding obligation, since the transaction did not render the corporation insolvent. In determining whether a given transaction is one beyond the powers of a corporation, insolvency, either in equity or under bankruptcy, is not a test to be employed. The redemption of petitioner's own capital stock impaired its capital stock, and under the cited authorities construing the applicable corporation law of West Virginia, the agreement to redeem was ultra vires and void. The agreement therefore created no enforceable obligation and no valid indebtedness arose. The payments of so-called interest did not constitute genuine interest deductible under section 23(b) of the Internal Revenue Code of 1939. So holding, we find it unnecessary to discuss the respondent's alternative contention, that while the transaction was cast in the form of a purchase of shares of petitioner's198 capital stock, it, in substance, was an agreement to pay an annuity to the then holders in consideration of the surrender of their shares to the corporation. The respondent's disallowance of the so-called interest payments as not constituting deductible interest is sustained. The next issue presents the question whether the respondent properly determined that petitioner was subject to surtax imposed under section 102 of the Internal Revenue Code of 1939 for each of the taxable periods involved. The question is one of fact. Helvering v. Chicago Stock Yards Company, 318 U.S. 693">318 U.S. 693; Lion Clothing Co., 8 T.C. 1181">8 T.C. 1181. Petitioner concedes it has the burden of showing the respondent's determination was erroneous. The respondent's position is based primarily on the premise that petitioner was "availed of" by its shareholders for the purpose of avoiding surtaxes upon themselves. Section 102(a). The record shows that prior to September 1950 the petitioner's issued and outstanding shares of capital stock, consisting of 2,000 shares, was held equally by the Miller and Stratton families. All the corporate officers and the majority of the directors199 were members of the Stratton family. Since the management and the disposition of the corporate net profits was under control of the Strattons', it is understandable that the Miller interest desired that the corporation's assets or the stock be disposed of so that they would not be dependent upon such dividends as the Strattons declared and paid. It is, likewise, understandable why the Strattons preferred to retain their investment. Some negotiation looking to a sale of the plant or the stock was carried on by the president at a sale price greatly in excess of the price which the Strattons were willing to have the corporation agree upon, to redeem the Miller interests. George Nicholson, a mutual friend and a certified public accountant, who had charge of the corporation's and the individual stockholders income tax returns was contacted for the purpose of working out a plan that would be mutually beneficial to all the stockholders. The plan proposed by Nicholson and approved by the stockholders was the redemption by the corporation of the shares of its capital stock held by the Miller interests. The plan provided for the redemption of the 1,000 shares by the corporation for the aggregate200 consideration of $450,000 with a small cash payment, and promissory notes to which were attached a schedule of installment payments of principal and interest at 4 per cent payable at six month periods. The payments to Edna for her 500 shares were to continue until April 1, 1977, and the payments to her two daughters were to continue to April 1, 1994. If the notes ran to maturity, the total interest payments would amount to $351,069.56, or a liability of principal and interest in the aggregate amount of $801,069.56. Each note contained a provision limiting the payment of future dividends on the remaining capital stock and also a provision permitting the acceleration of payments of both principal and interest after April 1, 1961, with adjustments accordingly. No corporate purpose was achieved by petitioner's redemption of its shares, except such tax savings as might result from a deduction of the interest payments on the notes. However, the plan purported to assure the Strattons the entire ownership and control of petitioner and purported to assure the Miller family a fixed and steady income, in lieu of dividends, for a long period of years. The record shows the rates at which the201 respective stockholders of petitioner were taxed on the income they reported. If all the earnings and profits had been distributed instead of being accumulated, the taxable rates of the stockholders would have been increased considerably. Since the ratio of tax on section 102 undistributed net income is only 27 1/2 per cent, it is apparent that the plan adopted would be a profitable one for the stockholders even if the section 102 surtax liability was successfully imposed on petitioner. We think it is reasonable to assume that Nicholson, who authored the plan, was aware of such tax-saving results, and that such information was also conveyed to the stockholders and largely motivated the adoption of the plan. Petitioner contends that the evidence shows that the accumulation of its earnings and profits was necessary and reasonable to provide working capital and for contemplated improvements to its plant and facilities. There is some testimony to the effect that in the fiscal year 1954, an addition to petitioner's plant was being planned at an estimated cost of $100,000. At the time of the hearing of this proceeding in March 1958, the sum of $20,000 had been appropriated for that purpose. 202 The redemption of 50 per cent of its capital stock and the investment of the sum of $41,147.50 in 1952, in the stock of other corporations which stock was not sold until 1955, is, we think, inconsistent with a plea that the accumulation of funds is justified for legitimate business needs. The respondent relies heavily upon the case of Pelton Steel Casting Co., 28 T.C. 153">28 T.C. 153, affd. 251 Fed. (2d) 278, certiorari denied 356 U.S. 958">356 U.S. 958. Petitioner attempts to distinguish the Pelton case, and contends that the instant case falls within the ambit of Dill Mfg. Co., 39 B.T.A. 1023">39 B.T.A. 1023, and Gazette Pub. Co. v. Self, 103 Fed. Supp. 779. In the instant case, as in the Pelton case, supra, the facts show that by the redemption of its own shares no corporate purpose was served, but show a purpose to prevent the imposition of surtax upon its shareholders. Where the intent to avoid surtaxes clearly appears, the corporation is availed of for the proscribed purpose and justifies the imposition of the statutory penalty. In our opinion the rationale of the Pelton case, supra, is clearly applicable to the case at bar and will be followed as203 a controlling authority. The cases relied upon by petitioner were considered and distinguished in the Pelton case, and no purpose would be served by again reviewing them. In computing the section 102 undistributed net income, the respondent recognized only the dividends actually paid by petitioner. We think the payments of so-called interest, having been made under the plan, in good faith, and in the belief that the agreement of petitioner to redeem its shares was enforceable, such payments should be treated as distributions in the nature of dividends. Emanuel N. (Manny) Kolkey, 27 T.C. 37">27 T.C. 37, affd. 254 Fed. (2d) 51. The section 102 undistributed net income has been adjusted to reflect such distributions. We hold that petitioner has not carried its burden of showing that it was not availed of during the fiscal years ended June 30, 1951 to 1954, inclusive, for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting earnings and profits to accumulate instead of being divided or distributed. The respondent's imposition of the section 102 surtax is therefore sustained. Another issue involves the propriety204 of the respondent's action in disallowing certain expenditures for which a deduction was claimed as ordinary business expenses for repairs. Section 24(a) of the 1939 Code provides: "SEC. 24. ITEMS NOT DEDUCTIBLE. "(a) General Rule. - In computing net income no deduction shall in any case be allowed in respect of - * "(2) Any amount paid out * * for permanent improvements or betterments made to increase the value of any property or estate, * * * "(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;" The regulations, in substance, provide that the cost of incidental repairs which neither materially add to the value of the property, nor appreciably prolong its life, but keep it in ordinary operating condition, may be deducted as an expense. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property should be added to the capital account, or charged against a depreciation reserve if such account is kept. Regulations 118-29.23(a)-4. The question as to whether the repair is incidental and the cost deductible as an ordinary205 expense or is a capital expenditure and nondeductible is one of fact, depending on the character, the extent, and the permanency of the work accomplished by the expenditure. As to the items now in controversy, we have made ultimate findings of fact based upon the purpose and effect of the expenditures which are decisive of this issue. We think a detailed discussion of each separate item involved would serve no helpful purpose. The final question presented is whether the respondent erred in disallowing the additions to petitioner's bad debt reserve for the taxable years ended June 30, 1952 to 1954, inclusive. Petitioner's accounts receivable at the close of each year, the additions to reserve (per return), the chargeoffs, and the balance of the bad debt reserve are as follows: F/y EndedAccountsAdditions PerBalanceJune 30ReceivableReturnChargeoffsof Reserve1951$120,856.910$1,147.99$ 7,492.611952109,369.89$7,879.081,314.6014,136.941953118,015.177,308.68022,760.22195492,169.365,766.08261.8828,264.42The respondent disallowed the entire additions to the bad debt reserve claimed206 by petitioner as excessive in view of its collection experience. At the time of petitioner's organization on June 1, 1947, it took over the partnership bad debt reserve of $9,477.69. From that time until the fiscal year ended June 30, 1954, petitioner's total chargeoffs were in the amount of $3,977.54. During the same period petitioner increased its bad debt reserve to $28,264.42. During the taxable periods in question, petitioner's bad debt losses totaled only $1,576.48. Section 23(k)(1) of the Code of 1939, allows, in the discretion of the Commissioner, a reasonable addition to the bad debt reserve. Petitioner has the burden of showing that the Commissioner's determination is an abuse of his discretion and arbitrary. In support of petitioner's position that its claimed additions to its bad debt reserve was reasonable, it is contended that during the Korean War it took on a number of new accounts from customers whose credit rating was unknown, and it had some customers who were delinquent in payments, and the corporate officers felt that additional debt reserves should be set up to cover questionable accounts. Petitioner was still doing business with its delinquent customers. 207 One of the factors applied in determining whether the addition to the bad debt reserve is reasonable is the petitioner's prior record. Mill Factors Corporation, 14 T.C. 1366">14 T.C. 1366. This record shows that petitioner's customers were largely manufacturing concerns. Petitioner's debt loss, as revealed by the facts, indicate its collection experience was excellent. From a viewpoint of sound business management it may be wise to accumulate surplus funds against future contingencies, but that is not the function of a bad debt reserve contemplated by section 23(k)(1) of the Code. S. W. Coe & Co. v. Dallman, 216 Fed. (2d) 566. In the light of this record we are convinced that petitioner has not carried its heavy burden of showing that the Commissioner has abused his discretion or acted arbitrarily in disallowing the claimed additions to the reserve for bad debts as excessive. Therefore, the respondent's determination is sustained. The parties are agreed that pursuant to the Court's opinion, the subsidiary issues as to the net operating loss carry-back from the fiscal year 1955 to the taxable fiscal year 1954, and the correct excess profits tax income for the years208 ended June 30, 1951, 1952, and 1953, can be taken care of under Rule 50. Decision will be entered under Rule 50. Footnotes*. Note: The record contains no explanation of the differential of $10.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622149/	JACK K. LARABEE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLarabee v. CommissionerDocket No. 18928-87.United States Tax CourtT.C. Memo 1989-298; 1989 Tax Ct. Memo LEXIS 310; 57 T.C.M. (CCH) 755; T.C.M. (RIA) 89298; June 19, 1989. Jack K. Larabee, pro se. John R. Keenan, for the respondent. SWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent determined deficiencies in petitioner's Federal income tax for 1983 and 1984 in the respective amounts of $ 10,135 and $ 8,133, and additions to tax under section 6661 1 for each year. The primary issues for decision are whether petitioner is entitled to additional net operating loss and interest311 expense deductions. FINDINGS OF FACT Petitioner resides in Knoxville, Tennessee. The issues in this case relate to alleged losses arising from petitioner's ownership of cattle and to interest allegedly paid by petitioner to a personal friend. Beginning in 1972, petitioner decided to "learn the cattle business." In 1973, petitioner and his wife entered into what petitioner described as a partnership with a Mrs. Arvazine K. Slate and her husband with regard to the purchase of cattle. The Slates soon withdrew from the partnership, but petitioner apparently continued to pay for the advice of Mrs. Slate as a cattle consultant. In June of 1976, due to a series of financial and operational problems in the conduct of petitioner's cattle business, all of the cattle petitioner owned at that time (apparently numbering 600 head), as well as farming equipment petitioner owned, were foreclosed on and sold by or through the Production Credit Association of Kentucky. After312 expenses of the foreclosure sale and after petitioner's creditors were paid, no sales proceeds remained for distribution to petitioner. The loss of petitioner's cattle and farming equipment gave rise to the realization by petitioner of a substantial operating loss for 1976. On June 1, 1977, petitioner apparently purchased for $ 165,000 several hundred additional head of cattle. On or about that date, petitioner entered into what he refers to as a "master cattle purchase contract" with Mrs. Slate. This purported contract was a very general written statement indicating, at most, an intention on the part of petitioner to issue a series of installment notes in favor of Mrs. Slate. The purported contract did not describe the amount of the notes to be issued, the total debt obligations to Mrs. Slate, nor the nature of the transaction that gave rise to petitioner's obligation to issue the notes. The master cattle purchase contract with Mrs. Slate, however, appears to relate to petitioner's June 1, 1977, purchase of cattle. In June of 1977, as contemplated by the cattle purchase agreement with Mrs. Slate, petitioner issued in favor of Mrs. Slate a series of 50 or 60 promissory notes, 313 each in the principal amount of approximately $ 1,000. In July or August of 1977, the Production Credit Association of Kentucky again foreclosed on petitioner's cattle, and again, after expenses and creditors were paid, petitioner realized nothing from the foreclosure sale. Also, in spite of the purported security interest in the cattle which she allegedly had sold to petitioner, Mrs. Slate received nothing from this foreclosure sale. The foreclosure sale of the cattle in 1977 allegedly gave rise to an operating loss for petitioner in the amount of $ 360,000. In 1978, petitioner moved to Austin, Texas. In 1978 or 1979, petitioner passed the CPA exam and began teaching college-level accounting courses in Texas. In 1980, petitioner suggested to Mrs. Slate that she move from her then residence in Knoxville, Tennessee to Austin, Texas, purchase a home in Austin, and allow petitioner to live in the home with her. Petitioner also suggested to Mrs. Slate that she allow him to use a portion of the home as an accounting office. Mrs. Slate agreed to the proposed arrangement, purchased the home in Austin, and moved into the home with petitioner. Petitioner and Mrs. Slate, who previously314 had divorced her husband, lived in the home in Austin from 1980 through 1985. Although the purported promissory notes given to Mrs. Slate called for monthly payments of principal and interest, from 1980 through 1985 petitioner allegedly made payments on the notes in an unconventional manner. As explained, during those years, both petitioner and Mrs. Slate resided together in Austin, Texas. Throughout each year, Mrs. Slate and petitioner allegedly would discuss the bills and expenses relating to the joint residence they were maintaining. Petitioner states that he often paid grocery bills, utility and phone bills, and other miscellaneous bills and expenses relating to the residence. Petitioner also states that he paid many of Mrs. Slate's personal bills and expenses such as personal credit card bills. Petitioner claims that at periodic intervals throughout the year, he and Mrs. Slate added up the total of the personal bills and expenses petitioner had paid on Mrs. Slate's behalf, and Mrs. Slate credited that amount against petitioner's various alleged obligations to Mrs. Slate (namely, personal and office rent attributable to petitioner's use of Mrs. Slate's home, and principal315 and interest due on the promissory notes). Petitioner alleges that the portion of the total payments he made on Mrs. Slate's behalf that was credited to interest on his notes to Mrs. Slate was $ 4,625 in 1983 and $ 5,441 in 1984. Petitioner has not submitted adequate verification or documentation of the manner by which he and Mrs. Slate allocated the total bills and expenses he allegedly paid in 1983 and 1984 on behalf of Mrs. Slate between the different obligations he allegedly owed Mrs. Slate. On petitioner's 1983 individual Federal income tax return, petitioner claimed a net operating loss carryover deduction of $ 31,567, arising from the claimed 1977 net operating loss of $ 360,000, and an interest deduction of $ 4,625 relating to the alleged interest payments to Mrs. Slate. On his 1984 individual Federal income tax return, petitioner claimed a net operating loss carryover deduction of $ 25,368, arising from the claimed 1977 net operating loss, and an interest deduction of $ 5,441 relating to the alleged interest payments to Mrs. Slate. On audit, respondent allowed petitioner net operating loss carryforward deductions for 1981 and 1982, arising from net operating losses316 incurred in petitioner's cattle business in 1975 and 1976. Respondent, however, disallowed the 1977 claimed net operating loss in its entirety and the loss carryforward deductions claimed with respect thereto for 1983 and 1984. Respondent also disallowed the interest expense deductions claimed by petitioner for 1983 and 1984 with respect to the alleged note payments to Mrs. Slate, and respondent imposed the section 6661 addition to tax for each year. OPINION Petitioner's entitlement under section 172 to the claimed net operating loss carryforward deductions in 1983 and 1984 and his entitlement under section 163 to the claimed interest expense deductions are dependent upon a showing by petitioner that he incurred the claimed net operating losses in 1977 and that he incurred the claimed interest expenses in 1983 and 1984. Petitioner has the burden of proof with regard to these issues. Rule 142(a); ; ; . Petitioner's evidence on these issues was disorganized, confusing, and inadequate to convince us that317 he is entitled to the claimed losses or interest expenses. Petitioner may have incurred losses in 1977 from his cattle business. On the record presented, however, we are unable to verify that fact or the amount of the loss. Petitioner's books and records are incomplete. The nature of the 1977 transaction by which petitioner allegedly purchased cattle from Mrs. Slate for $ 360,000 is unclear. Of particular concern to us is the nature and validity of petitioner's liability on the numerous $ 1,000 promissory notes purportedly associated with the transaction. The evidence concerning the payments on the notes is equally confusing and suspect. We find petitioner's testimony to be incredible concerning the manner by which he, a CPA, intentionally commingled his payments of Mrs. Slate's personal bills and expenses with alleged payments of his debt obligations. At trial we were particularly bothered by petitioner's failure to call Mrs. Slate as a witness even though petitioner communicated with her by telephone during the trial, and even though petitioner otherwise apparently had Mrs. Slate's cooperation. Petitioner's failure to call Mrs. Slate as a witness gives rise to a presumption318 that, if called, her testimony would have been adverse to petitioner on the issues before us. See , affd. . For the reasons stated, we sustain respondent's disallowance of the claimed net operating loss and interest expense deductions. With regard to the substantial underpayment and addition to tax under section 6661, petitioner has not offered any specific argument other than that the tax deficiencies are erroneous. Having sustained respondent's tax deficiencies, we also sustain the section 6661 additions to tax. Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622152/	The Jarie Corporation, a Delaware corporation in dissolution v. Commissioner.Jarie Corp. v. CommissionerDocket No. 92345.United States Tax CourtT.C. Memo 1963-152; 1963 Tax Ct. Memo LEXIS 193; 22 T.C.M. (CCH) 726; T.C.M. (RIA) 63152; May 31, 1963William E. Bardusch, Jr., for petitioner. Philip Shurman and Robert D. Whoriskey, for the respondent. MURDOCK Memorandum Opinion MURDOCK, Judge: The Commissioner determined a deficiency of $27,293.15 in income tax of the petitioner for 1958. The only issue for decision is whether the petitioner is exempt from tax under section 501(c)(3), Internal Revenue Code194 of 1954. The return was filed with the district director of internal revenue for the Lower Manhattan District of New York. The parties have filed a stipulation of facts which is adopted as the findings of fact. There is no other evidence in the record in this case. The petitioner was incorporated in 1929 under the laws of Delaware by Joseph R. Esposito, who transferred securities to it in exchange for all of its stock, which he then held until his death on August 5, 1957. All net earnings distributed by it were paid or payable to Joseph and it was properly regarded as his personal holding company for tax purposes during that period. The certificate of incorporation contains no reference to charities. A certificate of dissolution of the petitioner was filed on March 9, 1959. The returns of the petitioner were on a cash basis. An income tax return and a personal holding company return for the petitioner were filed for the calendar years 1957 and 1958. E. B. Hallett, James Beckett and Russell Gowans were the executors of Joseph's estate and were also the only directors of the petitioner after Joseph's death. The executors filed a petition to probate Joseph's will on August 9, 1957 to195 which a brother filed objections on September 12, 1957. A trial was held on November 6, 1958 at which the contestant offered no proof and the will was admitted to probate on December 17, 1958. The will provided for the payment of debts and funeral expenses, for the payment of all inheritance and estate taxes out of the residuary estate, for the distribution of some personal belongings to individuals and an athletic club, for two specific bequests of $10,000 each to Catholic churches for masses, for 21 specific bequests totaling $455,000 to named individuals, and to nine tax free charities a total of $135,000 in specific bequests plus the residue of his estate. Paragraph "EIGHTEENTH" of the will was as follows: EIGHTEENTH: In the event that the assets of my estate remaining after payment of debts, taxes and expenses of administration shall be insufficient to pay in full all monetary legacies herein provided, it is my wish and direction that the bequests to individuals hereinabove named shall be preferred as to payment to the bequests for charitable purposes and shall not abate. Paragraph "TWENTY-FIRST" was as follows: TWENTY-FIRST: As I realize the settlement of my estate will196 be delayed because of the requirements of Income, Estate and Inheritance Tax Laws, I expressly provide that no monetary bequests made in this Will shall bear interest until the Federal Tax liability of my estate shall have been finally determined and have been fully paid, with interest, if any. The income tax returns of the petitioner showed, inter alia, the following. Taxable In-Endcome beforeDividendsTotalof YearGrossRegularSpecialReceivedDistribu-EarnedYearIncomeDeductionsDeductionsDeductionbutionsSurplus1957$ 44,687.79$4,911.13$ 39,776.66$31,033.210$92,058.901958140,382.795,008.25135,374.5427,523.70$105,00081,512.81 These returns showed for each year "Paidin or capital surplus $35,996.55" and for the beginning and end of 1958 "Surplus reserves $317,474.83" which exceeded the same item on the 1957 return by $34,085.44, the amount of a consent dividend added to surplus. See sec. 565(c)(2). The petitioner made some changes in its investments between August 5, 1957 and the end of 1958. The value of its assets at August 5, 1957 was $1,031,206.71 and at March 10, 1959 was197 $860,406.01. The original income tax return of the estate for 1957 reported a consent dividend of $34,085.44 from the petitioner (see section 565), total income of $34,335.44 and no charitable deduction or distributions to beneficiaries. An amended return for 1957 was filed on April 21, 1959 claiming a charitable deduction of $34,277.20 and no taxable income. The income tax return of the estate for 1958 reported dividends of $105,000 from the petitioner, total income of $106,616.27, a charitable deduction of $105,736.52 and no taxable income. Those returns do not show that any amount was distributed or distributable to any particular charitable organization. There is no showing of the date or amount of any distribution by the estate or of any accounting of the executors. The petitioner starts off with the burden of proof. It concedes that it was a personal holding company while Joseph lived but contends that its status changed at his death on August 5, 1957, at which time his estate became the owner of all of its stock. Its organization, it argues, then consisted, under New York law, of its certificate of incorporation and Joseph's will, and thus it became a corporation "organized198 for charitable purposes, i.e., to pass along its income and earnings to the charitable residuary legatees." It cites and relies upon John Danz Charitable Trust, 32 T.C. 469">32 T.C. 469, affirmed, 284 F. 2d 726. It says "It is plain from the record that Jarie's 'operation' from the date of testator's death was simply to hold, invest and reinvest securities and cash and pay over the net income realized to its sole stockholder, the Estate." Actually, the day to day operations of Jarie did not change in any material way up to the close of 1958. It continued its investment policy, added its 1957 earnings to its surplus, distributed some of its current earnings to Joseph's estate in 1958 and retained some of its earnings. The stipulation shows that the value of its assets was $1,031,206.71 on August 5, 1957, and $860,406.01 on March 10, 1959 when it liquidated. The operations of Jarie from January 1, 1957 to August 5, 1957, all of the earnings of which were reported in its 1957 return, were admittedly those of Joseph's personal holding company. His will provided for the payment of his personal debts, funeral expenses, taxes, interest thereon, and the expenses of administration199 of his estate. He mentioned therein the possibility that his assets might then not be sufficient "to pay in full all monetary legacies" and in that case the bequests to individuals were preferred over those for charitable purposes. There was a will contest. Expenditures connected with the above were not charitable purposes for the use of earnings of Jarie. Joseph's will provided for specific cash bequests of $610,000. The record in this case does not show how the estate was settled or what it did with any earnings of Jarie. The limited amount of facts which can be gleaned from the stipulation does not justify a conclusion that the petitioner was organized and operated during 1958, exclusively for religious, charitable or educational purposes or that no part of its earnings inured to the benefit of any private shareholder or individual within the meaning of section 501(c)(3) of the Internal Revenue Code of 1954, or that John Danz Charitable Trust, supra, has any application. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622161/	H. B. McNary v. Commissioner.H. B. McNary v. CommissionerDocket No. 25434.United States Tax Court1952 Tax Ct. Memo LEXIS 145; 11 T.C.M. (CCH) 692; T.C.M. (RIA) 52288; June 30, 1952H. B. McNary, pro se. Robert F. O'Malley, Esq., for the respondent. LEMIRE Memorandum Findings of Fact and Opinion Petitioner protests the disallowance of certain "miscellaneous deductions" aggregating $1,165 and a theft loss of $930. Findings of Fact Petitioner is a consultant civil engineer and is a resident of Sutton, West Virginia. He and his wife filed a joint return for 1946 with the collector for the district of West Virginia. The gross income reported on the return was $780 received from the Board of Education, Sutton, West Virginia, $5,589.69 from the Military Government for Germany, and a capital gain of $1,124.85. Deductions were claimed in the amount of $3,792.55, including miscellaneous deductions of $1,665 and a loss146 from theft of $930. The miscellaneous deductions included the following items: Dues - Civil & Mining Engineers societies- AIME - AMC - WVCMA$ 25Professional books & magazines140Expenses attending professional meetings350Personal expenses while away from homein business - not reimbursed750Office help150Repairs to car used in business250Total$1,665 In determining the deficiency the respondent disallowed the deduction of both the $1,665 item and the $930 theft loss. On May 1, 1946, petitioner went to Germany as Chief of Coal Mining, Industries Branch, Military Government, where he remained throughout the taxable year 1946. While in Germany and while performing his official duties, petitioner made certain expenditures from his individual funds for the entertainment of officials of other representative governments for which he was not reimbursed. Petitioner made these expenditures in cash and kept no record of them. On one occasion he supervised a 30-day tour of Germany by a number of representatives of the American, British, French and Russian Governments. On other occasions he furnished entertainment for various groups of foreign representatives147 while visiting the American zone in Germany. Food, drinks and flowers were among the items which petitioner provided for such entertainment. Also on his return petitioner claimed the deduction of a loss of $930 from the theft of the following articles: Lady's caracul fur coat $500Leica camera350Schick electric razor15Gold pocket watch65Total $930 Petitioner found the above articles missing on returning to the room in which he was billeted in Berlin. It was discovered that entry had been gained to the room through a window during petitioner's absence. The fur coat and the Leica camera had been acquired by petitioner at a so-called "barter" store in exchange for food stuffs and other commodities which had been sent to petitioner by members of his family in the United States. The barter plan store was set up by the authorities to combat the black market and to provide a legitimate means of exchanging American goods for German and other foreign goods. German appraisers at the store had appraised the fur coat and camera at the amounts which petitioner claimed as loss deductions in his return. The watch was an heirloom and the electric razor one that148 had been given petitioner as a Christmas present. Opinion LEMIRE, Judge: The evidence adduced by the petitioner in this proceeding in support of his claim for the disallowed deductions consists almost entirely of his oral statements. Petitioner kept no record of his expenditures and had no documentary proof of any of them. He was not represented by counsel at the hearing. The deductibility of the items claimed as miscellaneous deductions, the total amount of $1,665, is controlled by section 23(a)(1)(A), Internal Revenue Code, which provides in part as follows: "SEC. 23. DEDUCTIONS FROM GROSS INCOME. "In computing net income there shall be allowed as deductions: "(a) Expenses. - "(1) Trade or Business Expenses. - "(A) In General. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * " The deduction of personal, living, or family149 expenses, other than medical expenses, is expressly prohibited by section 24(a)(1), Internal Revenue Code. The $750 item included under miscellaneous deductions was described in the return as "Personal expenses while away from home in business." Petitioner testified at the hearing that the money was spent in part for travel and in part for food, drinks, flowers and entertainment for his associates. His testimony was in part as follows: "As I have said before, as far as traveling expenses are concerned, $750 does not come within traveling expenses allowed to an employee. As far as the others are concerned - I would like to make a statement there, the $750 is set up as traveling expenses. There was probably a very small increment of that that could be charged directly as traveling expenses. For instance, the drivers of our cars out in the so-called lands, Bavarian, Hessian, and so on, were mostly Germans; unfortunately for them, the Military Government made no provision to feed them while they were in the field. We used to carry in the Army, three-in-one, a dollar a package; we would get them from the commissary to feed those fellows, for a while, until a couple150 of them froze to death, they would sleep in the back of cars. They eventually changed that. There were small items in the way of actual travel. Other than that, several hundred dollars of that, $750, is directly chargeable to entertainment rather than travel expenses, as we understand it." In the circumstances of this case and in the absence of more definite evidence as to the nature and amount of the expenditures in dispute, we are unable to determine that petitioner's official duties required him to expend $750 of his personal funds over a period of eight months for official travel or for the entertainment of his assoc&ates. Nor can we find that the amount claimed was a business, as distinguished from personal, expense. Among the other items making up the miscellaneous deductions are $350 for expenses of attending professional meetings, $150 for office help, and $250 for repairs for car used in business. These items all relate to the four months' period January 1 to May 1, 1946, when petitioner was living at Sutton, West Virginia. Petitioner testified as to these items as follows: "During the time I was in the United States in 1946, which was up until May, I had the expense, 151 the operating expense of my office and my automobile, which is normal to my business. I believe it was set up at about $250 for the car, $150 office expense, which was a parttime payment for stenographic work; and I believe the item is $350 for traveling expense and the entertainment. I am on a Research Committee and a member of several mining organizations which I visit each year. I do, of course, have a rather sizeable item in traveling throughout the various states in which I conduct my business." We do not know what meetings petitioner attended, where they were held or what relation they may have had to his business or profession as a consultant engineer. There is the same lack of information about the "office help" item of $150. There is no evidence that the use of an automobile was required in petitioner's business or as to just what use was made of it. We do not know whether the automobile was used exclusively for business or was used for both business and pleasure, or the nature of the repairs for which petitioner claimed the deduction. It might be pointed out that in his return petitioner reported no income or loss from his profession or business in 1946. There should152 at least be some explanation of why the items to which petitioner claims to have expended for the production of income did not produce any income, if such was the case. For lack of evidence respondent's disallowance of these items must be sustained. The evidence is equally unsatisfactory as to the claimed theft loss of $930. The deduction allowable on account of a loss from theft under section 23(e)(3) is the value of the property at the time of the theft, but the amount cannot exceed the adjusted basis thereof. The adjusted basis of the fur coat and the camera would be approximately their cost to petitioner. They had recently been acquired and had suffered no use of consequence. The cost of the articles was not proven, however, and according to the evidence could not be determined. Petitioner estimated that the actual cost was about 10 percent of the amount claimed as a loss. Accepting that as a reasonable estimate, we find that petitioner is entitled to a loss deduction of $50 for the fur coat and $35 for the camera. For lack of evidence as to the proper basis for computing the deductions claimed on account of the loss of the watch and the electric razor, respondent's disallowance153 of the deductions is sustained. Deduction will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622163/	EDITH ANDREWS LOGAN, ET AL., 1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Logan v. CommissionerDocket Nos. 5508, 5916-5918, 6014, 6436-6438, 18202.United States Board of Tax Appeals12 B.T.A. 586; 1928 BTA LEXIS 3497; June 14, 1928, Promulgated 3497 1. Petitioners sold stock on March 11, 1916, for more than cost and for more than the March 1, 1913, value. A part of the consideration received was a contract providing for future payments as ore was mined. The contents and life of the mine and the annual production were capable of determination. Held, that the contract received had a determinable fair market value at the date of receipt. 2. Deferred payments under the contract were based upon the number of tons mined annually from the Mahoning Mine, the mineral content of which was susceptible of accurate determination. Held, that such portion of the deferred payments received during each year as the number of tons mined during such year bears to the total determined content of the mine constitutes a return of principal and that the balance constitutes a receipt of taxable income. John W. Ford, Esq., Millard F. Tompkins, Esq., and Walter M. Anderson, Esq., for the petitioners. L. C. Mitchell, Esq., for the respondent. SMITH 587 These proceedings are for the redetermination of deficiencies in income tax as follows: DeficiencyOverassessmentEdith Andrews Logan, Docket No. 5508:Claim filed 1915$18.60Claim filed 19161,441.15Claim filed 1917491.73Claim filed 1918$994.05Claim filed 191914,277.92Claim filed 19206,776.6622,048.631,951.48Henry W. Heedy, Docket No. 5916:Claim filed 1918424.38Claim filed 1919291.67Claim filed 1920272.21988.26William J. Hitchcock, Docket No. 5917:Claim filed 19187,967.60Claim filed 19193,024.06Claim filed 19203,144.0514,135.71Frank Hitchcock, Docket No. 5918:Claim filed 19188,483.14Claim filed 19194,889.75Claim filed 19201,701.2015,074.09Wiliam M. Andrews, Docket No. 6014:Claim filed 1918135.80Claim filed 191971.19Claim filed 192046.76253.75Carrie L. Shaw, Executrix, Estate of John Shaw, DocketNos. 6436, 6437, 6438:Claim filed 1918518.60Claim filed 1919147.47Claim filed 192077.25743.32Julia Andrews Bruce, Docket No. 18202:Claim filed 19189,419.61Claim filed 191911,285.5120,705.123498 These proceedings were consolidated for hearing and decision. The allegations of error in the several petitions are substantially the same and are that the Commissioner erred, (1) in adding certain amounts to the net income reported in the returns filed by the petitioners for the years in question, under the general and erroneous description "ore payments received from the Youngstown Sheet & 588 Tube Co. less returns of capital thereon," and in adding to net income reported in the returns filed for the taxable years any sums whatever in respect of the transactions so described; and (2) in treating as taxable income for the taxable years any portion of the sums received by the petitioners during those years as part of the sale price of shares of stock in the Andrews & Hitchcock Iron Co., which were sold during the year 1916. FINDINGS OF FACT. 1. The petitioners are all citizens of the United States and residents of Youngstown, Ohio, except Julia Andrews Bruce, who is a resident of Greenwich, Conn.2. Prior to March 1, 1913, and continuously to March 11, 1916, Edith Andrews Logan owned 250 shares; her mother, Louisa Andrews, owned 1,180 shares; Henry W. Heedy, 1003499 shares; William J. Hitchcock, 1,000 shares; Frank Hitchcock, 1,000 shares; the Cleveland Trust Co., trustee for the three children of U. A. Andrews (of which William M. Andrews was one), 120 shares; and Julia Andrews Bruce, 350 shares, constituting all of the capital stock of the Andrews & Hitchcock Iron Co., an Ohio corporation, which at all said times mentioned had 4,000 shares of capital stock issued and outstanding. 3. The Andrews & Hitchcock Iron Co. at all times between March 1, 1913, and March 11, 1916, owned among other assets a 12 per cent interest in the capital stock of the Mahoning Ore & Steel Co., which controlled under a lease dated April 1, 1895, and running for 97 years after said date, an iron mine located on the Mesaba Range in Minnesota, known as the Mahoning mine. 4. On March 11, 1916, all the stockholders of the Andrews & Hitchcock Iron Co. entered into a certain written contract with the Youngstown Sheet & Tube Co., an Ohio corporation, providing for the sale of their stock in the Andrews & Hitchcock Iron Co. to the Youngstown Sheet & Tube Co., the material portions of which contract are set forth in the findings of fact in 3500 . This contract made reference to a written contract dated December 16, 1914, by and between the stockholders of the Mahoning Ore & Steel Co., the material portion of which is also set forth in the findings of fact in 5. Under the said contract of March 11, 1916, the Youngstown Sheet & Tube Co. paid for all the outstanding stock of the Andrews & Hitchcock Iron Co. the sum of $2,200,000 in cash and further covenated and agreed to and with the vendors of said stock as additional consideration for the said stock, as follows: Fourth: It is understood that said THE ANDREWS & HITCHCOCK IRON COMPANY is the owner of twelve per cent or Three hundred sixty (360) shares of the capital stock of the MAHONING ORE & STEEL COMPANY, a corporation of 589 the State of Pennsylvania, having a capital stock of Three hundred thousand dollars ($300,000.00) divided into Three thousand (3,000) shares of the par value of One hundred Dollars ($100.00) each, which said Ore and Steel Company is the owner of certain valuable mines for the production of iron ore, and that the said THE ANDREWS & HITCHCOCK IRON3501 COMPANY, by an agreement in writing in quintuplicate bearing date of December 16th, 1914, is entitled to take each year a full quota of each grade of ore to be produced by said Ore & Steel Company in proportion to the amount of stock owned by or represented for it, as provided for in said agreement, a copy of which is hereto attached, and marked "Exhibit A" for the purpose of making the same a part hereof; and for the purpose of fixing the balance of the purchase price to be paid by The Youngstown Company, it is therefore further agreed between said parties as follows, to-wit: That The Youngstown Company shall, and will each year hereafter, take or cause to be taken the full quota of ore to which the said THE ANDREWS & HITCHCOCK IRON COMPANY, its successors or assigns, may be entitled, under and by virtue of the terms of said written agreement of December 16, 1914, and shall give the notice provided for in said agreement and will pay or cause to be paid to said THE DOLLAR SAVINGS & TRUST COMPANY for the benefit of said stockholders, and as the balance of said purchase price, each year, on or before thirty days after the close of navigation to the transportation of ore on the Great3502 Lakes, the Sum of Sixty cents (60??) per ton for each and every ton of twenty-two hundred forty (2240) pounds of iron ore so entitled to be taken for such year, and actually delivered by said Ore & Steel Company, it being understood that if any part of the quota for any year be left at the mine by election of The Youngstown Company, The Youngstown Company shall pay on account thereof to the stockholders in the same manner as though the same had been shipped from the mine, but shall not thereafter be required to pay any additional sum on account thereof. 6. The said contract of December 16, 1914, between the stockholders of the Mahoning Ore & Steel Co., which was by reference made part of the said contract of March 11, 1916, contained among other provisions the following: The tonnage of each grade to be produced annually shall be fixed by the Board of Directors on or before April 1st, in each year, and notice of the fixing of said tonnage shall be mailed promptly to each stockholder. Each of the interests, as hereinbefore set forth, shall be entitled to take a full quota of each grade to be produced, in proportion to the amount of stock owned by or represented for them, and3503 within fifteen days after receipt of notice referred to in preceding paragraph, shall notify in writing the President of said Mahoning Ore & Steel Company, whether or not it elects to take the full quota to which it is entitled. Undesired tonnage, if any, shall be offered pro rata to the other stockholders, and such portion thereof not desired by them can be disposed of by the Board of Directors by reducing the originally fixed production to the extent of the unaccepted tonnage or in any other manner the Board of Directors may agree upon. The price of ores shall be fixed each year by the Board of Directors, and shall be at or about the cost of production, including all costs, transportation, delivery, handling, etc., to the lower lake ports. 7. The Cleveland Trust Co. on January 31, 1918, transferred and assigned to William M. Andrews a 40/4000 interest in the then 590 unpaid portion of the sale price of said stock and terminated the trust with respect thereto. 8. On October 29, 1916, Louisa Andrews assigned and transferred to John Shaw, by way of gift inter vivos, an interest of 80/4000 in the then unpaid portion of the sale price of said stock. 9. The3504 value on March 1, 1913, of the shares of stock owned by the petitioners and sold by them under said contract of March 11, 1916, was in excess of the following sums, respectively: Edith Andrews Logan, 250 shares$173,089.80Henry W. Heedy, 100 shares69,235.93William J. Hitchcock, 1000 shares692,359.25Frank Hitchcock, 1000 shares692,359.25The Cleveland Trust Co., trustee for William M. Andrews, 40 shares27,694.37Julia Andrews Bruce, 350 shares244,703.7010. The value on October 29, 1916, of the 80/4000 interest in the unpaid portion of the sale price of said stock acquired by John Shaw by gift from Louisa Andrews on that date was in excess of $11,388.74. 11. Since the sale of said shares of stock under the contract of March 11, 1916, the petitioners have respectively received the following sums on account of the purchase price of said stock, down to and including the year 1920, the amounts shown for 1916 in each case representing the stockholder's share of $2,200,000 paid in cash under the contract of March 11, 1916: Edith Andrews Logan: 1916$137,500.0019179,900.00191811,250.0019198,995.5019205,444.30Henry W. Heedy: 191655,000.0019173,960.0019184,500.0019193,598.2019202,177.73William J. Hitchcock:1916550,000.00191739,600.00191845,000.00191935,982.00192021,777.25Frank Hitchcock:1916550,000.00191739,600.00191845,000.00191935,982.00192021,777.25William M. Andrews:1916$22,000.0019171,584.0019181,800.0019191,439.281920871.09John Shaw:19173,168.0019183,600.0019192,878.5619201,742.18Julia Andrews Bruce:1916192,500.00191713,860.00191815,750.00191912,593.703505 591 12. The total of the sums received by the several petitioners as the result of the sale of said stock owned by them and sold under the contract of March 11, 1916, down to and including the year 1920 was in each case less than the value on March 1, 1913, of the stock sold and less than the cost thereof; and in the case of John Shaw was less than the value of his interest at the date he acquired it by gift from Louisa Andrews. 13. On March 11, 1917, Louisa Andrews, Julia Andrews Bruce's mother, died, leaving a last will and testament which was duly admitted to probate and under which Julia Andrews Bruce received by bequest a 550/4000 interest in any payments that might subsequently become due under the said contract of March 11, 1916. 14. The value of the said 550/4000 interest so acquired by Julia Andrews Bruce Under her mother's will was fixed by the Commissioner of Internal Revenue for the purposes of the Federal estate tax imposed upon the estate of Louisa Andrews at $277,164.50. 15. Since the death of her mother Louisa Andrews on March 22, 1917, Julia Andrews Bruce, down to and including the year 1920, has received the following sums under said contract3506 of March 11, 1916, on account of the 550/4000 interest in the future payments under said contract acquired by her under her mother's will: 1919$19,790.10192011,977.4916. The total of the sums so received by Julia Andrews Bruce since her mother's death by virtue of the 550/4000 interest in the future payments under the contract of March 11, 1916, acquired by Julia Andrews Bruce under her mother's will was less than the value of the said 550/4000 interest as fixed by the Commissioner for the purposes of the Federal estate tax upon the estate of Louisa Andrews, and less 592 than the value of said interest at the date it was acquired by inheritance from her mother. 17. The several petitioners, between March 1, 1913, and December 31, 1920, kept no books and their returns for Federal income-tax purposes for the years 1916 to 1920, inclusive, were made on the basis of cash receipts and disbursements. 18. On March 11, 1916, the Mahoning Ore & Steel Co.'s property consisted of approximately 1,000 acres of leased mineral land and at that time between 400 and 500 acres were totally or practically unexplored. 19. Fifty per cent of the stock of the3507 Mahoning Ore & Steel Co. in 1916 was held by the Cambria Steel Co., and the remainder by other steel companies. 20. Until 1909 or 1910 the policy of the Mahoning Ore & Steel Co. had been one of conservation, the production running between 1,000,000 and 1,500,000 tons per annum. 21. In 1911, 1912, and 1913, owing to the increasing tax burden and the change of the control of the Cambria Steel Co., the company entered upon extensive stripping operations which placed it in a position to produce 3,000,000 tons a year. 22. Under the agreement of December 16, 1914, the amount of tonnage to be produced annually by the Mahoning mine was left to the determination of the board of directors of that company. 23. A difference of opinion existed between engineers and experts qualified by education and training in the iron mining industry employed by the Mahoning Ore & Steel Co., on the one hand, and by the Commissioner, on the other, both as to the estimated annual production of the Mahoning mine and its life as of March 11, 1916. 24. Engineers employed by the Commissioner estimated that at the date of the contract of March 11, 1916, the ore reserves of the Mahoning Ore & Steel3508 Co. were 82,858,535 tons; that the average annual future production from said mine would be 1,841,300 tons; and that the life of the mine was 45 years from March 11, 1916. 25. The estimate mentioned above and adopted by the Commissioner as a basis for determining deficiencies in the income tax of the petitioners was based upon data furnished by the engineers of the Mahoning Ore & Steel Co. to the respondent to enable him to fix the depletion rate for the Mohoning Ore & Steel Co. It was based upon the content of recoverable ore in only approximately 620 acres out of the entire property leased by the company. 26. Since fixing the deficiency in the case of Edith Andrews Logan, the Commissioner in a proceeding in which the depletion rate for the Mahoning Ore & Steel Co. was changed, based upon data furnished by the company and the opinions of duly qualified engineers and experts employed by him, found that the life of said mine was 40 593 years from March 1, 1913, and that the estimated ore reserves of said mine on March 1, 1913, were 88,561,533 tons. The tonnage mined from the Mahoning mine from March 1, 1913, to March 11, 1916, was 5,039,655 tons. 27. The actual3509 ore in tons mined annually for the Mahoning Ore & Steel Co. between 1913 and 1926, inclusive, was as follows: 19131,515,42819141,212,28719152,311,94019162,215,78819172,525,14419182,019,48119191,217,16719201,720,5371921303,02019221,011,20419233,029,86519241,717,09219251,699,13319261,813,81128. Assuming that the said Mahoning mine had ore reserves on March 11, 1916, of 82,858,535 tons, and further assuming that all said ore would be mined, and 12 per cent thereof, namely, 9,942,664.2 tons, would be delivered to Youngstown Sheet & Tube Co., the total amount which would be received under the provisions of the contract of March 11, 1916, by all the vendors of said stock and their successors in interest would be the sum of $5,965,814.52, at the rate of 60 cents per ton. 29. The present worth of the sum of $5,965,814.52, based upon the assumption that the amount was to be received in equal annual installments during 45 years, discounted at 6 per cent, with provision for a sinking fund at 4 per cent, was on March 11, 1916, $1,942,111.46, which is the value of the contract at March 11, 1916, determined by the Commissioner3510 and used by him in computing deficiencies in tax. OPINION. SMITH: In the petition of Edith Andrews Logan it is stated that "the tax in controversy in income tax for the years 1915 to 1920, inclusive, and is more than $10,000 to-wit, $22,048.63." The notice of deficiency attached to the petition shows overassessments for the years 1915, 1916, and 1917, covered by claims filed in the aggregate amount of $1,951.48, and deficiencies in tax for the years 1918, 1919, and 1920 in the aggregate amount of $22,048.63. The pleadings do not present basic facts showing that the Board has any jurisdiction to determine the correct tax liabilities for the years 1915, 1916, and 1917, and the petitioner in her brief makes no reference to those years. The appeal is accordingly dismissed in so far as it relates to the years 1915, 1916, and 1917. The remaining issues presented by these proceedings are the same as those presented in , wherein we held that the transaction which took place in 1916 was a completed sale and that the amounts of money received by the petitioners during 594 the tax years under the contract of March 11, 1916, were3511 in part a return of capital and in part taxable income. It was argued before the Board in those proceedings, as it is argued by counsel for the present petitioners, that the interest of the petitioners in the contract of March 11, 1916, had no fair market value in 1916 and that, therefore, the transaction was not a closed one and that the petitioners were not liable to income tax upon moneys received in future years under the contract until they had recovered back the cost or fair market value on March 1, 1913, whichever was higher. In the opinion we stated: The petitioners have also raised the point that there was no market value for the contract right received by Julia Andrews Bruce and Louisa Andrews in 1916. The only testimony offered in support of these contentions was by Hitchcock, former president of the Andrews & Hitchcock Iron Co. This witness testified that in the negotiations for the sale of the stock there was no discussion concerning a full cash payment, because the buyer, the Youngstown Sheet & Tube Co. could not afford to pay cash in full. This is all the testimony offered in support of the allegation that the contract to receive future payments had no market3512 value. The present petitioners contend that unlike the Julia Andrews Bruce case, supra, they have offered affirmative proof showing that the contract of March 11, 1916, under which their shares of stock were sold, in so far as the future indeterminate payments were concerned, had no fair market value. Frank Hitchcock, the president of the Andrews & Hitchcock Iron Co. on March 11, 1916, testified at the hearing of the present cases: Q. Mr. Hitchcock, at that time, namely, March 11, 1916, did you know of any market where you could have obtained, or did you know of any market where could be sold, an interest of 12% of the stock of the Mahoning Ore & Steel Company? A. No, not at its value. Q. Mr. Hitchcock, in 1916, was there any price established by public sale or sales in the way of ordinary business, of similar contracts to this contract of March 11, 1916, by which the fair market value of the contract at that time, at the time it was made, could be determined? A. No. q. Was there in 1916 any general market for contracts of this character, and any established or current market price? A. No. John B. Putnam, connected with Pickands, Mather & Co. 3513 , Cleveland, Ohio, Likewise testified that in his opinion there was no fair market for the several petitioners' interests in the contract of March 11, 1916; that the vendors on any sale of this contract in 1916 could not have readily realized in cash or its equivalent its real value. J. C. Agnew, muining engineer who connected with the Mohoning Ore & Steel Co. from 1904 to 1923, testified: 595 Q. In 1916, was there any price established by public sales or sales in the way of ordinary business, of similar contracts, by which the fair market value of that contract at the time it was made could be determined? A. No. Q. Was there, in 1916, any general market for contracts of that character, and any published or current market price for the same? A. Not to my knowledge. Q. In your opinion, could the vendors or sellers under that contract, on any sale of the contract, have realized in 1916 in cash or its equivalent its real value? A. No, I do not think so. Of the above witnesses, Hitchcock and Agnew testified before the Board in 3514 The only additional witness for the petitioners in the present proceedings is John B. Putnam. He did not profess to be an expert on any subject connected with mining and did not claim to have anything more than general information as to any subject connected with these proceedings. He stated that he was generally familiar with iron-ore contracts. He also stated: There have been sales of iron ore mines, but I am not familiar with any except in a general way. Two mining engineers testified for the respondent that in their opinion it was practicable and feasible to estimate both the reserve and probable life of the Mahoning mine. Both of these men were familiar with the property in controversy. One of the engineers had taken part in formulating the Commissioner's determination as to the probable life of and as to the tonnage of ore in the mine. He stated that the pit operated by the Mahoning Company adjoined another pit known as the Hall Rust Mine, on adjoining property, and that the two properties constituted one mine from a physical standpoint and that it was the largest developed iron mine in the United States. The iron is found3515 in a well defined formation and is one of the best grades of iron ore in the United States. Above the iron ore is the surface or overburden of glacial drift, varying from 5 to 30 feet in thickness. He stated: The physical conditions make it feasible to estimate the ore content. You can make a very accurate estimate of it. I would say the degree of accuracy obtained in estimating ore reserves in this property will be much higher than at any other mine that I know of, because of the geographical conditions and the development of the work, the drill work, and the activity of adjacent properties * * . I do not know of any mining section where it is as easy to make an estimate of ore reserve as it is on the Mesaba. The stipulation filed in these proceedings shows that the respondent estimated ore reserves and probable life as of 1916 and also as of 1913. The estimate of reserve in 1913 when modified by the ore mined between 1913 and 1916 is within one-half of one per cent of 596 the 1916 estimate. In 1913 the probable life was estimated at 40 years and in 1916 at 45 years. On this point one of the engineers for the respondent testified: The Commissioner's appraisals3516 of 40 years as of March 1, 1913, and 45 years as on March 11, 1916, are very consistent because they were made as of different basic dates. In each case you had a different set of facts on which to base the valuation. In the later appraisal you had additional history of three years to consider. The production for those three years was slightly less than 2,000,000 tons a year and during those three years the demand for iron ore was about the average. All of the mining engineers who testified before the Board agreed that the production of a mine of the character of the Mahoning mine here involved in strongly influenced by the general conditions of business in the country. They were agreed that in times of prosperity the production will be greater than in times of depression. J. C. Agnew, testifying for the petitioners, stated: The demand for iron ore bears a very close relation to the general properity of the country * * In estimating the future production of the Mahoning mine as of 1916 the general demand in this country for iron ore would certainly be an important factor. Another important factor would be the condition of the industry in this country, whether times were3517 prosperous or otherwise. The two Government engineers concurred in this view. Upon the basis of data furnished by the Mahoning Ore & Steel Co., the respondent determined that the ore in place as of March 11, 1916, was 82,858,535 tons. It is in evidence that this estimate did not take into consideration ore, if there was any, in approximately 400 acres of land controlled by the company. No evidence has been adduced before the Board that would prove the inaccuracy of the estimate. The doubt, if any exists, is as to the length of time it will take to mine the ore. Upon the basis of data furnished by the Mahoning Co. the respondent estimated that the life of the mine would be 45 years from March 11, 1916, and that the average annual production would be 1,841,300 tons. During the 11-year period from 1916 to 1926, inclusive, the total production was 19,272,242 tons, or an average annual production of 1,752,000 tons. The contract which the stockholders of the Andrews & Hitchcock Iron Co. had with the Youngstown Sheet & Tube Co. was that they should receive 60 cents per ton upon their 12 per cent interest in the ore mined from the Mahoning mine. The important question in the3518 case is as to whether that contract had a fair market value as of March 11, 1916. The petitioners contend that they could not have gotten a fair market value for their interests in the contract if they had attempted to sell them. Witnesses for the petitioners believed that the true value of the interest of each of the petitioners was much in excess of what each could have sold it for. This question 597 of belief does not, however, in our opinion satisfactorily establish that the interests had no fair market value. In 1916 it could be foreseen that each of the petitioners would receive considerable amounts of money under the contract during the years immediately succeeding 1916. It is hardly probable that persons conversant with the contract would not have given something for the interests of the several petitioners therein. Statements that the contract had no value because in the opinion of certain witnesses the interests of petitioners therein could not have been sold at their full market value is not satisfactory evidence that they did not have a fair market value. In support of their contention that the contract of March 11, 1916, had no fair market value in 1916, 3519 the petitioners cite the decision of the court in . We are of the opinion that that case is readily distinguishable from the cases at bar and is not controlling here. In that case the court expressly stated that the stock could not have been disposed of "except at such a sacrifice as to amount to a virtual donation," and that attempts to sell the stock were unsuccessful. There is no such evidence before the Board in the proceedings at bar. Upon the record made we are of the opinion that the contract received by the petitioners as a part consideration for their holdings in the Andrews & Hitchcock Iron Co. had a determinable fair market value when received by them in 1916. No evidence has been adduced that the determination of the Commissioner of the fair market value of the interests of the several petitioners at the basic dates were in error, and in the absence of such evidence the determinations of the respondent of such values are approved. The petitioners' contention that they derived no taxable income from payments made to them during the taxable years because up to the close of 1920 no one of them had received3520 under the contract the admitted value of the property sold either as of March 1, 1913, or March 11, 1916, is very similar to that which was made before the Board in , wherein it appeared that in January, 1913, the petitioners sold certain ore-bearing property and each of them received in exchange for its or his interest therein a certain amount in cash and 41 noninterest-bearing promissory notes, payable annually thereafter, endorsed by the United States Steel Corporation and further secured by a vendor's lien upon the property. Upon the facts presented we held that the amounts received by the petitioners upon the payment of their respective notes in the years 1919, 1920, 1921, and 1922 in excess of the fair market value of such notes on March 1, 1913, which value was in excess of cost, was taxable income. One of the petitioners in that case was Francis S. Kosmerl and from the adverse decision of the Board 598 appealed the case to the Circuit Court of Appeals for the Seventh Circuit. In an opinion handed down February 18, 1928, the order of the Board was affirmed. 3521 . In the course of the opinion the court stated: For petitioner a witness testified generally that at the time the notes were given the ore body was worth more than 35 cents per ton. But the ore at that time was plainly not worth that much to the owners, who had optioned it under the lease at 35 cents a ton, not payable in cash, but as and when it should be mined, over a period which, on January 1, 1913, had yet 41 years to run; so that while the lessee had the right to exhaust the property at 35 cents per ton, this might not, and probably would not, have been payable until many years after the date when the lease was abandoned and the sale consummated. So it appears that the actual consideration which passed from the owners was not a present 35 cents per ton, but that price over a period up to 41 years thereafter, thus greatly reducing the 35 cents per ton value of the consideration which passed in payment for the notes. And so with respect to the notes themselves, which, by their terms, matured up to 40 years from their date, without interest. That the notes were good is quite beyond dispute - good, however, only for their face value at maturity, 3522 but surely not good for their face value when made. That a note, however absolutely good the security, due 40 years from its date, without interest, is not worth its face at time of making is apparent from the mere statement. And so with the notes in question, paid in 1921 and 1922, eight and nine years from their date. Conceding these notes to have been capital assets of the taxpayer on their date, they were capital assets not for their face value but for the materially less amount which the notes were then actually worth; and in their payment at maturity there was plainly gain, profit or income to the extent of the difference. In , the court dealt with a very similar situation, and held that while the annually maturing obligations represented capital assets, and were not taxable as gains, profits, or income, yet where the obligations were for serial annual payments without interest, under the acts of 1918 and 1921 there was, upon conversion of the obligations through their payment, profit to the extent of the difference between the value of the obligations on March 1, 1913, and the amount so realized thereon. 3523 The above-referred to case is not an exact parallel to the cases at bar, for there the petitioners parted with a note during each taxable year and received the face value thereof. Here the petitioners parted with shares of stock in Andrews & Hitchcock Iron Co. in 1916 for a cash consideration and a contract entitling them to receive an amount per annum to the end of the lease held by the Mahoning Ore & Steel Co. based upon the amount of ore mined during each year. The number of tons of ore in the mine was susceptible of accurate determination and the amount of the ore to be mined annually over a period of years was likewise susceptible of determination. If the difference between the present worth of the noninterest-bearing notes in 1913 in the Kosmerl appeal and the amount received during the taxable year was income of the taxable year we think that the application of the same principle to the proceedings at bar requires the 599 petitioners to return as taxable income a portion of the amount of royalties received each year. This was substantially the decision of the Circuit Court of Appeals, Third Circuit, in 3524 . The plaintiff in suing to recover the tax paid on amounts received under a mining lease entered into prior to March 1, 1913, claimed that inasmuch as under the Pennsylvania law the lease was treated as a sale of coal in place, the payments received should be treated as a return of capital. In the course of the opinion the court stated: Reverting to the plaintiff's contention that all payments she had received under the instrument here in question were tax free because they were part payments of the purchase price of property sold prior to March 1, 1913, still - always keeping in view the nature of mining, the source of the proceeds - we think each payment represented in some measure both capital and increment, capital because it stood in the place of coal and increment because in the payments running through ninety-nine years interest on the capital must inevitably have been included, and that this increment or interest was a gain "derived" within the generalization of the statute "from any source whatever" and was income in substantially the sense of 3525 (4 Am.Fed. Tax Rep. 3769). The plaintiff can very properly demand that the capital included in her proceeds from mining shall not be (6 Am.Fed. Tax Rep. 6754); But when the capital in the proceeds has been determined and set aside the balance is income and is the very thing on which the Government lays its hands and exacts a tax. (3 Am.Fed. Tax Rep. 2883); * * * See also . At the hearing of these proceedings counsel for the petitioners stated that they desired merely to submit to the Board these cases on the sole and particular question whether the 1916 transaction was a closed transaction and that if upon the evidence submitted the Board was of the opinion that it was a closed transaction then the deficiencies must be redetermined in accordance with the Board's decision in 3526 , in which the same contract was involved. Counsel for the respondent objected, however, to the redetermination of the deficiencies in accordance with the , decision and contended that the deficiencies should be redetermined to be the amounts found by the respondent. In , we held: * * The Commissioner in his determination of the deficiency has determined the fair market value of the right to receive future payments, and from the evidence presented we can not say that his determination is not correct. A portion of each payment under the contract was a return of capital and a portion represented gain. The Commissioner has determined what portion is gain by dividing the 1916 value of the contract by the total tonnage to be obtained, reaching the conclusion that the payment for each ton represents 19.53 cents return of principal and 40.47 cents income, or, in other words, that 600 each payment, whether made one year after the agreement was made or 45 years thereafter, is made up 35.554 per cent return of principal and 67.446 per cent income. 3527 The payments to all the stockholders were estimated by the Commissioner to be $132,573.60 annually for 45 years. These payments were reduced to present worth, using a discount of 6 per cent on future payments with a 4 per cent return on sinking fund. It is evident that the present worth of the payment to be received at the end of the first year differs substantially from the present worth of the payment to be received 45 years in the future. It is further evident that the present worth of all of the payments is the sum of the present worth of each annual payment, proper adjustment for the sinking fund being made. In determining what portion of the payment represented a return of the 1916 value, the Commissioner has made the allocation between principal and gain as if the present value in 1916 of each of the annual payments to be received was exactly the same. * * * Our question now is whether we were correct in reaching the above conclusion. It will be noted from the foregoing that for the purpose of determining the amount of income received by each petitioner from the royalty payments the Commissioner considered that of each royalty payment received a part represented a3528 return of the value of the contract on April 11, 1916, and the balance represented income. The amount of each royalty payment which represented a return of capital was determined by dividing the fair market value of the contract on April 11, 1916, by the estimated tons of ore in the mine on that date. The difference between the royalty payment of 60 cents and the foregoing amount was taken as the income received on account of each ton of ore mined. The income for a given year was obtained by multiplying the unit of income for a single ton of ore by the total number of tons mined in a given year. The Board rejected the respondent's basis and held that: The proper manner in which to determine what portion of the payment is principal is to split up the total 1916 present worth into its component parts and to treat the present value of the first year's payment as a return of principal upon the first 1,841,300 tons (the estimated annual production) mined, the present value of the second year's payment as a return of principal upon the second 1,841,300 tons mined, and similarly each year until the mine becomes exhausted, or the principal is all returned. In this manner the greater3529 part of the amounts received in the first years would represent a return of principal and a small part income, whereas during the last years of the existence of the contract the reverse situation would be true regardless of the income produced by the contract in the various years. For example, under this theory, the amount to be accounted for each year would be $1,064,600, and in the first year approximately 94 per cent would be considered a return of principal, and approximately 6 per cent income, whereas in the forty-fifth year approximately 6 per cent would represent a return of principal and approximately 94 per cent would represent income. 601 Does the foregoing decision of the Board afford a reasonable basis for the determination of the amount of income of the petitioners from the royalty payments received? It is believed that this question may best be answered by keeping in mind the nature of the asset received when the 1916 transaction was effected. What happened in 1916 was that certain stock was sold for $2,200,000 and a contract which the respondent determined had a fair market value at date of receipt of $1,942,111.46, which value we have approved for lack3530 of evidence showing error on the part of the respondent in making such determination. The contract in question was an incomeproducing asset in that under its terms the owners thereof were entitled to receive income to the extent of 60 cents a ton on a certain part of the ore that was to be mined and the contract was exhaustible in that it had a value only so long as there remained ore to be mined. The Board is of the opinion that a proper solution to the question of what part of the royalties received constituted taxable income lies in considering the entire amount of royalties received in a given year as includable in gross income and then in permitting a reasonable deduction therefrom in each year for the exhaustion of the contract. Section 213(a), Revenue Act of 1918, provides in part that gross income - Includes gains, profits, and income derived from * * * trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from3531 any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer * . We can not escape the conclusion that the foregoing provision would require all royalties received to be included in the gross income of the recipients. But all of the amounts received would not be subject to tax for the reason that in the production of this income, the asset which produced this income was gradually being exhausted and Congress provided in section 214(a)(8), Revenue Act of 1918, that there shall be allowed as a deduction from gross income "A reasonable allowance for the exhaustion * * of property * * ." No one would seriously question that a contract is property, and we think it equally clear that the contract in question is property which is being exhausted in the production of income and, consequently, that a deduction on account thereof is justified under the foregoing provision of the statute. See . The difference between the royalties received and the allowance for exhaustion would constitute gain derived from capital which would satisfy the3532 classic definition of income as laid down in , and since often 602 reiterated, to the effect that income is the "gain derived from capital, from labor, or from both combined." Here the gain is derived from capital, which capital is in the form of a contract which was received in part payment for stock which was sold and which will be productive of income until exhausted. Our next question is what constitutes a reasonable allowance for the exhaustion of the contract. Since the value attaching to the contract is on account of royalties to be received as the ore is mined, we are of the opinion that a reasonable allowance in each year is determinable upon the basis of the ore mined. It is true that we are not here seeking to determine depletion in the case of a mine, yet the relationship between the exhaustion of the mine and the exhaustion of the contract are such that we think the same principles would be applicable in each case. The method for computing the deduction for the depletion of mineral deposits, as set out by the Commissioner in his regulations, is on the basis of the annual production. Article3533 210(b), regulations 45, provides: When the value of the property at the basic date has been determined, depletion for the taxable year shall be determined by dividing the value remaining for depletion by the number of units of mineral to which this value is applicable, and by multiplying the unit value for depletion, so determined, by the number of units sold within the taxable year. * * * See also articles 201, 202, 203, and 204 of the same regulations. In , the court had before it the question of the reasonableness of the Commissioner's regulations with respect to depletion under the Revenue Act of 1916, which embody the same principle which appears in the aforementioned regulations (in so far as material to this discussion), the Government there contending that - Royalties represented both capital and income and that the allowance for capital depletion which the statute authorized was to be determined by the value in the ground of each ton of coal on March 1, 1913, * * * multiplied by the number of tons mined in the year for which the tax was payable. In approving the Commissioner's regulations as providing3534 a reasonable depletion allowance, the court said: * * On the theory of the statute, as we read it, depletion allowance was intended as a return to the taxpayer of the original cost of the coal so that he may be taxed not on the whole of its sale price in the event that he is an operating owner, or on the full amount of royalties if he is a lessor, but that he may be taxed on the difference between the cost (capital) and the sale price or royalties received (income). (Of course in estimating income on sale price other factors enter.) If he were allowed to deduct in each year the full amount of the sale price or the full amount of the royalties received (as the plaintiff here claims), the practical effect would be that he would, for many years, pay no tax at all, and this regardless of the fact that the total sale price (or total royalties) may, ton by ton, show a profit over the original capital cost. It is 603 this profit or net income annually earned which the act taxed annually. And in this regard we see no distinction in the application of the principle to a mine owner whose income is royalties and to a mine owner whose income is derived from working the mines and3535 selling the coal. The only difference is that in the latter more factors enter into the calculation. The principle is the same. We do not find that the Rules and Regulations prescribed by the Secretary of the Treasury for the enforcement of the allowance for depletion under the provisions of the Revenue Act of 1916 are, in view of the subject matter of taxation, unreasonable, or that by these rules the taxable was deprived of the deduction which the statute allowed. Likewise, in , where it was held that a lessee of a mine is entitled to an allowance for depletion, the court said: It is said that the depletion allowance applies to the physical exhaustion of the ore deposits, and since the title thereto is in the lessor, he alone is entitled to make the deduction. But the fallacy in the syllogism is plain. The deduction for depletion in the case of mines is a special application of the general rule of of the statute allowing a deduction for exhaustion of property. While respondent does not own the ore deposits, its right to mine and remove the ore and reduce it to possession and ownership is property within the meaning3536 of the general provision. Obviously, as the process goes on, this property interest of the lessee in the mines is lessened from year to year, as the owner's property interest in the same mines is likewise lessened. There is an exhaustion of property in the one case as in the other; and the extent of it, with the consequent deduction to be made, in each case is to be arrived at in the same way, namely, by determining the aggregate amount of the depletion of the mines in which the several interests inhere, based upon the market value of the product, and allocating that amount in proportion to the interest of each severally considered. The Board is convinced that the foregoing principles which were considered applicable in determining a reasonable allowance for the depletion of a mine would apply with equal force in determining the reasonable allowance for the exhaustion of a contract which is dependent for its value upon the right to receive a royalty upon the content of a mine as the ore is mined and which value will be reduced or exhausted as the ore is taken from the ground. While in the instant case the respondent divided the royalties received as between a return of capital3537 and income, the result reached is the same as if the entire royalties received had been included in gross income and an allowance for exhaustion of the contract treated as a deduction from this gross income. In fact, the end sought in an exhaustion allowance is to have the capital sum invested in a wasting asset returned to the taxpayer as a charge against income earned by the asset and in this way avoid taxing a return of capital. The entire income earned is not taxable, but only so much thereof as does not represent a return of capital. The return of capital is represented in the case at bar by the exhaustion allowance, which, when deducted from the total royalties received, will 604 produce the same amount of taxable income as determined by the respondent. In the instant proceedings we are not attempting to lay down a rule for the determination of a reasonable amount for depletion in the case of a mine. Nor do we attempt to determine what would be a reasonable allowance for the exhaustion of a contract where the facts are substantially different from those which obtain in the instant proceedings. All that we do determine is that the method invoked by the respondent3538 of computing the income from the contract is reasonable and should be sustained in the absence of evidence of error on the part of the respondent in making such determinations. See . The action of the respondent is accordingly sustained. The foregoing principles, as to the manner in which income from the contract shall be reported are, of course, inconsistent with the method approved by the Board in , in that under the Bruce case, neither the income to be reported nor the allowance for exhaustion bear any necessary relation to the income received in a given year, nor to the extent to which exhaustion has been suffered in the production of this income. It is true that in the valuation of this contract we have based our conclusion as to the fair market value upon the basis of the present worth of the royalties which it was estimated would be received over the life of the contract, but because we followed this method of valuation does not mean that where, for example, the same tonnage of ore was mined in the first year and in the last year of the existence of the contract the greater3539 part of the royalties in one case would be capital and in the other case income. The net income in each case would be the same. The value which we arrived at was such a value as we considered would have resulted had the contract been offered for sale by a person willing to sell and had been acquired by a person willing to buy. In effect, the method followed and the result reached is not essentially different from that in the case of the valuation of a leasehold at March 1, 1913. In such case a value is often assigned to the leasehold for the reason that had it been necessary to renew the lease on that date the rental to be paid would have been greater than was being paid under the terms of the lease negotiated prior to March 1, 1913, and, consequently, we say that there will be a saving over the remaining life of the lease of the difference between the two rental amounts, which reflects a March 1, 1913, value of the leasehold. Even though such value may be arrived at on the basis of the present worth of the savings over the period of years, we have never heard it contended that the deduction allowable in a given year on account of the exhaustion of such a leasehold value should3540 bear any relation 605 to the present worth value of the saving for such year. The basis for exhaustion of such a leasehold which has been recognized repeatedly by the Board and the courts is either a time or production basis, depending upon the nature of the asset, and that, regardless of the fact that in determing the March 1, 1913, value, the value of the saving for the first year would be greater than for any succeeding year. We do not conceive that the situation with respect to the exhaustion of the contract in question would have been different had the valuation which we arrived at been upon the basis of an offer to buy the contract rather than the present worth method. An offer to buy would necessarily have been predicated upon the profits to be realized from the contract and the profits which were expected to be realized one year hence would have been a greater present value than the profits which were expected to be realized forty-five years from that time, yet had the valuation been fixed on such an offer, it is hardly to be supposed that it would be seriously contended that the income to be reported and the exhaustion to be allowed would bear any relationship to3541 such values. To the extent, therefore, that the opinion in , is in conflict with the views hereinbefore expressed, the same is overruled. Reviewed by the Board. Judgments will be entered for the respondent.PHILLIPS (Dissenting in part) PHILLIPS, dissenting in part: The difficulty I encounter in the present case is in reconciling the method by which the capital value of the contract is determined with the method by which the capital returned by each payment is computed. In valuing the contract a method is used which recognizes that payments to be received in the future must be discounted to their present value (Findings 28 and 29). Upon this basis it is recognized that the right to receive royalties from the ores to be mined in the first year of operations is much more valuable than the right to receive royalty from an equal number of tons of ores to be mined several years later. The value of the contract is determined to be the sum of the present value of these future payments (Finding 29). In this manner the value of the contract is determined by assigning a capital value to the royalty upon each ton of ore to3542 be mined in the future, a greater capital value per ton being assigned to the royalty from the first ore mined than to the royalty from the ore which is mined later. It seems to me that if we are to use this method of determining the capital value of the contract, we are not justified in departing from it when the royalties are received and we are called upon to determine what portion of the amount received from each ton mined represents capital value. 606 The rule adopted by the Commissioner and followed by the Board by which a uniform value is assigned to the royalty right in each ton of ore, whether mined in the first year or the last year of operations, may be proper in a large majority of cases, but it seems to me that it can not properly be applied where, as here, in determining the capital value of the contract, capital values have been assigned to the right to receive royalties on these ores which vary according to the time when the ores will be mined. It is my opinion that in such a case the petitioners have received income only to the extent that the royalties received in the taxable years exceed what has been determined to be the present value, at the time the*3543 contract was made, of the right to receive the royalties on an equal number of tons of ore. The computation of income upon this basis is no more difficult than the computation of the present worth of the right to receive royalties; it requires, in fact, nothing more than the use of the same tables used in the computation of value. This principle has received the sanction of the courts in Hull v. McHale (United States District Court for the Eastern Division of the Northern District of Illinois), not reported, which was affirmed by the Circuit Court of Appeals for the Seventh Circuit in , and followed in Spalding v. Reinicke, not reported, which arose in the same district. TRAMMELL agrees with this dissent. Footnotes1. The following proceedings were heard with the above and are decided herewith: Henry W. Heedy, Docket No. 5916; William J. Hitchcock, Docket No. 5917; Frank Hitchcock, Docket No. 5918; William M. Andrews, Docket No. 6014; Carrie L. Shaw, Executrix, Estate of John Shaw, Deceased, Docket Nos. 6436, 6437, and 6438; Julia Andrews Bruce, Docket No. 18202. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/1722399/	72 Mich. App. 183 (1976) 249 N.W.2d 348 TENNANT v. RECREATION DEVELOPMENT CORPORATION Docket No. 24710. Michigan Court of Appeals. Decided November 8, 1976. Jennings & Devries, for plaintiffs. John E. Hart, for defendants. Before: R.B. BURNS, P.J., and M.J. KELLY and S.S. HUGHES,[] JJ. M.J. KELLY, J. Plaintiffs brought an action in equity to establish ownership of a small peninsula of land that has formed by accretion to the south shore of Portage Lake. 185 The record shows that the parties are abutting riparian or littoral property owners with the plaintiffs on the east side owning Government Lot 4 and the defendants on the west side owning Government Lot 3. The alluvion which formed by the process of accretion is contiguous to the defendants' property and proceeds laterally in front of the plaintiffs' property, separated by a bay of water which is approximately 700 feet across, running north and south. At trial, the case was submitted to the court upon facts and exhibits which were stipulated to by the parties. Plaintiffs appeal as of right from the judgment entered by the trial court which adjudged the defendant, Recreation Development Corporation, to be the owner of the disputed parcel of land and ordered the action as to the defendant, Water Land Construction Company, dismissed with prejudice. The issue is whether the owners of riparian or littoral property, attached to which is a deposit of alluvion created by the process of accretion extending laterally across a neighboring tract, should be awarded title to that part of the alluvion which has impinged upon the frontal riparian access of the neighboring tract. The basic rules set forth by the parties in their briefs are impossible to harmonize under the facts of this case. On the one hand this state has generally recognized that the beds of navigable, inland lakes are owned by the adjoining riparian or littoral owners in approximate proportion to their lakefront ownership and that such apportionment is possible and permissible notwithstanding the fact that the body of water may have an irregular shape. Lincoln v Davis, 53 Mich. 375; 19 N.W. 103 (1884), Jones v Lee, 77 Mich. 35; 43 N.W. 855 (1889), Grand Rapids Ice & Coal Co v South Grand Rapids 186 Ice & Coal Co, 102 Mich. 227; 60 N.W. 681 (1894), Weisenburger v Kirkwood, 7 Mich. App. 283; 151 NW2d 889 (1967). Additionally, case law has recognized that title to islands is ordinarily vested in the owner of the bed of water out of which they arise. People v Warner, 116 Mich. 228; 74 N.W. 705 (1898), Goff v Cougle, 118 Mich. 307; 76 N.W. 489 (1898), Hanson v Way Estate, 25 Mich. App. 469; 181 NW2d 537 (1970). On the other hand, this state has also adopted the rule that accretions belong to the land from which they begin. People v Warner, supra, Hilt v Weber, 252 Mich. 198; 233 N.W. 159 (1930), Killmaster v Zeidler, 269 Mich. 377; 257 N.W. 721 (1934). In Schweikart v Stivala, 329 Mich. 180; 45 NW2d 26 (1950), the Court held that in order to successfully assert title to accretions they must be contiguous to the land of the one asserting title. As the present case demonstrates, a conflict arises when the alluvion formed by the process of accretion begins to accumulate in a lateral direction impinging upon the riparian or littoral ownership and attendant rights of adjacent riparian property owners. The rights associated with riparian ownership generally include: (1) the right of access to navigable water, (2) the right to build a pier out to the line of navigability, (3) the right to accretions, and (4) the right to a reasonable use of the water for general purposes such as boating, domestic use, etc. Hilt v Weber, supra, p 225. Of the above, the right of access to navigable waters is often considered to be the most important right constituting the chief source of value of riparian property. Cutliff v Densmore, 354 Mich. 586; 93 NW2d 307 (1958), 61 ALR3d 1173, § 2(a), p 1177. We have found no Michigan case dealing with the precise issue. In Rondesvedt v Running, 19 Wis 187 2d 614; 121 NW2d 1 (1963), the plaintiff brought an action to quiet title to a peninsula of accreted land on an inland lake, which was attached to his property. The plaintiff and the defendant were adjacent riparian or littoral landowners. The peninsula proceeded laterally in front of defendant's adjacent property, but was not contiguous thereto. The peninsula was separated from defendant's property by a small bay of water approximately 130 feet across. The plaintiff therein relied upon the doctrine of accretion and claimed that he should be declared the owner of the entire parcel in dispute. The defendant contended that the accreted peninsula should be apportioned between the plaintiff and herself because the parcel in dispute arose out of the lake bed owned by her and because the alluvion impaired and would substantially destroy her direct access to the open waters of the lake. The Wisconsin Supreme Court held as follows: "`We are also of the opinion that the principles applicable to the apportionment of lands formed by accretion among the owners of contiguous uplands is quite controlling as to the rights of the respective parties in this case. Such owners are entitled to lands made by accretion or reliction in front of their property and contiguous thereto in certain proportions, according to the formation of their respective shorelines. Houck, Rivers, § 162; 3 Washburn, Real Prop. 58; Angell, Tidewaters, 171. However such accretions may be commenced or continued, the right of one owner of uplands to follow and appropriate them ceases when the formation passes the line of his coterminous neighbors. "A littoral proprietor, like a riparian proprietor, has a right to the water frontage belonging by nature to his land, although the only practical advantage of it may consist in the access thereby afforded him to the water for the purposes of using the right of navigation. This 188 right is his only and exists by virtue and in respect of his riparian proprietorship."' " * * Although our present problem involves a deposit on a lake bed, we find persuasive the reasoning of the authorities cited, that accretion extending laterally is not to increase the amount of access of one owner to navigable water at the expense of other owners. "The owner of lot 7, before the accretion occurred, had access to the open water of the lake by traversing the shallows in a direct line from any portion of her shore. She may still reach open water but, because of the process of accretion, may not do so by water in a direct line from all parts of her shore. The process is continuing and the impairment of access will be more substantial in the future. "The rule relied upon by plaintiff, that alluvion formed by accretion belongs to the owner of the upland to which it is contiguous, is, in part at least, a recognition of the riparian right of that owner to access to the water. Where the circumstances are such that the full application of that rule in favor of one riparian owner would destroy or substantially impair the riparian right of another owner to access, we think the rule must yield. "In discussing rules of apportionment, this court has said: "`* * * the dominant rule is that each must have his due proportion of the line bounding navigability and a course of access to it from the shore exclusive of every other owner, and that all rules for apportionment or division are subject to such modification as may be necessary to accomplish substantially this result.'" * * * "We conclude that defendant's right, as owner of lot 7, to access to the open water of the lake ought to be preserved, so far as possible, by apportioning to her part of the alluvion, as determined by the circuit court." 19 Wis 2d 619-621; 121 NW2d 1, 5-6. (Citations omitted.) (Footnotes omitted.) The circuit court had apportioned the accreted 189 peninsula by extending the boundary line between plaintiff's and defendant's lots in a straight line perpendicular to the present shore line. We find Rondesvedt, supra, to be persuasive authority for the following reasons: (1) the lake in Rondesvedt, and the lake in the case at bar are inland lakes similar in size;[1] (2) the arguments presented and the issue framed for the court in Rondesvedt are identical to the arguments presented to and the issue confronting this Court; (3) the facts in Rondesvedt are closely analogous to the facts in the present case; and (4) the reasoning of the Wisconsin Supreme Court is sound and the result equitable. The only difference between Rondesvedt and the case at bar is the difference in feet between the shore line, at the boundary lot lines, and the two accreted peninsulas. This difference is not of sufficient magnitude to preclude the application of the Wisconsin Supreme Court's analysis and result to the present case. Moreover, in the case at bar the possibility does exist that the process of accretion of the peninsula will continue in the future. Further, the majority of the few courts addressing themselves to this issue have also applied the rule of apportionment. 61 ALR3d 1173, § 3, p 1182.[2] We find that the apportionment made by the circuit court and approved by the Wisconsin Supreme Court in Rondesvedt is reasonable. We hold that the Government Lot line separating the plaintiffs' and defendants' respective properties should 190 be extended perpendicularly to the shore of Portage Lake in a northerly direction and the accreted property so apportioned. Reversed. NOTES [*] Former circuit judge, sitting on the Court of Appeals by assignment pursuant to Const 1963, art 6, § 23 as amended in 1968. [1] Long Lake in the Rondesvedt case is 3,290 acres and Portage Lake in the case at hand is 2,110 acres. [2] See Mulry v Norton, 100 NY 424; 3 N.E. 581 (1885), Crandall v Allen, 118 Mo 403; 24 S.W. 172 (1893), Waring v Stinchcomb, 141 Md 569; 119 A 336; 32 A.L.R. 453 (1922), Steinem v Romney, 233 Md 16; 194 A2d 774 (1963), United States v 1,629.6 Acres of Land, 335 F Supp 255, 268-271 (D Del, 1971), rev'd on other grounds, 503 F2d 764 (CA 3, 1974).	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4622164/	A. T. Matthews v. Commissioner.Matthews v. CommissionerDocket No. 53947.United States Tax CourtT.C. Memo 1955-330; 1955 Tax Ct. Memo LEXIS 7; 14 T.C.M. (CCH) 1294; T.C.M. (RIA) 55330; December 22, 19557 Held, on the facts, that petitioner disposed of a note by sale rather than in a compromise settlement. Deduction of the loss realized on the sale of such note is limited by the provisions of section 117 of the 1939 Code. Howard L. Robinson, Esq., Union Bank Building, Clarksburg, W. Va., for the petitioner. James F. Shea, Esq., for the respondent. RICEMemorandum Findings of Fact and Opinion Respondent determined deficiencies in income tax of the petitioner8 for the years 1948, 1949, and 1950 in the amounts of $6,727.02, $1,995.72, and $18,622.54, respectively. The parties have entered into stipulations settling all the issues raised by the pleadings for the years 1948 and 1949, and all but one of such issues for the year 1950. The sole issue remaining is whether respondent correctly determined that petitioner is limited to a capital loss deduction of $1,000 for the year 1950 with respect to a $31,500 loss sustained by him during that year. Some of the facts were stipulated. Findings of Fact The stipulated facts are so found and are incorporated herein by this reference. Petitioner resided in Clarksburg, West Virginia, during the years 1948, 1949, and 1950. He filed his returns for such years on the cash basis, with the collector of internal revenue for the district of West Virginia. During the period 1939 to May 1947, petitioner bought and sold a number of parcels of real estate and made an occasional loan. Four of the loans which he made during these years, aggregating approximately $75,000, were purchase-money loans made to various individuals who had purchased real estate from him. Two loans, in the amounts of $10,0009 and $62,500, respectively, were made to the Anchor Fixture Company and petitioner also discounted a note of between $6,000-$7,000 which was owed the Anchor Fixture Company by one of its customers. Another loan made by petitioner was to the Nitro Land Company, a corporation in which he owned approximately 43 per cent of the outstanding stock. In May 1947, petitioner acquired 75 per cent of the stock of the Stonewall Jackson Hotel and a like amount of the stock of the corporation which held title to the real estate of the hotel, namely, the Stonewall Building Company. He loaned $5,000 to one John S. Dump, Jr., to enable that individual to acquire the remaining 25 per cent of the stock of these two corporations. Petitioner then lent substantial sums to the two hotel corporations. From May 1947 to the date of the hearing herein, petitioner's occupation was that of president and manager of the Stonewall Jackson Hotel. Petitioner did not make any loans after 1947, except on his "own property." The $62,500 loan to the Anchor Fixture Company (hereinafter referred to as Anchor) was made in the following manner: Early in 1947, F. G. Hart, president of Anchor, suggested that the corporation10 acquire a loan from petitioner for the purpose of retiring 250 shares of its capital stock in order that Hart would have complete control of the corporation, and dissensions between major stockholders would thus come to an end. F. G. Hart owned, at that time, 248 of the 500 shares of the corporation's outstanding common stock. Petitioner and his attorney, Dale G. Casto, each owned one share and the remaining 250 shares were owned by E. A. Haddad and members of his family. On February 4, 1947, petitioner loaned Anchor the sum of $62,500, receiving a negotiable promissory note in that amount from the corporation. Interest was payable on such note at the rate of six per cent per annum. Anchor used the proceeds of petitioner's loan to purchase 250 shares of its outstanding stock from E. A. Haddad and infant members of E. A. Haddad's family, in accordance with the plan suggested by the corporation's president. These shares could not be reissued without the written consent of petitioner. F. G. Hart guaranteed the repayment of the loan to petitioner by pledging his 248 shares of stock as collateral. By October 16, 1950, Anchor's financial condition had deteriorated to the point where11 it could no longer meet the payment of its bills in the regular course of business and it was in default in the payment of its promissory note to petitioner. The E. A. Haddad Company was interested in obtaining operating control of Anchor and, on October 16, 1950, it made the following offer to Anchor: "Mr. F. G. Hart, President Anchor Fixture Company "I have examined for E. A. Haddad Company the financial circumstances of this corporation and, in my opinion, it is hopelessly insolvent unless some new money is obtained by it and provision made for the payment of the indebtedness of this corporation. "E. A. Haddad Company can purchase the A. T. Matthews note, executed by this corporation, bearing date the 4th day of February, 1947, originally in the sum of $62,500.00 with credits due thereon, and now in the sum of $54,000.00, for the sum of $25,000.00. E. A. Haddad Company is willing to purchase this note and advance the said $25,000.00 if this corporation will, upon my delivery of said note to it, issue to E. A. Haddad Company 250 shares of the capital stock of this corporation. "The corporation has an authorized capital stock of $50,000.00 and 250 shares of such stock have12 been issued and are now outstanding and there are 250 shares now held by the Treasury as Treasury Stock. "In addition to the purchase of this note, E. A. Haddad Company will loan to the corporation the sum of $15,000.00 in order to enable this company to continue to operate and will take therefor a note of said corporation, payable at such time as may be agreed upon. "You will please advise if you are interested in accepting this proposal. Yours very truly, /s/ E. A. Haddad President." The offer of the E. A. Haddad Company was accepted by the shareholders of Anchor on October 16, 1950, and the following resolution of acceptance was adopted: "BE IT RESOLVED by the owners and holders of all the outstanding stock of this corporation, that the written proposal of E. A. Haddad, as president of E. A. Haddad Company, wherein the said E. A. Haddad Company would purchase from A. T. Matthews a certain promissory note bearing date the 4th day of February, 1947, originally in the sum of $62,500.00, for the sum of $25,000.00 and endorse, transfer and deliver said note to this corporation for 250 shares of its capital stock, be and the same is hereby accepted." On that same day, the13 E. A. Haddad Company paid to Dale G. Casto, attorney for petitioner, the sum of $25,000, and Casto delivered to the E. A. Haddad Company the Anchor note, which had been previously endorsed by petitioner. The Haddad Company transferred the note to Anchor and 250 shares of Treasury stock of Anchor were issued to the Haddad Company on October 16, 1950. The petitioner and his attorney, Dale G. Casto, each transferred their one share of Anchor stock to members of the Haddad family on that same day. Petitioner held the Anchor note from February 4, 1947 to October 16, 1950, a period of over three years. Petitioner claimed a deduction on his return for 1950 for the loss which he had sustained on the disposition of the Anchor note. Respondent determined that petitioner had "sustained a long-term capital loss of $31,500.00 on account of the sale of said note, $1,000.00 of which is an allowable deduction for the year 1950. In the alternative, said loss of $31,500.00 is a non-business bad debt, $1,000 of which is an allowable deduction." Opinion RICE, Judge: During the period 1939 to 1950, inclusive, petitioner made a number of loans to various individuals and corporations. Four of these14 loans were purchasemoney loans arising out of the sale of parcels of real estate by petitioner; several loans were made to three corporations in which he had a substantial proprietary interest; and the remaining four loans do not lend themselves to ready classification. We are here concerned with a loan in this last group of four; namely, one in the amount of $62,500, which was made in 1947. We must decide whether petitioner is entitled to deduct, in full, a $31,500 loss which he sustained in 1950 upon the disposition of the note evidencing this loan or whether he is limited to a $1,000 capital loss deduction as determined by respondent. Petitioner contends that he was regularly engaged in the business of lending money to individuals and business enterprises and that the $31,500 loss sustained on the disposition of the Anchor note is deductible in full as a business loss under section 23(e)(1) of the 1939 Code. 1 We need not decide, however, whether petitioner was engaged in the business of making loans. For even assuming that he was, and assuming that the instant loan of $62,500 was made in the course of such business, we think the record clearly demonstrates that the note evidencing15 such loan was sold rather than extinguished by means of a compromise settlement and, accordingly, petitioner's loss deduction is limited by the provisions of section 117 of the 1939 Code. 2 It has been firmly established that, under section 117(a)(1), accounts and notes receivable are capital assets unless held by a person engaged in selling the same in the ordinary course of his trade or business. (C.A. 5, 1945); ; ; , affd. (C.A. 2, 1942), certiorari denied ; , affd. (C.A. 6, 1942). Section 23(g)(1) provides that "Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117" and, therefore, even though the instant note may have been acquired in the regular course of petitioner's business, the loss realized on its sale is a capital loss, deductible only to the extent provided16 by section 117(d). ; ; 17 Petitioner argues that the Anchor note was liquidated by a compromise settlement rather than by sale or exchange and that, accordingly, the limitation imposed by sections 23(g)(1) and 117 upon the deductibility of his loss is inapplicable. Petitioner refers to the statement in Regulations 111, Section 29.23(e)-1, that "Substance and not mere form will govern in determining deductible losses," but we are convinced that the substance of the instant transaction was, in fact and effect, a sale. Anchor, the maker of the note, did not have the available cash to effect a compromise of its indebtedness to petitioner had it desired to do so. The E. A. Haddad Company was desirous of obtaining some 250 shares of Anchor Treasury stock and revitalizing that corporation. However, the stock could not be issued without petitioner's consent under the terms of the loan he had made to Anchor. The E. A. Haddad Company, therefore, purchased the note from petitioner for $25,000 and then transferred it to Anchor in return for 250 shares of its capital stock. At the same time, it also supplied Anchor with some $15,000 as working capital. Careful study of this transaction compels the conclusion that petitioner18 elected to sell the Anchor note to the E. A. Haddad Company rather than exercise his legal rights as a creditor. Although Anchor appears to have been insolvent at the time of this transaction, it is entirely possible that petitioner might have been eventually able to secure an equal or even larger amount directly from Anchor than from the sale of the note to the E. A. Haddad Company. But, having chosen to pursue the latter course, he must accept the tax consequences. Additional evidence that this transaction was a sale rather than a compromise of indebtedness is the fact that the minutes of the October 16, 1950, meeting of Anchor stockholders refer to the transaction as a sale. The part played by the obligor of the note, Anchor, in the negotiations between petitioner and the E. A. Haddad Company, does not remove the transaction from the category of a sale to that of a compromise of indebtedness. See (C.A. 3, 1945), affirming a Memorandum Opinion of this Court, entered April 28, 1943 [; ; . The transaction, as it19 was consummated, had real economic significance. Petitioner sold his note to the E. A. Haddad Company and the purchaser, in turn, exchanged this note with Anchor, the obligor, for 250 shares of its Treasury stock. The record does not show that the E. A. Haddad Company purchased these 250 shares of Treasury stock for $15,000 cash and then permitted Anchor to retire the note itself, by way of compromise. As conceived and executed by the parties, there were two independent transactions - first, the sale of the note, and then the exchange of the note for Treasury stock. Having disposed of the note in this manner, petitioner's loss deduction on this transaction must be limited by the provisions of section 117. Petitioner has cited (C.A. 2, 1939); (D.C.Mass., 1943); and . These cases involve compromise of indebtedness situations and are distinguishable on their facts. Decision will be entered under Rule 50. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * (e) Losses by Individuals. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise - (1) if incurred in trade or business; * * ↩2. SEC. 117. CAPITAL GAINS AND LOSSES. (a) Definitions. - As used in this chapter - (1) Capital Assets. - The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include - (A) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; * * (d) Limitation on Capital Losses. - * (2) Other taxpayers. - In the case of a taxpayer, other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus the net income of the taxpayer of [or] $1,000, whichever is smaller. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622165/	NOAKER ICE CREAM CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Noaker Ice Cream Co. v. CommissionerDocket No. 11397.United States Board of Tax Appeals9 B.T.A. 1100; 1928 BTA LEXIS 4303; January 7, 1928, Promulgated 4303 Where a depreciable asset was acquired prior to March 1, 1913, at a cost which, when depreciated to March 1, 1913, is less than the March 1, 1913, value, and the asset is sold or disposed of in 1919 at a price which is less than either the March 1, 1913, value or cost properly depreciated to date of sale, the deductible loss is the difference between the selling price and cost properly depreciated from date of acquisition to date of sale or disposition, which depreciation represents not only depreciation sustained on cost prior to March 1, 1913, but also depreciation sustained on cost from March 1, 1913, to date of sale. Albert B. Arbaugh, Esq., for the petitioner. J. A. O'Callaghan, Esq., for the respondent. LITTLETON1101 The Commissioner determined a deficiency of $994.09 for the calendar year 1919, which deficiency the petitioner claims is erroneous in so far as it results from the action of the Commissioner in reducing the cost of a building acquired in 1909 by depreciation at 4 per cent per annum from 1909 to March 1, 1913. The petitioner concedes that in determining gain or loss from the disposition of the property in 1919, the4304 cost of the building should be reduced by the amount of depreciation at 4 per cent per annum on the March 1, 1913, value of said property, which value it is agreed was greater than cost. FINDINGS OF FACT. In 1909 the petitioner, an Ohio corporation, constructed a two-story building at Canton at a cost of $7,375 and on March 1, 1913, this building had a fair market value in excess of its cost. In 1919 the petitioner demolished and removed the building and recovered a salvage of $200. In computing the deductible loss on account of the demolition of the building in 1919, the Commissioner reduced the original cost of the building by the amount of depreciation computed at the rate of 4 per cent per annum from 1909 to December 31, 1918. OPINION. LITTLETON: As a practical matter the question in this case is the amount of the gain or loss resulting from the demolition of a building. The parties are in accord as to the cost; the rate of depreciation from the date of acquisition to March 1, 1913; the March 1, 1913, value; the rate of depreciation from that date to its demolition, and the amount received as salvage. Thus we have the requisite facts to determine the amount of loss4305 sustained on the demolition of the building in question, but it becomes necessary to pass upon one question of law which must be applied to the foregoing facts in order to arrive at the loss to which the petitioner is entitled as a deduction from gross income in 1919. While the question of law which is raised by the error assigned in the petition is the extent to which depreciation sustained prior to March 1, 1913, is to be taken into consideration in determining the deductible loss in question, the question is really broader than this and makes necessary a decision as to the extent to which depreciation sustained both prior and subsequent to March 1, 1913, must be considered in this case. Since cost was less than the March 1, 1913, value, the respondent determined the deductible loss in question by reducing cost by depreciation sustained from date of acquisition to March 1, 1913, 1102 plus depreciation allowed on the March 1, 1913, value from March 1, 1913, to date of sale and then taking the difference between the resulting remainder and the selling price, which in this instance was the amount recovered as salvage, whereas the petitioner takes the position that the foregoing4306 determination is erroneous to the extent that depreciation sustained prior to March 1, 1913, is used to reduce cost for the reason that there was no income-tax law in effect prior to March 1, 1913, under which any deduction could be taken or allowed for such depreciation. The petitioner concedes in its brief that the holding of this Board in , is opposed to its view, but invites our attention to case of , decided subsequent to the Even Realty case. After the petitioner's brief was filed the Ludey case was considered by the Supreme Court and a decision rendered thereon on May 16, 1927. See . It becomes necessary, therefore, to consider whether there is anything in the decision of the court in , which is in conflict with, and therefore requires a change in our holding as set out in the Even Realty case. In the 4307 , the Board said: The same considerations that lead us to the conclusion that adjustment for recoveries of capital by allowance for exhaustion, wear and tear, and obsolescence must be made in computing gain upon the sale of property, compel us to the belief that similar adjustments should be made to cost before comparing it with value on March 1, 1913, for the purpose of deciding which of them should be the basis for that computation. If the taxpayer recovered a part of the cost of his property before March 1, 1913, only the balance of that cost can properly be recoverable thereafter. The Constitution certainly does not entitle a taxpayer to recover any part of his cost more than once, before becoming accountable for taxes upon his gain. If, after proper adjustment for partial recoveries, it appears that the cost exceeds the value at March 1, 1913, that adjusted cost rather than the March 1, 1913, value should be taken as the basis for all subsequent computations; if it be less than the March 1, 1913, value the latter is the proper basis. Thus, if a taxpayer in 1903 buys a building with a normal life of 20 years for $10,000, 4308 and recovers in rents one-half of that cost by 1913, he is entitled to recover thereafter through deductions or upon the sale of the property either $5,000 or the market value at March 1, 1913, whichever is higher. To allow more would be permitting him a double recovery of part of his capital investment before accounting for profit, and certainly the Constitution does not compel that. The case of , involved a situation where the taxpayer held on March 1, 1913, certain assets which were acquired prior to March 1, 1913, the value of which on March 1, 1913, was in excess of the original cost. Other assets were acquired between March 1, 1913, and date of sale, but we will leave these out of account as there can be no dispute as to the meaning of the decision on this point. The assets (meaning assets acquired prior to 1103 March 1, 1913) were sold in 1917 at a price which exceeded the March 1, 1913, value, less depreciation and depletion from March 1, 1913, to date of sale. There was, therefore, involved a gain on the sale of property where the March 1, 1913, value exceeded cost. With respect to the amount of depreciation4309 and depletion which must be deducted from cost or March 1, 1913, value, the court held: Congress doubtless intended that the deduction to be made from the original cost should be the aggregate amount which the taxpayer was entitled to deduct in the several years. As to the meaning of "cost" as used in the opinion, the following footnote appears in the opinion: Some of the properties were purchased before March 1, 1913. As to these the term cost is used, throughout the opinion, as meaning their value as of March 1, 1913, that value being higher than the original costs. It would seem, therefore, that what the court said was that where the March 1, 1913, value of depreciable assets exceeds cost and the sale price exceeds the March 1, 1913, value, after adjustment for depreciation and depletion, the taxable gain is represented by the difference between the March 1, 1913, value, less allowable depreciation and depletion from March 1, 1913, to date of sale, and the selling price. Obviously, it was unnecessary in that case to consider depreciation or depletion which was sustained on cost prior to March 1, 1913, for the reason that cost was less than the March 1, 1913, value, and, 4310 therefore, when we have a selling price which exceeds either the cost or the March 1, 1913, value, we need concern ourselves only with the higher of two, which in this case was the March 1, 1913, value. The reason which prompted the court to limit the depreciation and depletion to be deducted to that allowable as a deduction from 1913 to 1917 is not only explainable, but is also entirely logical when we consider that the allowable depletion under the Revenue Act of 1913 was not on the basis of depletion sustained, but was limited to a percentage of the output of a mine. In any other manner, it is difficult to see the necessity for making a distinction between "sustained" and "allowable" since when applied to depreciation the amount sustained in any one year could hardly be said not to be the reasonable allowance contemplated by the statute (except under the 1913 Act applicable to individuals entitled to such a deduction on account of mining property). Applying this explanation of the Ludey case to this proceeding we find that here we have cost less than the March 1, 1913, value, but with the selling price less than either cost or March 1, 1913, value. Were there no adjustments4311 necessary for depreciation, we would say that the deductible loss is the difference between cost and selling price. . The question here is, what adjustment shall be made on account of depreciation? Shall 1104 it be only an adjustment for the allowable depreciation sustained between March 1, 1913, and the date of sale, which adjustment shall be considered in connection with whatever basis - whether cost or March 1, 1913, value - is used? The result which would follow from an affirmative answer to the foregoing question may be illustrated by the following example of a building purchased in 1908 and sold in 1918: Cost (1908)$8,000Value (March 1, 1913)10,000Life of building (years)25Depreciation on cost for 5 years to March 1, 1913$1,600Depreciation on March 1, 1913, value for 5 years from March 1, 1913, to 19182,500Sale price3,000The deductible loss on this theory would be obtained by deducting the depreciation allowable on the March 1, 1913, value, to wit, $2,500, from the March 1, 1913, value and from cost - without making any adjustment for depreciation sustained prior to4312 March 1, 1913 - and then allowing as a loss the remainder which results when the sale price is deducted from the smaller of the two remainders. The result would be a loss of $2,500 (cost $8,000 less depreciation, $2,500 and less sale price of $3,000). We are of the opinion that there are two valid objections to this result: First, the amount used as a basic figure from which the sale price is deducted is not depreciated cost, even if we concede that depreciation sustained prior to March 1, 1913, is not to be considered, since the depreciation allowable subsequent to March 1, 1913, is the depreciation on the March 1, 1913, value and not on cost alone. The March 1, 1913, value of $10,000 is made up of two amounts, viz, depreciated cost and appreciation to March 1, 1913, which in the case stated would be, depreciated cost $6,400 and appreciation $3,600. Hence, when we allow depreciation of $2,500 on the March 1, 1913, value to 1918, $1,600 is being allowed on cost $900and on the appreciation. Therefore, if we desire to compare true cost reduced by depreciation on cost allowed subsequent to March 1, 1913, with depreciated March 1, 1913, value, we should reduce cost by only $1,6004313 instead of $2,500. To do otherwise would mean a reduction of the loss by the depreciation on appreciation and thereby increasing taxable income for 1918 to this unwarranted extent; in effect, taxing income which it appears Congress intended should be exempt. The other objection to this result is the failure to consider depreciation sustained prior to March 1, 1913. Admittedly, in the Ludey case the court took into consideration only depreciation and depletion allowable subsequent to March 1, 1913, but is the case authority for 1105 the proposition that depreciation sustained prior to March 1, 1913, is not to be considered where the assets were acquired prior to March 1, 1913, and a loss is involved, that is, both cost and the March 1, 1913, value exceed the selling price? We are of the opinion that it is not. There a gain resulted and not a loss, and hence it was obviously unnecessary to consider cost or adjustments to cost prior to March 1, 1913. So long as we start with the March 1, 1913, value in excess of cost and must consider only the higher of the two as was true in the Ludey case, cost and adjustments thereto can be forgotten and only the March 1, 1913, value4314 considered. This is precisely what the court did. The reasoning which would disregard depreciation sustained prior to March 1, 1913, proceeds on the theory that the March 1, 1913, value is capital which is to be returned to a taxpayer before taxing income, and that the return contemplated is that allowable as deductions from gross income under the taxing statutes in force for 1913 and subsequent years to the date of sale. That this was held to be true in a case involving a taxable gain where it was unnecessary to consider depreciated cost, does it follow that the same rule should apply with respect to the determination of a deductible loss? We think not. We are of the opinion that there can be a return of capital (cost) when it is not deductible in the same sense as when deductible. A depreciable asset used in a trade or business is being continually returned to the owner thereof. In the hypothetical case stated, the $1,600 depreciation sustained from 1908 to March 1, 1913, was a proper charge against operations for those years and represented a gradual sale of the asset during those years. That the court in the Ludey case did not have a different theory is shown by the4315 following statement: We are of opinion that the revenue acts should be construed as requiring deductions for both depreciation and depletion when determining the original costs of oil properties sold. Congress, in providing that the basis for determining gain or loss should be the cost or the 1913 value, was not attempting to provide an exclusive formula for the computation. The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used. The amount of the allowance for depreciation is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost. The theory underlying this allowance for depreciation is that by using up the plant a gradual sale is made of it. The depreciation charged is the measure of the cost of the part which has been sold. When the plant is disposed of after years of use, the thing then sold is4316 not the whole thing originally acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties. Any 1106 other construction would permit a double deduction for the loss of the same capital assets. (Italics supplied.) In view of the foregoing, we are of the opinion that only by taking into consideration depreciation sustained both prior and subsequent to March 1, 1913, on cost, can we obtain a true depreciated cost which we can compare with the depreciated March 1, 1913, value for the purpose of determining a deductible loss in 1918 of assets acquired prior to March 1, 1913. When this is done, the hypothetical case hereinbefore mentioned is solved in the following manner: Original cost$8,000Less -Depreciation to March 1, 1913, on cost$1,600Depreciation on cost from March 1, 1913, to 19181,6003,200Net depreciated cost$4,800March 1, 1913, value$10,000Less - Depreciation on March 1, 1913, value to 19182,500Net depreciated March 1, 1913, value7,500Sale price3,000Deductible loss ($4,800 - $3,000)1,8004317 Consistent with the foregoing, the Board is of the opinion that where a depreciable asset was acquired prior to March 1, 1913, at a cost which, when depreciated to March 1, 1913, is less than the March 1, 1913, value and the asset is sold or disposed of in 1919 at a price which is less than either the March 1, 1913, value or cost, properly depreciated to date of sale, the deductible loss is the difference between the selling price and cost properly depreciated from date of acquisition to date of sale or disposition, which depreciation would represent not only depreciation sustained on cost prior to March 1, 1913, but also depreciation sustained on cost from March 1, 1913, to date of sale. Reviewed by the Board. Judgment will be entered on 10 days' notice, under Rule 50.GREEN GREEN, dissenting: I can not agree with the conclusion reached in the opinion adopted by the majority of the Board. As was therein stated, we have all of the facts before us. It is necessary only to pass upon one question of law in order that we have a complete formula for the solution of the problem. The question of law is whether the basis (cost or March 1, 1913, value, as the4318 case may be) for the purpose of determining gain or loss on a sale or other disposition of property shall be reduced by the amount of the exhaustion, wear and tear sustained prior to March 1, 1913. The exhaustion, wear and tear are commonly referred to as depreciation. 1107 The Revenue Act of 1913 and all subsequent acts, have provided for an annual deduction from gross income for depreciation, but not until the Revenue Act of 1921 was there any expressed statutory requirement that depreciation be considered in the computation of the gain or loss resulting from the sale or other disposition of depreciable property. Prior to the passage of the 1921 Act, the authority for such consideration was found only in the Commissioner's regulations and the decisions of the Bureau of Internal Revenue. We held in the , that when computing the amount of the gain or loss resulting from the sale or other disposition of property, the basis for such computation, whether that basis be cost or March 1, 1913, value, should be reduced by the amount of the depreciation. This case arose under the Revenue Act of 1918, which contained no4319 provision with reference to the use of depreciation in the computation of gain or loss. The Supreme Court in , held that such reduction should be in the amount of the allowable depreciation or depletion. This it held upon the theory that the deduction for depletion is "to be regarded as a return of capital," and it is obvious that depreciation is to be similarly regarded. Prior to the Revenue Act of 1921, none of the revenue acts specified the basis for depreciation of property acquired prior to March 1, 1913, but I think it is now commonly conceded that under such prior acts the value on that date is the basis. See . It is the value on that date which is to be returned to the taxpayer through the annual deductions. Regardless of the depreciation sustained prior to that date, he is entitled to have his deduction computed and allowed upon that basis, and the sum of such allowable deductions must be deducted from the cost or March 1, 1913, value in the computation of gain or loss. In every case where property was acquired prior to March 1, 1913, and sold or disposed of4320 after that date, the March 1, 1913, value must be considered in determining accurately the amount of the taxable gain or deductible loss. It may or may not be a limitation on the gain or the loss depending upon, in the first instance, whether such value is greater than the cost, and in the second instance, whether it is less than cost. In ascertaining the March 1, 1913, value, theories and formulas should be put aside and the determination made upon actualities. See . But inevitably, since depreciation, in the sense of wear and tear, takes place to a greater or lesser degree, in all depreciable property, such depreciation affects the March 1, 1913, value and is reflected therein although it may be that other elements, such as appreciation in value, 1108 are also reflected. In the instances where the March 1, 1913, value is used as the basis for the determination of gain or loss, the reduction of such basis by the amount of depreciation sustained prior to March 1, 1913, would in itself practically result in the allowance of a double deduction for depreciation. It seems to me quite clear that Congress intended4321 that only the allowable depreciation should be deducted from the cost or March 1, 1913, value in determining gain or loss. The further reduction of such basis by the amount of the depreciation sustained prior to March 1, 1913, would destroy the mathematical and economical precision of the fundamental principle. My conclusion in this respect finds ample support in the legislative history. In section 202(b)(2) of the Revenue Act of 1926, Congress, for the first time, enacted a statute requiring the reduction of the basis by the amount of depreciation sustained prior to March 1, 1913. The last sentence of such paragraph reads as follows: In addition, if the property was acquired before March 1, 1913, the basis (if other than the fair market value as of March 1, 1913) shall be diminished in the amount of exhaustion, wear and tear, obsolescence, and depletion actually sustained before such date. The report of the Ways and Means Committee to the House of Representatives, with reference to this new provision, is as follows: When property is acquired prior to March 1, 1913, the present law provides that in the case of a sale of such property the basis for determining gain or loss4322 shall be cost or March 1, 1913, value, whichever is higher; and also provides that in making adjustments for depreciation, etc., proper adjustment shall be made for depreciation, etc., "previously allowed." Owing to the fact that there was no income tax prior to March 1, 1913, in cases where property was acquired prior to that date no depreciation has been "allowed," and the taxpayer may receive too large a basis for determining gain or loss. The amendment proposed provides that the deductions for depreciation, etc., to be made in such cases shall be such deductions as were actually sustained with respect to such property, which would include such depreciation as had occurred prior to that date. The report of the Senate Finance Committee with reference to the new provision, reads as follows: When property was acquired prior to March 1, 1913, the present law provides that in the case of a sale of such property the basis for determining gain or loss shall be cost or March 1, 1913, value, whichever is higher; and also provides that in making adjustments for depreciation, etc., proper adjustment shall be made for depreciation, etc., "previously allowed." Owing to the fact that there4323 was no income tax prior to March 1, 1913, in cases where property was acquired prior to that date no depreciation has been "allowed," and the taxpayer may receive too large a basis for determining gain or loss. The amendment proposed provides that the deductions for depreciation, etc., to be made in such cases shall be such deductions as were actually sustained with respect to such property, which would include such depreciation as had occurred prior to that date. 1109 Under existing law in the case of determining gain from the sale or other disposition of property, the cost or March 1, 1913, value of such property is required to be reduced by the amount of depreciation or depletion allowed under prior income tax laws. It has been claimed that the effect of this provision is to allow a taxpayer to elect to take no depreciation or depletion against his annual income and to permit him to write off the entire cost or March 1 value at time of sale. The bill as passed by the House provides that the cost or March 1, 1913, value in the case of sale shall be reduced by the amount of depreciation or depletion allowable under prior income tax acts in computing the gain subject*4324 to tax. It is believed that the rule stated by the House bill is the correct rule and that all taxpayers should be required to take proper annual deductions for depreciation and depletion. It seems to me clear that in the computation of gain or loss resulting from the sale or other disposition of property acquired prior to March 1, 1913, and sold prior to the effective date of the Revenue Act of 1926, the basis, whether such basis be cost or March 1, 1913, value, may be reduced only by the amount of depreciation sustained subsequent to March 1, 1913, and allowable under the various revenue acts in effect since such date. MURDOCK, SMITH, SIEFKIN, TRUSSELL, TRAMMELL, and VAN FOSSAN concur in the dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622166/	LEE HOLMES AND SALLY HOLMES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHolmes v. CommissionerDocket No. 29083-84.United States Tax CourtT.C. Memo 1987-475; 1987 Tax Ct. Memo LEXIS 471; 54 T.C.M. (CCH) 595; T.C.M. (RIA) 87475; September 21, 1987; As amended September 21, 1987 Lee Holmes, pro se. Kirk S. Chaberski, for the respondent. PARRMEMORANDUM FINDINGS OF FACT AND OPINION PARR, Judge: Respondent determined a deficiency of $ 10,404.00 in petitioners 1981 Federal income tax. After concessions, 1 the issues remaining for decision are (1) whether petitioners are entitled to and have adequately substantiated Schedule C truck expenses, Schedule E rental expenses, depreciation of and casualty losses to rental properties; and (2) whether, due to adjustments in petitioner-husband's business profits, petitioners are subject to additional self-employment tax. 472 FINDINGS OF FACT Some of the facts were stipulated and are so found. The stipulation of facts are incorporated herein by reference. Petitioners, Lee Holmes and Sally Holmes, resided in Little Rock, Ark., when they timely filed the petition in this case. Petitioners filed a joint Federal income tax return for the 1981 taxable year with the Internal Revenue Service Center in Austin, Tex.Mr. Holmes was a self-employed professional plumber during the 1981 taxable year. Petitioners also owned and operated a rental parcel in Pulaski County, Ark. There were two houses and four trailers on the parcel at the beginning of the 1981 taxable year. Petitioners attached Schedule C (Profit or (Loss) From Business or Profession) to their 1981 Federal income tax return. They claimed cost of goods sold in the amount of $ 11,737.00 and deductions in the amount of $ 2,425.00. Included within the deductions were claims for car and truck expenses in the amount of $ 1,580.00 and utility/telephone expenses in the amount of $ 240.00. Petitioners also filed a Schedule E (Supplemental Income Schedule) with their 1981 Federal tax return to reflect both income and expenses connected with their473 rental properties. The claimed expenses totalled $ 4,874.00 and consisted of advertising ($ 28.00); utilities ($ 3,370.00); supplies ($ 475.00); insurance ($ 425.00); and garbage removal ($ 576.00). Petitioners depreciated the rental property using a ten-year straight-line depreciation method with a useful life of ten years and no salvage value. Depreciation for the 1981 taxable year was taken in the amount of $ 4,100.00. Petitioners also attached Form 4864 (Casualties and Thefts) to their 1981 tax return. They claimed casualty losses on their rental property totalling $ 5,900.00. 2Respondent sent a notice of deficiency to petitioners on May 16, 1984. Respondent disallowed the following expenses for failure to to adequately substantiate: (1) Cost of goods sold$ 11,737.00(2) Utilities/telephone240.00(3) Truck expense1,580.00(4) Rental expenses4,874.00(5) Rental depreciation4,100.00(6) Casualty losses6,000.00(7) Miscellaneous deductions860.00Respondent has since474 conceded petitioners' cost of goods sold, utility/telephone 3 and miscellaneous deductions. Mr. Holmes offered no documentary evidence at trial to substantiate his claimed truck expense of $ 1,580.00. He testified that he estimated his truck expense at $ 25.00 per week. 4 Petitioners also failed to offer any evidence to support their advertising ($ 28.00) or insurance ($ 425.00) expenses. In fact, Mr. Holmes admitted that he did not carry insurance during the 1981 taxable year. 475 In support of other rental expenses petitioners offered several cancelled checks. Petitioners paid the Arkla Gas Company $ 2,082.70 with sixteen checks drawn on R. L. Holmes account in 1981. Of the sixteen checks, two were written on January 10th; two on February 15th; two on March 9th; one on March 28th; one on March 29th; two on May 15th; two on June 20th; and two on September 15th. Mr. Holmes was unsure of how may gas meters were on the rental property in 1981, but he believed there were two. Although four different account numbers appeared on the face of the cancelled checks, petitioners failed to offer any evidence linking any of the accounts to the rental property. Petitioners also paid the Little Rock Water Company a total of $ 947.96 in 1981 with seventeen checks drawn on the account of R. L. Holmes. Included in these checks are one dated January 10th; one dated January 30th; one dated February 25th; two dated March 9th; one dated March 28th; one dated April 8th; two dated May 15th; two dated July 12th; one dated August 10th; two dated September 15th, and three dated October 10th. Mr. Holmes testified that there were two meters at the rental properties in 1981. Again, 476 four different accounts were stated on the face of the checks and petitioners failed to present any evidence connecting a particular account to the rental property. Petitioners submitted cancelled checks payable to the Arkansas Power and Light Company in a total amount of $ 909.71. There were eight checks drawn on the account of R. L. Holmes. There was a check for each month from March through July and September through November, ranging from $ 97.00 to $ 139.00. Again, petitioners offered no documentation in support of their contention that these checks were written for the rental property in Pulaski County. Petitioners submitted one cancelled check in the amount of $ 110.00 to the Little Rock Waste Water Utility. Mr. Holmes testified that he was not sure that the check was written for the rental property. Petitioners also paid $ 599.11 to Cash Lumber Co. and Lowe's for lumber and/or building supplies during 1981. Petitioners failed to offer documentation in support of their contention that supplies were bought to fix the rental properties. Petitioners did, however, testify that no repairs were made on their residence during 1981. Finally, in support of the claimed deduction477 for garbage removal, petitioners submitted four checks drawn on the account of R. L. Holmes payable to Arkansas Waste Disposal in the amount of $ 339.15. One check was written in the amount of $ 88.70 in April; one check was written in June for $ 133.05, one in July for $ 44.35 and one in October for $ 133.05. Mr. Holmes testified that garbage collection is free in the section of Little Rock where his residence is located, but that he must pay for garbage removal on the rental property which is in a rural area. Petitioners claimed depreciation of $ 4,100.00 on all of their rental properties in 1981. They failed to file a depreciation schedule in 1981. However, according to Mr. Holmes, based on their 1980 depreciation schedule, 5 the acquisition date and alleged cost or other basis for each unit was as follows: Cost orPropertyDate of AcquisitionOther BasisHouse1970$ 18,000.00Trailer 119801,000.00Trailer 219735,000.00Trailer 319755,000.00Trailer 419747,000.00House19704,000.00478 Petitioners depreciated all their rental units using a ten-year straight-line method with a useful life of ten years and no salvage value. Although not specified it seems the $ 4,100 depreciation taken in 1981 was attributable to the $ 18,000 house and the four trailers. Petitioners paid $ 18,944.50 for the house and lot in Pulaski County, Ark. A chicken house and a feed house were also located on the lot when purchased. Petitioners valued the house at $ 18,000.00 and the other structures and the land at $ 944.50. Petitioners offered no documentary evidence to support their cost or other basis in any of the four trailers. In addition to depreciation claimed on all four trailer for the entire 1981 taxable year, petitioners also claimed a casualty loss in the amount of $ 6,000 for the total destruction of one of the four trailer and the partial destruction of another of the trailers. Petitioners claimed the 1973 trailer was totally destroyed by a fire which occurred on or about February 1981. 6 The claimed amount of the loss was $ 5,000. Petitioner also claimed $ 1,000 casualty loss for damage to his 1974 trailer. 7 Again, however, petitioner failed to offer any evidence as479 to the cost or other basis of either trailer or as to the value of the trailers after the fire. Additionally, petitioner's testimony on the issue is in conflict with his 1981 tax return. 8480 OPINION The first question in this case is whether petitioners are entitled to and have adequately substantiated their claimed deductions for truck expenses, rental expenses, depreciation and casualty losses. Petitioners have the burden of proving that respondent's determination is incorrect and that they are entitled to the deductions at issue. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). 9 This Court is empowered to make an allowance for the type of deduction claimed by petitioners, based on an estimate, if we are convinced the expense actually occurred and a basis exists to estimate the deduction. Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (1930). In this case, petitioners offered no documentary proof in support of truck expenses actually incurred. Nor did they offer any evidence of local business mileage so that the optional method of computing automobile expenses could be applied. Since petitioners' estimate of truck481 expenses is not related to actual expenses or mileage, we have no basis on which to estimate the deduction. Similarly, petitioners offered no evidence to substantiate rental expenses for advertising and insurance. In fact, Mr. Holmes admitted at trial he did not carry insurance during the 1981 taxable year. Petitioners did offer cancelled checks in support of their other rental expenses. They produced checks to Little Rock Water Works, Arkansas Power and Light Company, Little Rock Waste Water Company and two lumber stores. Petitioners failed, however, to present any evidence connecting these payments to the rental property. Thus petitioners have failed to prove they are entitled to claim these expenses under section 212 and we must, therefore, disallow the deductions. Rule 142(a). A reasonable basis does exist to permit a partial deduction for payments to Arkla Gas Company. Petitioners presented sixteen checks payable to Arkla Gas drawn on the account of R. L. Holmes. While none of the payments were specifically for the rental property, there were account numbers on the face of all the checks. Of the sixteen checks drawn, eight were payable to account number 1546418042482 and six were payable to account number 1148276041. 10 In addition, the date the checks were drawn for both accounts were identical with one exception. A check was drawn for account number 1148276041 on March 28 and a check was drawn on account number 1546418042 on March 29. 11 The checks for account 1148276011 ranged from $ 169.76 to $ 319.66, but the checks for account 1546418042 ranged from $ 16.59 to $ 88.14. Mr. Holmes' testimony at trial explains the disparity in the checks for the two accounts. Mr. Holmes testified that certain checks might have been for his483 residence but it was impossible that other checks were for his home because they were too high. He stated that his average gas bill for his residence was about $ 30 per month. Mr. Holmes was unsure if there were one or two gas meters on the rental property. He thought there were two, one for the big house and one for the four trailers and the small house. We find under this record that the gas bill at the rental property would be greater than the bills for petitioners' residence. Moreover, the disparity in payments for the two accounts indicates one bill was consistently much greater than the other bill. We thus find payments on account number 1148276041 were for the rental property. All checks for account 1148276041 were drawn between January and June of 1981. Petitioners failed to present any evidence that gas bills for the second half of the year were similar to those during the first half of the year. Moreover, since we do not know which units were occupied during the year and when they were occupied, we also have no way of estimating what the gas bills would be at the rental property. Therefore, we allow a deduction only to the extent of the checks actually presented484 for account 1148276041, or a total of $ 1,385.84. Petitioners also claimed a deduction for garbage removal in the amount of $ 576.00. In support of this deduction they presented four checks payable to Arkansas Waste Disposal totalling $ 399.15. Of the four checks drawn, one check was for $ 44.35, one for $ 88.70 and two for $ 133.05. Respondent would have us disallow this deduction because of disparities in the amounts of the checks. Respondent fails to realize, however, that each payment is easily divisible by $ 44.35. This fact combined with Mr. Holmes' testimony that the city provides free garbage removal for his residence leads us to conclude that all of the checks presented were for garbage removal at the rental property. Moreover, since it is apparent that the monthly charge for garbage removal was $ 44.35, we have a reasonable basis to estimate petitioners' deduction at $ 532.20. Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (1930). Petitioners claimed $ 4,100.00 rental depreciation in 1981. Petitioners did not provide a depreciation schedule with their tax return. Mr. Holmes testified that he used a ten-year straight-line method with a ten-year useful life485 and no salvage value to depreciate all of his property. Mr. Holmes also testified that depreciation in 1981 was exactly the same as depreciation in 1980 and provided a copy of his 1980 depreciation schedule. 12 In 1980 petitioners claimed depreciation in the amount of $ 4,500.00. Presumably, petitioners did not depreciate the second house which had been previously depreciated at a rate of $ 400.00 per year. With the exception of a deed and a loan agreement on the first house purchased by petitioners, the 1980 depreciation schedule was the only evidence presented to substantiate petitioners' depreciation.486 Since petitioners cannot prove the purchase date or purchase price of any of the trailers, we must disallow any deduction for their depreciation. Camp Wolters Land Co. v. Commissioner,5 T.C. 336">5 T.C. 336 (1945), affd. in part, revd. in part 160 F.2d 84">160 F.2d 84 (5th Cir. 1947). Petitioners did present evidence to prove both the purchase date and purchase price of the first house. The deed clearly specifies that the house was purchased in December 1970 for $ 18,944.50. Mr. Holmes stated that he attributed $ 18,000.00 of the purchase price to the house and the remainder to the land and run-down structures. Respondent claims that petitioner started to depreciate this house in 1970 and petitioner claims depreciation began in 1971. Since petitioner was using ten-year straight-line method of depreciation with a ten-year useful life an no salvage value, it does not matter whether depreciation began in 1970 or 1971. In either case, the property would be completely depreciated prior to 1981. Therefore, petitioners are not entitled to any depreciation for the 1981 taxable year. Petitioners claimed a casualty loss in the amount of $ 6,000 on their 1981 Federal tax return.487 Section 165 authorizes taxpayer to deduct casualty losses sustained during the taxable year which are not compensated by insurance or otherwise. The amount of the deduction is equal to the fair market value of the property before the casualty less the fair market value of the property after the casualty. The amount of the deduction is further limited in that it cannot exceed the taxpayers' adjusted basis in the property. Petitioners have submitted Form 4684 (casualties and thefts), which was attached to their 1981 Federal tax return, as evidence of the amount their loss. Mr. Holmes' testimony also was in conflict with the loss claimed in 1981.13 Petitioners have failed to prove both the basis and the value of the trailers. Thus, respondent's disallowance of this deduction must be sustained. Camp Wolters Land Co. v. Commissioner,5 T.C. 336">5 T.C. 336 (1945), affd. in part, revd. in part 160 F.2d 84">160 F.2d 84 (5th Cir. 1947). Self Employment TaxThe remaining issue is whether petitioners are subject to additional self-employment tax for the 1981 taxable year. Mr. Holmes business' profits must be upwardly adjusted because of the*488 disallowed deduction for his truck expenses. Therefore, petitioners are subject to additional self-employment tax. Decision will be entered under Rule 155.Footnotes1. Prior to trial respondent-conceded that petitioner was entitled to miscellaneous deductions in the amount of $ 901.90 and that petitioners were entitled to cost of goods sold of $ 11,737.00. Additionally, after trial, respondent conceded that petitioner was entitled to a utilities/telephone deduction in the amount of $ 240.00. ↩2. Petitioners claimed casualty losses in the amount of $ 6,000. However, taxpayer are only able to recover casualty losses to the extent they exceed $ 100.00. Sec. 165. ↩3. Petitioner claimed $ 240.00 on his 1981 Federal tax return as utility/telephone expense. At trial petitioner testified he claimed $ 30 per month as a telephone expense ($ 360.00). Since petitioners only claimed $ 240.00, we allow a telephone expense in that amount. ↩4. Mr. Holmes believed the Internal Revenue instructions accompanying 1040 form authorized a $ 25/week deduction in lieu of documentary substantiation for travel expenses. He failed, however, to offer the document which advised this action. The Internal Revenue Service has issued a Revenue Procedure which authorizes an optional method of computing transportation expenses by automobile. Rev. Proc. 82-61, 2 C.B. 849">1982-2 C.B. 849↩. Under the optional method, rather than substantiation of actual expenses incurred, a taxpayer may compute the deduction using a standard mileage rate of 20 cents per mile for the first 15,000 miles of business use each year and 11 cents per mile for business use in excess of 15,000 miles. 5. Petitioners failed to itemize their 1981 depreciation schedule and instead claimed an aggregate amount of $ 4,100.00. ↩6. Petitioners offered an unauthenticated written statement of a Mrs. McClure corroborating that a fire occurred on or about February, 1981. Respondent stipulated that the document was a letter but objected to the introduction of the letter for substantive purposes. It is unnecessary to consider the statement of Mrs. McClure because we believe petitioners' testimony concerning the occurrence of the fire. ↩7. In 1981 petitioner listed the cost or other basis of the 1974 trailer was $ 5,000. (Form 4684) On the 1980 depreciation schedule, however, the cost of other basis of the 1974 trailer was listed as $ 7,000. ↩8. Petitioner claimed a casualty loss in the amount of $ 6,000 on his 1981 tax return ($ 5,000--1973 trailer and $ 1,000--1974 trailer). At trial, however, petitioner testified that he had $ 6,000 loss on the 1973 trailer, which exceeds his basis on his 1980 depreciation schedule ($ 5,000.00). He tried to justify the amount of the loss claiming it exceeded his cost because he had fixed up the trailer and furnished it. Petitioner offered no documentary evidence to support this contention. In addition, at trial Mr. Holmes stated damage to the 1974 trailer was minor, only about $ 100.00 to fix the roof. ↩9. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during 1981, and all Rule references are to the Tax Court Rules of Practice and Procedure. ↩10. Each of the other two checks payable to Arkla Gas Company had a different account number. There is not adequate proof linking either check to the rental property. Therefore, deductions for those amounts are disallowed. ↩11. The checks presented for Arkla Gas were drawn as follows: ↩DateAccount 1148276041Account 1546418042January 10$ 277.42$ 61.98February 15319.6688.14March 9235.6381.39March 28169.76-March 29-47.76May 15174.1337.60June 20209.2436.54September 15-16.59October 10-33.5712. Petitioners' 1980 depreciation schedule was as follows: ↩Dep. allowedDep.DescriptionDateCost oror allowableDep.Lifefor thisof PropertyAcq'dOther Basisin prior yearsMethodor RateYearHouse1970$ 18,00010%10 Yrs.10$ 1,800.00Trailer 119806,00010%10 Yrs.10600.00Trailer 219735,00010%10 Yrs.10500.00Trailer 319765,00010%10 Yrs.10500.00Trailer 419747,00010%10 Yrs.10700.00House19704,00010%10 Yrs.10400.0013. See supra↩ n. 8.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622167/	Newark Amusement Corporation v. Commissioner. Louis Handloff and Mollie Handloff v. Commissioner.Newark Amusement Corp. v. CommissionerDocket Nos. 67015, 67016.United States Tax CourtT.C. Memo 1960-137; 1960 Tax Ct. Memo LEXIS 156; 19 T.C.M. (CCH) 705; T.C.M. (RIA) 60137; June 27, 1960156 Held, that the corporation transferred full ownership of certain improved realty to the individual petitioner, its sole stockholder, rather than mere legal title for the benefit of the corporation; such transfer was not shown to be in payment of loans owing from the corporation to the petitioner; such transfer constituted the distribution of a taxable dividend to the petitioner; the amount of the taxable dividend is limited to the accumulated earnings or profits of the corporation, plus its earnings or profits of the taxable year; in computing the earnings or profits for the taxable year the unpaid Federal income taxes for such year are not to be taken into account, the corporation being on the cash receipts and disbursements method of accounting, following Helvering v. Alworth Trust, 136 F. 2d 812, and Paulina duPont Dean, 9 T.C. 256">9 T.C. 256, and distinguishing Drybrough v. Commissioner, 238 F. 2d 735; the fair market value of the property at the time received by the petitioner was at least as great as the amount of the earnings or profits of the corporation available for the payment of dividends; the dividend is in the amount of such available earnings157 or profits; and that the petitioner is not entitled to a loss deduction on account of the demolition of the building on the property. Held, further, that the respondent did not err in disallowing deductions claimed by the corporation on account of the demolition of the building and for depreciation on the building for the period after it was transferred to the individual petitioner. Sydney A. Gutkin, Esq., 744 Broad Street, Newark, N.J., and David Beck, Esq., for the petitioners. Albert Squire, Esq., for the respondent. ATKINSMemorandum Findings of Fact and Opinion ATKINS, Judge: The respondent determined deficiencies in income tax against the petitioners as follows: DocketIncomePetitionerNo.YearTaxNewark Amusement670151952$ 1,614.59Corporation1953836.45Louis Handloff and67016195345,503.84Mollie HandloffThe issues with respect to the corporate159 petitioner are whether the respondent erred in disallowing for the year 1953 a demolition loss in the amount of $19,333.35 and depreciation in the amount of $250. For the year 1952 the issue is whether the petitioner is entitled to carry back a net loss from the year 1953. With respect to the individual petitioners the principal issue is whether Louis Handloff received a taxable dividend in 1953 upon the delivery to him from the corporation of a deed to certain real property, and if so the amount of such dividend. An alternative issue is whether, if Handloff did receive the property as a dividend, he is entitled to deduct a demolition loss of $19,333.35 and depreciation of $1,000. Findings of Fact Some of the facts are stipulated and are incorporated herein by this reference. Newark Amusement Corporation, referred to hereinafter as the corporation, was incorporated on or about April 1, 1930, under the laws of the State of Delaware. It filed its income tax returns for the years in question on the cash receipts and disbursements method of accounting with the director of internal revenue at Wilmington, Delaware. The petitioners, Louis and Mollie Handloff, are husband and wife160 residing in Newark, Delaware. They filed their joint return for the year in question with the same director of internal revenue. Louis will be hereinafter referred to as the petitioner. At organization the corporation took over a motion picture theatre formerly operated by the petitioner. In 1934 it acquired a piece of real estate for $16,000, which it has since held for rental purposes. The petitioner has been the sole stockholder and president of the corporation since its inception. During the years involved herein the corporation's other officers were his wife and his son, Herman. He and his wife were directors. There has never been a meeting of its board of directors or of its stockholders. Petitioner and his wife talked over matters affecting the corporation, but no minutes of such discussions were ever entered on the corporate books. The corporation's accounting records consisted of loose leaf sheets listing income and expenses on a cash receipts and disbursements method. It did not keep a double entry set of books, did not maintain a general ledger, and did not prepare balance sheets. Since 1948, its returns have been prepared by a firm of certified public accountants from161 such records as were available, without making an audit of such records. From time to time petitioner supplied money needed by the corporation. On November 25, 1948, he delivered his personal check payable to the corporation in the amount of $6,000, and on November 30, 1948, he delivered his personal check of $2,000 payable to Keil Motor Co., for air conditioning the theatre. These amounts were never repaid by the corporation to the petitioner. On March 23, 1948, the corporation purchased property on the north side of Main Street, Newark, Delaware, known as 108 East Main Street, which is the property in question herein. The purchase price was $40,000, and there were other items of cost amounting to $24.19. The corporation gave a purchase money mortgage for $4,000, and the balance of $36,024.19 was paid by a check drawn by the petitioner on his personal account. The property had a frontage on East Main Street of 17.22 feet and a depth of about 366 feet. There was located on the property a 2 1/2 story, frame building, 28 feet X 57 feet, containing offices which the corporation held for rental purposes. The corporation reported the rental income it received each year from the property162 and deducted the taxes and expenses it paid with respect thereto. The corporation allocated $25,000 of the purchase price to the building and took depreciation deductions on that basis. In December 1951, the petitioner approached W. T. Grant Company, hereinafter referred to as Grant, and discussed the possibility of locating one of Grant's stores on the site of the property in question. Beginning in January 1952, Grant gave serious consideration to this possibility and its representative, Harvey Hopkins, surveyed the property as well as property located at 17 Centre Street, the latter property not then being owned by either the petitioner or the corporation. This property was a rectangular plot 50 X 94 feet contiguous to and at right angles to the rear of the property at 108 East Main Street. It was so located that it would provide an outlet from the principal property to Centre Street. Hopkins negotiated with the petitioner and his son upon the basis of a lease covering both the Main Street and the Centre Street properties to be improved by a onestory building, a part of the rental to be based upon the land values of such properties. Hopkins suggested a valuation of $90,000 to163 $100,000 and an annual rental based thereon of $4,500 to $5,000. At that time the petitioner sought a higher valuation and rental. Sometime in late 1952 Grant drafted a proposed lease and delivered it to the petitioner. The petitioner referred the lease to his nephew, Morris Cohen, an attorney who had previously represented the petitioner in various legal matters. Cohen did not actively participate in negotiations with Grant, but suggested to the petitioner or his son certain revisions in the documents. Thereafter a revised lease and lease agreement were drawn up between the petitioner as landlord, and Grant, dated November 25, 1952, but these were not executed on that date. Grant was willing to enter into the agreements at that time, but the petitioner was not. In July 1953, the petitioner, upon hearing a rumor of a proposed new shopping center to be built on East Main Street in Newark, Delaware, came to the conclusion that it was to his advantage to sign the lease. He thereupon contacted Grant and the lease and the lease agreement were signed on July 16, 1953. The lease was recorded in New Castle County, Delaware, on October 16, 1953. Both the lease and the lease agreement were164 signed by the petitioner and his wife. The corporation did not sign these documents, nor is it mentioned therein. The lease was for a term beginning February 1, 1954 and ending on January 31, 1984, with an option in the lessee to extend the term until January 31, 1994. The lease covered all of the property at 108 East Main Street except the westerly 12 feet (and as to that the lessee was granted a right-of-way) and all of the property known as 17 Centre Street, together with building and improvements to be erected on the Main Street property by the petitioner in accordance with the lease agreement. In addition the lessee was granted the use of a certain area contiguous to 108 East Main Street, owned by the petitioner, for use as a parking lot. In the lease agreement it was provided that the petitioner should at his own expense demolish the existing improvements on the property and construct a one-story building according to fixed specifications and provide a graded and surfaced area for parking. It was provided that Grant should pay the petitioner a fixed annual rent of $4,500 until January 31, 1959, and $5,000 thereafter. The tenant was also required to pay an additional fixed165 rent at an annual rate equal to six per cent of the cost of construction of the new building, not to exceed, however, $10,500 per year. In addition to the fixed rent, Grant was required to pay rent in an amount equal to the amount by which three per cent of gross retail sales should exceed the sum of the fixed rent and the taxes, insurance, and repairs or replacements which were to be borne by the tenant. The rent was to commence on the date that possession of the premises should be delivered to the tenant. All rental payments were to be made to the petitioner at an address, which was his residence, or to such other person and at such other address as might be designated by notice in writing from the petitioner to Grant. It was provided that the tenant should make all necessary repairs and replacements and would pay for the heat and utilities as well as all real estate taxes on the properties. In the lease agreement the petitioner as landlord warranted and represented that he was seised of an indefeasible estate in fee simple in the premises free and clear of all liens, encumbrances and restrictions. The petitioner purchased the Centre Street property on January 25, 1953, for about166 $25,000. On September 23, 1953, the petitioner entered into a contract with a building contractor for the construction of a building in accordance with the specifications contained in the lease agreement. The petitioner is therein described as the owner of the property and the corporation is not mentioned. The petitioner then made arrangements with Newark Trust Company to borrow $150,000 to finance the construction of the building to be erected. He consulted with his nephew Morris Cohen and requested him to draw up the necessary legal papers to obtain the loan. Cohen then prepared a deed by which the corporation, for a stated consideration of $10, transferred the property located at 108 East Main Street to the petitioner. This document was signed on September 29, 1953, by the petitioner as president of the corporation. It contains the seal of the corporation attested by its secretary, Herman Handloff. Cohen prepared a construction loan agreement, which was signed by the petitioner and his wife and by Newark Trust Company on September 29, 1953, wherein the petitioner represented that he was the owner in fee of the property at 108 East Main Street. Cohen also prepared a judgment167 bond in favor of the Newark Trust Company, which was duly signed by the petitioner and his wife on September 29, 1953, binding themselves to repay to Newark Trust Company the amount of $150,000 at expiration of six months, with interest at 5 per cent per annum. Cohen also prepared a mortgage deed which was signed by the petitioner and his wife on September 29, 1953, transferring to Newark Trust Company the property at 108 East Main Street, the Centre Street property, and certain other property. None of the above instruments was signed by the corporation nor was it indicated therein that it had any interest in the property in question. These documents had been mailed to the petitoner by Cohen. After executing them the petitioner returned the deed and the mortgage to Cohen and they were recorded at Wilmington, Delaware, on September 29, 1953. On October 6, 1953, the building contractor made application for a permit to demolish the existing building on the property at 108 East Main Street. The petitioner also signed this application, describing himself as the owner of the property. On October 5, 1953, the petitioner made application for a permit to construct the new building on the168 premises, signing as the owner of the property. The application form contains a requirement that "If owner is a Corporate Body, two important officials sign below." The spaces for the signatures of such corporate officials are blank. The actual cost of construction of the new building was $148,125.06. Other miscellaneous expenditures chargeable to the cost of the building amounted to $12,876.87, resulting in a total cost of the building of $161,001.93. All these expenditures were paid from a personal account of the petitioner entitled "Louis Handloff, Building Account." The amount in excess of the $150,000 construction loan was paid by the petitioner from his personal funds. Construction of the new building was completed in time for Grant to commence business therein on June 17, 1954. Grant commenced paying rent beginning June 1, 1954. On September 21, 1954, the petitioner and his wife borrowed from Teachers Insurance and Annuity Association of America an amount of $150,000, executing a note in that amount on that date, providing for installment payments of principal and interest in the amount of $1,128.42 per month. The proceeds of this loan were used to pay the construction169 loan owing to Newark Trust Company. On the same date the petitioner and his wife executed a mortgage deed in favor of Teachers Insurance and Annuity Association whereby they mortgaged to that organization the property at 108 East Main Street and the Centre Street property, together with all rents and profits therefrom. Neither the mortgage nor the note indicates that the corporation had any interest in the property in question. On September 21, 1954, the petitioner and his wife, for purposes of further securing payment to Teachers Insurance and Annuity Association, executed an assignment of all their right, title, and interest in the lease dated November 25, 1952, between the petitioner and Grant. Therein the petitioner represented and warranted that he was the owner in fee simple absolute of the premises in question, that he had good title to the lease, and that no other persons, firm, or corporation had any right, title, or interest therein. The lease was never amended and Grant never received any notice to pay the rental to any one other than the petitioner and his wife. The rents actually paid have approximated $13,500 per year. On November 17, 1954, a special bank account was170 opened in the name of the corporation at Newark Trust Company to handle the receipts and disbursements with respect to the building occupied by Grant. Thereafter rental checks received by the petitioner were deposited to this account. The record does not show what disposition was made of rental checks received from June 1, 1954 to November 17, 1954. After the opening of the special bank account in the name of the corporation at Newark Trust Company on November 17, 1954, monthly mortgage payments to Teachers Insurance and Annuity Association were made by checks drawn by the petitioner as president of the corporation. The record does not show how payments of the monthly installments for the months of October and November 1954, were made. The corporation filed its income tax return for 1953 on March 15, 1954. Therein it claimed a loss in the amount of $19,333.35 upon the demolition of the building located at 108 East Main Street, being the difference between the portion of the original cost of the property allocated to the building, namely, $25,000, and the depreciation which had been taken thereon of $5,666.65. Therein the corporation claimed depreciation in the amount of $1,000171 upon this property. In the notice of deficiency the respondent disallowed the claimed demolition loss on the ground that the building in question was transferred to the petitioner prior to demolition. He disallowed $250 of the claimed depreciation on the building on the ground that depreciation was allowable to the corporation only for the period January 1 to September 29, 1953, the date on which the property was transferred to the petitioner. In its return the corporation had reported a net operating loss of $16,640.19. The respondent's disallowances of claimed deductions resulted in net income of $2,788.16. For the calendar year 1952 the corporation had reported income of $5,381.95 and had paid a tax of $1,614.59. Thereafter it made application for a carryback of a net loss from 1953 to 1952. This was originally allowed by the respondent and a refund of the $1,614.59 was made. In the notice of deficiency the respondent held that by reason of the adjustments which he made for 1953 there was no net operating loss for that year which could be carried back to 1952, and that consequently there was a deficiency for 1952. In their joint income tax return for the calendar year 1953 the172 petitioner and his wife showed gross income from rentals in the amount of $37,410.78, net rental income of $16,069.99, total net income of $35,337.39, and a tax liability of $12,156.94. The return showed that the petitioner owned depreciable property (consisting of a theatre, some stores and some houses, together with equipment) which had an original cost of $225,593.57 on which they took depreciation for 1953 in the amount of $4,824.13. In the notice of deficiency the respondent decreased the reported net income by $10,165.70, representing a portion of the rental income reported, on the ground that such amount had been included in the tax return of the corporation. The respondent determined that the reported income should be increased by an amount of $77,000, taking the position that the conveyance by the corporation to the petitioner of the property at 108 East Main Street constituted a dividend in that amount, representing the fair market value of the property transferred. At some time in 1954, prior to December 23, an internal revenue agent who examined the returns of the corporation for the years 1952 and 1953 informed Cohen and Benjamin Stolper, the accountant for the petitioner173 and the corporation, that in his opinion the conveyance on September 29, 1953, of the 108 East Main Street property from the corporation to the petitioner constituted a taxable dividend to the petitioner. Thereafter, at the suggestion of the accountant, Cohen prepared a deed by which the petitioner and his wife on December 23, 1954, for a recited consideration of $10, conveyed the property at 108 East Main Street to the corporation. This deed was never recorded, but at the suggestion of the accountant it was held in Cohen's file. Grant was not advised of this deed. All rent paid by Grant, commencing in June 1954, has been reported for Federal income tax purposes by the corporation as its income; the petitioner has not reported any of such rental payments as income. Facts Pertaining to Earnings or Profits of the Corporation The net income or net loss of the corporation, per stipulation, for each of the years 1930 to 1952, inclusive, was as follows: YearNet IncomeNet Loss1930$ 505.76$ 434.3719312,454.311932510.001933565.0019341,557.631935308.53193692.76193713.16193838.7319396.591940100.181941194288.68194311,096.1719449,894.70194514,834.70194610,162.1519475,022.6519489,083.18194911,732.7219506,034.0419512,322.7319525,381.95$86,159.43$6,081.26174 The total amount of Federal income taxes and additions to tax paid, per stipulation, for those years was $24,471.77, the tax for 1952 being $1,614.59. The accumulated earnings or profits of the corporation at December 31, 1952, were $57,220.99; the earnings or profits of the corporation for the year 1953 were $1,173.57; or total earnings or profits available for the payment of a taxable dividend in 1953 of $58,394.56. Additional Facts Pertaining to Value of Property The property at 108 East Main Street was located in a retail shopping area in the heart of the original business section of Newark. On September 29, 1953, the first floor of the building was occupied by the real estate department of a bank, and the second floor contained offices. From 1948 to 1953 in this area of East Main Street the buildings consisted principally of frame houses, some of which had been converted into stores by remodeling their fronts. For 1953 the property in question was assessed for local property tax purposes at $7,700 for the land and $7,775 for the building. Sales of properties on East Main Street in the vicinity of the property in question made within a reasonable time before or after175 September 29, 1953, were as follows: "December 31, 1952, property at 250 East Main Street with frontage of 109 feet and depth of 175 feet sold (for the new shopping center) for $60,000; "May 8, 1953, property at 47-49 East Main Street with frontage of 46 feet and depth of 333 feet, improved by a frame building with two stores on the street level and four offices on the second floor, sold for $50,000; "June 29, 1953, property at 149-151 East Main Street with frontage of 59 feet and depth of 333 feet, improved with an old three story frame building (demolished by the purchaser), which had been purchased in 1939 at a cost of $8,500, was sold for $59,000; "June 30, 1953, property at 230 East Main Street with frontage of 160 feet and a depth of 850 feet sold (for new shopping center) for $105,000; "December 17, 1953, property at 51 East Main Street with frontage of 50 feet and depth of 240 feet, improved by a brick and frame building used as a store and dwelling sold for $37,500; "January 14, 1954, property at 44 East Main Street with frontage of 27 feet and depth of 195 feet, and improved by an old brick building occupied by a store and two offices, sold for $27,000; "June 30, 1954, property176 at 132 East Main Street, with frontage of 40 feet and depth of 347 feet, improved by an old frame building with brick front containing one store and two apartments, and which had been purchased in 1937 for $6,500, sold for $37,000; and "December 1954, property at 253 East Main Street with frontage of 51 feet and depth of 196 feet, and improved by a brick dwelling and store, sold for $36,000. On September 29, 1953, the property at 108 East Main Street had a fair market value of at least $58,394.56. Opinion The principal issue in these consolidated cases is whether the individual petitioner Handloff received a taxable dividend in 1953 upon the execution by the corporation of the deed of September 29, 1953, transferring to him the property at 108 East Main Street. 1177 On brief the petitioner makes several arguments to the effect that he did not receive a dividend or if so that it is not in the amount determined by the respondent. First he contends that the deed in question did not convey the real ownership in the property to him, that it was no more than a "straw" conveyance transferring mere legal title, and that equitable title remained in the corporation. We have set forth the facts in considerable detail in the Findings of Fact. Upon a consideration of the whole record, it is our conclusion that by the deed of September 29, 1953, the petitioner acquired full ownerership of the property. Commencing in 1951 the petitioner personally negotiated with W. T. Grant Company with respect to leasing the property in question to Grant. These negotiations culminated in a lease executed in July 1953, between the petitioner and his wife and Grant, requiring the petitioner to demolish the existing building and erect a new store building, and providing for the payment of rental to the petitioner. In the negotiations Grant required that certain property on Centre Street be acquired and made a part of the lease and the petitioner individually acquired that178 property. The petitioner personally negotiated with Newark Trust Company for a construction loan of $150,000 and entered into a contract with a building contractor for the construction of the store building. On September 29, 1953, he, as president of the corporation, signed the deed conveying the Main Street property to himself. This deed was attested by his son Herman who was secretary of the corporation. Thereafter he and his wife executed a mortgage deed to Newark Trust Company covering the Main Street property, and certain other property which belonged to the petitioner. Later he obtained a permanent loan from Teachers Insurance and Annuity Association and used the proceeds to pay off the construction loan. He and his wife executed a mortgage deed to Teachers Insurance and Annuity Association covering the Main Street property and the Centre Street property. In these various documents the petitioner represented himself to be the owner of the Main Street property, and the deed of September 29, 1953, as well as the mortgage deeds were recorded. The corporation was not a party to any documents, other than the deed of September 29, 1953, and nowhere in any of such documents is it indicated179 that the corporation retained any interest in the Main Street property. In the permits for demolition of the old building and for construction of the new store building the petitioner represented himself as being the owner. In the lease the petitioner's wife specifically gave her consent and subordinated her right, title, and interest in the premises to the rights of the tenant. The lease itself provided that the rental should be paid to the petitioner at his home address unless the lessee should be otherwise notified. No such notification was ever given by the petitioner to Grant. After the petitioner had negotiated with Newark Trust Company for the contruction loan, he engaged his nephew Cohen, an attorney, to effect such loan. Cohen contacted Newark Trust Company and then prepared a judgment bond and the mortgage deed in favor of that company covering the Main Street property. Cohen testified that when he discovered that the Main Street property was owned by the corporation he, without detailed instructions from or consultations with the petitioner, prepared the deed of September 29, 1953, transferring title to the petitioner. He stated that he did this because the Centre Street180 property and the other property which Newark Trust Company required as security were owned by the petitioner and that it was not customary to include in one mortgage properties owned by different persons. He testified that he executed this deed as a "matter of stenographic convenience and that alone," and that no documentary stamps were placed on the conveyance because he considered it a "straw" conveyance, involving no consideration. He in effect testified that he transferred legal title to the petitioner, but that equitable title remained in the corporation. The petitioner testified that he left the matter entirely to Cohen in whom he had confidence, that he did not give any detailed instructions, and that he does not think that he reviewed any of the documents prepared for him by Cohen, but merely signed them. He stated that he never intended to transfer ownership from the corporation to himself and that when he, as president of the corporation signed the deed of September 29, 1953, he did not have any specific knowledge of what it contained. No record of either the petitioner or the corporation and no other document or memorandum was presented in evidence which would indicate181 that the corporation retained any interest in the property, or that the petitioner in taking title was acting on behalf of the corporation in any capacity. Cohen himself testified that there were documents to this effect. Nor was there any evidence whatsoever as to any oral understanding between the petitioner and the corporation or between the petitioner and Grant, the lending agencies, or the builder, that the corporation had any interest in the Main Street property after the execution of the deed of September 29, 1953. All such other parties dealt with the petitioner upon the basis of his representations that he was the owner. Anything which Cohen might have had in mind in respect to the transfer of mere legal title to the petitioner was not communicated by him to the petitioner. It appears that the petitioner himself did not tell Cohen that he wanted mere legal title transferred to him. The petitioner's statement that he did not intend that ownership be vested in him is inconsistent with his other representations and his acts. Furthermore, if his testimony was intended to convey the impression that he did not know that the deed of September 29, 1953, transferred the property to182 him, we cannot accept it as being true. Other testimony given by him indicates that he had talked the entire transaction over with his wife who was also a director of the corporation, and that he knew that Newark Trust Company required that the Main Street property be covered by the mortgage - indeed that it was the principal security. He must have known that the corporation itself had not mortgaged the property to the Newark Trust Company. Considering the petitioner's intelligence and his business experience, we conclude that he must have understood the steps which were being taken, particularly considering the magnitude of the over-all transaction. The petitioner makes much of the fact that on December 23, 1954, he and his wife executed a deed reconveying the property back to the corporation. It is contended that this indicates that the original intent was to transfer only legal title to petitioner. However, it is clear that this deed was prepared as an afterthought, following the disclosure by the internal revenue agent that in his opinion the transfer to the petitioner constituted a taxable dividend to him. Cohen so testified. The deed of reconveyance was not recorded, but was183 held in Cohen's file, and the lessee was never advised of the execution of this deed. We are not here concerned with the effectiveness of such reconveyance or its tax consequences: suffice it to say that its execution does not persuade us that the deed of September 29, 1953, was other than what it purported to be, namely, a transfer of absolute ownership to the petitioner. The petitioner also lays stress upon the fact that all rent paid by Grant, commencing in June 1954, has been reported for Federal income tax purposes by the corporation, rather than by the petitioner. But here again the action in so reporting the income occurred after the dividend question arose for the year 1953 and is of little probative value here. Nor, for the same reason, do we consider it significant that all rents received from Grant and all payments in discharge of the mortgage were made through a special bank account set up on November 17, 1954, in the name of the corporation. On brief petitioner states that the objective facts are consistent with the conclusion that it was not intended to transfer ownership to him, citing as examples the fact that no meetings of the directors of the corporation were184 held authorizing the conveyance, a settlement statement was not prepared, and documentary stamps were not affixed to the deed. In the first place the petitioner was the sole stockholder of the corporation, and it had not been its custom to conduct its affairs formally through directors' meetings. It is well established that a distribution may constitute a dividend even though not formally declared by the board of directors. Sachs v. Commissioner (C.A. 8) 277 F. 2d 879 (April 20, 1960), affirming Irving Sachs, 32 T.C. 815">32 T.C. 815, and cases cited therein. The fact that no documentary stamps were placed on the deed is of no particular significance since the documentary stamp tax is imposed upon conveyances of realty sold which involves a consideration. Sections 3480 and 3482 of the Internal Revenue Code of 1939, and sections 113.80 and 113.81 of Regulations 71. On brief it is stated, without elaboration except a reference to Scott on Trusts, sections 404, 405, and 485, that there was a resulting trust or a constructive trust in favor of the corporation. We have examined the authority cited but find nothing therein which would support such a contention under circumstances185 such as those here presented. It is our conclusion that the deed of September 29, 1953, conveyed to the petitioner absolute ownership in the property at 108 East Main Street, and that such conveyance constituted a distribution by the corporation to the petitioner. The petitioner argues that even if there was a distribution to him which is to be treated as a dividend, it does not follow that the dividend was in the full amount of the fair market value of the property. It is stated that the petitioner made loans to the corporation in an amount of at least $66,286 and that the dividend cannot exceed the excess of the value of the property distributed over the indebtedness. The alleged indebtedness to which the petitioner refers is made up of a number of items. First is the amount of $7,792.58, representing the total of net losses reported by the corporation on its income tax returns for the period 1931 to 1942, inclusive, which it is stated must have been paid by petitioner since the corporation was on the cash receipts and disbursements method of accounting. These net losses may have resulted from depreciation or other deductions which did not represent cash outlays by the corporation. 186 Hence, it may not have been necessary for the corporation to have funds advanced to it. In any event there is no evidence whatsoever to show that the petitioner did make advances in that amount. The second item referred to is $40,000, representing the amount paid in 1948 as the purchase price of the property of 108 East Main Street. The only portion of this amount which the record shows was paid by the petitioner was $36,024.19. The other items are $6,000 paid to the corporation by check dated November 25, 1948, $2,000 paid on behalf of the corporation by check dated November 30, 1948, and an amount of approximately $11,000, which petitioner personally paid for the construction of the improvements at 108 East Main Street over and above the $150,000 construction loan. Obviously this last mentioned expenditure was made after the property had been transferred to the petitioner, since construction of the improvements on the property did not commence until the property was placed in his name. The petitioner testified that at the inception of the corporation and from time to time as it became necessary he supplied funds to the corporation. At another point he stated that he loaned funds187 to the corporation. He also referred to "advances" made. He stated that the $6,000 item was a loan to the corporation. He did not specifically so state with respect to the $2,000 item, although this might have been the purport of his testimony. He stated, however, that he had never received repayment of these amounts. There is no evidence to show that any notes were ever given for these or any other amounts or that any interest was ever paid by the corporation to the petitioner on any amounts which he supplied. Nor were any records of the corporation introduced to show that any amounts supplied by the petitioner were treated as loans. Under these circumstances we cannot conclude that any amounts which the petitioner supplied to the corporation constituted loans rather than contributions of capital to the corporation. Furthermore, even if there was any indebtedness owing from the corporation to the petitioner, there is no evidence whatsoever to show that the transfer of the property to him was intended to be or was in payment of any such indebtedness. The petitioner properly contends that in no event can it be considered that he received a taxable dividend in excess of the accumulated188 earnings and profits of the corporation at December 31, 1952, plus earnings and profits of the corporation for the year 1953. 2 The parties have stipulated the facts from which the earnings and profits available for the payment of a taxable dividend are to be computed. However, on brief the respondent has computed this figure to be $58,394.56, whereas the petitioner contends that the amount is $53,958.11. The petitioner's computation is erroneous in that it fails to take into consideration stipulations as to excessive depreciation taken by the corporation in each of the years 1942 and 1946 in the amount of $1,800. The other item of difference between the computations of the petitioner and the respondent relates to the earnings or profits for the year 1953. The parties stipulated that if this Court should determine that the demolition loss of $19,333.35 deducted by the corporation on its return for 1953 is not an allowable deduction "then its earnings and profits for the year 1953 were $2,788.16." It is clear, and we hold, that whether or not the corporation might otherwise have been entitled to deduct a demolition loss, the fact that the property at 108 East Main Street was transferred189 by the corporation to the petitioner prior to the demolition of the building thereon would preclude the allowance of a demolition loss by the corporation. Despite the fact that the amount of $2,788.16 was stipulated to be the "earnings and190 profits" for the year 1953, the petitioner argues on brief that this amount should be decreased by the tax at 30 per cent on that amount, or $836.45. A reference to the notice of deficiency shows that the amount of $2,788.16 is the net income of the corporation for 1953 as determined by the respondent, and that the amount of $836.45 is the deficiency which the respondent determined, which determinations we approve herein. The corporation, being on the cash receipts and disbursements method of accounting, did not pay this tax in 1953, and indeed it does not appear that it has yet been paid. The petitioner cites no authority in support of his position. The respondent on brief does not contend that the stipulation precludes consideration of the question raised by the petitioner, but takes the position that the earnings and profits should not be reduced since the corporation was on the cash receipts and disbursements method of accounting, citing section 39.115(a)-2 of Regulations 118; 3Helvering v. Alworth Trust (C.A. 8), 136 F. 2d 812, certiorari denied 320 U.S. 784">320 U.S. 784, reversing 46 B.T.A. 1045">46 B.T.A. 1045; and Paulina duPont Dean, 9 T.C. 256">9 T.C. 256, appeal191 dismissed (C.A. 3), January 26, 1949. He argues that Drybrough v. Commissioner (C.A. 6), 238 F. 2d 735, which reversed United Mercantile Agencies, Inc., 23 T.C. 1105">23 T.C. 1105, is distinguishable.192 The quoted regulations have been in existence since 1941. The Supreme Court has often stated that Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and that they constitute contemporaneous constructions by those charged with administration of these statutes which should not be overruled except for weighty reasons. Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, (a case which, incidentally, approved another provision of the same section of the regulations here involved). After the decision in Alworth Trust, supra, this Court has followed that decision and has held that unpaid Federal income taxes are not to be taken into account in determining the earnings or profits of a corporation on a cash basis. Paulina duPont Dean, supra.We have carefully considered Drybrough v. Commissioner, supra, but we are of the opinion that that case does not affect the general principles applicable in the ordinary case such as the instant case. There the two taxpayers who owned and controlled the corporation diverted to themselves income of the corporation which would have been subject193 to a 95 per cent excess profits tax had this income been reported by the corporation. Later, when the respondent proceeded against the corporation, they returned these amounts to the corporation in full, but the deficiencies and penalties assessed against the corporation more than exhausted those funds and the claim was made that the corporation was thereby rendered insolvent. The court did not specifically disagree with the decision in Helvering v. Alworth Trust, supra, but stated: " * * The practical issue presented to the Court of Appeals in the Alworth case, however, was whether corporate tax liability should reduce earnings and profits in 1937 or 1938. Here, by contrast, the practical issue is whether a corporation's earnings and profits can ever be effectively adjusted by taxes owed and subsequently paid, in order to prevent a distribution of capital from being taxed as ordinary income. * * "In the present case the petitioners knew that the corporation was properly chargeable with a ninety-five per cent excess profits tax on the funds which they were diverting. They subsequently had to pay the money back to the corporation to enable it to meet its tax194 obligations. Both common sense and realism require the conclusion that the corporate taxes attributable to the diverted income should be excluded from the corporation's earnings and profits under the circumstances of this case. * * * We further conclude that the fraud penalties for which the corporation has been found liable should be deducted from earnings and profits for the respective years in which the fraudulent returns were filed. * * " It is our conclusion that in the instant case the unpaid deficiency of $836.45 for the year 1953 should not be used to reduce the earnings or profits of the corporation for that year. However, the tax of $1,614.59 for the year 1952 does reduce the earnings or profits for the year 1953, the year in which paid. We have accordingly found that the accumulated earnings or profits of the corporation at December 31, 1952, were $57,220.99, that the earnings or profits for the year 1953 were $1,173.57, or a total of earnings or profits available for the payment of a taxable dividend in 1953 of $58,394.56. The property in question was purchased by the corporation in 1948 for $40,000. The respondent determined that it had a fair market value of $77,000195 on September 29, 1953. On brief the petitioner contends that the fair market value did not exceed $28,333.33. Considerable evidence was adduced as to the fair market value of the property as of that date. This consisted of evidence of sales of other properties, appraisals made, and opinion testimony. We have set forth in the Findings of Fact the details of the sales which occurred in the vicinity within a reasonable time before and after September 29, 1953. These show that some properties in the neighborhood sold for as much as $1,000 per front foot. In general the properties were similar to the property in question, and although the depths of the lots varied, this apparently was not a substantial factor in determining value. We also note that in January 1953, the petitioner purchased the property at 17 Centre Street, which adjoined the property in question at the rear, for $25,000. This property had a frontage of 50 feet on Centre Street, which was a side street, whereas the property in question had a frontage of 77 feet on Main Street. The petitioner's witness, John P. Dolman, a real estate broker and appraiser who had made an examination of the property just prior to the trial196 in this case, but who had previously, in 1953 or 1954, acquired some knowledge of property values in Newark, testified that in his opinion the land at 108 East Main Street, taking into account the lease agreement calling for the erection of the new building, had a value at September 29, 1953, of $50,000. The petitioner testified that in his opinion the property in question had not increased in value until the new shopping center was started. The record does not show precisely when the new shopping center was commenced, but it does show that as early as December 1952, property was being purchased for that project. Herman Handloff, the petitioner's son, who is a member of the real estate appraisal committee of a local bank, testified that in his opinion the land in question was worth about $20,000 in September 1953, and that the improvements prior to demolition had a value of about $25,000. Robert E. Hickman, a witness for the respondent, who was a licensed real estate broker, testified that on July 21, 1953, he submitted to Teachers Insurance and Annuity Association an appraisal of the property projected to the time of completion of the new building. In such appraisal he estimated197 that the property would have a fair market value at the date of occupancy of $278,000 of which $108,000 represented the value of the land at 108 East Main Street and 17 Centre Street, no value being assigned to the old building which was to be demolished. The respondent's other witness, Harvey Hopkins, who was employed as a real estate negotiator by Grant in 1953, testified that he made surveys of the property in that year, that it appeared to him at that time that the property was the best available site in Newark for a Grant store, and that the value of the land, including the Centre Street land, would be at least $90,000, computed by the capitalization of the fixed rental at 5 per cent. In this connection the evidence shows that when Hopkins and the petitioner negotiated in 1952 for the rental to be paid by Grant, they did so on the basis of a value of $90,000 to $100,000 for the Main Street and Centre Street land, without regard to the improvements. Based upon a consideration of all the evidence presented, we are satisfied that the property at 108 East Main Street had a fair market value on September 29, 1953, of at least $58,394.56, and we have so found as a fact. It is held, 198 therefore, that the transfer of the property to the petitioner on that date constituted the payment of a taxable dividend to him in the amount of $58,394.56. The petitioner contends in the alternative that he should be allowed a deduction for depreciation on the building for the year 1953 in the amount of $1,000. This was the amount which had been claimed by the corporation as depreciation on the old building for the full year 1953, of which the respondent allowed $750 as a deduction by the corporation. We fail to see any ground for holding that the petitioner is entitled to deduct any depreciation on account of this property. Irrespective of the question of basis of the building in the hands of the petitioner, the fact that the petitioner did not hold the property for any substantial time after its acquisition, but rather demolished it immediately (on brief petitioner states that demolition commenced on October 1953) would preclude the deduction of any amount on account of depreciation of the building. The petitioner also makes the alternative contention that he is entitled to a demolition loss in the amount of $19,333.35, this being the difference between the portion of the original199 cost of the property to the corporation which had been allocated to the building, namely, $25,000, and the amount of depreciation which the corporation had deducted, $5,666.65. Here again, wholly aside from the question of the proper basis of the building in the hands of the petitioner, no deduction is allowable. It is well established that if a taxpayer purchases real estate improved with a building, which at the time he buys it he intends to demolish, or where the building is demolished for the purpose of making way for the erection of a new structure, or demolition is required as a condition to the acquisition of a valuable lease, the taxpayer is not entitled to deduct the basis of the building. Liberty Baking Co. v. Heiner (C.A. 3), 37 F. 2d 703; Commissioner v. Appleby's Estate (C.A. 2), 123 F.2d 700">123 F. 2d 700, affirming 41 B.T.A. 18">41 B.T.A. 18; Blumenfeld Enterprises, Inc., 23 T.C. 665">23 T.C. 665, affirmed per curiam (C.A. 9) 232 F. 2d 396; Estate of Clara Nickoll, 32 T.C. 1346">32 T.C. 1346, on appeal (C.A. 7). As stated in Commissioner v. Appleby's Estate, supra: "* * * Losses are recognized only when they result from a closed200 transaction. If a building is demolished because unsuitable for further use, the transaction with respect to the building is closed and the taxpayer may take his loss; but if the purpose of demolition is to make way for the erection of a new structure, the result is merely to substitute a more valuable asset for the less valuable and the loss from demolition may reasonably be considered as part of the cost of the new asset and to be depreciated during its life. * " The question of the deductibility of a demolition loss has usually arisen in cases where there has been a purchase by the taxpayer, whereas here the petitioner received the property as a dividend. However, this does not affect the basic question here involved. In Commissioner v. Appleby's Estate, supra, the property in question had been acquired by inheritance. We hold that the petitioner is not entitled to a deduction in 1953 on account of the demolition of the building at 108 East Main Street. We have held hereinabove that the corporation is not entitled to deduct a demolition loss as claimed. We also approve the respondent's disallowance of depreciation claimed by the corporation on the old building201 at 108 East Main Street for that portion of 1953 after the property was transferred to the petitioner. It follows that the corporation had no net operating loss for the year 1953 for the purpose of a carryback to the year 1952. Decisions will be entered under Rule 50. Footnotes1. Section 115 of the Internal Revenue Code of 1939 provides: (a) Definition of Dividend. - The term "dividend" * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. * * * (b) Source of Distributions. - For the purposes of this chapter every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. * * (j) Valuation of Dividend. - If the whole or any part of a dividend is paid to a shareholder in any medium other than money the property received other than money shall be included in gross income at its fair market value at the time as of which it becomes income to the shareholder.↩2. Section 115(n) of the Internal Revenue Code of 1939, as added by section 3 of Public Law 629, 84th Cong., 2d Sess. (53 Stat. 46) provides in part: (n) Certain Distributions in Kind. - (1) Notwithstanding any other provision of this section, a distribution of property by a corporation to its stockholders, with respect to its stock, shall be * * considered to be a distribution which is not a dividend (whether or not otherwise a dividend) to the extent that the fair market value of such property exceeds the earnings and profits of such corporation accumulated after February 28, 1913, and the earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions, except those described in subparagraphs (A), (B), and (C), of paragraph (3), made during the taxable year) without regard to the amount of the earnings and profits at the time the distribution was made. * * ↩3. Section 39.115(a)-2 of Regulations 118 provides in part as follows.. Earnings or profits. (a) In determining the amount of earnings or profits (whether of the taxable year, or accumulated since February 28, 1913, or accumulated before March 1, 1913) due consideration must be given to the facts, and, while mere bookkeeping entries increasing or decreasing surplus will not be conclusive, the amount of the earnings or profits in any case will be dependent upon the method of accounting properly employed in computing net income. For instance, a corporation keeping its books and filing its income tax returns under sections 41, 42, and 43 on the cash receipts and disbursements basis may not use the accrual basis in determining earnings and profits * *. The above provision was first incorporated in section 19.115-3 of Regulations 103 (under the Internal Revenue Code of 1939) by T.D. 5059 (July 8, 1941), 2 C.B. 125">1941-2 C.B. 125↩, and the same language continued in section 29.115-3 of Regulations 111.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622168/	THE CHRONICLE PUBLISHING COMPANY AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentChronicle Pub. Co. v. CommissionerDocket No. 18740-90United States Tax CourtT.C. Memo 1992-45; 1992 Tax Ct. Memo LEXIS 50; 63 T.C.M. (CCH) 1899; T.C.M. (RIA) 92045; January 27, 1992, Filed 50 An appropriate order will be issued denying petitioner's motion for reconsideration. Robert C. Livsey, for petitioner. Ann M. Murphy, for respondent. TANNENWALD, Judge. TANNENWALDMEMORANDUM OPINION This case is before us on petitioner's motion for reconsideration and revision of our opinion, 97 T.C. 445">97 T.C. 445 (1991). In that opinion, we directed our attention, in accordance with the arguments of the parties, to the issue of whether petitioner's clipping library fell within the category of "a letter or memorandum, or similar property" specified in section 1221(3)1 so as to constitute ordinary income property subject to the limitation of section 170(e)(1)(A). We held that it did fall within such category on the ground that it was a "corporate archive" under section 1.1221-1(c)(2), Income Tax Regs., and also rejected petitioner's contention that section 1221(3) did not apply to corporations.51 Petitioner's motion for reconsideration rests upon the contention that the clipping library is "property eligible for copyright protection" and is therefore similar to a copyright under section 1.1221-1(c)(1), Income Tax Regs. Petitioner therefore argues that the clipping library does not constitute an ordinary income asset because petitioner is not "a taxpayer whose personal efforts created such property" under section 1221(3)(A). Respondent objects to petitioner's motion on the ground that it raises a new issue which would require the submission of additional facts either by way of stipulation or trial. We stated in Alexander v. Commissioner, 95 T.C. 467">95 T.C. 467, 469 (1990): It is the policy of this Court to try all the issues raised in a case in one proceeding to avoid piecemeal and protracted litigation. The granting of a motion for reconsideration rests within the discretion of the Court, and will not be granted unless unusual circumstances or substantial error is shown. Vaughn v. Commissioner, 87 T.C. 164">87 T.C. 164, 166-167 (1986).Petitioner's motion clearly does not meet this standard. There is no suggestion that all of the facts to establish52 petitioner's present position were not available at the time the issue in respect of the clipping library was submitted fully stipulated under Rule 122. Nowhere in petitioner's briefs in the earlier proceeding is there any reference to its present substantive contention or to the possible application of section 1221(3)(A) or section 1.1221-1(c)(1), Income Tax Regs. Furthermore, the case which petitioner cites in support of its motion, Transamerica Corp. v. United States, 15 Cl. Ct. 420 (1988), was cited by petitioner in its earlier brief but for a totally different purpose. We think it clear that the submission of additional facts by way of stipulation or trial would be necessary in order for us to resolve the substantive issue raised by petitioner. Indeed, petitioner itself recognizes that this is the case when it asks us to reconsider and revise our opinion "with or without further trial". In this connection, we are aware that other issues remain to be tried. However, we think that this fact is irrelevant, since the legal issue, disposed of in our opinion, was severed from the other issues with the agreement of the parties. The severed issue must, therefore, 53 stand on its own feet. Under the circumstances herein, we think it was incumbent on petitioner, as a foundation for the issue it now seeks to raise, to have attempted to obtain an augmented stipulation of facts to accompany the Rule 122 motion or to insist on a trial. The long and short of the matter is that petitioner, not being satisfied with our decision, wants to try again. This we are not prepared to let petitioner do. See Koufman v. Commissioner, 69 T.C. 473">69 T.C. 473, 476-477 (1977). See also Chiquita Mining Co. v. Commissioner, 148 F.2d 306">148 F.2d 306, 310 (9th Cir. 1945). An appropriate order will be issued denying petitioner's motion for reconsideration. Footnotes1. 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.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622169/	MERRITT M. and MAUD L. WILLIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWillis v. CommissionerDocket No. 9568-76.United States Tax CourtT.C. Memo 1980-304; 1980 Tax Ct. Memo LEXIS 278; 40 T.C.M. (CCH) 934; T.C.M. (RIA) 80304; August 11, 1980, Filed 278 Held, petitioners are not entitled to a loss deduction for 1973. The loss, if any, occurred in 1971. Held,further, petitioners are entitled to a theft loss deduction in an amount determined by the Court. Merritt M. Willis and Maud L. Willis, pro se. Cynthia J. Olson, for the respondent DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: Respondent determined a deficiency of $1,165.88 in petitioners' income tax for the taxable year ended December 31, 1973. Due to petitioners' concession, the issues for decision are: (1) Whether petitioners are entitled to a loss deduction for 1973 in connection with the disposition of certain salvaged building materials; and (2) Whether petitioners are entitled to a theft loss deduction for 1973 in any amount greater than the $190 allowed by respondent. FINDINGS OF FACT Some of the facts have been stipulated and, subject to an exception hereinafter noted, they are so found. The stipulated facts, together280 with the exhibits attached thereto, are incorporated herein by this reference. Petitioners Merritt M. Willis (hereinafter Merritt) and Maud L. Willis (hereinafter Maud) were husband and wife during the taxable year 1973. Petitioners were divorced in 1975. At the time the petition in the instant case was filed, Merritt resided in Carson City, Nev., and Maud resided in Reno, Nev.Merritt and Maud lived separately during 1973 and originally each filed a separate return for the taxable year 1973. Subsequent to filing separate returns, petitioners filed an amended joint income tax return for 1973. In 1968 Merritt purchased two houses (but not the underlying land) from the State of Nevada at a nominal cost (approximately $30 each) with a view to demolishing them and salvaging the building materials. These houses were situated on the right-of-way of the soon-to-be-constructed Interstate 80 highway. Merritt acquired the houses for the purpose of using the building materials for the construction of rental properties. At that time petitioners owned other rental properties. The building materials consisted of bricks, lumber, toilets, bathtubs, and washbasins. Shortly after281 he purchased the two houses, Merritt had the houses demolished and had the salvaged building materials transported to a residence in Reno, Nev. (hereinafter Reno residence), then shared by petitioners. Merritt intended to store the building materials at the Reno residence until he could use them. Subsequently in 1968 petitioners separated and Merritt moved to Carson City, Nev. Maud continued to live at the Reno residence at which the building materials were stored. After the separation Merritt moved approximately one-fourth of the building materials from the Reno residence. The remaining three-fourths stayed on the property. In April 1971 a document entitled "Notice to Owner of Hazardous and Unsanitary Conditions" and addressed to Merritt at the Reno residence was sent by the Washoe CountyNevada Building and Safety Department. This notice required the removal of the salvaged building materials from the Reno residence. Maud received the notice. Although he no longer lived at the Reno residence, Merritt saw the notice. 1282 On April 30, 1971, Maud filed a motion in the Nevada State District County for authority to dispose of the salvaged building materials. At that time petitioners were apparently engaged in divorce proceedings. The motion was granted by the Washoe County District Court by order dated April 30, 1971. Both Maud and Merritt were represented by attorneys in this proceeding. Following the District Court's granting of her motion, during 1971 Maud disposed of all of the salvaged building materials located at the Reno residence. The lumber was sawed and used for firewood at the Reno residence. The remaining materials were either given away or transported to a local dump. Petitioners had a basis of $1,910 in the materials disposed of by Maud. In August 1973 Merritt's residence was burglarized. The items listed below, alongside of which are listed the values assigned thereto by Merritt, were stolen: ItemValue4 suits$401 overcoat601 power saw301 $10 gold piece2001 power drill101 pocket watch501 wristwatch156 blankets241 rug pad101 Mexican nude painting401 automatic 22 caliber pistol401 butane torch and tank51 Polaroid camera252 butcher knives51 Hoover vacuum cleaner402 Carson City silver dollars201 dollar bill (silver certificate)1$615283 On his originally filed separate return for 1973, Merritt deducted $955 as a long term capital loss as a result of the disposition of the salvaged building materials. This amount was calculated as being his one-half share of the approximate total cost of the community property disposed of by Maud. A similar deduction was not claimed by Maud on her separate return. On their amended joint return for 1973, petitioners deducted $1,910 ($955 X 2) as a long term capital loss. Also on his separate return for 1973, Merritt claimed a theft loss of $515 ($615 value less $100 limitation). This deduction was also claimed on the amended joint return. In the statutory notice of deficiency, respondent determined that no capital loss deduction was allowable since it had not been established that any deductible loss was sustained during the taxable year. It was also determined that a theft loss in excess of $190 ($290 less $100 limitation) had not been established. OPINION Prior to a discussion of the substantive issues involved herein, we first address a procedural matter. Despite petitioners having filed an amended joint income tax return prior to the issuance of the statutory notice284 of deficiency, respondent in that notice (which was a joint notice) computed the deficiency in tax by using as a starting point the taxable income reported by Merritt on his separate return for 1973. 2 To this was added the income reported by Maud and the deductions claimed by her were subtracted.In addition the adjustments made to Merritt's reported income which are here in dispute were added back to arrive at joint taxable income. Although it would seem logical to compute the joint deficiency by reference to the amended joint return, we cannot say that respondent's method was improper. There is no legal requirement that respondent use the figures contained in the amended joint return in determining the amount of the deficiency. The notice of deficiency clearly informs petitioners of the deficiency amount and the adjustments made. While petitioners may285 have justifiably been confused, there is no assertion that petitioners were in any way misled or misinformed. We have checked the notice of deficiency and have concluded that it accurately reflects the same joint taxable income as would be arrived at by starting with the joint return and making the same adjustments that were made in the notice of deficiency. While we do not recommend that respondent issue notices of deficiency computed in a manner that might be confusing to both the taxpayers and the Court, we conclude that petitioners received a valid notice of deficiency. The first substantive issue for decision is whether petitioners are entitled to a loss deduction for 1973 in connection with the disposition of salvaged building materials. We agree with respondent's determination that petitioners are not entitled to any such loss. In 1968 Merritt obtained at a cost of approximately $2,600 certain building materials which he stored at a residence he then shared with Maud. Merritt intended to use the materials to construct additional rental properties. At that time petitioners already owned a number of rental properties. Subsequent to the acquisition of the building materials, 286 Merritt and Maud separated and Merritt moved out of the residence at which the materials were located. Merritt later removed approximately one-fourth of the building materials to another place. The parties agree that petitioners had a basis of $1,910 in the materials which were not moved. In 1971, following receipt of both a notice from the county building and safety department to remove the building materials and an authorization from the county district court to remove the materials, Maud disposed of all of the salvaged building materials. Some of the materials were thrown away, some were given away, and some were retained by Maud for her personal use. No money was received for any of the disposed of materials. It is petitioners' claim that the foregoing disposition of the building materials gave rise to a deductible loss for 1973 because that was the year in which he discovered that the materials were missing. Even assuming that this disposition could give rise to a trade or business loss deduction under section 165, I.R.C. 1954, 3 it is clear that 1971 not 1973 would be the proper year in which to claim any loss. 287 A loss under section 165 is allowable only for the year in which the loss is sustained. "[A] loss shall be treated as sustained during the taxable year in which the loss occurs as evidenced by closed and completed transactions and as fixed by identifiable events occuring in such taxable year." Sec. 1.165-1(d)(1), Income Tax Regs. Disposition of all the building materials by Maud in 1971 was the identifiable event which fixed any "loss." Although Merritt seemingly recognizes that 1971 was the proper year in which to claim a deduction, he raises two points in support of the deduction in 1973. The first point is that he only became aware in 1973 of the 1971 disposition of the building materials. While the record is anything but clear as to whether Merritt knew in 1971 that the materials were disposed of, this fact is unimortant in determining when any loss would be deductible. Unlike a theft loss which is deductible in the year in which a taxpayer discovers the theft, sec. 165(e), a loss of the type at issue herein is deductible during the year when those events288 which fix the loss occurred. Sec. 1.165-1(d)(1), Income Tax Regs.; Montgomery v. Commissioner,65 T.C. 511">65 T.C. 511 (1975). On the facts of this case, the events fixing the loss occurred when the materials were disposed of in 1971. Merritt's second point in support of the deduction in 1973 is that he was originally told by an agent of respondent that rather than reopening a just-completed audit of his 1971 income tax return, it would be preferable to take the deduction in 1973. It was only after the statute of limitations precluded filing an amended return for 1971 that Merritt was told he could not take the deduction in 1973. Even if Merritt's testimony is true, it is of no help to petitioners case since respondent would not be bound by the misadvice of his agents. See Neri v. Commissioner,54 T.C. 767">54 T.C. 767 (1970). Accordingly we conclude that petitioners are not entitled to any loss deduction in 1973 as a result of the 1971 disposition of the salvaged building materials.The issue remaining for decision is whether petitioners are entitled to any theft loss deduction in excess of the $190 amount allowed by respondent, a question289 on which petitioners have the burden of proof. Rule 142(a), Tax Court Rules of Practice and Procedure. There is no dispute that in 1973 Merritt's residence was burglarized and that the items set forth in the findings of fact were stolen. The dispute concerns establishing the fair market value of and Merritt's basis in those items as of the date of the theft, a deduction being allowed only for the lesser of fair market value or basis. Sec. 1.167-7(b)(1), Income Tax Regs.Direct evidence was not introduced at trial by respondent concerning how it was determined that Merritt had a $290 theft loss and an allowable deduction of $190. Apparently, respondent obtained the $290 figure from the theft report filed by Merritt with the police immediately after the theft was discovered. Merritt testified that this report was inaccurate in that it did not include all the property stolen since it took him some time to accurately identify those items. While the principal evidence in support of the claimed theft loss was Merritt's testimony, we found that testimony to be candid and forthright on this issue. The values ascribed to the stolen items were reasonable. 290 Based on the evidence presented and using our best judgment, Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (2d Cir. 1930), we conclude, after allowing for the section 165(c)(3) limitation of $100, that petitioners are entitled to a theft loss deduction in the amount of $347. The following is the basis for the allowed deduction: ItemLesser of FMV or BasisSuits$40 (FMV)Overcoat60 (FMV)Power saw30 (FMV)$10 gold piece50 (Basis)Power drill10 (FMV)Pocket watch50 (FMV)Wristwatch15 (FMV)Blankets24 (FMV)Rug pad10 (FMV)Painting40 (FMV)Pistol40 (FMV)Torch & tank5 (FMV)Camera25 (FMV)Knives5 (FMV)Vacuum40 (FMV)Silver dollars2Dollar bill1 (FMV)$447Decision will be entered under Rule 155.Footnotes1. Contained in the stipulation of facts submitted into evidence was the stipulation that Merritt did not receive the notice referred to above because he no longer lived at the Reno residence. During trial, however, Merritt testified that he had received the notice. Accordingly, he have disregarded the stipulation. Jasionowski v. Commissioner,66 T.C. 312">66 T.C. 312, 317-18↩ (1976).2. The audit procedure which resulted in the issuance of the statutory notice apparently began as an audit of Merritt's separate return for 1973. Subsequent to initiation of this audit, petitioners decided to file an amended joint income tax return for 1973. This may explain why the deficiency was computed as it was.↩3. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable years in issue, unless otherwise noted. Sec. 165 provides in material part: (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. (b) Amount of Deduction.--For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property. (c) Limitation on Losses of Individuals.--In the case of an individual, the deduction under subsection (a) shall be limited to-- (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. A loss described in this paragraph shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100. For purposes of the $100 limitation of the preceding sentence, a husband and wife making a joint return under section 6013↩ for the taxable year in which the loss is allowed as a deduction shall be treated as one individual. No loss described in this paragraph shall be allowed if, at the time of the filing the return, such loss has been claimed for estate tax purposes in the estate tax return.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622170/	Estate of Florence Honigman, Deceased, Abraham Shlefstein, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Honigman v. CommissionerDocket No. 8327-73United States Tax Court66 T.C. 1080; 1976 U.S. Tax Ct. LEXIS 45; September 28, 1976, Filed 45 Decision will be entered for the respondent. Decedent gave her residence to her daughter, who lived in an apartment. The plan was that the residence would be sold, that the daughter would buy a new house, in which the decedent would reside, and that, pending the consummation of the foregoing, decedent would continue to live in the old residence. Contracts were made to sell the house. Decedent continued to live in the residence and died before the contracts were closed. Held, the old residence is includable in decedent's estate since she retained the possession or enjoyment thereof for a period which in fact did not end before her death. Sec. 2036(a)(1), I.R.C. 1954. Seymour Frank, for the petitioner.Peter W. Mettler, for the respondent. Tannenwald, Judge. TANNENWALD1080 Respondent determined a deficiency46 of $ 10,024.95 in the estate tax of Florence Honigman. The only issue before us is whether the value of a residence is to be included in the estate as a transfer subject to a retained interest under section 2036. 1FINDINGS OF FACTSome of the facts are stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.Abraham Shlefstein is the executor of the Estate of Florence Honigman, who died at the age of 56, a resident of Brooklyn, N.Y., on June 2, 1969. At the time the petition was filed, the executor also resided in Brooklyn. A Federal estate tax return was timely filed with the Internal Revenue Service in Brooklyn.Decedent's husband died in June 1968. Thereafter decedent owned and lived alone in their three-bedroom residence, in which she also carried on her employment as a bookkeeper. During the same period, decedent's daughter 47 lived with her own family in a small apartment. Decedent decided to give the residence to her daughter, who would have the option of selling 1081 or occupying it. Decedent did transfer the property to her daughter on April 2, 1969. In connection with this transaction, a Federal gift tax return was filed by the executor in 1970.Decedent's daughter and son-in-law decided to sell the residence, intending to reinvest the proceeds in a larger house which would contain a separate apartment for decedent. They persuaded decedent to live with them, despite her initial reluctance to do so. On April 10, 1969, decedent's daughter and son-in-law contracted to purchase such a new home. Title to this property was scheduled to pass on June 30, 1969, but the contract was canceled due to decedent's death.On May 9, 1969, decedent's daughter contracted to sell the residence she received from decedent. Decedent participated actively in the negotiations leading up to the contract of sale. Closing on this contract was scheduled for August 15, 1969, at which time the premises were to be "vacant and broom clean." Closing actually occurred on July 22, 1969.Decedent continued to live in the 48 house given to her daughter until she entered the hospital during her last illness. She continued to do her bookkeeping work there. It was the intent of decedent, her daughter, and her son-in-law that she occupy the residence until she moved into the planned new house. Decedent's daughter wanted her to stay in the house until it was sold, partly to prevent vandalism and for the convenience of the broker in showing the property to prospective purchasers. There were no other living quarters available to decedent had she vacated the residence before the new house was available. She paid no rent to her daughter and her estate paid telephone and utility bills on the property covering periods after April 2, 1969. Decedent's daughter paid the final insurance premium on the premises in October 1969.ULTIMATE FINDING OF FACTDecedent retained the possession or enjoyment of the residence which she gave to her daughter for a period which did not in fact end before her death.OPINIONThe facts of this case as set forth above are simple and virtually undisputed. The issue is whether those facts require 1082 the inclusion of the value of decedent's residence in her estate under section49 2036, which provides in pertinent part:SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.(a) General Rule. -- The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), 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 * * [Emphasis added.]This section is phrased in the alternative and requires property to be included in the decedent's estate if she retained the actual possession or enjoyment thereof, regardless of whether she had any enforceable right to do so. Possession or enjoyment is retained under a gift when there is an express or implied understanding to that effect among the parties at the time of the transfer. Guynn v. United States, 437 F.2d 1148">437 F.2d 1148 (4th Cir. 1971); Estate of Francis M. Hendry, 62 T.C. 861 (1974);50 Estate of Emil Linderme, Sr., 52 T.C. 305">52 T.C. 305 (1969). Although decedent's daughter testified that the decision to sell the house was taken after the gift, the evidence shows that these events must have been virtually simultaneous. The daughter and son-in-law contracted to buy a new residence just 8 days after the gift. At that time there was an express understanding that decedent would continue to occupy the old residence until living quarters were available in the new house. In any event, we conclude that there was at least an implied understanding at the time of the gift that decedent would live in the house until her daughter sold it. Petitioner attempts to avoid the impact of these facts by arguing that decedent's continued occupancy was solely for her daughter's benefit, i.e., to protect against vandalism and to assist in selling the property. Arguably such occupancy would not amount to a "retention" of possession or enjoyment by decedent; 2 but we are convinced by all the evidence that any benefits flowing to decedent's daughter were only peripheral consideration for decedent's continuing to live on the premises. Decedent's daughter never sought51 to occupy the property; the 1083 only use she ever intended to put it to was to sell it. All parties intended that until a sale occurred decedent would make her home and place of business there just as she had previously. Obviously this intention arose from practicality, affection, and common decency and would not have vanished in the absence of any incidental benefit to the daughter. The understanding between decedent and her daughter at the time of the gift constituted the retention of beneficial possession or enjoyment under the transfer, within the meaning of section 2036.It is undisputed that the house in question was decedent's actual residence up to the time of her death. This case therefore fits within the literal wording of the statute, requiring only that possession or enjoyment be retained by the decedent "for any period which does52 not in fact end before [her] death." The result appears harsh -- had decedent lived a few months longer and had events transpired as planned, there would probably be no argument that the house was includable in her estate 355 -- but, if dictated by the statute, it must be imposed. This Court has on several occasions noted, but not adopted, a possible interpretation of section 2036 which would permit us to hold for petitioner. Estate of Francis M. Hendry, 62 T.C. at 875-876; Estate of Ethel R. Kerdolff, 57 T.C. 643">57 T.C. 643, 649 (1972); Estate of Marie J. Nicol, 56 T.C. 179">56 T.C. 179, 183 (1971). In National Bank of Commerce in Memphis v. Henslee, 179 F.Supp. 346 (M.D. Tenn. 1959), the court determined that the corresponding provision (section 811(c)(1)(B) of the 1939 Code) required gifts to be included in a transferor's estate only when the facts showed that his possession, enjoyment, or right to income -- which in fact was retained until his death -- was intended at the time of the gift to endure for his lifetime. 4The District Court relied both on the legislative53 history of the Revenue Act of 1932 (S. Rept. No. 665, 72d Cong., 1st Sess., 1939-1 C.B. (Part 2) 496, 532) and on Treasury regulations interpreting the 1939 Code (sec. 81.18, Regs. 105, as amended by T.D. 5834, 1 C.B. 72">1951-1 C.B. 72, 81, par. 8(A)). We find the cited legislative history to be inconclusive and subsequent reenactments have not been accompanied by clarification of congressional intent on this issue. Significantly, respondent's regulations (sec. 20.2036-1(a), Estate Tax Regs.), 1084 which, insofar as this case is concerned, have been in effect since June 23, 1958 (see T.D. 6296, 2 C.B. 432">1958-2 C.B. 432, 499), no longer make intention a test of includability under section 2036. See also Estate of Francis M. Hendry, supra;Estate of Ethel R. Kerdolff, supra;Estate of Marie J. Nicol, supra.We note, however, that this Court's decisions under the 1939 Code held that the phrase "for any period which does not in fact end before his death" should be interpreted literally and rejected any*54 limitation on its application where the decedent's retained possession, enjoyment, or right to income might have ended before his death if it did not in fact do so. Estate of Robert Manning McKeon, 25 T.C. 697">25 T.C. 697, 704 (1956); Estate of Ambrose Fry, 9 T.C. 503 (1947). See Estate of Marie J. Nicol, supra.Although there is some indication in the legislative history that Congress was thinking of situations where the period of retention was such as to evidence an intention that decedent's possession or enjoyment should continue for his life (see S. Rept. No. 665, supra), the wording of section 2036 itself is clear and unambiguous and reflects no such qualification. Such being the case, we find ourselves unable to adopt a loose construction in order to aid this petitioner (see Lowndes, Kramer & McCord, Federal Estate and Gift Taxes 201-202 (1974)) -- a course which could open up a Pandora's box of litigation. 5 Accordingly, respondent must prevail.Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. Cf. Estate of Allen D. Gutchess, 46 T.C. 554 (1966); Estate of William H. Myers, T.C. Memo. 1968-200↩.3. Respondent does not argue that the gift was made in contemplation of death.↩4. The court found on the facts before it that such an intention did exist. See 179 F. Supp. at 352↩.5. "[Inquiries] into subjective intention, especially in intrafamily transfers, are particularly perilous." See United States v. Estate of Grace, 395 U.S. 316">395 U.S. 316, 323↩ (1969).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622171/	Achilles H. Kohn, Petitioner, v. Commissioner of Internal Revenue, RespondentKohn v. CommissionerDocket No. 24414United States Tax Court16 T.C. 960; 1951 U.S. Tax Ct. LEXIS 204; May 4, 1951, Promulgated 204 Decision will be entered under Rule 50. Petitioner acquired a mortgage by gift in 1930. In 1935 the mortgagor deeded the property to him on his agreement to pay taxes on the property then in arrears. The mortgagor, however, was not released from his personal obligation on the mortgage deed. Petitioner sold the property in 1944. Held, that the basis for determining gain or loss on the sale is the fair market value of the property when acquired by the petitioner in 1935, with proper adjustment for depreciation to the date of sale. Morris Back, Esq., for the petitioner.Robert M. Willan, Esq., for the respondent. LeMire, Judge. LeMIRE 961 OPINION.The respondent has determined a deficiency of $ 3,262.70 in petitioner's income tax for 1944. One of the two issues presented by the pleadings has been settled by stipulation. The remaining issue involves a loss deduction claimed on the sale of a parcel of improved real estate.The essential facts have been stipulated and are found as set out in the written stipulation.On December 12, 1930, petitioner acquired by gift from his mother a bond and mortgage on a parcel of real estate known as 2240 Cedar Avenue, 205 Bronx, New York, of $ 12,000 to secure a loan which she had made in 1930 to Beilin Service Corporation.On June 12, 1935, Beilin Service Corporation deeded the property to petitioner under an agreement whereby petitioner agreed to pay, and did pay soon thereafter, a tax arrearage against the property of $ 1,303.94, and the mortgagor was to be permitted to continue to occupy the premises at a rental of $ 35 per month. In acquiring title to the property petitioner incurred expenses and fees of $ 38.09.The property was conveyed to petitioner subject to the first mortgage which he then held and without any release of the mortgagor's obligation on the bond and mortgage. The deed of conveyance specifically provided that the mortgage was not intended to merge in the fee.The parties have stipulated that the bond and mortgage had a value when acquired by petitioner of $ 12,000 and that the property had a net value when deeded to the petitioner in 1935 of $ 10,000.On November 9, 1944, petitioner sold the property for $ 7,000, of which $ 2,500 was paid in cash and the balance by reducing the existing mortgage, which the purchaser assumed, to $ 4,500. In making the sale the petitioner paid206 broker's commissions and other expenses amounting to $ 552.75, making the net amount received by him $ 6,447.25.The parties further stipulated that if this Court should decide that the fair market value of the land and building when acquired by the petitioner in 1935, as adjusted by depreciation allowed or allowable, shall be the basis for measuring gain or loss on the sale in 1944, the amount of petitioner's loss on the sale is $ 389.42.The narrow question here presented is the basis for computing petitioner's loss on the sale of the Cedar Avenue property. The proper basis, as the parties agree, is the adjusted cost basis determined under section 113 (a), (b), Internal Revenue Code. The respondent has determined that this basis is $ 6,836.67, which is the fair market value of the property at the time petitioner acquired it from the mortgagor in partial satisfaction of the mortgage debt adjusted for depreciation allowed or allowable. Petitioner contends that the mortgage basis is 962 the amount of his donor's original $ 12,000 loan on the property, plus the taxes and incidental expenses up to the time he acquired title to the property. Petitioner used that basis, $ 12,000207 plus taxes, for computing depreciation deductions on the property in his returns for the years 1935 to 1944.Petitioner contends that there was no closed transaction with respect to the mortgage loan which his mother made on the property until he sold the property in 1944.Ordinarily, a taxpayer who, by mortgage foreclosure or by voluntary conveyance, acquires title to property securing the mortgage loan reduces the indebtedness by the amount of the fair market value of the property so acquired and is entitled to charge off the balance of the mortgage indebtedness as a bad debt owing to the extent that it is shown to be uncollectible. See Bingham v. Commissioner, 105 F. 2d 971; Commissioner v. Spreckels, 120 F.2d 517">120 F. 2d 517; and John H. Wood Co., 46 B. T. A. 895. The basis for computing gain or loss upon a subsequent sale of the property is its fair market value when so acquired, adjusted to the date of sale.The petitioner argues that the rule of these cases is not applicable where, as here, the mortgage obligation is not satisfied or extinguished at the time the property is acquired. *208 There is no merit in that contention. The unsatisfied portion of the mortgage obligation continues as an unsecured debt of the mortgagor. It can be deducted, as a bad debt, only in the year when it becomes worthless. See section 23 (k) (1), Internal Revenue Code. The evidence before us does not show when the debt in question became worthless and petitioner does not claim any bad debt deduction.The respondent is sustained on his adjustment of the deduction claimed.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622173/	The Electric Auto-Lite Company v. Commissioner.Electric Auto-Lite Co. v. CommissionerDocket No. 111986.United States Tax Court1943 Tax Ct. Memo LEXIS 165; 2 T.C.M. (CCH) 560; T.C.M. (RIA) 43371; August 4, 1943165 Theodore Pearson, Esq., for the petitioner. Lawrence R. Bloomenthal, Esq., for the respondent. STERNHAGEN Memorandum Opinion STERNHAGEN, Judge: A deficiency for 1939 of $465.78 income tax and $289.66 declared value excess profits tax was determined by the Commissioner as a result of three adjustments. The taxpayer assails only the disallowance of a deduction of $30,006.25 taken by the taxpayer as a capital loss in the sale of all the shares of Marko Storage Battery Corporation to USL Battery Corporation, of which it owned all the shares. The facts are all contained in a stipulation. The petitioner is a corporation with its principal office in Toledo, Ohio, where it filed its 1939 income tax return. Until December 15, 1939, the date of the sale here in question, it owned all the shares of Marko Storage Battery Corporation, which had manufactured and sold storage batteries. This it ceased to do in 1935, and in 1936 it rented its machinery and equipment. USL Battery Corporation was incorporated in New York in 1928, and in 1939 all its shares were owned by the petitioner. It, too, manufactured and sold storage batteries. The stipulated basis to petitioner of the Marko shares was $158,978.80. 166 They were sold on December 15, 1939, to USL for $128,972.55. This was no less than fair market value, and it is not disputed that the sale was actuated by legitimate business considerations and that it was not a sale intended to accomplish a tax deduction or in any way actuated by a tax-saving motive. Neither Marko nor USL had been created or used as a tax-saving device. The Commissioner's disallowance of the loss is defended principally on the authority of . But that case involved what the Court thought to be a sham device of an individual for the effectuation of tax-advantageous transactions which were otherwise without substance. We think it may not be regarded as a direction to disallow the present loss, which was, so far as we can see or are told, a bona fide business transaction, the tax consequences of which were incidental to its purpose. In the year 1939, consolidated returns of affiliated corporations such as these were not required or permitted; and if the result in 1939 of the present sale of the Marko shares were to be ignored for tax purposes, it is hard to see what future transaction will be recognized *167 as the occasion when as to this taxpayer the effect is to be felt. The disallowance of the deduction of the $30,006.25 is reversed. Since other adjustments are not assailed, Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622174/	DEAN HOWARD SHAW, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentShaw v. CommissionerDocket No. 6688-73.United States Tax CourtT.C. Memo 1975-365; 1975 Tax Ct. Memo LEXIS 6; 34 T.C.M. (CCH) 1577; T.C.M. (RIA) 750365; December 24, 1975, Filed Dean Howard Shaw, pro se. George W. McDonald, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined a deficiency in petitioner's Federal income tax for the taxable year 1968 in the amount of $2,222. The sole issue involved is whether the net operating loss of $12,975.45 sustained by petitioner for the taxable year 1971 must be reduced for personal exemptions and nonbusiness deductions in allowing it as a deduction in the taxable year 1968. FINDINGS OF FACT Petitioner filed his Federal income tax return for the taxable year 1968 with the "Internal Revenue District at Ogden, Utah." He was a resident of Fullerton, California when he filed his petition. Petitioner claimed a net operating loss of $12,985.45 for the taxable year7 1971. The return for 1971 contained a mathematical error $10of; therefore, the loss sustained in that year was $12,975.45. On his Federal income tax return for that year he claimed personal exemptions totaling $1,350 and claimed nonbusiness deductions totaling $6,414.31. During 1971 he received nonbusiness income of $284.36. The return for 1971 was audited by the Internal Revenue Service and the sole adjustment made was to correct the $10 mathematical error. Petitioner sought the advice of the Internal Revenue Service in preparing Form 1045, which is prescribed for use by taxpayers other than corporations in claiming a tentative carryback adjustment under section 6411 of the Internal Revenue Code of 1954. Petitioner found the instructions for preparation of Form 1045 confusing. He discovered that the employee of the Internal Revenue Service was also confused but petitioner prepared the Form 1045 as best he could. The Commissioner, in his statutory notice of deficiency, reduced the amount claimed as the net operating loss carryback deduction for personal exemptions and nonbusiness deductions, offset by nonbusiness income. OPINION Petitioner does not contest8 the correctness of the adjustment made by the Commissioner. He concedes that it is authorized by law. He contends, however, that it is unfair because he relied upon the advice of the Internal Revenue Service in preparing the Form 1045 to claim the tentative refund. We believe the testimony of petitioner. We believe that he acted in good faith and we find it commendable for him to seek the assistance of the Internal Revenue Service in preparing Form 1045. At a time when taxpayers are encouraged by the Commissioner to seek the assistance of the Internal Revenue Service in the preparation of their returns it may appear to petitioner, and we can appreciate his viewpoint, unfair that erroneous advice by the Internal Revenue Service is not binding on the Commissioner of Internal Revenue. The law is, however, well-settled. Darling v. Commissioner,49 F.2d 111">49 F.2d 111, 113 (4th Cir. 1931), affg. 19 B.T.A. 337">19 B.T.A. 337 (1930), cert. denied 283 U.S. 866">283 U.S. 866 (1931); Alfred Fortugno,41 T.C. 316">41 T.C. 316, 323-324 (1963), affd. 353 F.2d 429">353 F.2d 429 (3d Cir. 1965). 1 From the standpoint of fair play, therefore, we must regrettably hold for respondent. *9 Decision will be enteredfor the respondent.Footnotes1. James M. Ferguson,T.C. Memo 1974-244">T.C. Memo 1974-244↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622175/	L. M. Steiner and Harriet T. Steiner, Petitioners, v. Commissioner of Internal Revenue, RespondentSteiner v. CommissionerDocket No. 51187United States Tax Court25 T.C. 26; 1955 U.S. Tax Ct. LEXIS 79; October 17, 1955, Filed 79 Decision will be entered for the respondent. Petitioners underestimated their income tax liability for 1950 by more than 20 per cent. The increase in tax over the estimated amount was caused by the declaration of an unexpected dividend on December 26, 1950. Held, petitioners' declaration of estimated tax for 1950 was not computed on the basis of facts shown on their return for 1949 and petitioners are liable for the addition to tax of 6 per cent for substantial underestimation of tax imposed by section 294 (d) (2), 1939 code. Robert J. Johnson, Esq., for the petitioners.Thomas A. Steele, Jr., Esq., for the respondent. Withey, Judge. WITHEY26 OPINION.Respondent determined a deficiency of $ 305.78 in the income tax of petitioners for 1950 and an addition to tax of $ 1,308.36 under section 294 (d) (2) of the Internal Revenue Code of 1939.The petitioners concede the correctness of the deficiency in tax determined by respondent. They also concede that if they were liable for an addition to tax under section 294 (d) (2) then the amount thereof as determined by respondent81 is correct. This leaves for determination only the question of whether the petitioners were liable for an addition to tax under section 294 (d) (2).All of the facts have been stipulated and are found accordingly.Petitioners filed their joint income tax returns for 1949 and 1950 with the collector of internal revenue at St. Paul, Minnesota.Petitioners' 1949 income tax return disclosed adjusted gross income in the amount of $ 157,175.88, deductions of $ 20,800.88, net income in the amount of $ 136,375, and a tax liability of $ 66,667.75. The computation of petitioners' income tax for 1949 reflected net long-term capital gain in the amount of $ 18,243.42, resulting from the sale of 2,801 shares of stock in American Linen Supply Company, sometimes hereinafter referred to as American Linen.Petitioners filed their joint declaration of estimated tax for 1950 with the collector of internal revenue at St. Paul, Minnesota, showing an estimated tax liability of $ 63,143.78 for the year. This estimate 27 of tax was based on estimated adjusted gross income of $ 137,251.86, deductions totaling $ 10,800.88, and net income of $ 126,450.98. In estimating their gross income for 1950, 82 petitioners subtracted from their adjusted gross income for 1949 the sum of $ 18,243.42, representing net long-term capital gain realized from the sale of the American Linen stock in 1949, and $ 1,680.60, representing dividends received on such stock for that year. Petitioners made the foregoing adjustments in estimating their tax for 1950 because they did not anticipate any further disposition of stock or other capital assets during 1950 and they believed they were entitled to eliminate nonrecurring items in making such estimate.Petitioners estimated withholdings on salary at $ 3,351.60, leaving a balance of $ 59,792.18 to be paid on their estimated tax for 1950. Quarterly installment payments were made on their estimated tax for 1950 as follows:Mar. 15, 1950$ 14,948.04June 15, 195014,948.04Sept. 11, 195014,948.04Jan. 11, 195114,948.06Total$ 59,792.18During 1949 and 1950 petitioner L. M. Steiner was a vice president and a director of American Linen. Throughout 1950 he owned 14,491 shares of stock in American Linen and petitioner Harriet T. Steiner owned 9,596 shares of stock in that corporation. Further, throughout 1949 and 1950 L. M. Steiner was83 the beneficiary of one-half the income of the Jess McIvor Steiner Trust and one-half the income of the Frank M. Steiner Trust. He also was co-trustee of each of the aforementioned trusts. The principal asset of each trust was stock in American Linen. During 1950 petitioner received distributions of the income of these trusts totaling $ 104,932.17.In 1949 American Linen paid 4 quarterly dividends of 30 cents per share. Petitioners reported dividend income in the amount of $ 30,920 on their return for 1949. In 1950 American Linen paid quarterly dividends of 30 cents per share on the following dates: January 5, 1950, April 5, 1950, July 5, 1950, and September 5, 1950. In addition, it paid a further dividend of 30 cents per share on December 26, 1950. The payment of the latter dividend increased petitioners' income for 1950 by $ 28,872.90. If the additional dividend had not been paid, petitioners' net income as reflected on their final return would have been $ 125,345.09, a lower amount than the net income of $ 126,450.98 used by them in preparing their declaration of estimated tax for 1950.No amended declaration of estimated tax for 1950 was filed.Petitioners' income tax return84 for 1950 was filed on March 15, 1951. It disclosed a tax liability of $ 84,976.32, of which $ 3,683.86 was reported 28 as paid by withholding and $ 59,792.18 by payments on the declaration of estimated tax. Payment of $ 21,500.28 was made at the time the return was filed.Concededly, petitioners' correct tax liability for 1950 was $ 85,282.10. Eighty per cent of that amount, or $ 68,225.68, is $ 4,749.64 in excess of petitioners' estimated tax payments increased by credits for actual withholdings totaling $ 63,476.04.Petitioners' failure to meet the 80 per cent requirement of section 294 (d) (2) was not caused by the increase in normal tax and surtax rates on individuals imposed by the Revenue Act of 1950.Petitioners take the position that the declaration of estimated tax for 1950 was computed "on the basis of the facts shown on * * * [their] return for the preceding taxable year," within the meaning of section 294 (d) (2) of the 1939 Code and that, accordingly, the addition to tax imposed under that section is not applicable.Section 58 (a) of the 1939 Code imposes upon taxpayers a duty to file a declaration of estimated tax under specified circumstances. 186 Although 85 the essential contents of the declaration of estimated tax are specified in section 58 (b) of the 1939 Code, the taxpayer is free to compute his estimated income tax liability in any manner he sees fit. 2 If, however, his correct tax liability exceeds the estimated tax by more than 20 per cent, section 294 (d) (2) provides for the imposition 29 of a 6 per cent addition to tax. 3Section 294 (d) (2) gives the taxpayer the privilege of computing his estimated tax on the basis of facts shown on his income tax return for the preceding taxable year, in which event the addition to tax for substantial underestimation of tax does not apply.87 In support of their position, petitioners contend that the computation of their estimated tax for 1950 was based upon the amount of adjusted gross income reported in their return for 1949 and, further, that the sale of the American Linen stock, likewise reported on their return for 1949, created a nonrecurring type of income which may be disregarded in computing the estimated tax for 1950. We cannot agree with petitioners' contentions. We do not think that by use of the language, "on the basis of the facts shown on his return for the preceding taxable year," Congress meant to include every inference which might be drawn from information reported on the return. It is our opinion that the phrase "facts shown on his return for the preceding taxable year," as used in section 294 (d) (2), means the elements which enter into an income tax computation, such as income, deductions, gains, losses, exemptions, marital status, credits, etc., rather than the refinements of transactions giving rise to these particular items.We believe petitioners' action in failing to amend their 1950 declaration of estimated tax or file their final return in lieu thereof by January 15, 1951, even though they88 knew before January 15 of the following year that it did not properly reflect their full taxable income, had the effect of violating the provisions of section 58 (a) and (d) of the 1939 Code, thereby placing them outside the section 294 (d) (2) exemption provision. Regardless of the fact that the two sections of the 1939 30 Code were adopted at different and rather widely separated times, they are nevertheless, in part at least, concerned with the same subject matter, i. e., the filing of declarations of estimated tax, and must, therefore, be read together. It is true that Congress has by these provisions made it mandatory that an estimation of tax be filed but that its provisions for the filing of amendments thereto are permissive. Yet, we think that the two acts, read from their four corners, and read together with respect to like subject matter, require the conclusion that a taxpayer must estimate as nearly accurately as he reasonably can the income taxes to be levied and assessed against him for any given year and that should he find during a tax year that his original declaration does not reflect the tax upon his full income it is the intent of Congress that 89 he shall amend his declaration so as to do so. The main and primary "fact" with which Congress was concerned in the above-quoted phrase from section 294 (d) (2) was, was all of the taxable income reasonably known to petitioners throughout the tax year used in the computation of their estimated tax? An estimation of tax based upon less than all such income is in direct contravention of Congressional intent. Indeed, Congress has provided a penalty for so doing if, as here, the estimated tax falls below 80 per cent of the actual tax liability and a construction of the statutes here involved which permits escape of penalty when less than all known income is used in the computation of the tax estimate vitiates and emasculates the provisions of the 1939 Code with respect to the entire subject matter of declarations of estimated tax. We think petitioners were not bound to include in their computation of 1950 estimate items of 1949 income which they peculiarly knew would not recur, but, in so doing, they took themselves out from under the provisions of section 294 (d) (2) and therefore we think they were obligated to amend their estimate or file their tax return on or before January90 15 of 1951 when they concededly knew that their declaration of estimated tax as filed did not reflect all of their income for 1950. So far as appears from this record, their 1949 income tax computation was based upon all of their 1949 taxable income. That is the factual basis of their 1949 computation of income tax which they failed to use in the computation of their declaration of estimated tax for 1950.Decision will be entered for the respondent. Footnotes1. SEC. 58. DECLARATION OF ESTIMATED TAX BY INDIVIDUALS.(a) Requirement of Declaration. -- Every individual (other than an estate or trust and other than a nonresident alien with respect to whose wages, as defined in section 1621 (a), withholding under Subchapter D of Chapter 9 is not made applicable) shall, at the time prescribed in subsection (d), make a declaration of his estimated tax for the taxable year if -- (1) his gross income from wages (as defined in section 1621) can reasonably be expected to exceed the sum of $ 4,500 plus $ 600 with respect to each exemption provided in section 25 (b); or(2) his gross income from sources other than wages (as defined in section 1621) can reasonably be expected to exceed $ 100 for the taxable year and his gross income to be $ 600 or more.↩2. SEC. 58. DECLARATION OF ESTIMATED TAX BY INDIVIDUALS.(b) Contents of Declaration. -- In the declaration required under subsection (a) the individual shall state -- (1) the amount which he estimates as the amount of tax under this chapter for the taxable year, without regard to any credits under sections 32 and 35 for taxes withheld at source;(2) the amount which he estimates as the credits for the taxable year under sections 32 and 35; and(3) the excess of the amount estimated under paragraph (1) over the amount estimated under paragraph (2), which excess for the purposes of this chapter shall be considered the estimated tax for the taxable year.↩The declaration shall also contain such other information for the purposes of carrying out the provisions of this chapter as the Commissioner, with the approval of the Secretary, may by regulations prescribe, and shall contain or be verified by a written statement that it is made under the penalties of perjury.3. SEC. 294. ADDITIONS TO THE TAX IN CASE OF NONPAYMENT.(d) Estimated Tax. -- * * * (2) Substantial underestimate of estimated tax. -- If 80 per centum of the tax (determined without regard to the credits under sections 32 and 35), in the case of individuals other than farmers exercising an election under section 60 (a), or 66 2/3 per centum of such tax so determined in the case of such farmers, exceeds the estimated tax (increased by such credits), there shall be added to the tax an amount equal to such excess, or equal to 6 per centum of the amount by which such tax so determined exceeds the estimated tax so increased, whichever is the lesser. This paragraph shall not apply to the taxable year in which falls the death of the taxpayer, nor, under regulations prescribed by the Commissioner with the approval of the Secretary, shall it apply to the taxable year in which the taxpayer makes a timely payment of estimated tax within or before each quarter (excluding, in case the taxable year begins in 1943, any quarter beginning prior to July 1, 1943) of such year (or in the case of farmers exercising an election under section 60 (a), within the last quarter) in an amount at least as great as though computed (under such regulations) on the basis of the taxpayer's status with respect to the personal exemption and credit for dependents on the date of the filing of the declaration for such taxable year (or in the case of any such farmer, or in case the fifteenth day of the third month of the taxable year occurs after July 1, on July 1 of the taxable year) but otherwise on the basis of the facts shown on his return for the preceding taxable year. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622176/	BASIC BIBLE CHURCH OF AMERICA, AUXILIARY CHAPTER 11004, HERBERT C. GRAF, APOSTLE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Basic Bible Church v. CommissionerDocket No. 23563-81 X.United States Tax CourtT.C. Memo 1983-287; 1983 Tax Ct. Memo LEXIS 504; 46 T.C.M. (CCH) 223; T.C.M. (RIA) 83287; May 24, 1983. Herbert C. Graf, for the petitioner. 505 Virginia C. Schmid, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: Respondent determined that petitioner is not exempt from Federal income tax under section 501(c)(3). 1 As petitioner has exhausted its administrative remedies and filed its petition before the 91st day after respondent mailed his determination, petitioner has properly invoked the jurisdiction of the Court pursuant to section 7428. See section 7428(b)(2), (b)(3). The only issue for our decision is whether petitioner has established that it is an organization described in section 501(c)(3). FINDINGS OF FACT The case was submitted on a stipulated administrative record under Rules 122 and 217. 2 For purposes of this proceeding the Court has assumed that the facts contained in the administrative record are true. Rule 217(b). The stipulated record is incorporated herein by reference. Petitioner, Basic Bible Church of America506 (Chapter 11004), was organized prior to August 1978 under the name "Elohim Life Science Church." It is an unincorporated Wisconsin association with its principal meeting place in Oshkosh, Wisconsin. Petitioner has never filed an "Application for Recognition of Exemption," Form 1023, with the District Director, St. Paul, Minnesota. In letters dated July 25, 1978, and August 29, 1978, the District Director notified petitioner that it would have to submit information to determine whether petitioner met the requirements for exempt status as a religious organization under section 501(c)(3). By letter dated November 21, 1978, the Acting Regional Commissioner notified petitioner that an examination of its books and records would be necessary to determine (1) its initial and continuing qualification for exemption under section 501(c)(3), (2) whether it qualified as an organization to which contributions are deductible under section 170, and (3) the amount of tax, if any, to be imposed on the organization. Petitioner and respondent scheduled an examination date of January 24, 1979. However, a week before the appointed day, respondent received a letter from petitioner's pastor, Herbert507 C. Graf, which enclosed a number of church-related documents. Pastor Graf cancelled the scheduled meeting and stated: 1. This is to advise you that the undersigned is a Church personally and is a Church in connection [sic] with and in association with the Basic Bible Church of America. You will note that the Basic Bible Church of America is a tax exempt organization as is shown from a copy of the letter of tax exemption attached hereto dated April 18, 1974. Now, therefore, I trust that the above answers your inquiry and that it is sufficient to satisfy you that the undersigned as a Church personally is exempt from income taxes under Section (501(c)(3)) and that if there have been any taxes withheld or Social Security withheld that the same will be refunded. Mr. Graf enclosed several documents in his letter, including copies of (1) the Charter for Basic Bible Church of America (Chapter 11004), dated November 1, 1978; (2) an Apostle's Certificate, Basic Bible Church of America, given to Herbert C. Graf and signed by Jerome Daly, D.D., President, Basic Bible Church of America, Minneapolis, Minnesota, dated November 2, 1978; (2) a vow of poverty, dated November 2, 1978, signed508 by Herbert C. Graf and issued by Jerome Daly; (4) a letter of directions, dated November 1, 1978, addressed to Herbert C. Graf from Jerome Daly; (5) two certificates of ordination, dated November 1, 1978, of Herbert C. Graf as minister and bishop of Basic Bible Church, signed by Jerome Daly, Presiding Archbishop; (6) the Declaration of Independence, United States Constitution, and a brochure entitled "The Religions of the World;" (7) the original articles of incorporation of the Basic Bible Church of America in Minneapolis, Minnesota; and (8) an Internal Revenue Service determination letter issued to the Minneapolis, Minnesota, Basic Bible Church of America dated April 18, 1974. By letter dated January 18, 1979, the Internal Revenue Service again requested permission to examine petitioner's books and records. Petitioner responded on January 20, 1979, "[t]he books and records of The above named Church beyond what has already been sent to you will not be available for your inspection." On March 16, 1979, the Internal Revenue Service issued a summons to petitioner for information regarding its organization and operations. Petitioner did not respond to the summons. On December 24, 1980, respondent509 notified petitioner of its initial determination that petitioner was not entitled to recognition as a tax exempt organization described in section 501(c)(3). Following petitioner's appeal of the determination, respondent notified petitioner of his final adverse determination by letter dated June 15, 1981, stating as grounds for his ruling: Even though we have sent you several requests for the information necessary to support your claim that your organization is described in I.R.C. § 501(c)(3), and even though you were ordered by the United States District Court for the Eastern District of Wisconsin to comply with an Internal Revenue Service summons seeking that information, we have not received the required information. As a result, we find that you have not established that your organization is of the kind described in section 501(c)(3). Petitioner's charter was executed by the following trustees: Herbert C. Graf (Pastor and Bishop of Chapter 11004), Mary L. Graf, Sherri L. Graf, Marc W. Graf, Matt W. Graf, and Jason L. Graf. The charter of Chapter 11004, Basic Bible Church of America provides that petitioner is organized as an auxiliary church of510 the Basic Bible Church of America at Minneapolis, Minnesota to carry on the doctrines and principles of the Minneapolis church. It further provides, interalia, that (1) Chapter 11004 is "organized primarily for religious, charitable, literary and educational purposes, exclusively;" (2) no part of its earnings will inure to the benefit of private shareholders or individuals; (3) the church will not, as a substantial part of its activities, attempt to influence legislation or participate in any candidate's campaign for public office; (4) chapter 11004 is not organized or operated for the benefit of private interests; (4) one of the purposes of the church is to receive contributions and pay them to organizations described in section 501(c)(3); (6) upon dissolution, the church will dispose of all its assets through organizations described in section 501(c)(3). The Court of Common Pleas in the county where the church is located shall dispose of any remaining church assets in like manner; (7) records and accounts of all church assets shall be maintained; and (8) Chapter 11004 "is not under the management, direction or control of the parent church and therefore the parent church511 is not liable for any debts, obligations, engagements entered into or liabilities of any kind or nature incurred by the auxiliary church," nor is the parent church under the control of chapter 11004. Likewise, petitioner is not liable for the debts and obligations of the parent church. Petitioner's theology is based on the principle that "each individual owns the right over his own life, that he owns no right over the life of anyone else, and that no one owns any right over his life." It supports the principle that, "the Citizen exists for the sake of himself, his family and those others whom he chooses [sic] by the exercise of his own free will." OPINION Section 501(a) provides an exemption from Federal income taxation for organizations described in section 501(c). In order to be exempt under section 501(c)(3), an organization must satisfy three requirements: (1) It must be organized and operated exclusively for an exempt purpose; (2) no part of its net earnings may inure for the benefit of any private shareholder or individual; and (3) no substantial part of its activities may include carrying on propaganda, otherwise attempting to influence legislation, or participating512 or intervening in any political campaign. Petitioner has the burden of proving that it is described in section 501(c)(3). Basic Bible Church v. Commissioner,74 T.C. 846">74 T.C. 846 (1980); Rule 217(c)(2)(i). Our decision must be based on the stipulated administrative record. Houston Lawyer Referral Service, Inc. v. Commissioner,69 T.C. 570">69 T.C. 570 (1978); Rule 217(a). Petitioner contends that it is a religious organization described in section 501(c)(3). It argues that merely claiming to be a church is sufficient for tax exempt status, and the Internal Revenue Service may not disregard its claim. Petitioner is in error. It is elementary that the granting of an exemption to a qualifying group is a matter of legislative grace rather than a constitutional right. Christian Echoes National Ministry, Inc. v. United States,470 F.2d 849">470 F.2d 849, 857 (10th Cir. 1972), cert. denied 414 U.S. 864">414 U.S. 864 (1973); Parker v. Commissioner,365 F.2d 792">365 F.2d 792 (8th Cir. 1966) affg. a Memorandum Opinion of this Court, cert. denied 385 U.S. 1026">385 U.S. 1026 (1967); Unitary Mission Church v. Commissioner,74 T.C. 507">74 T.C. 507 (1980), affd. 513 by unpublished opinion (2d Cir. 1981). An organization must demonstrate that it has satisfied the specific requisites of the statute in order to be entitled to exemption. Universal Life Church, Inc. v. United States,372 F. Supp. 770">372 F. Supp. 770, 775 (E.D. Ca. 1974). A mere allegation that a group is a religious organization described in section 501(c)(3) does not determine the issue. United States v. Toy National Bank, an unreported case ( N.D. Iowa, 1979, 43 A.F.T.R. 2d 79-954, 79-1 USTC P9344). We are satisfied that petitioner has not made such a showing in the instant administrative record. The providing of organizational documents alone does not aid the Court in determining whether petitioner's activities satisfy the operational test of section 501(c)(3) and section 1.501(c)(3)-1(c), Income Tax Regs. Yet, when the Internal Revenue Service requested further information through an examination of books and records, petitioner refused to cooperate. The inference we draw from petitioner's failure to submit its books and records for examination is that such facts would have denigrated petitioner's cause. Bubbling Well Church of Universal Love, Inc. v. Commissioner,74 T.C. 531">74 T.C. 531, 536 (1980),514 affd. 670 F. 2d 104 (9th Cir. 1981); Founding Church of Scientology v. United States,188 Ct. Cl. 490">188 Ct. Cl. 490, 498, 412 F.2d 1197">412 F.2d 1197, 1201 (1969), cert. denied 397 U.S. 1009">397 U.S. 1009 (1970), Parker v. Commissioner,supra.Without such facts we cannot assess whether petitioner's activities were in furtherance of an exempt purpose, its receipts and disbursements, its assets and liabilities, and to what end its net earnings, if any, were applied. Petitioner "simply must allow the government access to information in order to determine whether the church remains within the criteria for a lighter tax burden. United States v. Holmes,614 F.2d 985">614 F.2d 985, 989-990 (5th Cir. 1980). We hold that petitioner has not established that it is an organization which is organized and operated exclusively for exempt purposes within the meaning of section 501(c)(3). 3 Thus, we sustain respondent's determination. *515 To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the year in issue.↩2. All rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise provided.↩3. We note that the favorable determination letter issued to the Basic Bible Church of Minneapolis, Minnesota, a copy of which was included in the administrative record, applies only to the parent church. Thus, the exempt status of the Minneapolis, Minnesota, Basic Bible Church is of no help to petitioner. See Basic Bible Church v. Commissioner,74 T.C. 846">74 T.C. 846, 855-856↩ (1980).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622177/	APPEAL OF LEWIS-HALL IRON WORKS.Lewis-Hall Iron Works v. CommissionerDocket No. 3097.United States Board of Tax Appeals2 B.T.A. 788; 1925 BTA LEXIS 2263; October 5, 1925, Decided Submitted July 15, 1925. 2263 Chas. D. Hamel, Esq., and J. H. Amick, C.P.A., for the taxpayer. Blount Ralls, Esq., for the Commissioner. 788 Before STERNHAGEN, LANSDON, and LOVE. This appeal is from the determination of a deficiency in income and profits taxes in the amount of $6,039.36 for the fiscal years ended January 31, 1920, 1921, and 1922. The taxpayer alleges that the Commissioner erred (1) in disallowing certain payments as ordinary and necessary expenses; (2) in disallowing the deduction from the gross income of certain amounts paid for State, county, and municipal taxes on property owned by the taxpayer during the year 1921; (3) by including in the taxpayer's income for the year 1921 a profit realized from the sale of property in which the taxpayer had no beneficial interest; and (4) by adding accrued and unpaid interest due on a contract in which the taxpayer had no beneficial interest to the taxpayer's income for 1921. FINDINGS OF FACT. 1. The taxpayer is a Michigan corporation with its principal office in Detroit. It is engaged in the manufacture of fabricated steel for building purposes. During the years involved in this appeal all its common stock was2264 owned by Harry S. Hall and Henry B. Lewis in the proportion of approximately 47 to 53 per cent, respectively, and all the preferred stock outstanding was owned by Henry B. Lewis and his wife. 2. During the fiscal year ended January 31, 1920, the taxpayer expended $500 in payment for the services of speakers employed to address its employees at stated times. The taxpayer asserts and the Commissioner admits that such payments are deductible from gross income as ordinary and necessary expenses for the year in which they were made. 789 3. The taxpayer paid taxes to the State of Michigan, the County of Wayne, and the City of Detroit in the amount of $6,233.55 during the fiscal year ended January 31, 1921. The Commissioner admits and the parties agree that of such payments the amount of $5,026.97 is deductible from the taxpayer's gross income for the year in which it was paid, under the provisions of section 214(a)(3) of the Revenue Acts of 1918 and 1921. 4. For some time prior to September, 1919, Hall and Lewis were engaged jointly in the business of manufacturing motor trucks in Detroit. In September, 1919, the Lewis-Hall Motors Corporation was organized with Hall2265 and Lewis as officers and with common stock in the amount of $343,000 issued to them in the proportions of about 55 and 45 per cent, respectively. Much of the stock originally allotted to Hall and Lewis was afterwards sold to the public. 5. Some time in December, 1919, Hall, acting for himself and Lewis, secured an option on a certain parcel of real estate located in Detroit and paid therefor the amount of $1,000, which was advanced to him by the taxpayer. On February 18, 1920, he entered into a contract to purchase the said real estate of the Chicago Railway Equipment Co. for a consideration of $145,000. Under the terms of the contract Hall was to pay $50,000 in cash, this payment to include the $1,000 theretofore paid, and the remainder of the purchase price in 10 annual installments, with interest at the rate of 6 per cent annually. Hall never made any payments in discharge of the provisions of the contract. One of the provisions of the said contract is as follows: It is hereby understood and agreed that the interest of said party of the second part herein may [shall] be assigned by him to a corporation; and that upon such assignment such corporation shall be entitled2266 to all the rights, and assume all the liabilities of the second party hereunder. 6. On the same date, February 18, 1920, Hall executed the following assignment to the taxpayer: In consideration of the sum of One Dollar and other valuable considerations to me in hand paid, receipt whereof is hereby acknowledged, I hereby sell, assign and transfer to Lewis-Hall Iron Works, a Michigan Corporation, all my right, title, and interest in and to the within contract and the property therein described. Signed Harry S. Hall (LS) The Lewis-Hall Iron Works at the same time accepted the above assignment in the following terms: The Lewis-Hall Iron Works, a Michigan Corporation, the assignee abovenamed, does hereby accept the above assignment and covenant and agree to and with the Chicago Railway Equipment Company, an Illinois Corporation, parties of the first part to the within contract, in consideration of the foregoing assignment, to assume, perform, and carry out all the conditions and 790 obligations contained in the within contract to be performed and complied with by the said party of the second part thereto. 7. On the same date, February 18, 1920, the Lewis-Hall Iron2267 Works entered into contract to sell the real estate referred to above to the Lewis-Hall Motors Corporation for a consideration of $200,000. Except the names of the parties, this contract is substantially identical in terms with the contract between Hall and the Chicago Railwa y Equipment Co. On the same day the Lewis-Hall Motors Corporation issued its check in the amount of $50,000 to Lewis-Hall Iron Works as its first payment on the property so acquired, and the Lewis-Hall Iron Works issued its check in the amount of $49,148 to Hall, who immediately endorsed the same and paid it over to the Chicago Railway Equipment Co. as the balance of principal and interest due on the first payment provided for in the original sale contract. 8. Subsequent to February 18, 1920, the Lewis-Hall Motors Corporation became insolvent and was taken over by the Security Trust Co., of Detroit, as receiver in bankruptcy. Sometime in May, 1923, the said receiver sold the real estate in question for $215,000. From the proceeds of such sale the Chicago Railway Equipment Co. was paid $103,996.69, the balance of principal and interest due it under the terms of the original sales contract. Subsequent to*2268 the sale of the real estate in question by the receiver the Lewis-Hall Iron Works assigned all its interest in the proceeds of such sale to the First National Bank of Detroit, which thereby received the amount of $72,471.37 from such proceeds, which it used to extinguish the personal indebtedness of Hall and Lewis to it. 9. Resulting from its acceptance of the assignment of the sales contract between Hall and the Chicago Railway Equipment Co., the taxpayer was the owner of such contract, and the profit resulting from its sale of the real estate in question to the Lewis-Hall Motor Corporation was a part of its gross income for the year ended January 31, 1921. 10. The taxpayer realized no income during the year 1922 from interest accruals on the amounts due it from the Lewis-Hall Motor Corporation. DECISION. The deficiency should be computed in conformity with the foregoing findings of fact. Final settlement will be made on consent or on 10 days' notice, under Rule 50. ARUNDELL not participating.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622180/	WEST VIRGINIA-PITTSBURGH COAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.West Virginia-Pittsburgh Coal Co. v. CommissionerDocket Nos. 20337, 25030.United States Board of Tax Appeals24 B.T.A. 234; 1931 BTA LEXIS 1673; September 30, 1931, Promulgated 1673 1. Expenditures for additions to coal-mining machinery and equipment bought for the sole purpose of maintaining normal production are deductible as expenses of the year when purchased and installed. 2. The full value as of January 1, 1914, of the physical property and receivables acquired by the petitioner on May 1, 1912, together with the amount of cash then acquired, is includable in the invested capital of the petitioner for 1917. 3. The petitioner had no earned surplus at the beginning of the taxable year 1918 and made no distributions to stockholders from the date of its organization. Held that invested capital for 1918 based upon the cash value of the property at the time paid in for shares of stock should not be decreased by amounts in respect of depletion or depreciation alleged to have been sustained during prior years, nor by amounts in respect of taxes which had accrued for prior years. 4. A reduction in the amount of capital stock outstanding in 1915, without any distributions being made to the stockholders, did not operate to reduce invested capital. Sidney P. Simpson, Esq., and Wm. B. Hubbell, Esq., for the petitioner. John D. Foley,1674 Esq., for the respondent. SMITH 234 These proceedings were consolidated for hearing. The deficiencies asserted, together wih the amounts in controversy, are as follows: YearDeficiency Deficiency in assertedcontroversy1917$5,195.35$19,233.62191830,292.1021,570.7919191,525.36None.192090,777.7255,206.00192210,950.158,550.00138,740.60104,560.41The amount in controversy for 1917 is stated to be $19,233.62. The petitioner claims that if it is successful in its contentions before the Board the result for 1917 will be a refund of $14,038.27. No allegation of error is made with respect to the deficiency asserted for 1919. There are two primary issues involved, the first of which relates to the amounts allowable as invested capital for the years 1917, 1918, and 1920, and the second to income adjustments for the years 1917, 1918, 1920, and 1922. The claimed income adjustments result from 235 the action of the Commissioner in disallowing as deductions from gross income, on the grounds that they constituted additions to capital, certain expenditures made by the petitioner for items of coalmining1675 equipment which the petitioner contends did not increase the output or reduce the cost of operation or add to the value of the petitioner's mines. It is also claimed that the petitioner's net loss for 1921 was larger than the amount allowed by the Commissioner and that by virtue thereof it is entitled to a larger deduction from the net income of 1922 than has been allowed by the Commissioner. FINDINGS OF FACT. 1. The petitioner is a West Virginia corporation, organized January 8, 1912, having its principal corporate office at Wellsburg, Brooke County, W. Va., and an accounting office at Cleveland, Ohio, from which its tax returns for the years 1917 to 1922, inclusive, were filed. 2. On May 1, 1912, the petitioner acquired from Lewis-findley Coal Company, a West Virginia corporation, certain coal lands and other physical property of a value as of said date of $2,201,139, together with $93,619.16 in cash and miscellaneous assets and receivables of an aggregate value as of said date of $78,533.05, in consideration of the issuance of 14,900 shares of capital stock of the petitioner of a par value of $100 per share and the assumption by the petitioner of $1,000,000 face amount1676 of the outstanding bonds of the Lewis-Findley Coal Company and of miscellaneous unsecured debts of that company aggregating $54,029.01. 3. The actual cash value of the coal lands and other physical property so acquired by the petitioner on May 1, 1912, was on January 1, 1914 $2,170,064.42, and the actual cash value as of January 1, 1914, of the miscellaneous assets and receivables acquired by the petitioner on May 1, 1912, from the Lewis-Findley Coal Company was $78,533.05. 4. The petitioner on January 1, 1917, had an accumulated operating deficit of $311,600.62. 5. On January 13, 1915, the authorized capital stock of the petitioner was reduced to 10,000 shares having a par value of $100 per share. No cash or other assets of the petitioner were paid out or distributed to the stockholders of the petitioner in connection with or as a result of such reduction of capital stock. The transaction was accounted for on the books of the petitioner by reducing its capital stock account from $1,500,000 to $1,000,000 and by reducing its book investment in coal lands and equipment by $500,000. 6. No dividends were paid by the petitioner upon its capital stock from the time of its1677 organization to and including December 236 31, 1920, except one on August 31, 1920, in the amount of $100,000 and another on September 30, 1920, in the amount of $50,000. 7. In computing the invested capital of the petitioner for the taxable year 1918, the Commissioner decreased the amount at which the mining properties of the petitioner were to be included in invested capital by the amount of $115,003.69 in respect of depletion alleged to have been sustained by said mining properties from the time of their acquisition by the petitioner to and including December 31, 1917, the petitioner at the beginning of the year having an operating deficit. 8. In computing the invested capital for 1920, the Commissioner decreased the amount at which the mining properties of the petitioner were to be included in invested capital by the amount of $175,141.87 in respect of depletion alleged to have been sustained by the mining properties from the time of their acquisition by the petitioner to and including December 31, 1919. 9. In computing the invested capital of the petitioner for the taxable years 1918 and 1920, respectively, the Commissioner decreased invested capital by $96,199.131678 in respect of depreciation alleged to have been sustained on the depreciable property of the petitioner from the time of its acquisition to and including December 31, 1916. The petitioner had an operating deficit at January 1, 1918. 10. In computing the invested capital of the petitioner for 1918, the Commissioner decreased the invested capital by $17,176.90 in respect of income and profits taxes upon the petitioner for the taxable year 1917, thereby reducing invested capital below the original paid-in capital. 11. In computing invested capital for 1920, the Commissioner decreased invested capital by $893.51 in respect of income taxes upon the petitioner for the taxable year 1919, and by the amounts of $288,337.26 and $30,292.40, respectively, for additional income and profits taxes for the taxable years 1917 and 1918. 12. In determining the deficiencies shown in the notice of deficiency in Docket No. 20337, the Commissioner has allowed the petitioner as invested capital for 1917 the amount of $1,000,000, for the year 1918, $1,018,812.06, and for the year 1919, $1,092,373.63. 13. The petitioner operates in the "Panhandle" district of West Virginia. Since 1912 it has1679 owned and operated three coal mines, all of which are located in Brooke County, West Virginia, and all of which mine on the Pittsburgh vein. 14. The mines so owned and operated by the petitioner are known respectively as the Locust Grove Mine, the Gilchrist Mine, and the La Belle Mine. All of these mines are drift mines; that is, the outcrop occurs on a hillside so that the entries and workings can be 237 driven in horizontally instead of it being necessary to sink a vertical shaft down to the coal. The coal mined is high-volatile bituminous. 15. During the years 1917 to 1922, inclusive, the Locust Grove Mine had an output capacity of approximately 1,500 tons of coal per day; the Gilchrist Mine of approximately 800 tons of coal per day; and the La Belle Mine of approximately 700 tons of coal per day. 16. The normal daily output capacity of a mine is the productive capacity of the mine as demonstrated in actual production and as contemplated by the predesigned machinery and the equipment incident to the operation. 17. During 1917 the petitioner made the following expenditures for items of mine equipment: Steel rails$18,153.72Mining machines8,900.00Mine locomotives4,150.00Mules4,272.50Motors2,474.20Pumps2,003.20Pipe1,149.20Steel ties$585.00Trolley wire917.07Fans380.83Mine car - repair parts8,925.50Rotary converter5,250.0057,161.221680 18. All the above items of equipment purchased in 1917, and disallowed by the respondent as a deduction in that year, were purchased for the purpose of maintaining the normal daily production of the petitioner's mines and were actually installed in the petitioner's mines during the year 1917. None of this equipment was purchased for the purpose of increasing the normal output of the petitioner's mines or for the purpose of decreasing the cost of operation thereof. The installation of this equipment did not have the effect of increasing the normal output of the petitioner's mines nor of decreasing the cost of operation thereof. 19. The expenditure of $8,925.50 for "mine car repair parts" made during 1917 and disallowed by the respondent as a deduction in that year, was for mine car wheels and car repair parts, which were purchased to repair the petitioner's mine cars. They were used for that purpose during the year 1917, and were not used for the purpose of building new cars. 20. During 1918 the petitioner made expenditures for mine locomotives of $22,587. These expenditures were charged by the petitioner on its books to operating expense. The Commissioner has disallowed1681 these expenditures as deductions from gross income for the taxable year 1918, on the ground that they should have been capitalized. 21. These mine locomotives, purchased in 1918, the cost of which has been disallowed by the respondent as a deduction in that year, were purchased for the purpose of maintaining the normal production of the petitioner's mines and were actually installed and placed 238 in service in the petitioner's mines during the year 1918. They were necessary because of the increased length of haul consequent upon the advance of the working faces. They were not purchased for the purpose of increasing output or decreasing cost of operation, and their installation did not have the effect of increasing output or decreasing cost of operation. 22. Two 5-ton locomotives purchased by the petitioner in 1917 at a cost of $2,850, constituting part of the equipment charged by the petitioner to expense in that year and disallowed as a deduction by the respondent, were scrapped in 1918. 23. During 1920 the petitioner made the following expenditures for items of mine equipment: Mine cars$41,070.72Steel rails31,346.26Mining machines12,375.00Transformers3,416.04Mules7,197.94Motor$400.00Pumps2,904.30Self-starters791.5099,501.761682 These expenditures were charged by the petitioner on its books to operating expense. The respondent has disallowed these expenditures as deductions from gross income for the taxable year 1920 on the ground that they should have been capitalized. 24. The mine cars purchased in 1920 were purchased to take care of the increased length of haul consequent upon the advance of the working faces. The steel rails were purchased to extend the trackage facilities of the petitioner's mines as the working faces advanced, and to replace rails which had been worn out. The mining machines were purchased to take care of the cutting of the coal in the scattered territory opened up by the advancing working faces. The transformers were purchased for installation in additional substations which became necessary as the area of the mine increased, or to replace transformers destroyed by lightning. The mules were purchased to take care of the extra haulage due to the advance of the workings and to replace mules that had been worn out or killed. The motors were purchased to operate pumps or fans needed by reason of the advance of the workings. The pumps were purchased for use in draining the additional1683 area opened up by the advancing working faces, or to replace pumps worn out in service or eaten out by the action of the sulphur water prevalent in the mine. The self-starters were purchased to equip motors for newly installed pumps and fans. 25. All of the above items of equipment purchased in 1920, and disallowed by the respondent as deductions in that year, were purchased for the purpose of maintaining the normal daily production of the petitioner's mines, and were actually installed in the petitioner's mines during the year 1920. None of this equipment was purchased for the purpose of increasing the normal output of the petitioner's 239 mines or for the purpose of decreasing the cost of operation thereof. The installation of such equipment did not have the effect of increasing the normal output of the petitioner's mines nor of decreasing cost of operation thereof. 26. During the year 1921 the petitioner made the following expenditures for mine equipment: Mine cars$5,500.00Mine locomotives11,117.00Mining machines5,500.00Motors1,401.55Motor-generator set4,400.00Mules$1,247.19Pumps525.0029,690.74These expenditures1684 were charged by the petitioner on its books to operating expense. The respondent disallowed these expenditures as deductions from gross income for the taxable year 1921 on the ground that they should have been capitalized. 27. The mine cars, mining machines, motors, mules and pumps purchased by the petitioner during the year 1921 were purchased for the same purposes as the similar equipment purchased in 1920. The mine locomotives purchased in 1921 were purchased for the same purposes as the mine locomotives purchased in 1918. The motor-generator set was purchased in order to provide additional power to take care of the increased power requirements of the additional equipment made necessary by the increased area of the mine, and also to overcome line loss resulting from the increased length of transmission lines. 28. All the above items of equipment, purchased in 1921 and disallowed by the respondent as deductions in that year, were purchased for the purpose of maintaining the normal daily output of the petitioner's mines, and were actually installed in the petitioner's mines during the year 1921. None of this equipment was purchased for the purpose of increasing the normal1685 output of the petitioner's mines or for the purpose of decreasing the cost of operation thereof. The installation of such equipment did not have the effect of increasing the normal output of the petitioner's mines nor of decreasing the cost of operation thereof. 29. A rotary converter, purchased in 1917 at a cost of $5,250 and charged by the petitioner to expense in that year, and disallowed by the respondent as a deduction in that year, was placed in a substation at the mine in 1917, but was never actually operated. When it was attempted to operate this machine in 1918, it was discovered that it would not operate, for the reason that it was a 25-cycle machine, whereas the only current available was 60-cycle. The machine was moved outside of the substation and never used again, and was eventually scrapped in 1921. 240 30. During 1922 the petitioner made the following expenditures for mine equipment: Fan$1,070.00Mine locomotives10,950.00Mine cars9,475.00Mining machines7,225.00Motors430.50Motor-generator set4,664.71Mules$3,069.15Pumps225.00Replacement of drum hoist1,500.00Transformers100.0038,709.36These1686 expenditures were charged by the petitioner on its books to operating expense. The respondent has disallowed these expenditures as deductions from gross income for the taxable year 1922, on the ground that they should have been capitalized. 31. The fan purchased in 1922 was purchased to take care of the ventilation in the increased area of the petitioner's mines so that normal production could be maintained. The mine locomotives were purchased fo the same purpose as those purchased in 1918. The mine cars, mining machines, motors, mules, pumps and transformers were purchased for the same purpose as those purchased in 1920. The motor-generator set was purchased for the same purpose as that purchased in 1921. 32. All of the above items of equipment purchased in 1922 and disallowed by the respondent as deductions in that year were purchased for the purpose of maintaining the normal daily output of the petitioner's mines, and were actually installed in the petitioner's mines during the year 1922. None of this equipment was purchased for the purpose of increasing the normal output of the petitioner's mines or for the purpose of decreasing the cost of operation thereof. The1687 installation of such equipment did not have the effect of increasing the normal output of the petitioner's mines, nor of decreasing the cost of operation thereof. 33. The item of $1,500 disallowed by the respondent in 1922 as "replacement of drum hoist" was in fact a repair. A drum hoist is a large unit consisting of a motor, frame, gears and a spool on which the cable winds. It is used in raising and lowering mine cars along the incline leading from the mine-mouth to the tipple. The expenditure made in 1922 was for the purchase of a new spool to replace one that was worn out. The new spool was used for such replacement in 1922. The spool so replaced was only a part of the complete drum hoist. 34. The petitioner's mines had all passed out of the development stage prior to 1917; that is, sufficient surface facilities had been constructed and working places developed to permit the mines to produce their respective normal daily output capacities. 35. The output capacity of the petitioner's mines was not increased during the period from 1917 to 1922, nor was the cost of 241 operation decreased, and no expenditures were made during this period for the purpose of1688 increasing output or decreasing cost of operation. The sole purpose of purchasing additional equipment acquired during this period was to maintain normal production and prevent an undue increase in the cost of operation. 36. Natural conditions in the petitioner's mines made it necessary for the petitioner to purchase more equipment to produce a given tonnage than would be needed in a mine where these conditions did not exist. The petitioner's mines are unusually wet, which requires numerous pumps for drainage with motors to operate them. This water has a high sulphuric acid content which attacks and rapidly corrodes all of the metal equipment with which it comes in contact. The nature of the terrain in which the petitioner's mines are located is such that the coal measure is cut by deep ravines into a so-called "oak-leaf" formation, with the result that the working places become widely scattered, and more mining machines and other equipment are needed to produce a given daily tonnage than in a mine where the coal is found in a broad unbroken block. 37. The average normal useful life of the various types of mine equipment purchased by the petitioner during the taxable years1689 1917-1922 was not less than as follows: Years60 and 70 lb. steel rail540 and 45 lb. steel rail425 lb. steel rail2Mining machines10Mine locomotives10Mules and ponies2Motors3Pumps2Wood pipe3Steel ties4Trolley wire6Fans5Rotary converters10Motor-generator sets10Mine cars3Transformers10Self-starters238. The production of the petitioner's mines for the years 1913 to 1920, inclusive, was in tons as follows: Tons1913347,024.351914331,041.711915367,207.291916441,380.691917377,591.881918537,927.61919603,165.31920652,923.4939. It is the general practice in the bituminous coal-mining industry to charge to current expense expenditures for additional equipment for a developed coal mine when such equipment is purchased for the purpose of maintaining normal production. OPINION. SMITH: The principal issue in these proceedings is whether the petitioner may deduct from gross income in the tax years involved 242 amounts paid for additional machinery and equipment to maintain the normal output of its mines. This issue is decided in favor of the1690 petitioner, upon the authority of ; ; , inconsistent with or reversing decisions of the Board which held that such expenditures were not deductible from gross income as ordinary and necessary expenses. In view of the above cited cases, the decision of the Board in , and numerous other cases denying the deduction of such items, will not be followed in the future. This disposition of the claimed deductions for additional items of machinery and equipment necessarily changes the computations of invested capital. Other questions relating to invested capital may be shortly disposed of. They are: (1) Whether the full value of the coal lands and other physical property and the receivables and the amount of cash acquired by the petitioner for stock in 1912 are to be included as part of the petitioner's invested capital for 1917, 1918, and 1920; (2) Whether the petitioner's invested capital for 1918 and 19201691 should be reduced by allowances for depletion or depreciation alleged to have been sustained in prior years; and (3) Whether the petitioner's invested capital for 1918 and 1920 should be reduced by amounts in respect of taxes for prior years. In addition, the facts of record raise two other issues which must be determined before there can be a recomputation of the deficiencies involved. (4) Whether the reduction of the petitioner's outstanding stock in 1915 had any effect upon its invested capital for 1917, 1918, and 1920; and (5) Whether the dividends paid by the petitioner in 1920 had any effect upon its invested capital for that year. The last two points will be disposed of first. The reduction of the petitioner's outstanding stock in 1915 from $1,500,000 to $1,000,000 did not operate to reduce the allowable invested capital. Cf. ; . Whether the dividends paid in 1920 affected the invested capital for 1920 depends upon the question as to whether the earnings of the company up to the date of each dividend payment had served to wipe out the1692 operating deficit and to equal the dividend payment. . For 1920 the respondent found an invested capital of $1,092,373.63. Petitioner contends that the invested capital should be $1,319,262.20, the same as for 243 1918. It admits, however, that the determination of this question depends upon whether the petitioner had a sufficient surplus available for the payment of the dividends at the time they were paid in 1920. Whether there was a sufficient surplus will be determined on the recomputation made in conformity with this opinion. In the computation of the deficiency for 1917, the respondent has used an invested capital of $1,000,000, which represented the par value of the stock outstanding at January 1, 1917. Counsel have stipulated that the assets acquired by the petitioner in exchange for its capital stock in 1912, had a cash value at the date of acquirement as follows: Coal lands and other physical property$2,201,139.00Receivables78,533.05Cash93,619.16Total assets acquired2,373,291.21Less:Total liability assumed1,054,029.01Original paid-in capital1,319,262.201693 The stipulation further shows that the actual cash value of the coal lands and other physical property acquired as above on January 1, 1914, was $2,170,064.42. The petitioner contends that the invested capital for 1917 is to be based upon the full value as of January 1, 1914, of the physical property and receivables acquired by the petitioner on May 1, 1912, together with the amount of cash then acquired (the company having no earned surplus but instead an operating deficit), which amount is found to be $1,288,187.62. The contention of the petitioner is sustained upon the authority of . For 1918 the respondent computed an invested capital of $1,018,812.06. The petitioner had no earned surplus at the beginning of the year. It contends that the paid-in capital should not be reduced by allowances for depletion or depreciation alleged to have been sustained in prior years, nor by amounts in respect of taxes for prior years, nor by the fact that its capital stock outstanding was reduced by from $1,500,000 to $1,000,000 in 1915, there being in that year no distribution of assets or earnings to its stockholders. 1694 The Board has repeatedly distinguished between earned surplus and paid-in capital and surplus for invested capital purposes. Thus, paid-in capital or surplus is not reduced by an operating deficit. ; ; ; . The contention of the petitioner upon this point must be sustained. In , the Board stated: 244 * * There is no distinction, in so far as concerns invested capital, between impairment resulting from an operating deficit and impairment resulting from depletion where adequate provision has not been made therefor. If the depletion actually sustained is not charged against surplus, to that extent there is no true earned surplus. * * * In the same opinion we stated at page 175: * * * The amount originally invested is not involved here. When the mine is purchased the investment ordinarily represents paid-in capital which is not reduced by depletion and which amount remains in invested capital unless and until withdrawn1695 in whole or in part by the stockholders in the way of dividends or otherwise. * * The parties have stipulated that at January 1, 1917, the petitioner had an accumulated operating deficit of $311,600.62. The net incomes, as found by the respondent for 1917 and 1918, were not sufficient to wipe out the operating deficit. The petitioner contends that the invested capital for 1918 should be $1,319,262.20, which as above shown, was the excess of the fair market value of the assets paid in to the corporation in 1912 for shares of stock over the liabilities assumed. The contentions of the petitioner with respect to the computation of invested capital for 1918 are sustained. Reviewed by the Board. Judgments will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622181/	Frederic W. Procter v. Commissioner.Procter v. CommissionerDocket No. 111015.United States Tax Court1943 Tax Ct. Memo LEXIS 208; 2 T.C.M. (CCH) 429; T.C.M. (RIA) 43329; July 6, 1943208 Thomas H. Fisher, Esq., 135 S. LaSalle St., Chicago, Ill., for the petitioner. John D. Kiley, Esq., and Harold H. Hart, Esq., for the respondent. LEECH Memorandum Opinion LEECH, J.: Respondent determined a deficiency in gift taxes in the amount of $36,487.85 for the calendar year 1939. The issues presented are: (1) whether the transfers are taxable under the gift tax provisions of the Revenue Act; and (2) whether petitioner is entitled to a specific exemption of $40,000 in determining his gift tax liability. The case was submitted on a stipulation of facts and exhibits. We find the facts as stipulated. [The Facts] Petitioner in 1939 was a nonresident citizen. His gift tax return for the year 1939 was filed by his attorneys with the collector of internal revenue at Baltimore, Maryland. On January 13, 1939, petitioner executed an irrevocable trust indenture, whereby he assigned and conveyed to the Guaranty Trust Company of New York, Lester Y. Baylis and himself as trustees, certain remainder interests in the corpus of two trusts established by his grandfather, Harley T. Procter. By its terms the rents, income and profits of the trust corpus were to be paid to the petitioner209 during his life, and the remainder to his surviving children and the issue and widows of any children predeceasing him. The property assigned and conveyed to the trustees consisted of "so much" of petitioner's right, title and interest in the two above mentioned trusts "as will remain (a) after the satisfaction and payment of the indebtedness to Lillian S. Procter * * * and (b) after a further deduction, if any becomes necessary, from said remainders of the amount provided for in Article 'ELEVENTH' hereof." One of the trusts established by Harley T. Procter was created by deed dated December 29, 1914 and the other by Article "sixth" of his last will and testament. Under the deed of trust the petitioner was entitled to receive the entire corpus upon the death of his mother, Lillian S. Procter, who was 63 years of age on January 13, 1939. Petitioner is the only child of Lillian S. Procter. The total value of the corpus of the deed of trust as of January 13, 1939 was $928,593.70. Under the testamentary trust the petitioner was entitled to receive the entire corpus in the event he survived the life tenant, Lillian S. Procter, and reached the age of 40 years. The value of the corpus of210 that trust, as of January 13, 1939, was $961,552.68. The petitioner was 36 years of age at the time he created the trust on January 13, 1939. This trust contains, inter alia, the following provisions: * * * EIGHTH: Frederic W. Procter hereby irrevocably directs the trustees of the trusts created by the said Indenture of Trust dated December 29, 1914, and by Article SIXTH of the Last Will and Testament of the late Harley T. Procter: (a) If at the time of the death of Lillian S. Procter the aforesaid seven promissory notes or any one of them shall remain unpaid, forthwith to pay to the estate of Lillian S. Procter or her assignee or assignees, the full amount of principal due upon such unpaid notes with interest at five (5%) per cent to January 13th, 1939, and thereupon (b) Forthwith to transfer to the trustees hereunder the entire rest and residue of said trust estates created by said Indenture of December 29, 1914, and Article SIXTH of the Last Will and Testament of Harley T. Procter, subject, however, to the provisions of Article ELEVENTH hereof. * * * ELEVENTH: The settlor is advised by counsel and satisfied that the present transfer is not subject211 to Federal gift tax. However, in the event it should be determined by final judgment or order of a competent Federal Court of last resort that any part of the transfer in trust hereunder is subject to gift tax, it is agreed by all the parties hereto that in that event the excess property hereby transferred which is decreed by such court to be subject to gift tax, shall automatically be deemed not to be included in the conveyance in trust hereunder and shall remain the sole property of Frederic W. Procter free from the trust hereby created. * * * * Lillian S. Procter was a signatory to this trust. Concurrently therewith and under date of January 13, 1939, the petitioner entered into an "agreement and assignment" with Lillian S. Procter. The trust of January 13, 1939 refers to this agreement as constituting part of the consideration expressed. The "agreement and assignment" recites, inter alia, that petitioner was theretofore indebted to Lillian S. Procter on seven demand promissory notes bearing interest at the rate of five per cent per annum. These notes evidenced further the "assigning, transferring and setting over to the said Lillian S. Procter, as security for the payment212 of" these notes and of all other liabilities of the petitioner "the following property, viz: all of the right, title and interest of the undersigned as remainderman or otherwise in and to" four certain trust funds, his interest in two of which was included in the assignment by petitioner dated January 13, 1939. Under the "agreement and assignment" these seven demand promissory notes were liquidated to January 13, 1939 by the inclusion of interest therein according to their terms. It was then provided THIRD: Lillian S. Procter agrees and covenants that after the execution of this agreement, the above said notes shall bear no further interest. The parties agree that the principal and interest due on said notes at the date of the execution of this agreement is the sum of $686,300.03, including interest to date. Included in said notes are the advances made by Lillian S. Procter to Frederic W. Procter as itemized in the schedule attached to said agreement of March 17, 1936 and the said Frederic W. Procter hereby acknowledges that all said notes have been and are just and valid obligations on his part. The said seven notes shall be endorsed as follows: "Interest on this note after213 January 13, 1939, is hereby waived. The interest of the maker thereof in the trust created by the THIRD Article of the Will of Harley T. Procter, and his interest in the trust created by the said Harley T. Procter by indenture dated December 30, 1902, are hereby released from the lien of this note, and the holder of this note shall have no recourse to said two trusts in case of default in the payment hereof, either by virtue of the lien herein provided, or by execution on any judgment against the maker, but only against the remaining two trusts, namely, one created by an indenture executed by Harley T. Procter December 29, 1914, and the other created by Article SIXTH of the said Last Will and Testament of Harley T. Procter." which endorsement shall be signed by Lillian S. Procter. There was no agreement to postpone demand or collection of the debt evidenced by these notes. On June 1, 1942 such demand was made in writing by Lillian S. Procter to petitioner. The present worth of $1 due at the death of a person aged 36 provided that a person aged 63 years shall have died before the person aged 36 is $0.25152. The present worth of the right to receive $1 at the death of a person aged214 36 years provided such death occur after four years and after the death of a person aged 63 years is $0.24883. On November 12, 1942, the petitioner instituted an action in the District Court of the United States for the Southern District of New York entitled "FREDERIC W. PROCTER, individually and as trustee under that certain Indenture of Trust dated January 13, 1939. Plaintiff, v. GUARANTY TRUST COMPANY OF NEW YORK, a corporation, and LESTER Y. BAYLIS, as Trustees under that certain Indenture of Trust dated January 13, 1939, and LILLIAN S. PROCTER, Defendants." This action is still pending undetermined. The complainant alleges, inter alia, Lillian S. Procter, defendant, may sell or otherwise dispose of said notes or said collateral to third persons not parties to this proceeding; and unless defendant be restrained from conveying or transferring said notes or selling said collateral, plaintiff by reason thereof would sustain irreparable loss and damage. The complainant prays, inter alia, that the trust dated January 13, 1939 be adjudged null and void and that the notes be cancelled. The petitioner has not claimed or been allowed the statutory exemption of $40,000215 or any part thereof at any time prior to 1939 and since the enactment of the Revenue Act of 1932. The remainder interests transferred by petitioner to the trust on January 13, 1939 had no value as of January 13, 1939. [Opinion] The petitioner's contention is that the transfers do not constitute taxable gifts for the following reasons: (a) the interest retained is subject to estate tax on his death; (b) the interests transferred are contingent remainders; (c) the effect of Paragraph "Eleventh" is to cancel and terminate the gift; and (d) the interests transferred had no value as of January 13, 1939. The petitioner's return showed no tax liability. The respondent, in calculating the value of the remainder interests transferred to the trust on January 13, 1939, deducted the admitted indebtedness of the petitioner to Lillian S. Procter in the sum of $686,300.03 from the total value of the corpus of the deed of trust dated December 29, 1914, and applied the discount factors to that amount. In thus determining the gift tax deficiency, he valued the transfers as of January 13, 1939 at $310,252.32. He now concedes that under the agreed total value of the corpus of the two trusts, 216 using the same factors employed in his notice of deficiency, the value would be $300,204.86. The position of the petitioner is that this indebtedness should be deducted not from the corpus of either trust but from the value of his remainders therein as of the date of the gift. The value of the transferred interests under such a computation would be zero, thus resulting in no gift tax. Which computation is correct depends upon whether the seven demand promissory notes of petitioner to Lillian S. Procter are payable according to their tenor, upon demand, and collectible then only from the remainder interests petitioner transferred to the trust of January 13, 1939. If they are, then petitioner is right. . See also . This is so because the value of the gift at its date must control. . Thus if petitioner's notes to his mother evidenced obligations payable upon demand and then collectible only from the pledged interests which were transferred, petitioner's gift, if any, was - 217 and could have been - no more than his equity in the pledged remainders after the payment. See also Respondent does not contend or even intimate that the notes did not evidence valid and binding obligations of the petitioner. His argument is premised wholly on the position that the payment of the notes was not enforceable until the death of Lillian S. Procter. To support this position he points to no specific provision in either the trust or the "agreement and assignment." Obviously there is none. There is some indication that respondent is relying on paragraph "Eighth" of the trust, quoted above, as furnishing some basis for this position. But, we think, that paragraph when considered against the background of other circumstances is meant to apply only if the notes have not been paid before the death of Lillian S. Procter. The notes were all payable on demand. As originally executed that was so and though a new endorsement was placed on them as of January 13, 1939, no other change was made except the waiver of interest. There was no agreement to postpone demand218 and collection. The effect of the new endorsement was apparently limited to releasing two of the four remainder interests, theretofore pledged generally for the payment of the notes, and restricting recourse for their nonpayment, upon demand, to the other two remainders which were transferred to the trust of January 13, 1939, subject to that pledge. Moreover, significantly, both petitioner and Lillian S. Procter so construed the contract. The former partially bases his complaint in the other proceedings in New York on that premise. The latter has already demanded payment of the notes. As we view the situation, petitioner intended to and did transfer to the trust of January 13, 1939, irrevocably, for the benefit of his issue, his equity in his remainder interests in the corpora of the two trusts mentioned therein, remaining after payment therefrom of his notes to his mother, Lillian S. Procter, upon demand. We conclude that the value of petitioner's gifts to the trust on January 13, 1939 was the value of his transferred remainder interests, as of that date, reduced by the face amount of the indebtedness to his mother, i.e., $686,300.03. *219 See also The value of those remainder interests is properly the subject of actuarial computation. ; , . Regulations 79, art. 19-(7). The factors upon which to make that computation have been found as stipulated. Applying those factors to the value, as found, of the corpus of the two trusts, the value of the petitioner's remainder interest therein is ascertained to be $472,823.04. The amount of the indebtedness of $686,300.03 to Lillian S. Procter being greater than that ascertained value of petitioner's remainder interests, the gift of the residue of those remainder interests had no value as of January 13, 1939. We sustain the petitioner on this ground alone. Petitioner is not liable for gift tax. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622184/	Henry J. Anderle v. Commissioner.Anderle v. CommissionerDocket No. 27579.United States Tax Court1951 Tax Ct. Memo LEXIS 88; 10 T.C.M. (CCH) 938; T.C.M. (RIA) 51295; September 28, 195188 Henry J. Anderle, pro se. George C. Lea, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Petitioner challenges respondent's determination of deficiencies in income tax of $4,879 and $783.17, together with negligence penalties of $243.95 and $39.16 for the years 1945 and 1946, respectively. The issues are whether respondent's computation of petitioner's income for the taxable years is correct, with the exception of one error by respondent as to 1945 which is conceded; whether respondent's partial disallowance of a deduction for medical expense was proper; and whether any part of any deficiency is due to negligence. Findings of Fact Petitioner, a resident of Apollo, Pennsylvania, filed his returns for the periods involved with the collector of internal revenue for the twenty-third district of Pennsylvania. Petitioner reentered the United States from Austria about 25 years ago at the age of 18. His first job was in a restaurant where he received approximately $30 per week, plus room and board. Later he settled in Pittsburgh and was employed as a member of a pole construction crew by the Bell Telephone Co. He lost that job89 in 1933. Subsequently he purchased a small truck and began to peddle food products, eventually going into the meat business. From 1933 to 1937 he peddled meat. In 1937 he rented and thereafter he operated a slaughterhouse. He later purchased the slaughterhouse for $3,200, making a down payment of approximately $1,500. In about 1939 he married, and in 1941 he had a daughter. Thereafter petitioner continued to operate the slaughterhouse. In 1942 sales by petitioner above O.P.A. ceiling prices resulted in the suspension for three months of his right to sell meat, with a probationary period of nine months. In 1943 his permit to operate the slaughterhouse was revoked by the local Zoning Board and it was never restored. In 1945 petitioner hauled and sold ice at least one or two days each week, receiving about $20 per day. During the years 1945 and 1946, petitioner was engaged in the slaughtering business which consisted in the purchase of livestock for slaughter and subsequent resale to meat dealers. During the taxable years petitioner purchased livestock from various livestock dealers, including a purchase in 1946 amounting to $11,116.21 from Producers Livestock Cooperative Association. 90 During the taxable years petitioner maintained no records relating to his business. In 1939 petitioner purchased a residence at 915 Madison Avenue, Pittsburgh, Pennsylvania, for $3,800, making a down payment of $500, and assuming a mortgage upon which he made payments in the years 1939 to 1944, inclusive, which varied in approximate amount from $640 to $960 per year. In 1942 petitioner purchased a lot adjoining the above residence. In 1943 he purchased slaughterhouse equipment for $3,135, and he constructed a concrete blockhouse which his 1943 tax return reported for depreciation at a basis of $3,765. In 1945 petitioner purchased a farm at Apollo, Pennsylvania, for $14,000, making a cash down payment and assuming a mortgage of $6,000, upon which he paid $3,000 in the same year. Taxes upon the home in 1945 were in the neighborhood of $300. Petitioner's 1946 return reported, for depreciation, the acquisition of an electric hoist in 1945 for $398, a grinder in 1946 for $365, and a cooler and machine in 1946 for $3,900. In 1946 petitioner paid $1,610 in satisfaction of Federal income tax liability for prior years. Petitioner's tax return for 1942 reported net income of $1,159.6391 and claimed depreciation of $573.50. His amended return for 1943 reported net income of $7,251.84 and claimed depreciation of $1,158. His return for 1944 reported adjusted gross income of $2,298.24, net income of $1,976.24, and claimed depreciation of $316. His 1946 return reported adjusted gross income of $1,377.68 and net income of $500.06. Among other items, that return claimed depreciation of $193.05, and showed nonbusiness expenses of $131.50 for interest on a mortgage, $425 for taxes on farm and residence, and $390 dental expenses. All of those returns claimed exemptions and credits for his wife and daughter. Respondent's notice of deficiency determined that "the net profit resulting from the operation of your business in the year 1945 was $16,398.00 in lieu of the amount of $1,661.38 reported by you in your 1945 Federal income tax returns," and that "the net profit resulting from the operation of your business in the year 1946 was $6,071.95 in lieu of the amount of $1,377.68 reported by you in your 1946 Federal income tax return"; determined that "the deduction for medical expenses, taken in your return in the amount of $321.12, is excessive to the extent of $234.72," which92 was computed by taking the difference between 5 per cent of the adjusted gross income for 1946 of $6,071.95 determined by respondent and 5 per cent of the adjusted gross income of $1,377.68 reported by petitioner; and stated that "A negligence penalty in the amount of 5 per centum has been asserted for the years 1945 and 1946 in accordance with the provisions of Section 293(a) of the Internal Revenue Code." Petitioner's living expenses and other personal expenditures for the years 1945 and 1946 were not less than $2,000 per year. Petitioner's adjusted gross income for the years 1945 and 1946 totaled $13,398 and $6,071.95, respectively. Part of the deficiency for each of the years in controversy was due to negligence. Opinion The issues being purely factual, our findings dispose of the proceeding. With the exception of a concession made by respondent, there is nothing in the record upon which we are willing to rely as sustaining petitioner's burden of proving any error in respondent's determination. Petitioner produced no books or records of any kind. His testimony was evasive, contradictory, and in some respects inherently incredible. There was no corroboration93 adequate to demonstrate that respondent's determination was in error. In the absence of credible evidence upon which to base any finding in petitioner's favor, we conclude that except in the respect noted, the deficiencies must be sustained. The item involving medical expenses is apparently eliminated automatically by the determination of the correct amount of income. The negligence penalties are sustained on the same grounds as those supporting the deficiency. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622185/	BOSTON SAFE DEPOSIT AND TRUST COMPANY AND CHARLES COBB WALKER, EXECUTORS OF THE WILL OF LOUISE COBB WALKER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Boston Safe Deposit & Trust Co. v. CommissionerDocket No. 79144.United States Board of Tax Appeals34 B.T.A. 911; 1936 BTA LEXIS 632; August 7, 1936, Promulgated 632 Decedent, in 1921, created a trust, reserving the power to "amend" in conjunction with the "trustees." She died in 1933. Held, the said transfers come within the provisions of section 302(d) of the Revenue Act of 1926 and should be included in decedent's gross estate. Witherbee v. Commissioner, 70 Fed.(2d) 696, followed. Charles M. Rogerson, Esq., for the petitioners. S. B. Anderson, Esq., for the respondent. BLACK 911 The respondent determined a deficiency in estate tax in the sum of $182,815.43. The issue presented for determination is whether the respondent erred in including in the gross estate of the decedent, who died February 23, 1933, certain property having an agreed fair market value of $1,209,275.43 at the date of the decedent's death, which property was conveyed by the decedent to trustees under a certain trust indenture dated July 7, 1921. 912 FINDINGS OF FACT. Louise Cobb Walker died on February 23, 1933, and the petitioners herein are the executors of her will. On July 7, 1921, the decedent created a trust and conveyed to two trustees (1) a piece of real estate known as "Highwood"; 633 (2) all her interest in certain other real estate; (3) all her interest as residuary legatee in the residue of the estate of her deceased husband; and (4) certain bonds, shares of stock, and securities. Under the first clause of the trust instrument the trustees were to allow the grantor to use Highwood during her life free of any expense in connection therewith and, upon her death, to allow her son Charles Cobb Walker the same privilege. Under the second clause the trustees were to pay the net income of the trust to the grantor in quarterly payments during her life, and, upon her death, to pay $125,000 of the capital to three certain institutions, and, if the son be then living, to hold the remaining capital in trust and pay the net income therefrom to her son in quarterly payments during his life, and, upon his death or the death of the grantor if she should survive her son, to pay the net income to the son's issue for 20 years. Under the third clause the trust was to terminate at the end of 20 years after the decease of either the grantor or her son, whichever of them should survive the other, and the capital was then to be distributed to the issue of the son, or, if no issue, 634 to such persons as would be so entitled if the grantor had died seized and possessed of such property and intestate. Under the fourth clause the trustees were to have complete control over the trust property with power to sell, etc., except, they could not sell Highwood without the grantor's written consent, if living, or, after her death, the written consent of her son, if living. The ninth, eleventh, and twelfth clauses of the trust indenture were as follows: Ninth. At any time during the life of said Louis Cobb Walker the Trustees are authorized to pay over to her in addition to any other provisions herein made for her benefit such sums out of the principal of the trust fund as may in their judgment be necessary for her comfortable maintenance and support, having due regard for the scale of living to which said Louise Cobb Walker has heretofore been accustomed. Eleventh. This trust may be terminated in whole or in part at any time during the life time of the said Louise Cobb Walker by the Trustees hereunder, such termination to be evidenced by a written declaration signed, sealed and acknowledged by them, and in that event the trusts declared hereunder shall be at635 an end as to so much of the trust fund as is described in said instrument of termination and the portion of the trust property so described, or the entire trust property if the trust shall be wholly terminated, shall be paid over to the said Louise Cobb Walker by the Trustees free and discharged of all trusts upon receiving from her an agreement, with satisfactory security for the performance thereof, indemnifying them against all outstanding liabilities by them incurred as such Trustees. 913 Twelfth. This indenture of trust and the trusts hereby created may be amended at any time during the lifetime of the said Louise Cobb Walker, such amendment to be in writing signed, sealed and acknowledged by her and by the Trustees. On November 25, 1922, pursuant to clause eleven, the trust was terminated as to 75 shares of first preferred stock of the United States Worsted Co. On February 3, 1923, pursuant to clause twelve, the trust was amended by striking out the entire tenth clause, relating to trustee vacancies, etc., and inserting a new clause in place thereof, under which new clause one of the trustees resigned his office. On January 11, 1924, pursuant to clauses636 ten and twelve, the trust was amended by adding to the trust indenture an entire new clause, as follows: Fifteenth: The trustees are directed to pay to the legal representatives of the estate of said Louise Cobb Walker from the principal of the trust fund in the hands of the said trustees an amount equal to the Federal Estate Tax and all other inheritance taxes which shall be assessed against the estate of said Louise Cobb Walker or against said legal representatives, to be used by said legal representatives for the payment of said taxes; and the trustees are further directed to pay out of the principal of the trust fund in their hands any and all inheritance taxes which may be assessed upon them by reason of any succession to any beneficiary under this trust. On February 8, 1926, pursuant to clauses ten and twelve, the trust was amended by striking out the last paragraph of the second clause, relating to the issue of Charles Cobb Walker, and the entire third clause, relating to the termination of the trust, and inserting new provisions relative thereto. Under the new third clause the Chicago Art Institute was substituted for the persons who would have taken if Charles Cobb637 Walker had left no issue or if the issue he left had all died prior to the 20-year period. On April 1, 1930, pursuant to clauses ten and twelve, the trust was amended by striking out the second paragraph of the second clause, relating to the payment of $125,000 of the capital, and inserting a new paragraph in which one of the previous beneficiaries was dropped and a new one added. On June 6, 1932, pursuant to clauses ten and twelve, the second and third clauses of the trust were again very materially amended. On August 8, 1932, pursuant to clause eleven, the trust was terminated as to $50,000 par value of bonds. On November 30, 1932, pursuant to clause nine, the trustees paid to the grantor the sum of $10,000 out of the principal of the trust fund. The respondent included in the decedent's gross estate, under the provisions of section 302(d) of the Revenue Act of 1926, the sum 914 of $1,209,275.43 representing the agreed value at the date of decedent's death of the property covered by the said trust instrument. The trustees under the trust indenture were the Boston Safe Deposit & Trust Co., a corporation duly established under the laws of the Commonwealth638 of Massachusetts, and R. Kent Hubbard of Middleton, Middlesex County, Connecticut. R. Kent Hubbard resigned as trustee, February 3, 1923, and thereafter the Boston Safe Deposit & Trust Co. continued as sole trustee. Neither of said trustees was at any time a beneficiary of the trust. OPINION. BLACK: The material provisions of section 302(d) and (h) of the Revenue Act of 1926, which in our opinion control the disposition of this case, are as follows: SEC. 302. 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 - * * (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, 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, * * * * * * (h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, 639 powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act. On the date of decedent's death, by reason of the reservation retained in clause twelve, the enjoyment of the trust was subject to change through the exercise of a power to amend by the decedent in conjunction with the trustees. This reservation to amend was in conjunction with "any person" as that term is used in the act. Helvering v. City Bank Farmers Trust Co.,296 U.S. 85">296 U.S. 85. The transfer made by the decedent, therefore, comes squarely within the provisions of subdivision (d) of section 302. Since subdivision (d) was first introduced into the Revenue Act of 1924 and reenacted in the Revenue Act of 1926, our question is whether that subdivision can be applied to a transfer made in 1921, at a time when there was no such provision in the statutes pertaining to Federal estate taxation. In view of subdivision (h), supra, there can be no doubt as to the intention of Congress in the matter. Petitioner, however, contends that Congress did not have constitutional640 authority to give the subdivision a retroactive effect on trusts created prior to any such statutory provision, and in support thereof cites Helvering v. Helmholz,296 U.S. 93">296 U.S. 93. 915 In that case, on the subject of the retroactive operation of subdivision (d), supra, the Supreme Court said: Another and more serious objection to the application of section 302(d) in the present instance is its retroactive operation. The transfer was complete at the time of the creation of the trust. There remained no interest in the grantor. She reserved no power in herself alone to revoke, to alter, or to amend. Under the revenue act then in force, to transfer was not taxable as intended to take effect in possession or in enjoyment at her death. Reinecke v. Northern Trust Company,278 U.S. 339">278 U.S. 339, 49 S. Ct. 123">49 S.Ct. 123, 73 L. Ed. 410">73 L.Ed. 410, 66 A.L.R. 397">66 A.L.R. 397. If section 302(d) of the Act of 1926 could fairly be considered as intended to apply in the instant case, its operation would violate the Fifth Amendment. 641 Nichols v. Coolidge,274 U.S. 531">274 U.S. 531, 47 S. Ct. 710">47 S.Ct. 710, 71 L. Ed. 1184">71 L.Ed. 1184, 52 A.L.R. 1081">52 A.L.R. 1081. The Helmholz case is, we think, distinguishable from the one now being considered. There, the transfer was complete when the trust was created. Here, the transfer was subject to change and was in fact changed several times. There, no interest remained in the grantor. The trust could be revoked only by the settlor securing the consent of all the beneficiaries. Here, the grantor retained a right to amend in conjunction with the trustees, who were not beneficiaries of the trust, and on January 11, 1924, in exercise of that power, the trustees were directed to pay certain amounts to the legal representatives of the decedent's estate. See clause fifteen set out in our findings. In the Helmholz case the decedent reserved no power in herself alone to revoke, alter or amend. That is also true here, but she did, however, reserve a power to amend in conjunction with the trustees. Because of these distinguishing features we are of the opinion that the instant proceeding is not controlled by the Helmholz decision. 642 The mere fact that the trust in question was created prior to the approval of the Act of 1924 is no ground for holding subdivision (d) not applicable. In Porter v. Commissioner,288 U.S. 436">288 U.S. 436, the decedent in 1918 and 1919 transferred certain bonds to a trustee for the benefit of his two children and grandchildren. He reserved the power alone to alter or modify. In holding that the transfers, although made prior to the approval of the 1924 Act, were "undoubtedly covered by subdivision (d)" of section 302 of the Revenue Act of 1926, and that Congress did not violate the Constitution in providing that subdivision (d) applied to transfers made before as well as after the enactment of the act, the Supreme Court said: But the reservation here may not be ignored for, while subject to the special limitation, it made the settlor dominant in respect of other dispositions of both corpus and income. His death terminated that control, ended the possibility of any change by him, and was, in respect of title to the property in question, the source of valuable assurance passing from the dead to the 916 living. That is the event on which Congress based the643 inclusion of property so transferred in the gross estate as a step in the calculation to ascertain in the amount of what in section 301 (26 USCA secs. 1092, 1093) is called the net estate. Thus was reached what it reasonably might deem a substitute for testamentary disposition. The difference between the Porter case and the instant proceeding is that in the former the power to alter or modify was reserved to the grantor alone, while here the power to amend was reserved to the grantor in conjunction with the trustees. We think, nevertheless, the same rule applies here as in the Porter case. See Witherbee v. Commissioner, 70 Fed.(2d) 696; certionari denied, 293 U.S. 582">293 U.S. 582; rehearing on writ of certiorari denied, 293 U.S. 631">293 U.S. 631. In Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339, the Supreme Court did not pass upon the effect of a power to amend reserved to the grantor in conjunction with a trustee, as that situation was not present in any of the seven trusts there involved. In two of the trusts a power to revoke was reserved to the grantor alone; the transfers were held taxable; 644 in five a power was reserved "to alter, change or modify the trust", which was to be exercised by the settlor and one or more of the beneficiaries. These transfers were held nontaxable, on the ground that, since the beneficiaries were adverse interests, the transfers were complete when made. (Cf. Mary Q. Hallock et al., Trustees,34 B.T.A. 575">34 B.T.A. 575.) The Supreme Court has since held, in Reinecke v. Smith,289 U.S. 172">289 U.S. 172 (an income tax case), that a trustee is not subsumed under the designation "beneficiary." In the course of its opinion it said: We think Congress may with reason declare that, where one has placed his property in trust subject to a right of revocation in himself and another, not a beneficiary, he shall be deemed to be in control of the property. We think it follows, therefore, that, where a decedent creates a trust prior to the Revenue Act of 1924 and reserves a power to amend the trust in conjunction with one not a beneficiary, the trust is to be considered as not irrevocable when made and, therefore, the proper subject of a transfer tax. 645 Witherbee v. Commissioner, supra;Edward Jackson Holmes et al., Executors,30 B.T.A. 97">30 B.T.A. 97. Cf. Dort v. Helvering, 69 Fed.(2d) 836; certiorari denied, 293 U.S. 569">293 U.S. 569; rehearing on writ of certiorari denied, 293 U.S. 630">293 U.S. 630; Commissioner v. Chase National Bank, 82 Fed.(2d) 157; Stewart W. Bowers, Trustee,34 B.T.A. 597">34 B.T.A. 597. In the Virginia Law Review, January 1936, there is an article entitled "A Day in the Supreme Court with the Federal Estate Tax", written by Charles L. B. Lowndes of the Duke University School of Law. This article discusses at some length the Supreme Court's decisions in White v. Poor; Helvering v. Helmholz; Helvering v.917 CityBank Farmers Trust Co., and Becker v.St. Louis Union Trust Co. The author, in discussing the applicability of section 302(d), (h) to trusts created prior to the first enactment of that section, among other things, says: "A trust which was revocable by the setlor in conjunction with a trustee who had no beneficial interest, for example, would clearly appear to be sufficient to sustain a retroactive646 tax", citing Reinecke v. Smith,289 U.S. 172">289 U.S. 172. The situation would of course be different if the trustees herein were also beneficiaries of the trust. In that sort of case Helvering v. Helmholz, supra, would apply, and, the trust having been created prior to the Revenue Act of 1924, none of the property transferred therein would be included as a part of decedent's gross estate. In reaching our conclusion in the instant case we have not overlooked Clarence H. Mackay et al., Executors,33 B.T.A. 765">33 B.T.A. 765. In that case the decedent grantor, Marie Louise Mackay, in 1919 created several trusts the income from which was to be paid to her grandchildren, nieces, and nephews for life and upon their deaths to their children in being at the date of each of the trust instruments, the principal of each trust to be distributed to her son, Clarence H. Mackay, upon the death of each of the said children. Each of the trusts was revocable by the grantor with the joint consent of the trustees, one of whom was the said Clarence H. Mackay. The decedent died on September 4, 1928. In that case we held that the remainder interest in each trust was647 not a part of the decedent's gross estate under either subdivision (c) or (d) of section 302 of the Revenue Act of 1926. The said remainder interest was not includable under either (c) or (d) because, Clarence H. Mackay being one of the trustees and also a remainderman, the doctrine of Reinecke v. Northern Trust Co., supra, applied as to (c), and to apply section 302(d) retroactively as to the remainder interest would be unconstitutional. Helvering v. Helmholz, supra.We also held that the value of the life estates was, however, includable in the decedent's gross estate under subdivision (c), but not under subdivision (d). While it will make no difference in the ultimate result in the Mackay case, we now think that the value of the said life estates was includable in the decedent's gross estate under subdivision (d) as well as under subdivision (c), for the reasons previously given in this opinion. The effect of this modification of the Mackay case is simply to state a second ground for reaching the same result, namely, the inclusion in the gross estate of Marie Louise Mackay of the value of the life estates there involved. 648 Petitioners devote a considerable portion of their brief to the contention that the reserved power to amend in conjunction with the trustees was in substance negligible and should, therefore, be 918 disregarded. In this they rely in part upon the statement contained in Porter v. Commissioner, supra, wherein the Supreme Court said: "We need not consider whether every change, however slight or trivial, would be within the meaning of the clause [subdivision (d)]." But the reserved power to amend in the instant proceeding was not limited in any way. The grantor and the trustees could amend in any way that could be agreed upon between them. One of the amendments was the addition of clause fifteen (set out in our findings) to the trust instrument. We do not think it can be said that such a power is slight or trivial. Petitioners' contentions on this point are denied. Petitioners also contend that the transfers in trust are not includable in the gross estate under section 302(c) of the Revenue Act of 1926, as amended by section 803(a) of the Revenue Act of 1932. Since the respondent has made no such contention and since we are of the opinion that the*649 transfers are includable under section 302(d) of the Revenue Act of 1926, we do not deem it necessary to decide whether they are also includable under subdivision (c) as amended. The respondent's determination is approved. Reviewed by the Board. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622186/	ALFRED E. DEVENDORF and BARBARA L. DEVENDORF, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDevendorf v. CommissionerDocket No. 8573-76.United States Tax CourtT.C. Memo 1981-680; 1981 Tax Ct. Memo LEXIS 59; 42 T.C.M. (CCH) 1753; T.C.M. (RIA) 81680; November 25, 1981. Ira B. Stechel and Joseph B. Pritti, for the petitioners. Lewis R. Mandel and Michael Shaff, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: Respondent determined deficiencies in petitioners' federal income tax as follows: YearDeficiency1970$ 4,677.60197151,074.00The sole issue presented is whether petitioners are entitled to net operating loss carrybacks to the taxable years 1970 and 1971 as a result of a theft loss, within the meaning of61 section 165(c)(3), 1 that was allegedly incurred in the taxable year 1973. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners Alfred E. Devendorf ("Devendorf") and Barbara L. Devendorf, husband and wife, resided in Mill Neck, New York at the time they filed the petition in this case. During the period 1964 to 1969, Devendorf was employed by the Long Island Lighting Co. as a management trainee at an annual salary of aproximately $ 8,500. In 1970, Devendorf graduated from Brooklyn Law School. During the period 1970 to September 1973, he did not work. After being admitted to the New York Bar in the summer of 1973, Devendorf was employed as a mediator in neighborhood disputes by the Nassau County, New York District Attorney's office. This latter employment ended in 1976. Upon reaching his 35th birthday in March 1970, Devendorf was to receive the corpus of a trust fund that had been created by his father; the value of such corpus in early 1970 was in excess of62 $ 400,000. Devendorf first met Paul G. Nathans ("Nathans") in 1950 when the two went to school together at the Choate School in Connecticut. From the time of their graduation in 1952 through the early 1970s the two men carried on a friendly and social relationship. Sometime in early 1970, shortly after Devendorf received the corpus of the trust fund set up by Devendorf's father, Nathans approached Devendorf seeking money. Beginning on May 27, 1970 and ending September 23, 1971, Devendorf made a series of 24 advances to Nathans. The total amount of such advances was $ 327,075. Also during this period, Nathans made eight payments back to Devendorf, totaling in all $ 70,588.85. After September 23, 1971, Devendorf made no further advances to Nathans. Nathans, however, continued to make payments back to Devendorf. From September 25, 1971 through October 4, 1972, Nathans made 15 separate payments totaling $ 57,900. At some point during this period, Nathans delivered to Devendorf various stock certificates as collateral for these advances. After liquidating this collateral during 1972 and 1973, Devendorf received an additional $ 6,296.17. In all, between 1970 and 1973, 63 Devendorf had advanced Nathans $ 327,075 and received in return money and property worth $ 134,785.02. In March or April, 1973, Nathans was arrested in Texas for conspiracy to smuggle half a ton of marijuana into the United States. In November, 1975, Nathans was convicted of the drug charge. In 1976 he was incarcerated at the federal prison in Danbury, Connecticut. Devendorf continued to keep in contact with Nathans during the latter's incaraceration and on one occasion, learning Nathans was ill, assisted Nathans in obtaining a transfer to a federal hospital in Lexington, Kentucky. On their 1970 tax returns, petitioners reported $ 3,900 as interest income received from Nathans. No interest income from Nathans was reported in 1971, 1972 or 1973. On their 1973 tax returns, petitioners claimed a casualty or theft loss of $ 192,190. This figure was calculated by subtracting the total value of money and property received from Nathans from 1970 through 1973 from the total amount of money advanced by Devendorf in 1970 and 1971 and subtracting the $ 100 statutory deductible amount. Thereafter, petitioners, after offsetting their joint 1973 income by a portion of such loss, timely64 filed an application for tentative refund (Form 1045) and a claim for refund (Form 843) for their taxable years 1970 and 1971 to carry back to those years a net operating loss of $ 188,730. Respondent allowed the claims for refund for 1970 and 1971 and issued the petitioners refunds in the amounts of $ 4,677.60 and $ 51,074, for 1970 and 1971 respectively, plus statutory interest thereon. On audit respondent disallowed petitiioners' theft loss deduction for 1973 and asserted deficiencies against petitioners of $ 4,677.60 for 1970 and $ 51,074 for 1971. Devendorf instituted no civil action to attempt to recover from Nathans in 1973 or in any subsequent year. Additionally, he never caused a criminal complaint to be issued against Nathans for the latter's actions. Devendorf's efforts at recovering the remaining advances have been limited to keeping in touch with Nathans and continually asking for repayment. Since the time of Nathans' arrest in 1973, Devendorf has recovered no more than $ 1,000 from Nathans (a payment received in 1975). In 1975, prior to the time Nathans was to be incarcerated, but after respondent's disallowance of petitioners' deduction, Devendorf met with65 Nathans. Devendorf presented Nathans with a 12-page document reciting a story of how Devendorf had been "swindled" by Nathans. Devendorf told the same story at the trial of this case. On September 9, 1975, Nathans returned this document to Devendorf with an affidavit attached to it. The affidavit, sworn to by Nathans before a notary public, stated "[T]he statement of facts concerning various transactins involving Alfred E. Devendorf and others and me are true as set forth in the attached statement." Nathans had been led to understand that this document would be used in the instant tax proceeding. At the time Nathans signed this affidavit, the statute of limitations on larceny had not expired under New York law. OPINION The sole issue for decision is whether petitioners incurred a deductible theft loss within the meaning of section 165(c)(3) in 1973. If we find that a theft loss occurred in 1973, under section 172(d)(4)(C) petitioners will be entitled to carry back a portion of that loss to their 1970 and 1971 taxable years, the years before the Court. See sec. 1.172-3(a)(3)(iii), Income Tax Regs. If, however, we conclude that the amounts at66 issue here merely constituted net voluntary advances from Devendorf to Nathans, no loss arising therefrom in 1973 would produce a net operating loss which could be carried back into petitioners' 1970 and 1971 taxable years. See secs. 166(d) and 172(d)(2)(A). The burden of establishing both the existence and amount of a theft is on the taxpayer. Rule 142(a), Tax Court Rules of Practice and Procedure. At trial, Devendorf presented the following story to support his theft loss claim: Sometime in early 1970, shortly after Devendorf received the corpus of the trust fund set up by Devendorf's father, Nathans approached Devendorf seeking money. Nathans represented to Devendorf that certain estate taxes were owed on Nathans' father's estate, but the estate, worth nearly $ 1 million, was illiquid. Nathans sought to borrow $ 65,000 to pay these alleged taxes. Without checking into the truthfulness of Nathans' statements, Devendorf loaned Nathans the money. No formal written agreements were made as to how or when this money was to be paid back or what rate of interest, if any, Nathans was67 to pay on the loan. However, Nathans delivered to Devendorf a 500,000-share certificate in Coast-to-Coast Co. to hold as collateral. Nathans told Devendorf that the stock was worth about 30 cents per share, but had previously been as high as $ 1 per share. In the fall or early winter of 1970, Nathans again approached Devendorf for money. Nathans told Devendorf about a newsstand Nathans had discovered near Church Street in Brooklyn, New York. Nathans said that the owner of the newsstand was interested in retiring and selling out the business. Nathans thought the newsstand would be a good investment opportunity and asked Devendorf to advance him funds to buy into this operation. Devendorf did not investigate the existence of this newsstand, nor did he seek to know whether Nathans' other statements in connectiong with it were accurate. Devendorf's only concern was that Nathans be in charge of managing the newsstand business personally. After receiving assurances from Nathans that Nathans would be an equal or managing partner in the newsstand business, Devendorf delivered a series of checks totaling $ 25,000 to Nathans to make the investment. No formal agreements were made68 between the two men as to how profits or losses from the venture were to be allocated or how and when Devendorf was to be repaid his advance. Devendorf expected to be paid back his investment and to receive additional money out of profits generated by the business, but no documents to that effect were drawn up.During the course of 1970, Devendorf loaned Nathans various other smaller sums on a short-term basis. Each of these short-term loans was paid back to Devendorf in full. In early 1971, Devendorf began asking Nathans for repayments of the outstanding larger loans. Nathans successfully put Devendorf off by saying that things were a little delayed with his father's estate. Nathans provided Devendorf with new assurances that the loans were secure: Nathans mentioned a piece of commercial property in Pennsylvania he owned worth in the neighborhood of $ 100,000, but tied up in partitioning problems. He also talked of giving Devendorf a 10 percent limited partnership interest in a commodity brokerage firm, Jay W. Kaufmann & Co., in which Nathans was a partner. Nathans stated that Jay Kaufmann, the other partner in the firm, owed him roughly $ 100,000. Finally, Nathans gave69 Devendorf a sealed manila envelope which Nathans said contained additional collateral, but he asked that Devendorf not open the envelope at that time. Devendorf was mollified by all this talk and complied with Nathans' request not to open the envelope. In March or April, 1971, Nathans again approached Devendorf with an investment opportunity. Nathans told Devendorf that a clothing firm in Ohio named Bobbie Brooks wished to dispose of remnants of various clothing lines to a single purchaser. Nathans said the price of these remnants was very low and that by simply separating the remnants into smaller lots, they could be resold to retail clothing establishments at a smart profit with virtually no risk. With little or no investigation of Nathans' statements, Devendorf again gave Nathans the money he wanted (roughly $ 65,000). Devendorf expected to be repaid and repaid handsomely for his investment, but once again the exact terms for advancing the money to Nathans were not formally worked out. In the summer of 1971, Nathans for a fourth time approached Devendorf for a large sum of money. Nathans said he knew of a California company that had a large inventory of adult or girlie70 magazines that was underpriced. Again, with little or no investigation, but primarily relying on Nathans' statements, Devendorf advanced Nathans about $ 75,000. Again, the exact terms of the loan or investment were not formally worked out. By September 23, 1971, Devendorf had advanced Nathans sums of money totaling in all $ 327,075. He had received back from Nathans only $ 70,588.85. During the following year Nathans continued to make frequent small payments in reduction of this "debt" to Devendorf while at the same time proposing new schemes and ventures for Devendorf to enter into. Devendorf, however, now short of cash, was cool to Nathans' further entreaties and instead began pressing Nathans for repayment of some of the monies advanced. Nathans continued to assure Devendorf that the various ventures were proceeding normally and profitably. The first indication to Devendorf that he might not be repaid occurred in March or April of 1973 when he received a phone call from Nathans' close friend and confident, Martin Snaric ("Snaric"). Snaric informed Devendorf that Nathans had been arrested in Texas for conspiracy to smuggle half of ton of marijuana into the United States. 71 Nathans was in jail and could not raise the $ 1,000 or $ 2,000 bail to get out. Snaric said he was unable to raise the money out of Nathans' remaining assets in New York and thought that Devendorf, as a friend of Nathans, might be willing to help raise bail. Devendorf declined to help, but was very disturbed by what he heard from Snaric concerning Nathans' monetary worth. At this point Devendorf contacted Nathans' lawyer, Nathans' accountants, Nathans' business partner and Nathans himself. He learned that Nathans was, in a word, broke. Nathans admitted to him that the various transactions had been "a collection of stories" and that there was no money left to pay Devendorf back. Most of what Nathans had told Devendorf over the past few years regarding the various enterprises was untrue. Nathans had not used the advances for the purposes intended, but rather had spent the money on himself in high living. The various items of collateral either were not as valuable as Nathans had represented, did not exist at all (e.g., Jay Kaufmann claimed he did not owe $ 100,000 to Nathans), or were never formally made collateral (e.g., Devendorf never did receive a 10 percent interest in72 Jay W. Kaufmann & Co.) In summary, Devendorf testified that he was the victim of an elaborate swindle by Nathans. To corroborate this testimony, petitioners produced an affidavit signed by Nathans in 1975 admitting the truth of Devendorf's story. Petitioners produced no documentary evidence. They explain that there are no documents in this case because all the advances between Devendorf and Nathans were done on an informal, friendly basis. Thus, the petitioners' case appears to stand or fall on the credibility of Nathans' affidavit and Devendorf's testimony that intentional mis-representations produced the losses described herein. After weighing all the evidence in this case, and taking into account Devendorf's demeanor at trial we concluded that Devendorf's testimony and the statements contained in Nathans' "confession" are not credible for the following reasons: First, Devendorf portrays himself as a naive young man, unknowledgeable in the ways of the business world. This, he says, explains why he made no investigations of his friend's assertions and why he never asked for any papers to be drawn up. While it is true that even the naive are allowed theft loss deductions73 under the Internal Revenue Code, Nichols v. Commissioner, 43 T.C. 842">43 T.C. 842, 886 (1965), we do not believe Devendorf was as naive as he now claims to have been. Devendorf was a law school graduate in 1970. He presumably knew how to draw up legal documents and ask questions about what he heard when such large sums of money were involved. More importantly, Devendorf's behavior toward Nathans since 1973 has hardly been that of a man who was consistently lied to and cheated out of $ 200,000. It would only be human nature for Devendorf to want to sue Nathans civilly for recovery of the "stolen" funds or have a criminal complaint issued against Nathans. Devendorf worked for a district attorney's office from 1973 to 1976, so he certainly knew how to bring such actions. Yet he contends he turned the other cheek. He argues that it would have served no purpose to bring a criminal suit against Nathans because Nathans out of jail was more likely to earn money and repay him than Nathans in jail. Additionally, he argues, a civil suit in 1973 would have been useless since Nathans was penniless and judgment-proof at the time. We find such reasoning a bit inconsistent: If Devendorf74 anticipated that Nathans might be able to earn money out of jail, presumably a civil judgment enforceable for 20 years, 2 would have some value in years subsequent to 1973. A more likely explanation for Devendorf's failing to prosecute civilly or criminally is that no theft actually occurred. 3Another factor which seems to belie Devendorf's testimony that Nathans swindled him repeatedly in 1970 and 1971 is the fact that the two men have done favors for each other well after Nathans' alleged theft was uncovered in 1973. Devendorf had stayed in touch with Nathans throughout the latter's incarceration on drug smuggling charges in 1976. On one occasion learning that Nathans was ill, Devendorf interceded on Nathans75 behalf and got Nathans moved from federal prison in Danbury, Connecticut, to a hospital in Lexington, Kentucky. We find it not a little surprising that the alleged victim of a theft would be so solicitous as to the health of the swindler. Finally, in 1975 Nathans signed an affidavit entirely confessing the truthfulness of Devendorf's swindle story. The statute of limitations had not run on larceny at the time Nathans signed this paper. Devendorf did not choose to use this document to obtain a civil or criminal judgment against Nathans. Instead, Devendorf used the confession merely to assist in the proof of the instant case. Nathans was led to understand at the time he signed this confession that it was intended for use in Devendorf's dispute with the Internal Revenue Service. 4This continued friendship and willingness to do favors for each other seems hard to explain if Nathans actually76 swindled Devendorf. It is certainly possible that victim and thief could remain friends after a $ 200,000 swindle, but we do not find it probable. In sum, we do not feel that Devendorf's story and Nathans' tax confession are credible. Accordingly, petitioners have failed in their burden of proving that any loss they might have sustained in 1973 was the product of theft. Respondent asserts that these advances were not the product of theft, but rather that they simply constituted nonbusiness loans. At trial petitioners were unclear as to whether they challenged this particular assertion of respondent. Petitioners' theft loss claim would, of course, not be inconsistent with the fact that the advances in question were originally intended as loans. However, petitioners made no effor to prove that Devendorf was in the business of making loans. Devendorf admitted that at least the advance of $ 65,000 to Nathans to help pay the estate taxes on his father's estate was a loan. Petitioners' 1970 income tax returns also show that they considered this particular advance a loan; they reported $ 3,900 of interest income received from Nathans in that year. In the absence of any documentation77 to the contrary and in light of the evidence adduced by petitioners which actually supports part of respondent's determination, we hold the 1970 and 1971 advances to be nonbusiness loans. To the extent any of the advances were not intended as loans, they presumably represent intended investments in Nathans' various projects. In the case of taxpayers other than corporations, losses arising out of nonbusiness loans are treated as short-term capital losses. Sec. 166(d). Losses on investments likewise normally are treated as capital losses. Sec. 1211; cf. sec. 1244. We need not decide whether the loans or investments became worthless in 1973, and therefore whether any losses occurred in 1973, because in this case the existence of capital losses would not entitle petitioners to net operating loss carryback deductions in the years 1970 and 1971. Sec. 172(d)(2)(A). To reflect the foregoing, Decision78 will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, unless otherwise specifically indicated.↩2. N.Y. Civil Practice Law and Rules sec. 211(b) (McKinney 1972). ↩3. We are by no means saying that failure to prosecute Nathans bars petitioners from taking a theft loss deduction; that is clearly not the law. See, e.g., Jones v. Commissioner, 24 T.C. 525↩ (1955). Such failure, however, does cast doubt on Devendorf's story when not adequately explained.4. Devendorf's approach appears inconsistent. Having first built his case upon Nathans' duplicitousness, he now expects this Court to accept as true the statements in Nathans' affidavit. Nothing in the record convinces us that we should give the affidavit any credence whatever.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622187/	William R. Miller and Nancy C. Miller v. Commissioner.Miller v. CommissionerDocket No. 4854-69 SC.United States Tax CourtT.C. Memo 1970-167; 1970 Tax Ct. Memo LEXIS 198; 29 T.C.M. (CCH) 741; T.C.M. (RIA) 70167; June 22, 1970, Filed William R. Miller, pro se, 6815 Alnwick Ct., Indianapolis, Ind.James McGrath, for the respondent. IRWINMemorandum Findings of Fact and Opinion IRWIN, Judge: The Commissioner determined a deficiency of $324.64 in petitioners' Federal income tax for the calendar year 1967. Due to a concession made by petitioners in their petition, the sole issue for decision is whether petitioners are entitled to a casualty loss deduction under section 165(c)(3) of the Internal Revenue Code of 1954. 1Findings of Fact William R. (hereinafter petitioner) and Nancy C. 199 Miller are husband and wife, who filed a joint Federal income tax return for the calendar year 1967 with the district 742 director of internal revenue, Indianapolis, Indiana. At the time of the filing of the petition herein, they resided in Indianapolis. On November 30, 1965, petitioners purchased a house located on Lot No. 236, Avalon Hills, Section 9, commonly known as 6815 Alnwick Court, Indianapolis, Indiana. The desirability of this lot was enhanced by the large Beech and Maple trees located thereon. In fact, wooded lots situated in the Avalon Hills area cost approximately $2,500 more than similarly situated unwooded lots. On December 2, 1965, the property in question was graded and leveled. In the opinion of a landscape gardener and tree surgeon, the grading of fill dirt of the root system of the trees located on the lot in question caused them to die because the fill dirt prevented osmotic action of absorption and aeration, thereby suffocating the trees. As of the date on which the grading occurred, the trees were, in the gardener's opinion, doomed. An appraisal of the property in question was made in February 1968. At that time the fair market value of the property200 prior to the loss of the trees was $42,500, whereas the value thereof after the loss in question was $41,000. According to a real estate appraiser, the loss would be in the same amount had the appraisal been made in February 1966. Some of the trees were removed in the spring of 1967, at which time it was apparent that they were dead. Other trees which still manifested some signs of life were not removed until the fall of 1967, at which time there was no doubt that these trees were also dead. Petitioners claimed a $1,400 2 casualty loss deduction on their 1967 income tax return which respondent disallowed in its entirety. Opinion As a result of improper grading, certain trees situated on petitioner' property suffocated and died. Petitioners claimed a casualty loss deduction therefor, which respondent disallowed. The issue presented for our decision is whether the damage to the trees caused by improper grading is a casualty loss within the meaning of section 165(c)(3) which provides in pertinent part as follows: SEC. 165. LOSSES. 201 (a) General Rule. - There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. * * (c) Limitation on Losses of Individuals. - In the case of an individual, the deduction under subsection (a) shall be limited to - * * * (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. * * * The phrase "other casualty" has been defined as "an event due to some sudden, unexpected, or unusual cause." Matheson v. Commissioner, 54 F. 2d 537, 539 (C.A. 2, 1931). Under the rules of ejusdem generis, "other casualty" must have the same characteristics as fire, storm, or shipwreck. Appleman v. United States, 338 F. 2d 729 (C.A. 7, 1964); Shearer v. Anderson, 16 F. 2d 995 (C.A. 2, 1927); Keenan v. Bowers, 91 F. Supp. 771">91 F. Supp. 771 (E.D.S.C., 1950). We have recognized that the "term 'suddenness' is comparative, and gives rise to an issue of fact,". Rudolf Lewis Hoppe, 42 T.C. 820">42 T.C. 820, 823 (1964), affd. 354 F. 2d 988 (C.A. 9, 1965); E.G. Kilroe, 32 T.C. 1304">32 T.C. 1304, 1306 (1959).202 Therefore, a careful examination of the facts in the case before us is warranted in order to determine whether the requisite "suddenness" was present so as to justify a casualty loss deduction under section 165(c)(3). The grading took place on December 2, 1965. Photographs introduced into evidence by petitioner show that some of the trees in question had died as of the spring of 1967, whereas others appeared healthy at that time and did not die until the fall of the same year. The process by which the trees died was described as suffocation of the roots. In the words of a tree surgeon, the fill dirt prevented osmotic action of absorption and aeration, thereby suffocating the trees. The very nature of the cause of death indicates that the loss caused by improper grading arose through a progressive deterioration rather than a sudden occurrence. 743 While it may be true, as petitioner contends, that the grading close to the trees and their root systems was unexpected, the death of the trees is the result of progressive deterioration, here a minimum of 16 months. While we sympathize with petitioner's situation, we are unable to find that requisite degree of "suddenness" or "unexpectedness" 203 which would warrant a deductible casualty loss. The damage to the trees, according to the evidence, was due to the gradual suffocation of the root systems. Accordingly, we are constrained to deny the deduction claimed therefor. Fay v. Helvering, 120 F. 2d 253 (C.A. 2, 1941), affirming 42 B.T.A. 206">42 B.T.A. 206 (1940); Matheson v. Commissioner, supra.Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. Although the actual loss was $1,500, section 165(c)(3)↩ limits the deduction for a casualty loss to the amount of the loss in excess of $100.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622189/	George H. Huntington and Elizabeth D. Huntington v. Commissioner.George H. Huntington v. CommissionerDocket No. 39074.United States Tax Court1953 Tax Ct. Memo LEXIS 147; 12 T.C.M. 918; T.C.M. (RIA) 53277; August 14, 19531953 Tax Ct. Memo LEXIS 147">147 The exchange of shares of stock in a corporation that was essentially a holding company for shares in a new company that was essentially an operating company was a transfer that gave rise to gain or loss under the Revenue Act of 1917. John T. Sapienza, Esq., for the petitioners. Paul M. Stewart, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion Respondent determined a deficiency of $10,435.30 in the income tax of petitioners for the year 1948, as a result of his finding that an improper basis was used in computing gain or loss on the sale of certain securities in 1948 by petitioner Elizabeth D. Huntington, hereinafter referred to as petitioner. Prior to 1917 petitioner owned 500 shares of the common stock of Phelps, Dodge & Co. which were exchanged in 1917 for an equal number of shares of stock in Phelps Dodge Corporation. In 1929 the stock was split four for one and petitioner sold her 2,000 shares in 1948. The only issue to be decided is whether the exchange of stock in 1917 was taxable or non-taxable. The parties have stipulated the applicable basis for gain or loss in either event. The facts were fully stipulated and we1953 Tax Ct. Memo LEXIS 147">148 incorporate them herein by reference. Certain of the pertinent facts are summarized below. Findings of Fact Petitioners, husband and wife, filed a joint income tax return for the year 1948 with the collector of internal revenue for the second district of New York. Petitioner had acquired, between 1909 and 1915, 500 shares of the capital stock of Phelps, Dodge & Co., a corporation organized under the laws of New York, on December 11, 1908. That company was at all times engaged primarily in holding the stock of other companies and owned all the capital stock of the following corporations: Copper Queen Consolidated Mining Company Detroit Copper Mining Company of ArizonaBurro Mountain Copper Company Stag Canon Fuel Company Moctezuma Copper Company Bunker Hill Mines Company Phelps Dodge Mercantile Company Phelps, Dodge & Co. did not directly hold any mining properties or carry on any mining activities, nor did it own stock in any companies other than those listed above. Its only activity other than as a holding company was the selling of metals. In 1916 its income from the sale of metals amounted to $649,453.73, while its income from dividends on the stock of its subsidiaries1953 Tax Ct. Memo LEXIS 147">149 was $19,100,000. The Copper Queen Consolidated Mining Company, incorporated under the laws of New York on August 10, 1885, was the largest subsidiary of Phelps, Dodge & Co. It was primarily engaged in carrying on the business of mining. Its gross income for 1916 was from the following sources: Sales (Mining)$29,457,129.69Interest794.65Dividends from Subsidiaries0Dividends from Others249,027.20Pursuant to certain resolutions passed by the board of directors of Phelps, Dodge & Co. on March 8 and 26, 1917, and by the board of directors of the Copper Queen Consolidated Mining Company on March 12, 1917, the following actions were taken: 1. The Copper Queen Consolidated Mining Company changed its name to Phelps Dodge Corporation, effective March 14, 1917, and increased its authorized capital stock from $2,000,000 to $50,000,000, consisting of 500,000 shares of $100 par value stock. This was identical to the capital structure of Phelps, Dodge & Co. 2. Phelps, Dodge & Co., on March 20, 1917, transferred to Phelps Dodge Corporation all of the capital stock of the following corporations: Detroit Copper Mining Company of ArizonaBurro Mountain Copper1953 Tax Ct. Memo LEXIS 147">150 Company Stag Canon Fuel Company Moctezuma Copper Company Bunker Hill Mines Company Phelps Dodge Mercantile Company In return for the transfer of the stock of those six companies, Phelps, Dodge & Co. received certificates of indebtedness of Phelps Dodge Corporation in the amount of $73,000,000. 3. On March 31, 1917, Phelps Dodge Corporation acquired from Phelps, Dodge & Co. all of its remaining assets (with the exception of the 20,000 shares of Phelps Dodge Corporation then owned by Phelps, Dodge & Co.) giving in return therefor additional certificates of indebtedness amounting to $1,450,000. 4. On March 31, 1917, Phelps, Dodge & Co. accepted 430,000 shares of stock of Phelps Dodge Corporation in full payment and cancellation of the certificates of indebtedness amounting to $74,450,000. 5. On or about May 15, 1917, Phelps, Dodge & Co. distributed to its stockholders the 450,000 shares of stock of Phelps Dodge Corporation, receiving in exchange all of its own stock. Petitioner exchanged her 500 shares of Phelps, Dodge & Co. stock for 500 shares of Phelps Dodge Corporation. 6. Immediately thereafter Phelps, Dodge & Co. was dissolved. 7. Phelps Dodge Corporation dissolved1953 Tax Ct. Memo LEXIS 147">151 the Detroit Copper Mining Company of Arizona, the Burro Mountain Copper Company, and the Stag Canon Fuel Company and thereafter continued to own and operate the mining properties of those companies as branches of its own mining operations. It did not dissolve the Moctezuma Copper Company which operated in Mexico, nor the Bunker Hill Mines Company and the Phelps Dodge Mercantile Company. On March 31, 1917, the officers and directors of Phelps, Dodge & Co. and Phelps Dodge Corporation were identical with one minor exception. The certificates of incorporation of both companies conferred general powers to operate either as mining or holding companies. Differences in the corporate powers conferred by the certificates were concerned with activities other than mining or holding stock. In the resolution of the board of directors of Phelps, Dodge & Co. passed March 8, 1917, and proposing the exchange of stock described above, the following language was used: "WHEREAS the operation and conduct of the business of said properties (the various subsidiaries) with separate corporate organizations is complicated, increases expenses and causes confusion; and * . "WHEREAS in order to change1953 Tax Ct. Memo LEXIS 147">152 the form of corporate organization from the holding company plan to the owning and operating plan so far as lawful and consistent, and to secure a more efficient, simple and economical conduct of the business of said companies, it is proposed that the following action be taken: -" * * After the conclusion of the 1917 transactions, Phelps Dodge Corporation was still primarily engaged in carrying on the mining business, and in fact did so to an even greater extent as a result of the acquisition of the mining properties formerly owned by the Detroit Copper Mining Company of Arizona, the Burro Mountain Copper Company, and the Stag Canon Fuel Company. For the year 1918 the gross income of Phelps Dodge Corporation consisted of the following: Sales (Mining)$38,731,569.58Interest503,527.58Dividends from Subsidiaries2,470,000.00Dividends from Others454,951.18Commissions on Sales343,098.35On February 25, 1929, Phelps Dodge Corporation made a four for one split-up of its stock, changing the par value from $100 to $25 per share, and petitioner thereafter held 2,000 shares instead of 500 shares. Petitioner sold the 2,000 shares in 1948 for a net price1953 Tax Ct. Memo LEXIS 147">153 of $114,065.29. The interest of petitioner in Phelps Dodge Corporation was substantially different from her interest in Phelps, Dodge & Co. The 1917 exchange was a taxable transaction. The adjusted basis for the purposes of sale of the 2,000 shares of Phelps Dodge Corporation by petitioner in 1948 is $112,914.62. Opinion ARUNDELL, Judge: After the passage of appropriate corporate resolutions, Phelps, Dodge & Co. in 1917 entered into a series of transactions with its principal subsidiary, re-named Phelps Dodge Corporation, whereby Phelps, Dodge & Co. was dissolved after its stockholders had exchanged their stock for an equal number of shares in Phelps Dodge Corporation. It is petitioner's contention that although the exchange in 1917 was then treated as nontaxable by all interested parties in good faith, subsequent decisions indicate that the exchange was taxable. It was on that theory that petitioner, in preparing her income tax return for 1948, considered the fair market value at the time of the 1917 exchange the appropriate basis for computing gain or loss on the sale of her 2,000 shares of stock in Phelps Dodge Corporation. It is respondent's contention that the exchange1953 Tax Ct. Memo LEXIS 147">154 in 1917 was nontaxable and that petitioner's basis for the stock in the predecessor corporation, Phelps, Dodge & Co., is applicable. The Revenue Act in effect at the time of the exchange contains no provision covering corporate reorganizations and related transactions. Our decision, then, will turn upon the application of the case law which has developed. Petitioner relies primarily on , certiorari denied , and . In the Bancker case, the taxpayer exchanged, with another individual, stock of the Coca-Cola Company, an operating company, for stock of the Coca-Cola International Corporation which had no substantial assets other than a majority of the outstanding stock of the Coca-Cola Company. Coca-Cola International Corporation was then engaged in reducing its capital stock by offering two shares of Coca-Cola Company for each share of its own stock. The two for one exchange was in accord with fair market value. In holding the exchange taxable, the Court said: "Notwithstanding the close relationship maintained in 1930 between the shares involved in Bancker's exchange, 1953 Tax Ct. Memo LEXIS 147">155 they were essentially different. The corporations, though organized under the same law, probably had different corporate powers and certainly were engaged in wholly different activities. A share of Coca-Cola stock entitled its owner to vote in the meetings of that company, to draw dividends directly from it, and to share in its assets on dissolution. A share of International could at the holder's option be used to make him the holder of two shares of Coca-Cola, but until he exercised the option he was entitled only to vote in the meetings of International, to receive such dividends as it declared, and on dissolution to share in its then assets. * * * It was a true conversion of his capital into a substantially different investment, and served to realize and to measure the gain he had from his original purchase of Coca-Cola stock." Cf. Respondent attempts to distinguish the Bancker and Cullinan cases from the question before us by pointing out that in both of those cases the taxpayer was parting with stock in an operating company and receiving stock in a holding company, whereas the reverse is true in the case at bar. That attempted distinction1953 Tax Ct. Memo LEXIS 147">156 has no validity in the light of the Court's language in $2 . There the taxpayers exercised the option of exchanging stock of Coca-Cola International Corporation for stock of Coca-Cola Company. In ruling on an issue not germane to the question here, the Court said: "If the Prescotts' transaction be looked on as an exchange of stocks, the case is ruled by Bancker's Case. It is not true that the Prescotts in receiving the shares of Coca-Cola merely got what they already equitably owned as stockholders. The assets of a corporation are not the property of the stockholders, either in law or in equity, but belong to the corporation, and are subject to its disposal and to its debts. * " We think that in the case at bar petitioner's interest after the exchange was essentially different from her previous interest and, therefore, the transaction was one that gave rise to gain or loss. Respondent concedes in his brief that Phelps, Dodge & Co. was a holding company to the extent of about 90 per cent and that Phelps Dodge Corporation was an operating company to the same extent. Prior to the exchange, petitioner had no direct rights with1953 Tax Ct. Memo LEXIS 147">157 respect to the mining properties. Her only interest was in the holding company. One of the principal purposes of the reorganization as set forth in the corporate resolution was a change from the holding company plan to the owning and operating plan. Respondent cites , and , in support of his contention that petitioner's interest was not essentially changed by the exchange and that it should be regarded as nontaxable. In neither of those cases was there a question of a change from a holding company to an operating company or vice versa. We think that respondent was in error in not permitting the use of the adjusted fair market value of the securities at the time of the exchange as petitioner's basis. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622190/	E. R. SQUIBB & SONS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.E. R. Squibb & Sons v. CommissionerDocket No. 84283.United States Board of Tax Appeals36 B.T.A. 260; 1937 BTA LEXIS 744; June 30, 1937, Promulgated 1937 BTA LEXIS 744">744 Where a corporation purchases shares of its own capital stock and sells them at a profit, the profit constitutes taxable income of the corporation. M. T. Moore, Esq., Joseph C. White, Esq., and Thomas F. Boyle, Esq., for the petitioner. Rudy P. Hertzog, Esq., for the respondent. SMITH 36 B.T.A. 260">261 OPINION. SMITH: This proceeding is for the redetermination of a deficiency in income tax for 1932 in the amount of $10,985.71. The petitioner alleges that the respondent erred in the determination of the deficiency - (1) in including in taxable income $75,763.50 as profit on the sale of its capital stock during the taxable year, and (2) in failing to allow as an additional deduction from gross income the amount of $4,063.10 accrued as additional liability for New York franchise tax for the year beginning November 1, 1932. The respondent concedes that the petitioner is entitled to the deduction from gross income of $4,063.10 additional liability for New York franchise tax. The facts bearing upon the profit realized by the petitioner from the sale of its own shares of stock have all been stipulated. In 1929 the Squibb Plan, Inc. (Delaware corporation1937 BTA LEXIS 744">745 hereinafter called the Squibb Plan), was organized for the purpose of promoting and increasing the distribution and sale of the petitioner's products. Pursuant to the plan, of which the organization of the Squibb Plan was a part, the distributors of the petitioner's products were enabled to participate in the petitioner's profits by subscribing at $50 per share for the class of stock of Squibb Plan known as "Distributors' Preferred Shares." In furtherance of that participation plan, by an agreement between the petitioner and Squibb Plan entered into August 14, 1929, the petitioner agreed to make certain paymetns to Squibb Plan based upon the amount of net purchases made from the petitioner by holders of distributors' preferred shares, and, in addition, to sell to Squibb Plan one share of common stock of the petitioner at a price of $50 per share for each share of distributors' preferred shares issued to the distributors of petitioner's products. During the year 1929, in which the agreement between the petitioner and Squibb Plan was entered into, common stock of the petitioner was selling at a range of from $46 to $82 per share. Petitioner had on hand no shares of its common stock1937 BTA LEXIS 744">746 to sell to Squibb Plan, and to carry out the agreement purchased shares of its own stock in the open market. During 1932 the petitioner sold shares of stock purchased in the open market as follows: SharesSelling priceCostProfitCommon stock sold to:Squibb plan6,050$302,500.00$227,167.50$75,332.50Employees703,101.002,785.00316.00Preferred stock sold to individuals504,540.004,425.00115,00Total6,170310,141.00234,377.5075,763.5036 B.T.A. 260">262 All but 70 shares of the common stock of the petitioner sold by it in 1932 were purchased in the open market for the purpose of enabling it to fulfill its contractual obligation with Squibb Plan in accordance with the agreement of August 14, 1929. The 70 shares of its common stock sold to several of its employees during 1932 were sold upon the exercise of warrants held by the employees which had therefore been granted by the petitioner in consideration of the employees' efforts in promoting the success of Squibb Plan by securing subscriptions for its preferred shares. In this proceeding the petitioner submits that: The accretion represented by the excess of consideration1937 BTA LEXIS 744">747 received by the Petitioner upon reissue of its shares over the consideration given in acquiring such shares is capital and is not income within the definition of gross income in Section 22(a) of the Revenue Act of 1932. The respondent, on the other hand, contends that the profit of $75,763.50 was taxable profit of the petitioner for 1932. Gross income as defined by section 22 of the Revenue Act of 1932 broadly includes: * * * gains, profits, and income derived from * * * sales, or dealings in property, * * * the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * * In , the Supreme Court, in rejecting the contention that certain payments there involved did not constitute income, said: * * * If these payments properly may be called income by the common understanding of that word and the statute has failed to hit them it has missed so much of the general purpose that it expresses at the start. Congress intended to use its power to the full extent. 1937 BTA LEXIS 744">748 , * * In , the Court, referring to a similar section of a previous act, said that the statute reveals in its provisions an intention on the part of Congress to tax "pretty much every sort of income subject to the federal power." Cf. . In view of the all-inclusive terms of the statute it is evident that the profit of $75,763.50 realized by the petitioner from the sale of its own shares of stock in 1932 is subject to tax unless the transaction can be considered a capital transaction. As stated in ; certiorari denied, : Whether the acquisition or sale by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature 36 B.T.A. 260">263 of the transaction involved. * * [Citing 1937 BTA LEXIS 744">749 ; In the Woods Machine Co. case the taxpayer, in settlement of a patent infringement suit, received shares of its own capital stock which it retired, and the question was whether such acquisition gave rise to taxable gain. The court held that if stock is acquired or parted with in connection with the readjustment of the capital structure, capital gain would not be realized, but further stated: * * But where the transaction is not of that character, and a corporation has legally dealt in its own stock as it might in the shares of another corporation, and in so doing has made a gain or suffered a loss, we perceive no sufficient reason why the gain or loss should not be taken into account in computing the taxable income. * * * Similarly, in , the transaction in which the taxpayer received some of its own stock as partial consideration for a sale of its assets was regarded as taxable. To the same effect see 1937 BTA LEXIS 744">750 . In the last named case the court stated: The Board's decision that a corporation realizes neither a gain nor loss from the purchase of its stock was in keeping with its position at the time when it determined this case (; ; ), although its earlier decisions were to the contrary. ; . Meanwhile, the courts have held that a corporation acquiring its own stock may recognize a gain or loss provided the purpose of the transaction was not merely a capital readjustment [, certiorari denied , but a sale of property. (C.C.A. 1); 1937 BTA LEXIS 744">751 (D.C.W.D.Pa.); (C.C.A. 1). Since these decisions, the Board has adopted the rule laid down by the courts. . The Board reached a like conclusion in . The petitioner contends that the purchase and sale of its own shares of stock was not for the purpose of deriving a profit from the transactions involved, but was necessitated by the agreement which it had entered into with Squibb Plan on August 14, 1929. We are of the opinion that it is immaterial that the transactions were necessitated by the agreement which it had with Squibb Plan. The petitioner admittedly realized a profit of $75,763.50 from the sale of its own shares of stock which it previously had purchased in the open market. That profit is clearly taxable. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622192/	MONTGOMERY B. CASE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PHILIP L. GERHARDT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. E. MORGAN BARRADALE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. BILLINGS WILSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. %John j. mulcahy, petitioner, v. commissioner of internal/ REVENUE, RESPONDENT.Case v. CommissionerDocket Nos. 75816, 77375, 77376, 77377, 80769.United States Board of Tax Appeals34 B.T.A. 1229; 1936 BTA LEXIS 580; October 28, 1936, Promulgated 1936 BTA LEXIS 580">580 The compensation of officers and employees of the Port of New York Authority held immune from Federal income tax. Julius Henry Cohen, Esq., Austin J. Tobin, Esq., and Wilbur La Roe, Jr., Esq., for the petitioners. George D. Brabson, Esq., Francis H. Uriell, Esq., and John D. Kiley, Esq., for the respondent. STERNHAGEN 34 B.T.A. 1229">1230 Respondent determined the following deficiencies and penalties in petitioners' income taxes: YearDeficiencyPenaltyMontgomery B. Case1931$551.99Philip L. Gerhardt1933232.74E. Morgan Barradale1933439.57$109.89Billings Wilson1933733.14183.29John J. Mulcahy1932695.00173.75The petitioners were employees of the Port of New York Authority, and assail the inclusion in their income of the compensation paid to them by the Port Authority. FINDINGS OF FACT. Montgomery B. Case is a resident of Englewood, New Jersey; Philip L. Gerhardt, of Brooklyn, New York; E. Morgan Barradale, of South Orange, New Jersey; Billings Wilson, of New York, New York; and John J. Mulcahy, of New York, New York. All were employees of the Port of New York Authority in the1936 BTA LEXIS 580">581 respective taxable years. The Port of New York Authority (herein called the Port Authority) is a corporate body organized pursuant to a compact entered into between the States of New York and New Jersey on April 30, 1921, 1 to which Congress consented by a resolution approved August 23, 1921. 2 After reciting the great growth of commerce in the port of New York, and the benefit of cordial cooperation between the States of New York and New Jersey in the encouragement of capital investment and the formulation and execution of necessary physical plans through a joint agency, the compact created and defined the limits of a port district, and provided for the creation of the Port Authority as a body, corporate and politic, consisting of 12 commissioners: * * with full power and authority to purchase, construct, lease and/or operate any terminals or transportation facility within said district; and to make charges for the use thereof; and for any of such purposes to own, hold, lease and/or operate real or personal property, to borrow money and secure the same by bonds or by mortgages upon any property held or to be held by it. * * * Under the terms of the compact, the Port Authority1936 BTA LEXIS 580">582 was not empowered to pledge the credit of either state except by legislative permission; facilities owned or operated by it were made subject to regulatory laws and regulating commissions as if owned or operated by a 34 B.T.A. 1229">1231 private corporation, and the powers of any municipality to develop or improve port and terminal facilities were left unimparied. A plan for comprehensive port development was to be adopted by the legislatures of the two states, and the Port Authority was directed to make plans from time to time, supplementary or amendatory thereto; to make recommendations to the legislatures or to Congress for the better conduct of the port's commerce and for the increase and improvement of its transportation and terminal facilities, and to institute or intervenue in proceedings before the Interstate Commerce Commission and like bodies to further such improvements. It was authorized to make suitable rules and regulations, subject to constitutional limitations and the exercise of the power of Congress, for the conduct of navigation and commerce, to be effective upon the concurrence or authorization of the state legislatures. It was authorized to provide penalties for violations1936 BTA LEXIS 580">583 thereof, and they have been provided and incorporated into the states' criminal laws. It was given power to fix tolls and charges for the use of all its facilities. Salaries and other expenses incurred by it were to be appropriated by the state legislatures until its operating revenues were adequate to meet them, and power to incur obligations prior to such appropriations was denied. This compact, which amended and supplemented a former one entered into between New York and New Jersey in 1834, was induced by the necessity, widely recognized, for joint state action in the development as a whole of the Port of New York, which lies partly within the jurisdiction of each state. It was evolved after a series of efforts by the two states. Between 1911 and 1914 New Jersey appointed several successive commissions to study the port problem in cooperation with a New York commission. After reports by these commissions, New Jersey made efforts to secure a readjustment of freight rates to the port district, which led to a proceeding before the Interstate1936 BTA LEXIS 580">584 Commerce Commission, New York Harbor Case,47 I.C.C. 643, and aroused considerable opposition from the State and City of New York and various civic and commercial organizations. As a result of discussion of the desirability of unifying the port's transportation system, the New York-New Jersey Port and Harbor Development Commission was created by the legislative action of each state in 1917, and $450,000 was appropriated for its study of port and harbor conditions. After a thorough survey the Commission made a report to the legislatures in 1918, recommending a bistate corporate agency to carry out a comprehensive plan of port development, and a bistate legislative commission was appointed to cooperate with the former commission in a revision of its tentative proposals. This joint commission submitted a voluminous report in 1919, which, after reviewing the growing commerce of the port, the 34 B.T.A. 1229">1232 inefficiency of its terminal facilities, and the resulting hardship on its eight million inhabitants, described the port problem as primarily a railroad problem, and urged the adoption of an improvement plan comprising a complete reorganization of railroad terminal1936 BTA LEXIS 580">585 facilities, a joint operation and connection of railway belt lines, pier improvements, the establishment of food distribution stations, warehouses, highways, etc. The adoption of this program was urged by two successive governors of New York as a public necessity, and the requisite acts for the compact creating the Port Authority were finally passed by the legislatures of both states in April 1921. Pursuant to the mandate of the compact, the Port Authority investigated conditions within the port district, and recommended to the governors of the two states a comprehensive plan of port improvement in a report dated December 21, 1921. This comprehensive plan was adopted by acts of the legislatures of each state passed and approved in 1922. 3 It embraced nine "principles to govern development", as follows: (1) Unification of terminal operations within the port district; (2) consolidation of shipments to eliminate duplication of effort and inefficient loading; (3) routing of commodities to avoid centers of congestion; (4) establishment of union terminal stations; (5) coordination of port and terminal facilities; (6) tunnels and bridges for freight; (7) Federal improvement of channels; 1936 BTA LEXIS 580">586 (8) highways for distribution by trucks; and (9) methods for prompt relief pending future development. More specifically, the plan called for tunnels and bridges connecting New York and New Jersey, suitable markets, union inland terminal stations and warehouses in Manhattan, numerous belt railway lines and connections within the port district, an automatic electric system connecting Manhattan with the middle belt line and railroads, and union terminal stations in Manhattan to contain storage space and space for other facilities. The Port Authority was further directed by the acts to proceed in accordance with the plan as rapidly as might be economically possible, with all necessary constitutional powers except that of levying taxes or assessments, to request Congress to make appropriations for deepening and widening channels, to apply to all Federal agencies for assistance, to cooperate with state highway commissioners so that state trunk highways might fit into the plan, to render such advice, suggestions, and assistance to municipal officials as would permit local and municipal port improvements to fit1936 BTA LEXIS 580">587 into the plan. Section 8 provides further: * * * The bonds or other securities issued by the port authority shall at all times be free from taxation by either state. The port authority shall be regarded as the municipal corporate instrumentality of the two states for the 34 B.T.A. 1229">1233 purpose of developing the port and effectuating the pledge of the states in the said compact, but it shall have no power to pledge the credit of either state or to impose any obligation upon either state or upon any municipality, except as and when such power is expressly granted by statute, or the consent by any such municipality is given. Congress approved the plan by Joint Resolution of July 1, 1922, expressly reserving Federal rights and jurisdiction over the region affected. Thereafter the governors of the two states advised the Port Authority that they favored the construction at the earliest possible moment of bridges and tunnels between New York and New Jersey. The Port Authority proceeded to make preliminary studies of traffic conditions, building costs, and other pertinent questions for various bridges and tunnels, and in its consideration of the several proposed projects, held public1936 BTA LEXIS 580">588 hearings after published notice, which were attended by the public and representatives of various interested organizations, who frequently had conflicting views. It conferred and cooperated with commissions and agencies which had studied or were interested in the particular project. It considered prior studies and reports of individuals and commissions related thereto, and made full reports to the governors and legislatures of its findings and recommendations. After these studies and reports, the state legislatures in 1924 passed acts authorizing the Port Authority to construct, operate, maintain, and own two bridges with the necessary approaches across the Arthur Kill, one between Perth Amboy, New Jersey, and Tottenville, New York, 4 and one between Elizabeth, New Jersey, and Howland Hook, New York, 5 and appropriated $200,000 therefor. The Port Authority thereupon made borings, surveys, and engineering studies as to the character and location of the bridges, thoroughly canvassed local sentiment, attended meetings of local interests and meetings with committees appointed by the mayors of the three municipalities concerned, made counts of the vehicular traffic crossing all1936 BTA LEXIS 580">589 ferries on the Arthur Kill and Kill van Kull, investigated the records of the ferry companies, and made other pertinent studies. In 1925 construction of the proposed bridges was approved by the War Department, and in 1926 commenced. The bridges, known as the Outer-bridge Crossing Bridge and the Goethals Bridge, respectively, were completed on June 29, 1928, at a cost of over $17,000,000, financed by advances of $4,000,000 to the Port Authority by the two states and the sale of "New York - New Jersey Interstate Bridge Bonds - Series A" in the amount of $14,000,000. The bridge approaches were designed in cooperation with the state highway commissions to fit into 34 B.T.A. 1229">1234 the highway system and allow a circular flow of traffic at full capacity. In March 1931 the Port Authority engaged in the operation of a bus service across the Goethals Bridge to maintain traffic formerly attracted by private companies which had failed. In 1925 the legislatures of the two states similarly authorized the Port Authority to construct, operate, 1936 BTA LEXIS 580">590 maintain, and own a bridge, with the necessary approaches, across the Hudson River from Manhattan to Fort Lee, New Jersey, and each appropriated $100,000 for the preliminary studies. 6 After reports to the governors, the Port Authority commenced construction in 1927, and on October 25, 1931, this bridge, known as the George Washington Bridge, was opened to traffic, having been completed at a cost of over $57,000,000, financed by state advances of $9,800,000 and the sale of "New York-New Jersey Interstate Bridge Bonds - Series B" in the amount of $50,000,000. In the construction of this bridge, the Port Authority acquired four blocks in Manhattan between 178th and 179th Streets, over which it built an elaborate system of approach ramps to Riverside Drive. It is now completing a tunnel, carrying the approaches to the east side of Manhattan, which will be dedicated to the city and used by local traffic. On the New Jersey side the approaches were arranged to merge highway routes 1, 4, and 6 into a junction, running back to forkings a mile from the bridge head. The bridge has a traffic capacity for 30,000,0001936 BTA LEXIS 580">591 vehicles annually. Its center section was left unpaved because unnecessary for present demands. By similar legislation in 1925 the Port Authority was authorized to construct, operate, maintain, and own a bridge with the necessary approaches across the Kill van Kull from Bayonne, New Jersey, to Staten Island, New York, 7 which, after studies and reports, was begun in 1928 and completed in 1931, at a cost of over $13,000,000, financed by state advances of $4,100,000 and the sale of "New York-New Jersey Interstate Bridge Bonds, Series C" in the amount of $12,000,000. This is known as the Bayonne Bridge. Its approach in Bayonne was carried across railroad yards and waterfront streets to a less congested section of the city, and in Staten Island was laid over a filled-in quarry and arranged to permit a circular flow of traffic. The Port Authority has continuously owned, maintained, and operated these four bridges, charging tolls to defray their maintenance, operation, and general expenses and to meet interest charges and pay off the bonds, state advances and debt service on general and refunding bonds1936 BTA LEXIS 580">592 (which, however, under existing statutes can not be issued for any new facilities except four terminals), and, through its general reserve fund, debt service on its other bonds now outstanding. 34 B.T.A. 1229">1235 In 1934, the Outerbridge Crossing and Goethals Bridges produced tolls exceeding $400,000, paid by over 800,000 vehicles; the George Washington Bridge, $3,300,000, paid by over 6,150,000 vehicles; and the Bayonne Bridge, $210,000, paid by over 450,000 vehicles. The rate of toll was determined by the estimated annual amount necessary to meet operating expenses and interest and to provide a net amount for application against outstanding bonds. Since the Port Authority can raise money only by the sale of its securities or state advances, these estimates were made available to bankers interested in bidding for its bonds. Income or deficits from operation have been as follows: YearGoethals and Outerbridge Crossing BridgesWashington BridgeBayonne Bridge19281 $272,676.75192976,683.54193040,673.371931-23,340.21$504,264.081 $25,400.291932-187,272.171,473,363.61-101,466.111933-295,534.461,142,770.42-240,890.181934-298,851.291,356,476.67-163,848.671936 BTA LEXIS 580">593 Deficits were met from a general reserve fund of the Port Authority, and, in its annual reports, were attributed to a decline in traffic caused by the depression. In the operation of these bridges, the Port Authority maintains a uniformed police force who are designated by statute 8 as regular peace and police officers of both states with the usual police power to make arrests and issue summons. Between 1928 and 1935 the Port Authority, in connection with its development of bridge and tunnel approaches, acquired apartment houses and store buildings which it rented to minimize its loss of capital investment before their demolition. These operations resulted in a net income of $36,115.61 in 1931 and losses of $47,356.91 and $61,482.63 in 1932 and 1933, respectively. On December 31, 1933, it also had investments, aggregating $10,000, in the stock of 10 wholly owned subsidiary corporations, organized to acquire property for its projects or to manage the properties acquired for bridge and tunnel approaches before their utilization as such. 1936 BTA LEXIS 580">594 After studies begun in 1906 and culminating in legislation by New York and New Jersey for the construction of an interstate vehicular tunnel under the Hudson River, the Holland Tunnel was constructed between Manhattan and New Jersey pursuant to a bistate compact of December 30, 1919, and plans evolved by the New Jersey Interstate Bridge and Tunnel Commission and the New York Interstate Bridge 34 B.T.A. 1229">1236 and Tunnel Commission. The cost of this tunnel was met by direct appropriations of New York and a bond issue of New Jersey, which has since been refunded by a bond issue of the Port Authority. It was operated by the two commissions until 1930, when each state passed an act 9 merging the commissions with the Port Authority, which was thereby vested with the control, operation, and maintenance of the tunnel. In 1931 additional acts 10 were passed in which, in the interest of the general public, the states agreed: * * that the construction, maintenance, operation and control of all such bridges and tunnels, heretofore or hereafter authorized by the two states, shall be unified under the port of New York authority * * , to the end that the tolls and other revenues therefrom1936 BTA LEXIS 580">595 shall be applied so far as practicable to the costs of the construction, maintenance and operation of said bridges and tunnels as a group and economies in operation effected, it being the policy of the two states that such bridges and tunnels shall as a group be in all respects self-sustaining. The Holland Tunnel is producing a surplus of revenue which goes into the Port Authority's general reserve fund for application to deficits of other projects. The state legislatures further authorized the Port Authority to make plans for and construct a second tunnel to be known as the Midtown Hudson Tunnel, a project for the study of which each had appropriated $200,000 in 1930. 11 After studies and reports covering several years the Port Authority began construction in 1934, and expects to complete the work by 1938 at an estimated cost of $37,500,000 for the southern tube. It has acquired a 100-foot strip of land one-half mile long for the tunnel's Manhattan approach at 39th Street and 10th Avenue, and property in Weehawken for an elaborate1936 BTA LEXIS 580">596 New Jersey approach connecting with the state's highway system. The cost of construction is being met by a loan arrangement from the Federal Emergency Administration of Public Works, by virtue of which $2,500,000 of Midtown Hudson Tunnel notes were issued to refund prior bank loans for the project and the Government purchased installments of notes aggregating $12,300,000. In entering into this agreement, the Public Works Administration required and received the opinion of the Port Authority's general counsel that its notes were exempt from state and Federal taxation. The Port Authority has extensively studied the port district's system of transportation, highway, and terminal facilities and methods of handling freight used by the railways, ferry companies, and other transportation agencies, and has sought methods of remedying street, highway, and waterfront congestion within the district. In its reports, which are made annually or more often, it advised the 34 B.T.A. 1229">1237 governors and legislatures of both states that it was taking steps to remedy the congestion by an integrated and coordinated system1936 BTA LEXIS 580">597 of union inland freight terminals at various points in the port district, and it has been assisted in these projects by state appropriations and requisite legislation. It referred in its 1927 report to eight inland terminals in Manhattan already operated by railroads. The location and character of the first unit of this system, Inland Terminal No. 1, was determined after exhaustive research and studies and a public hearing at which the views of representatives of municipalities, railroads, shippers, consignees, warehousemen, civic and trade associations, property owners, and others interested were given. The Port Authority finally resolved to acquire a city block in Manhattan bounded by 15th and 16th Streets and 8th and 9th Avenues, and to erect upon it a terminal building of basements and upper stories, the basements and ground floor of which should be leased to trunk line carriers for receipt and delivery of freight and the upper floors leased for office, loft, and manufacturing purposes. The project received the approval of the governors and legislatures, and on December 31, 1930, the Port Authority entered into an agreement with the eight trunk line railroads entering the1936 BTA LEXIS 580">598 port district, after some initial reluctance on their part, to lease to them substantially all of the street and basement floors of the projected building for five years, with renewal options for nine successive five-year periods, to be used as a terminal station for the transportation, assemblage, and distribution of less than carload freight. The Port Authority acquired the proposed site by condemnation, and erected on it a building of 15 floors, 800 feet long and 200 feet wide, covering the entire block, and known as the Port Authority Commerce Building. The basement and 95 percent of the street floor are devoted to terminal purpose under the lease as a union station, without subdivision among the carriers, and the 13 upper floors are rented for manufacturing, office, loft, and industrial business purposes. The Port Authority maintains the portion of the building used for terminal purposes, but its facilities have been operated by the lessee railways since October 1932 through a joint agent, who is not an employee of the Port Authority. Under the system adopted by the railroads, shippers deliver less than carload freight, usually in the afternoon, by truck to the terminal1936 BTA LEXIS 580">599 on a street level platform; the freight is there received by the railroads' joint labor force and conveyed to the other side of the building where shipments for each railroad are assembled and conveyed to their respective rail heads. In the morning, incoming freight is similarly delivered to the consignee's truck from the street level platform. Formerly, shippers were obliged to deliver packages for different railroads to their separate pier stations and likewise to collect in-bound 34 B.T.A. 1229">1238 freight from these widely separated points. The union terminal has lightened traffic congestion and effected substantial savings to merchants in time and trucking costs, attracting deliveries even from New Jersey, Brooklyn, and Queens. Its facilities have been planned to take care of increased business in the future, only 10 percent of its capacity being utilized at present. The first year of operation it handled 40,000 tons of freight, and it is now handling between 60,000 and 70,000 tons a year. The railroads' pier terminals have not been eliminated because of this single union terminal, however, although some have been closed or transferred, but the Port Authority's program contemplates1936 BTA LEXIS 580">600 a gradual elimination of the use of the piers for terminal purposes by the construction of a total of 12 union terminals in equal zones as found practicable; the erection of a second in New Jersey is now contemplated. A large percentage of these piers is owned and leased by New York City. Besides the less than carload freight, the piers also handle carload consignments and perishables, which the union terminal does not receive. The Port Authority plans to induce the roads eventually to transfer carloads to trucks on the Jersey shore, and convey them for store-door delivery in New York. Perishables and dairy products are confined by an extensive underground refrigeration system to a district in lower west Manhattan, and their handling through the inland terminal is not contemplated. Tenants for the upper floors of the Commerce Building are solicited by real estate agents and advertising, and occupy the premises under leases, sometimes with a sliding rental scale. Its rates are somewhat higher than commercial rates for new leases, but 95 percent of available space is now rented. Offices of the Port Authority are located on the fifteenth floor. The nonterminal portion of the1936 BTA LEXIS 580">601 building is operated for the Port Authority by a superintendent and 92 men; 8 percent is rented for stores and offices and 92 percent as loft space. Its construction and rental were deemed necessary to provide sufficient revenue to make the terminal facility economically practical, for the Port Authority received no subsidy for the terminal from the states, and had to raise its $16,000,000 cost by bonds. To sell the bonds it was necesary to show sufficient prospective revenue from the project to make them attractive. As the keystone of its objective to simplify traffic, the Port Authority has made studies and plans to connect the railroads entering the district by a series of belt lines running through tunnels and other proposed connections. Water traffic in the port suffers interference from fog about 5 percent of the time, and from ice or ice drifts during January, February, and March. Before the opening of the Holland Tunnel there were six tubes of the Pennsylvania and the Hudson and Manhattan railroads under the Hudson River, but no vehicular highway 34 B.T.A. 1229">1239 between Manhattan and New Jersey, and ferries were taxed to capacity. Freight from New Jersey was brought by1936 BTA LEXIS 580">602 ferries to Manhattan, where it was impossible to expand the approaches, and the long lines of vehicles awaiting service caused great congestion in the adjoining streets. Of the 45 railroad terminal piers clustered around the south rim of Manhattan, 38 are still in use, and while the Holland Tunnel now draws off a great number of vehicles from this section, traffic in the port district has doubled in each of the past two decades, and the congestion remains very great. The separate operation of watercraft, moreover, by the several railroads for freight delivery entails overlappings and waste of efforts by the movement of partially loaded boats, which a consolidation of marine activities would eliminate, and the Port Authority has made unsuccessful efforts to work out a coordinating scheme with the roads. In furtherance of the proposed belt lines connecting the railroads, the Port Authority investigated the possibility of an automatic electric railway system, but abandoned it as too expensive. It next proposed the construction of a Greenville-Bayridge Tunnel to connect the roads on the two sides of the port, but after the accumulation of data and drafting of plans, the railroads1936 BTA LEXIS 580">603 declined to contract to use the tunnel, and the Port Authority then devoted its attention to the inland terminal system. In order to improve transportation conditions, reduce living costs, and enable the Port of New York to meet the competition of other ports, the Port Authority has cooperated with the state Dock Commission in its study of long piers to accommodate large liners; and in matters of harbor modifications, such as channel widening and deepening, subject to the approval of army engineers, it has made suggestions, surveys and taken part in hearings. It has made studies and suggestions for the coordination of railway marine activities embodied in reports submitted to the road's coordinating agents. It has complied with requests of outlying points to clear the harbor of ice by getting the use of coast guard ice-breakers and has vainly sought Federal legislation to supply more breakers. It has studied the transportation of cargoes of explosives, gasoline, and chemicals, and induced the Federal Government to make regulations for their control, which its staff assisted in framing. At the request of municipalities it has prepared reports on the location of free ports or1936 BTA LEXIS 580">604 tariff zones, and gratuitously cooperates with and advises district municipalities on port development. It has promulgated regulations concerning the storage period of freight on the railroads' piers, designed to relieve the congestion caused by a consignee's failure to remove for long periods, about which complaints had been made by shippers, inconvenienced and delayed by the accumulations. It has opposed efforts of outports before the Shipping Board to secure New York 34 B.T.A. 1229">1240 shipping. It has participated and given evidence in actions before the Interstate Commerce Commission brought by competitive ports to obtain rates favorable to them in relation to New York rates, where the principle involved affected many commodities or a large rate adjustment. It coordinates and assists in litigation affecting commerce, but does not supplant the efforts of the states, municipalities, and such agencies as the Chamber of Commerce, Produce Exchange, and Maritime Exchange. It has cooperated in the issuance of rules affecting navigation and commerce and commerce and has prescribed rules for the regulation of its own facilities, and further protected them by the erection of navigation1936 BTA LEXIS 580">605 lights and buoys. It has attempted to fix rates for harbor lighterage through negotiation with the railroads. It neither owns nor operates piers, ferries, tugs, ships, or dredges, but its facilities are in competition with the ferry companies and have reduced their traffic and earnings, and one company has gone out of business. These companies either are privately owned or are operated by railroads, and in either case are subject to state and Federal taxation. The Port Authority seeks to increase the traffic over its bridges and tunnels by advertisements in journals and public places. In 1933 it actively and successfully opposed a private company's application to the War Department for a permit to construct another bridge across the Hudson. The Port Authority's projects have been financed by state appropriations, by state advances repayable from the projects' revenue, and by issues of bonds and notes. Of the latter, series A, B, and C are each secured by a first lien upon the revenue of a particular project, subject to suspension as to current revenue when an amount equal to 20 percent of the issue is accumulated in sinking or special reserve funds over and above current interest1936 BTA LEXIS 580">606 and maturities. Repayment of state advances from a bridge's revenue is subject to the prior lien of the bridge bonds. All the bonds have by contract been issued as exempt from state and Federal tax on advice of counsel that they were so exempt. Upon issuance of its bonds, series D and E, secured by revenues of the Holland Tunnel and Inland Terminal No. 1, respectively, the Port Authority pledged its general reserve fund as security for all its outstanding issues, including prior bridge issues, and in 1935 it adopted a program for the refunding of its then outstanding obligations, aggregating $152,000,000 (series A to E, inclusive, and Midtown Hudson Tunnel notes) through the medium of its general and refunding bonds, which are supported by a pledge of its general reserve fund and (subject to prior liens and to the repayment of state advances) by a pledge of revenues of projects now in operation or under construction. In addition, all bonds acquired pursuant to the 34 B.T.A. 1229">1241 refunding program with the proceeds of general and refunding bonds are pledged as collateral security for the latter. Each issus so pledged is to be fully retired and canceled when the entire issue has1936 BTA LEXIS 580">607 been acquired, except that no bridge issue is to be fully retired and canceled until the advances made by the state for the particular project have been liquidated or amortized. The Port Authority has refnded and retired its entire issue of Midtown Hudson Tunnel notes, and is seeking to have the Public Works Administration cancel the existing loan agreement and make a grant not to exceed $4,780,000 in aid of the tunnel's construction. Pursuant to its refunding program, the Port Authority has also refunded the following bonds, acquired for retirement, which, with the three other issues below mentioned, constituted its funded debt as of November 30, 1935, adjusted to reflect the cancellation of $14,800,000 Midtown Hudson Tunnel notes on December 20, 1935, and the sale of $16,500,000 general and refunding bonds on December 11: OutstandingAcquired and pledgedSeries A (Arthur Kill Bridge)$12,200,000$5,643,000Series B (Washington Bridge)48,420,0001,580,000Series C (Bayonne Bridge)8,861,0003,139,000Series D (Inland Terminal)14,820,0001,180,000Series E (Holland Tunnel)46,008.000992,000On the same date there were outstanding general1936 BTA LEXIS 580">608 and refunding bonds, first series, 4 percent, due 1975, of $45,331,000, and of second series, 3 3/4 percent, due 1965, of $16,500,000 and series F bonds (Washington Bridge) of $2,500,000. By appropriate legislation enacted in 1934 and 1935, claims between New Jersey and the Port Authority were adjusted and liquidated by the latter's payment of $500,000 to the former. These claims arose from advances for the George Washington Bridge, the Port Authority's undertaking to bear the cost of certain highway construction, and other item. The annual reports of the Port Authority, submitted to the governors and legislatures of New York and New Jersey, contain statements of its progress, plans, activities, and financial conditions. As there shown, all its income, revenues, and receipts are derived from the following sources: (a) Toll charges from all of its bridges and tunnels; (b) rentals of Inland Terminal No. 1 paid by railroad carriers; (c) rentals from tenants of the upper floors; (d) rentals from real estate pending its use in connection with the comprehensive plan; (e) interest from securities in which sinking, reserve, and other funds are invested; (f) revenue from operation of1936 BTA LEXIS 580">609 a bus line over the Goethals Bridge; (g) interest on bank balances; (h) miscellaneous 34 B.T.A. 1229">1242 income such as rental of telephone ducts, sales of gasoline, towing, and tire-changing charges; (i) state advances. The securities in which its several funds are invested are bonds of New York and New Jersey municipalities; it also holds bonds issued by itself. Its gross income and net income, as so shown, were as follows: YearGross incomeNet income1931$7,367,288.39$3,602,325.63193210,270,699.823,659.006.26193310,134,638.213,112,953.78The functions of the Port Authority, as prescribed by the states' compact and statutes, are exercised by twelve commissioners, half of whom are appointed from among the resident voters of each state as their respective legislatures determine. The Commissioners take an oath of office and may be removed only upon charges and after a hearing - in the case of New York, by the governor; in the case of New Jersey, by the state senate. Their actions are binding only after approval by a majority and the lapse of a specified period after the minutes of each meeting have been transmitted to the two governors, who have1936 BTA LEXIS 580">610 a veto power over the acts of the commissioners from their respective states. The commissioners constitute a board for the purpose of doing business and may adopt suitable bylaws for its management. The Port Authority's facilities are subject to the jurisdiction of public service, utiity, and similar state commissions in the same manner as those of a private corporation. Its bonds and certain obligations are legal investments for fiduciaries in both states, and for the protection of public funds deposited by it; the statutes of both states authorize financial institutions to give it undertakings with sureties of its approval or securities as collateral. The Port Authority has power to make investigations in connection with its planning for port improvement, and to issue subpoenas to residents and property owners of New York, failure to comply being punishable upon the Port Authority's application to the Supreme Court. Its authorized rules for the regulation of port affairs are enforceable by mandamus, injunction, or other appropriate relief, which actions are entitled to a preference over all New York civil cases. It may institute or intervene in proceedings before the Interstate1936 BTA LEXIS 580">611 Commerce Commission, state public utility commissions, and like bodies or any other Federal, state, municipal, or local authority for the adoption and execution of physical improvements, changes in methods or rates of transportation, warehousing, docking, and lightering. It may condemn and take property through legal proceedings. 34 B.T.A. 1229">1243 The Port Authority has no stock and no stockholders, and is not owned by any private persons or corporations. Its projects are all operated in the interest of the public, and no profits inure to the benefit of private persons. Its properties and bonds or other securities issued by it are exempt by statute from state taxation. In Public Resolution 66, 67th Congress - H. J. Resolution 337 - Congress declared that its activities under the comprehensive plan * * will the better promote and facilitate commerce between the States and between the States and foreign nations and provide better and cheaper transportation of property and aid in providing better postal, military and other services of value to the Nation. Certain statutes of New York and New Jersey relating to the various projects of the Port Authority recite that they are: 1936 BTA LEXIS 580">612 * * in all respects for the benefit of the people of the two states, for the increase of their commerce and prosperity and for the improvement of their health and living conditions, and the Port Authority shall be regarded as performing a governmental function in undertaking the said construction, maintenance and operation and in carrying out the provisions of law relating to the said [bridges and tunnels] and shall be required to pay no taxes or assessments upon any of the property acquired by it for the construction, operation and maintenance of such * * . The States of New York and New Jersey obligated themselves to the payment of the Port Authority's administrative expenses each in the amount of $100,000 a year until its revenues were adequate to meet them, and prohibited the incurring of obligation for salaries, office, and other administrative expenses prior to the making of such appropriations. Since 1928 employees of the Port Authority who were transferred from New York state service and were members of the state retirement system, might continue in that system. Since 1935 all employees are permitted to join it. Montgomery B. Case was employed by the Port Authority1936 BTA LEXIS 580">613 from April 1, 1927, to December 31, 1932, as a construction engineer. He took an oath of office, was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra time to his duties when necessary without extra compensation. During 1931 he was executive head of the Port Authority's construction division under the supervision of its chief engineer, and had direct charge of all construction forces working on the Washington and Bayonne Bridges and the Holland and Midtown Hudson Tunnels, making frequent reports to the chief engineer. He had no outside office or business connection and did no engineering work for anyone else. His name was on the pay roll of the Port Authority, which he was required to sign with other employees. In 1931 he received a salary of $16,000, which the Commissioner included in his taxable income for that year. 34 B.T.A. 1229">1244 Philip J. Gerhardt has been employed by the Port Authority since May 7, 1931, as industrial consultant. He took an oath of office, was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra1936 BTA LEXIS 580">614 time to his duties when necessary without extra compensation. During 1933 his duties comprised the designing of the Inland Terminal No. 1, from an operations standpoint, and its operation and rental under the supervision of the Port Authority's general manager, to whom he submitted monthly time reports of his work. He had no outside office or business connection. His name was on the pay roll of the Port Authority, which he was required to sign with other employees. In 1933 he received a salary of $8,137.50, which the Commissioner included in his taxable income for that year. E. Morgan Barradale was a member of the staff of the New YorkNew Jersey Interstate Bridge and Tunnel Commission from its organization in 1919 until its merger with the Port Authority on May 8, 1930, and has since been employed by the Port Authority as superintendent of tunnel operations. He took an oath of office at the time of his employment by the Commission, was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra time to his duties when necessary without extra compensation. During 1933 he had charge of the operation and1936 BTA LEXIS 580">615 maintenance of the Holland Tunnel and of the Port Authority employees operating it under the supervision of the assistant general manager in charge of operations, to whom he made reports of his work and time. He had no outside office or business connection except his office and position as director and president of a building and loan association. His name was on the pay roll of the Port Authority, which he was required to sign with other employees. In 1933 he received a salary of $10,174.97, which the Commissioner included in his taxable income for that year. Billings Wilson has been employed by the Port Authority since July 1, 1922, as assistant general manager. He took an oath of office, was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra time to his duties when necessary without extra compensation. His duties comprise administrative work in the office and inspection work in the field under the supervision of the general mannager, to whom he submitted reports on various matters as required. He had no outside office or business connection. His name was on the pay roll of the Port Authority, 1936 BTA LEXIS 580">616 which he was required to sign with other employees. In 1933 he received a salary of $14,625 from the Port Authority, which the Commissioner included in his taxable income for that year. John J. Mulcahy has been employed by the Port Authority since June 1, 1928, as assistant general manager. He took an oath of office. 34 B.T.A. 1229">1245 was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra time to his duties when necessary without extra compensation. During 1932 he supervised the Port Authority's entire personnel and acted as administrative assistant to the general manager under supervision of the latter, to whom he submitted reports on various matters as required. He had no outside office or business connection. His name was on the Port Authority's pay roll, which he was required to sign with the other employees. In 1932 he received as salary of $10,950, which the Commissioner included in his taxable income for that year. OPINION. STERNHAGEN: The question raised by this proceeding is whether the compensation received by an officer or employee of the Port Authority for services regularly rendered1936 BTA LEXIS 580">617 is subject to Federal income tax. The compensation was held constitutionally immune in Leon Moisseiff,21 B.T.A. 515">21 B.T.A. 515, and Robert Carey,31 B.T.A. 839">31 B.T.A. 839. Modjeski, an engineer of the Port Authority, was held taxable as an independent contractor. Commissioner v. Modjeski, 75 Fed.(2d) 468; certiorari denied, 295 U.S. 764">295 U.S. 764. Commissioner v. Ten Eyck, 76 Fed.(2d) 515, involved directly the Albany Port District, but the court expressly dealt with the Port Authority as of the same character. Commissioner v. Harlan, 80 Fed.(2d) 660, held immune the pay of an attorney of the Golden Gate Bridge & Highway District at San Francisco. Thus the question might be regarded as fairly well closed for this Board. But the Government says that for one reason or another each of those decisions lacks authoritative force to control the general question. It now presents these cases as complete both in facts and argument to serve as a definitive test. The evidence has been stipulated at length and also given in the testimony of Port Authority employees. The Port Authority is organized for and operating1936 BTA LEXIS 580">618 in the traditionally sovereign function of protecting, improving, and developing the Port of New York; and all its activities are directed to and are incident to that end. The dual nature of our government requires that the state and Federal governments shall be adjusted to each other to produce the greatest power for each with the least friction. The prvoblem is not one of logical or legal absolutes, but of the promotion of a smooth practical interrelation of the two in recognition of their several sovereign necessities. Neither may so exercise its powers as to encroach upon the necessary or traditional sovereign functions of the other; and, since this doctrine is firmly established, it is not to be supposed that either is attempting to do so. The revenue act and its broad definition of income may not be regarded as an attempt to tax the salary of the state executive although it may be 34 B.T.A. 1229">1246 literally within its terms. The Attorney General expressed this opinion in 1919, 31 Op. A.G. 441. The immunity of such salary from Federal tax is inherent in the sovereignty of the state. If it inures to the benefit of the individual, this is but collatoral to the effect1936 BTA LEXIS 580">619 upon the state. To him, it is not a matter of independent personal right, but of perquisite of his office. We are bound, when the Circuit Court of Appeals has held, in affirmance of our own earlier decisions, that the Port Authority and other organizations similarly engaged are performing a traditionally sovereign function, to apply the doctrine and hold the pay of its employees to be exempt from Federal tax. Commissioner v. Ten Eyck, supra;21 B.T.A. 515">Leon Moisseiff, supra;31 B.T.A. 839">Robert Carey, supra;Commissioner v. Harlan, supra. That the Ten Eyck case is regarded by the court as a holding that port development is a traditionally sovereign function is fortified by its more recent opinion in Brush v. Commissioner, 85 Fed.(2d) 32. The argument is pressed that the immunity is lost when the activity of the state is one involving interstate commerce or navigation or is carried on under an interstate compact requiring Congressional consent. The argument is not new. It was considered and rejected in 1936 BTA LEXIS 580">620 Commissioner v. Harlan, supra, and there is enough in the opinion and briefs in the Ten Eyck case to show that the Federal power over interstate commerce and navigation were not overlooked. But to deal with the issue squarely, we are of opinion that the development of the port may not be interfered with by Federal tax even though the interstate and foreign commerce passing through the port and upon its highways, bridges, and tunnels is subject to Federal regulation, even though the navigable waters under its bridges and over its tunnels are under Federal control, and even though the underlying interstate compact required the consent of Congress. To this may be added that there is no reason to regard the revenue act as a means used by Congress to regulate interstate commerce, to control navigation, or as an implied condition of its consent to the interstate compact. Cf. United States v. Butler,297 U.S. 1">297 U.S. 1. Such a view, if accepted, might go so far, for example, as to subject the employees of a state highway department or public service commission to Federal tax under the present law. It would mean that in making an interstate compact1936 BTA LEXIS 580">621 the states would be surrendering the very sovereignty which the Constitution takes for granted and upon which the compact is founded - and this, not directly by an express condition in the resolution of consent, but by an implied relation between the general terms of the consent and the broad terms of the revenue act. Is it to be supposed that in the blanket consent to interstate compacts for crime prevention (U.S.C.A., title 18, § 420) 34 B.T.A. 1229">1247 lurks a power to tax the state police officers who are employed under the compact? Relying upon Commissioner v. Powers, 68 Fed.(2d) 634, the argument is made that the Port Authority is engaged in proprietary functions for profit with the effect of withdrawing sources of revenue from the Federal taxing power. This is said in respect of the rents from the Inland Terminal Building, more particularly the upper stories privately occupied; of the tolls from the bridges and tunnels; and of the destruction of private ferry competition. If these were independent profit-making ends in themselves, the argument would be more engaging. But these several operations, even though the revenues produced are substantial, are but1936 BTA LEXIS 580">622 incidental to the great and comprehensive sovereign project of improving the port and terminal facilities of the port district. Bush Terminal Co. v. City of New York,152 N.Y.Misc. 144. The Inland Terminal Building was not constructed to produce rent as a profit on investment, but to provide a more efficient terminal and thus expedite traffic and relieve highway congestion. The bridge and tunnel tolls and the reduction of traffic on the private ferries were incidental to the governmental project of providing highways to facilitate traffic and reduce port and harbor congestion in the common public interest. It has not heretofore been suggested that the maintenance of a free state highway was a proprietary function subject to Federal tax because it diminished or destroyed the traffic on an existing private toll road. State public school teachers are not regarded as taxable because a new public school may reduce the taxable profits of an existing private school. The essential question of the preservation of the state's sovereign powers in the interplay of our dual government may not be lost sight of by a pursuit of each detail of the method of exercising it as1936 BTA LEXIS 580">623 if it stood alone with a different history and a different purpose. Burnet v. Coronado Oil & Gas Co.,285 U.S. 393">285 U.S. 393; University v. People,99 U.S. 309">99 U.S. 309; G.C.M. 13745, XIII-2 C.B. 76. Cf. Trinidad v. Sagrada Orden de Predicadores,263 U.S. 578">263 U.S. 578. It may be doubted whether the Port Authority has any right to engage in business for the sole or primary purpose of making profit; but not until it does so will the effect upon its tax immunity require consideration. We hold that the Port Authority is engaged in the performance of a sovereign function of each of the states of New York and New Jersey and that the compensation received by its employees is exempt from the Federal income tax. This is primarily because of the constitutional right of the state to be free from Federal interference in the exercise of its sovereign powers. We hold further that even if the Port Authority's functions are not constitutionally immune from 34 B.T.A. 1229">1248 interference by Federal taxation, the power of the Federal Government to regulate commerce and control navigable waters has not been exercised by Congress through the imposition1936 BTA LEXIS 580">624 of tax in the general provisions of the revenue act, nor has such tax been provided for as an implied condition of consent to the interstate compact. Reviewed by the Board. Judgment will be entered for the petitioners.MELLOTT dissents. Footnotes1. Ch. 154, Laws of New York, 1921; ch. 151, Laws of New Jersey, 1921. ↩2. Public Resolution No. 17, 67th Cong. (S.J. Res. 88). ↩3. Ch. 43, Laws of New York, 1922; ch. 9, Laws of New Jersey, 1922. ↩4. Ch. 230, Laws of New York, 1924; Ch. 125, Laws of New Jersey, 1924. ↩5. Ch. 186, Laws of New York, 1924; ch. 149, Laws of New Jersey, 1924. ↩6. Ch. 211, Laws of New York, 1925; ch. 41, Laws of New Jersey, 1925. ↩7. Ch. 279, Laws of New York, 1926; ch. 97, Laws of New Jersey, 1925. ↩1. Interest for this year was charged to investment account. ↩8. Ch. 388, Laws of New York, 1928; ch. 113, Laws of New Jersey, 1932. ↩9. Ch. 421, Laws of New York, 1930; ch. 247, Laws of New Jersey, 1930. ↩10. Ch. 47, Laws of New York, 1931; ch. 4, Laws of New Jersey, 1931. ↩11. Ch. 426, Laws of New York, 1930; ch. 248, Laws of New Jersey, 1930. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622195/	First National Bank of Farmingdale, N. Y. v. Commissioner.First Natl. Bank of Farmingdale v. CommissionerDocket No. 111885.United States Tax Court1943 Tax Ct. Memo LEXIS 124; 2 T.C.M. 734; T.C.M. (RIA) 43408; September 7, 19431943 Tax Ct. Memo LEXIS 124">124 George Clott, Esq., for the petitioner. P. J. Cavanaugh, Esq., for the respondent. STERNHAGEN Memorandum Opinion STERNHAGEN, Judge: Among the several items of adjustment resulting in a determination of deficiency of $753.87 in 1939 income tax, the only one assailed is the disallowance of deductions for loss in the sale of bonds of the City of Gillespie and bonds of the City of Herrin. The case was submitted upon a stipulation of facts. [The Facts] The taxpayer, engaged in the banking business, filed its 1939 tax return in the First District of New York. 1. In 1923, it acquired bonds of the City of Gillespie at a cost of $4,000. In 1932, it charged off $2,000 by a charge to surplus. In 1933, it wrote off another $1,960, and then charged the aggregate $3,960 to profit and loss "pursuant to the bank examiner." This amount was claimed as a deduction on its 1933 return. The bonds were thereafter carried on the books at the remaining $40. In 1939, they were sold for $412.23. 2. In 1925, the taxpayer purchased bonds of the City of Herrin, Illinois, at a cost of $5,000. In 1930 and 1931, the taxpayer received partial payments of $1,433.36. In 1932, $2,113.33 was written off by a1943 Tax Ct. Memo LEXIS 124">125 charge to surplus. In 1933, a further charge-off of $1,418.31 was made; and the total of $3,531.64 was in that year, pursuant to the orders of the bank examiner, charged to profit and loss, and was claimed as a deduction on the 1933 return. The bonds were sold in 1939 for $300. In its 1933 tax return, the taxpayer reported a net loss of $16,386.06, and the Commissioner made no change. In its 1939 return the taxpayer claimed a deduction for loss of $3,116.77 from the sale of the Gillespie bonds, and reported neither gain nor loss in the sale of the Herrin bonds. The Commissioner, in determining the deficiency, disallowed the Gillespie deduction and instead recognized a gain of $372.23; and recognized a gain of $265 in the sale of the Herrin bonds. [Opinion] The taxpayer's argument is that the charge-off in 1933 was made at the direction of the bank examiner and therefore the deduction was not adequately supported, since a bank examiner's direction alone does not establish complete or partial worthlessness, citing . But that case did not hold that a bank examiner's direction prevented a deduction1943 Tax Ct. Memo LEXIS 124">126 if the debt was in fact wholly or partially worthless. The taxpayer claiming such deduction must prove the fact of worthlessness to the extent charged off, and the examiner's direction does not of itself provide such proof. Upon the present stipulation, the debts may in 1933 have been in fact worthless to the extent charged off, as the Commissioner recognized in allowing the net loss, irrespective of the bank examiner's direction; and in the absence of evidence to the contrary effect, it must be recognized here that the debt was properly reduced to the remaining basis of $40 for the Gillespie bonds and $35 for the Herrin bonds. The charge-off and deduction of the earlier years is not shown to be at variance with the fact or legally improper. They preclude the deduction of loss in equal amount in the year of sale, and the Commissioner's disallowance of deduction in respect of the Gillespie bonds is sustained. . The Commissioner, however, included in income of 1939 the excess of the sale price over the remaining book value after the charge-offs. This is contrary to Section 116, Revenue Act of 1942, calling the recovered amount1943 Tax Ct. Memo LEXIS 124">127 of a bad debt previously charged off, which did not result in a reduction of tax, a "recovery exclusion," and excluding it from gross income. The 1933 charge-offs were exceeded by the net loss, and they did not result in a tax reduction.the Commissioner's treatment as "gain" of the amount recovered in 1939, was therefore error. First National Bank in . Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622196/	WILLIAM ERNEST SEATREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTSeatree v. CommissionerDocket Nos. 22094, 33640.United States Board of Tax Appeals25 B.T.A. 396; 1932 BTA LEXIS 1531; January 27, 1932, Promulgated 1932 BTA LEXIS 1531">1531 1. Under articles of partnership petitioner was entitled to receive amounts equal to four shares of the firm profits for a period of three years after his retirement from the partnership. By irrevocable instrument he assigned all his right, title and interest therein to a trustee for benefit of his minor daughters. Held, that petitioner's interest was in the nature of a capital asset; that the assignment thereof transferred, not income but a property right, and that income subsequently arising therefrom was not taxable to petitioner. 2. Stipulation as to date of delivery of assignment rejected in view of facts to the contrary appearing upon the record and held that payments from firm for first year after retirement were taxable to petitioner, his interest not having been assigned before accrual of such payments. Edward B. Burling, Esq., and William Merrick Parker, Esq., for the petitioner. John D. Foley, Esq., for the respondent. GOODRICH25 B.T.A. 396">396 In these proceedings, which were consolidated for hearing petitioner contests deficiencies asserted by respondent as follows: 1922$10,956.9919234,012.6919245,111.881932 BTA LEXIS 1531">1532 Respondent having confessed error as to certain of the items included by him in his computation of petitioner's taxable income, there remains but one issue for our determination, namely, whether there should be included in petitioner's income amounts paid by the partnership of which he formerly was a member to a trustee under the terms of an assignment for the benefit of petitioner's daughters. 25 B.T.A. 396">397 Petitioner is a citizen of the United States, but since June 30, 1921, has resided abroad, and filed his Federal income-tax returns for the periods here involved in accordance with statute for such case provided. for many years prior to July 1, 1920, he was a member of a partnership engaged in the practice of accountancy on the Continent of North America and in the West Indies under the name of Price, Waterhouse & Company, hereinafter called the partnership. During the latter part of that period petitioner was entitled to 20 shares of the partnership profits. On July 1, 1920, new articles of partnership were duly executed by petitioner and the eighteen other members of the firm, and thereafter petitioner was entitled to 16 shares of the partnership profits. Under these1932 BTA LEXIS 1531">1533 new articles of partnership, which are in evidence, six of the partners, including petitioner, had the right to retire from the firm on June 30 of any year upon giving the specified notice of such intention. In the event of such retirement, or upon the death of one of the partners so named, the retiring partner, or his estate, was to receive under section 1 of Article IV, of the articles of partnership, "the amount of his capital contributed to the partnership, and any unpaid interest thereon at the rate of seven per centum per annum to the date of his retirement, or death, and his share of the profits of the partnership * , after deducting the amount of any claims which the partnership may have against him or his estate," to the date of his retirement, or death. In addition to these payments, it was provided (sec. 2, Art. IV) that these six partners should be entitled to the following: * * in each of the three years (commencing July 1) next immediately following his death or retirement, to receive from the partnership, in addition to the other amounts which shall be payable to him as in this Article provided, a portion of the profits of the partnership for each of such1932 BTA LEXIS 1531">1534 three years as if he were the owner of shares in the partnership, in addition to the shares of the continuing partners, as follows: * * In the case of said Seatree, 4 shares * * * Such payments shall be made to such retiring partner, or to his legal representatives as the case may be, at the same time that profits for each of such three years, when determined, shall be paid to the continuing partners. The payments provided by section 2 of Article IV of the partnership agreement were separate and distinct from the distributions to which the several partners were entitled while they remained members of the firm. While members, all the partners shared in the firm's earnings on the basis of the shares each held as set out in the agreement. These provisions for additional payments upon 25 B.T.A. 396">398 death or retirement applied to only six of the partners, including petitioner, and the payments were to be made without the rendition of further services by the retiring partner after his retirement, or by his representatives after his death. They were to be reduced by $3,000 per share unless the retiring partner gave a written undertaking to refrain for the next seven years from1932 BTA LEXIS 1531">1535 practicing his profession in the territory in which the firm operated. Section 4 of Article IV of the partnership agreement provided that the partnership should determine as to any partner attempting to sell, assign, transfer, or otherwise alienate his shares in the partnership, or any interest therein or part thereof. In the spring of 1920 the petitioner was urged by the senior partner of the American firm of Price, Waterhouse & Company to accept a responsible position with the Continental firm of the same name located in Paris. As an inducement to him to give up his connection with the American firm and undertake this new position, the American firm agreed to take an active interest in the Continental firm, to insist on his being made senior partner thereof, with a share of the profits commensurate with his position, and to make the payments to which Seatree was entitled under section 2 of Article IV direct to a trustee for his two daughters. The petitioner retired from the partnership as of June 30, 1921, and became senior partner of the Continental firm. The partnership during the years 1922, 1923, and 1924 kept its books of account and made its returns of income on the1932 BTA LEXIS 1531">1536 accrual basis of accounting and on the basis of a fiscal year ending June 30. In the period between July 1, 1921, and April 30, 1923, the partnership paid to petitioner from time to time in accordance with the articles of partnership, the capital sum which on June 30, 1921, stood to the petitioner's credit under the capital and shares agreement of the partnership, together with interest thereon from that date to the dates of payment, and his share of the firm profits to the date of his retirement. The interest so paid amounted to $9,098.40 in the year 1922 and $3,360 in the year 1923. In including these items of interest in petitioner's income for the periods in which received respondent erroneously subjected one-half of the item of $9,098.40 to 1921 rates of surtax instead of 1922 rates, and has twice included the item of $3,360 in petitioner's income for 1923. These errors respondent now confesses. On June 29, 1922, which was after his retirement, but before the payments were due under section 2 of Article IV of the articles of partnership, the petitioner executed a written instrument under seal, by which, "in consideration of the sum of one dollar, the receipt whereof is1932 BTA LEXIS 1531">1537 duly acknowledged, and other good and valuable considerations," 25 B.T.A. 396">399 he transferred and assigned to the Equitable Trust Company of New York in trust for his two minor daughters "all my right, title and interest in and to four undivided shares of the profits or income now due, or which may hereafter become due and payable to me for the three years ending June 30, 1924, under and by virtue of" the partnership agreement. The instrument, which is in evidence, gave the trustee power to manage and invest the funds coming into its hands, subject to the advice and consent of George Oliver May, or his successor; to divide such funds into two separate trusts, one for each of petitioner's daughters, and to accumulate such funds during the minority of the beneficiaries, thereafter to distribute to them the income or interest arising therefrom, free from the control or intervention of husband or creditors. The beneficiaries were given the right to dispose of the corpus of their respective trust funds only by testamentary disposition. The grantor reserved the right to add to the principal of the trust funds; to direct the investments of the funds should he so desire, and to remove or1932 BTA LEXIS 1531">1538 change the trustee. No power to revoke the trust was reserved. Broad powers of management were granted the trustee and it was provided that upon the death of the grantor the powers reserved to him were to vest in May, or his successor. The sum of $1 recited as a consideration was not in fact paid by the Trust Company to the petitioner. The instrument was delivered to the Trust Company, which, under date of August 3, 1922, accepted the assignment upon its trusts and terms. The partnership was fully advised with respect to the matter, and gave its consent to the assignment. The amounts equal to four shares of the profits of the firm payable under the provisions of section 2 of Article IV of the articles of partnership for the fiscal years ended June 30, 1922, 1923, and 1924, were respectively $22,378.30, $24,964.40, and $26,086.40. These amounts respondent has included in petitioner's income for said years, which action petitioner contends is erroneous. Payments on account of these amounts were made by the partnership to the Equitable Trust Company, as trustee, totaling, in 1922, $19,578.30, of which $17,978.30 was paid on July 25 and $1,600 was paid on October 24; in 1923, 1932 BTA LEXIS 1531">1539 $26,474; in 1924, $27,200. Respondent now confesses error in subjecting to 1921 rather than 1922 rates of surtax the sum of $11,189.15, being one-half of the amount payable in 1922 under section 2 of Article IV of the articles of partnership. Petitioner contends that no part of the amounts paid or payable by the partnership to the Trust Company during these years is income to him. 25 B.T.A. 396">400 OPINION. GOODRICH: It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property or property rights are assigned the income subsequently arising therefrom from is not taxable to the assignor, for the reason that the property no longer belongs to him and therefore the income from such property belongs, not to him, but to the new owner. ; affd., ; ; ; ; 1932 BTA LEXIS 1531">1540 ; reversed ; ; ; affd., ; ; ; ; ; ; ; ; ; ; reversed, . The difficulty in applying this rule lies in determining in each case precisely what has been assigned. Upon consideration, it is our opinion that in the case at bar, petitioner transferred, not income, but a property right. It is conceded that petitioner and the other five partners named in section 2 of Article IV were largely responsible for the establishment, growth, and good will of the firm and that the purpose of the provisions of that1932 BTA LEXIS 1531">1541 section was to compensate them upon their retirement, or their estates in event of death, for their respective interests in that good will. Their interests were in the nature of capital assets. The payments provided were in the nature of a three-year annuity. It is true as respondent points out, that the amounts of the payments were to be measured by the future profits of the firm and that they might be great or small accordingly as the partnership prospered. But the method of measuring the payments does not determine the nature of the source thereof. The partnership contract gave petitioner a right to four shares of the firm profits for a period of three years after his retirement. That right was a property right, a chose in action, and it could be transferred or assigned in praesenti.It was independent of the rendition by him of any further services to the firm and it was to vest in him immediately upon his retirement or in his heirs in event of his death. It was not the right of a partner while such to a share of partnership profits, but was a contractual right to compensation for his interest in the good will of the firm, built up by his services in the past, accruing1932 BTA LEXIS 1531">1542 to him in consideration of his retirement, whether by his own volition or by death. In law it is of the same nature 25 B.T.A. 396">401 as an interest in a contract of sale or lease (;); a share of an estate (; ); royalties (, and ); a right to income from a trust (; ), and other property rights or choses in action which have heretofore been considered and held capable of complete alienation. It is true that the instrument in precise language did not assign the contract itself. Petitioner did not intend to assign the whole of the contract for he had other payments due him thereunder - his capital investment with interest and his share of the firm profits earned prior to his retirement - which he retained for himself. We think, however, that it, in effect, assigned an interest therein. The instrument describes the1932 BTA LEXIS 1531">1543 subject of the assignment as "all my right, title and interest, in and to four undivided shares of the profits or income" arising under the partnership agreement. When read with the articles of partnership, there is no ambiguity. After his retirement, petitioner's only right to the earnings upon four shares of the firm arose under section 2 of Article IV. We think the granting clauses of the assignment sufficient to transfer that right and interest and, as we consider them in the nature of a capital asset, we think the assignment thereof was equivalent to an assignment of petitioner's interest in that part of the contract of partnership. Cf. ;Beyond doubt the assignor was divested of all right thereunder; beyond doubt the assignee could have demanded an accounting from the firm, and had the right to examine its books and records upon reasonable suspicion that it had failed to comply strictly with the terms of the agreement. Such a right, with respect to section 2 of Article IV, we think, was lost to petitioner by his assignment, for he had relinquished all ownership in the property right created1932 BTA LEXIS 1531">1544 by that section of the agreement when he transferred it by an irrevocable instrument. However, petitioner had not divested himself of his contractual right before the payments for the first year were due thereunder. It is stipulated that the assignment was executed and delivered to the Equitable Trust Company on June 29, 1922. We refuse to be bound by that stipulation, for it appears to be contrary to fact as disclosed by the record. The instrument was executed in Paris on June 29, 1922, but it was accepted by the Trust Company on August 3, 1922, in New York. Petitioner testified that the matter had been taken up with the Trust Company's foreign agents, but it does not appear that the instrument was delivered or accepted by them on June 29. On the contrary, the testimony is that it was mailed by petitioner 25 B.T.A. 396">402 in Paris to May in New York, who delivered it to the Trust Company. As this transaction was clearly in the nature of a gift, the delivery of the instrument to and the acceptance of it upon its terms by the trustee was essential to the completion thereof. Despite the stipulation, we are convinced that the transfer was not completed before August 3, 1922. The1932 BTA LEXIS 1531">1545 record does not disclose the basis upon which petitioner kept his accounts for the year 1922, nor does it disclose any basis of cost, beyond that of services rendered in the past, for petitioner's right to four shares of the firm earnings after his retirement. Therefore, for lack of evidence proving the same to be erroneous, we sustain respondent's action in including in petitioner's income for the year 1922 the sum of $22,378.30, regarding the assignment as effecting a transfer of accrued income in that amount in that year. We are not impressed by respondent's contention that, because the recited nominal consideration of $1 was not in fact paid, there was no valuable consideration for the assignment and that, consequently, petitioner could have avoided it had he so desired. As we have indicated, we regard this transfer as a gift, and a gift needs no consideration. Moreover, the instrument, which was irrevocable, also recited "other valuable considerations" and, in such case, the fact that the nominal consideration was not paid does not establish a failure of consideration. 1932 BTA LEXIS 1531">1546 ; ; ; . Furthermore, the petitioner could not have avoided the assignment by claiming that the instrument was without consideration, even if that were true. The law of New York is controlling upon this point. In the case of ; , the plaintiff was entitled to a residuary interest of one seventh under his father's will. He assigned his interest by an instrument under seal, reciting a valuable consideration, to two of his brothers and executed and delivered the assignment to another brother, the defendant, who was the executor. Thereafter, he claimed the assignment was without consideration, and that no consideration was ever given by the defendant or paid by the assignees. The court in its opinion stated: While it is true that under the provisions of Section 840 of the Code of Civil Procedure an executory instrument under seal is only presumptive evidence of consideration, which may be rebutted, an assignment is not an executory instrument. 1932 BTA LEXIS 1531">1547 It is completed by delivery of the assignment, and the statute has not changed the rule of the common law with respect to such instruments. The allegations of the complaint that the instrument was without consideration can, therefore, have no bearing upon the question. The declaration that the instrument 25 B.T.A. 396">*403 was signed and delivered and the instrument itself being set forth and being under seal, it is conclusive upon the plaintiff insofar as the question of consideration is concerned. In the light of this decision it is clear that petitioner could not have revoked his assignment to the Equitable Trust Company on the theory that there was no valuable consideration for it, since the assignment was signed, sealed and delivered to the Equitable Trust Company, which, in writing accepted the same upon its terms. Reviewed by the Board. Judgment will be entered under Rule 50.MORRIS, LANSDON, STERNHAGEN, TRAMMELL, ARUNDELL, and MURDOCK dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622201/	GUARDIAN TRUST CO., EXECUTOR, ESTATE OF HUGH HAMILTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Guardian Trust Co. v. CommissionerDocket No. 14061.United States Board of Tax Appeals15 B.T.A. 1256; 1929 BTA LEXIS 2698; April 4, 1929, Promulgated 1929 BTA LEXIS 2698">2698 The six-year period for collection after assessment provided in the 1924 Revenue Act, does not apply to an assessment made before June 2, 1924, the date on which the act was approved, and if the unabated portion of the tax so assessed is not collected within the statutory period as extended by waivers, if any, the collection of such tax by the Commissioner is thereafter barred. Russell v. United States,278 U.S. 181">278 U.S. 181. W. W. Spalding, Esq., for the petitioner. Shelby S. Faulkner, Esq., for the respondent. MURDOCK 15 B.T.A. 1256">1256 The deficiency in this case results from the denial in part of a claim in abatement for the year 1918 as shown by a letter from the Commissioner dated February 26, 1926. An additional assessment of $23,473.60 was later reduced to $17,721.94, against which the Commissioner applied credit for overpayments in other years in the amount of $11,433.26 to arrive at the amount of $6,288.68 as the amount due. The petition alleges that the statute of limitations has run against the assessment and collection of any additional tax for the year 1918 and also that the additional tax was not finally determined and assessed1929 BTA LEXIS 2698">2699 within one year after April 18, 1924, on which date the petitioner made a request that the income-tax liability be determined and assessed within one year in accordance with section 250(d) of the Revenue Act of 1921. FINDINGS OF FACT. The petitioner is the duly appointed and acting executor of the estate of Hugh Hamilton, who died on August 5, 1922. On March 15, 1919, Hugh Hamilton duly filed his income-tax return for the calendar year 1918 showing an income tax due of $4,086.88. On January 30, 1924, the Commissioner of Internal Evenue sent a letter to the petitioner, this letter being what is commonly known as the 30-day letter. It contained the following paragraph: In the event that the adjustments made are not satisfactory and it is desired to perfect the appeal provided for below, it will be necessary that you execute and forward with that appeal the attached waiver form. A blank form of waiver was enclosed with this letter. On or about February 15, 1924, the petitioner filed an amended return for Hugh Hamilton for the calendar year 1918 showing tax due in the amount of $16,146.60. With this return the petitioner 15 B.T.A. 1256">1257 enclosed a letter to the Commissioner1929 BTA LEXIS 2698">2700 of Internal Revenue and also enclosed the so-called waiver in the following form: IT:NR-F9 JEW-1865 INCOME AND PROFITS TAX WAIVER In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Estate of Hugh Hamilton (Guardian Trust Co.) [in ink] of 1918 [in ink] and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said for the years under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned. [Stamp] ESTATE1929 BTA LEXIS 2698">2701 OF HUGH HAMILTON Taxpayer [Signed in ink] Guardian Trust Co. Executor by C. M. Malone V-P Commissioner If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. The so-called waiver enclosed with the amended return filed February 15, 1924, was never signed by the Commissioner or by anyone acting for him. The return, the letter and the so-called waiver were duly received by the Commissioner of Internal Revenue on or about February 19, 1924. On March 13, 1924, the Commissioner of Internal Revenue signed a jeopardy assessment list on which appeared an assessment against the estate of Hugh Hamilton, deceased, for 1918, of $23,473.60, this being the only assessment list upon which any such additional assessment appeared. On March 17, 1924, the collector of internal revenue served on the petitioner his notice and demand for the payment of said additional assessment. On March 20, 1924, the petitioner filed with the collector1929 BTA LEXIS 2698">2702 its claim for the abatement of the additional assessment of $23,473.60. On April 12, 1924, the petitioner filed an amended abatement claim for the full amount. On April 18, 1924, the petitioner mailed a letter to the Commissioner of Internal Revenue, the body of which was as follows: In the matter of additional taxes for the years 1916 to and including August 5, 1922, assessed and to be assessed, with credits for over-payments, against the 15 B.T.A. 1256">1258 Estate of H. Hamilton. We desire that in accordance with the provisions of Section 250-D these taxes be determined and assessed by the Commissioner within one year from the date hereof. Mr. Hamilton died August 5, 1922. On May 3, 1924, the Commissioner of Internal Revenue mailed a letter to the petitioner, the body of which was as follows: Receipt is acknowledged of your letter dated April 18, 1924, requesting that all taxes due on account of income received during the lifetime of Hugg Hamilton, deceased, be determined and assessed within one year in accordance with the provisions of Section 250(d) of the Revenue Act of 1921. The tax liability will be determined as requested. Under date of November 18, 1925, the1929 BTA LEXIS 2698">2703 internal revenue agent in charge at San Antonio, Tex., submitted to the Commissioner of Internal Revenue his report of an investigation of the books of account and records of Hugh Hamilton for the years 1917 to 1922, inclusive. On October 31, 1925, the petitioner signed and delivered a paper in connection with this report in the following form: AGREEMENT CONSENTING TO DEFICIENCY AS ASSESSED The undersigned taxpayer hereby waives the right of appeal under Section 279(b) of the Revenue Act of 1924 from the decision of the Commissioner of Internal Revenue on a claim for abatement filed in accordance with Section 279(a) with respect to the items listed below, and consents to the deficiency in resulting therefrom as assessed. These items form (a part of) a deficiency in tax amounting to $11,290.68 as indicated by the report of the Internal Revenue Agent in Charge at San Antonio, Texas dated "This agreement is executed with reservation by the Taxpayer to hereafter raise and prosecute by Protest, Appeal, or proceedings under claim for refund, or otherwise, the question of whether any part of the Tax for the period in question (Years 1917 to 1921 inc. and to date of decedent's1929 BTA LEXIS 2698">2704 death in 1922) is barred by the Statutes of Limitation or the question as to the validity of any WAIVERS filed under any of the returns for the years mentioned." (Attach additional sheets if necessary). ESTATE OF HUGH HAMILTON DECEASED BY GUARDIAN TRUST COMPANY EXECUTOR AND TRUSTEE, (Name) Houston, Texas.(Address) (Signed) by W. BROWNE BAKER, Vice-President.Dated October 31st, 1925. Where the taxpayer consents to the entire assessment the items need not be listed; reference may be made to the letter. Note: This agreement is subject to the approval of the Commissioner and is not an agreement as provided under Section 1006, Revenue Act of 1924. On December 3, 1925, the petitioner filed with the internal revenue agent in charge at San Antonio, Tex., its protest against the additional assessment proposed in the said report, on the ground that the statute of limitations barred the assessment and collection of any 15 B.T.A. 1256">1259 additional taxes for the year 1918. On February 26, 1926, the Commissioner of Internal Revenue mailed to the petitioner a letter. This letter in so far as it pertained to the petitioner's tax liability for the year 1918, was1929 BTA LEXIS 2698">2705 as follows: Reference is made to the individual income tax returns of Hugh Hamilton, deceased, for the years 1917 to 1921, inclusive, and for the period January 1, 1922 to August 5, 1922. You are advised that the report of the Internal Revenue Agent dated October 10, 1925, covering an investigation of the tax liability of the estate of Hugh Hamilton for the years 1917 to 1921, inclusive, and for the period January 1, 1922 to August 5, 1922, has been approved as submitted with the following exceptions: * * * 1918The amount of tax previously assessed is $27,560.48 instead of $4,096.88. [sic.] The adjustment of this item is shown as follows: Original assessment$4,086.88Additional assessment March, 192423,473.60Total assessment27,560.48Less: Tax liability21,808.82Overassessment5,751.66* * * The evidence discloses that the decedent's original return for the calendar year 1918 was filed on March 14, 1919, and his return for the calendar year 1919 was filed on March 13, 1920. On March 1, 1924, prior to the expiration of the five-year period prescribed by the Revenue Act for making assessments for the year 1918 an additional assessment1929 BTA LEXIS 2698">2706 of $23,473.60 was made on the 1918 return under the provisions of Section 250(d) of the 1921 Act. On March 20, 1924, your claim for the abatement of the additional assessment of $23,473.60 was accepted by the Collector of Internal Revenue for the first district of Texas. On April 18, 1924, you submitted a written request that all taxes due on account of income received during the life time of Hugh Hamilton for the years 1916 to 1921, inclusive, and for the period from January 1, 1922, to August 5, 1922, the date of the death of the decedent, be determined and assessed within one year from the date of April 18, 1924, in accordance with the provisions of Section 250(d) of the Revenue Act of 1921. In February 1925, within the five-year period prescribed by the Revenue Act of making assessments for the year 1919, and within one year from the date of your written request for immediate assessment the item of $3,560.78 was assessed on the 1919 return under the provisions of Sections 274(d) and 277(a)(3) of the 1924 Act and your claim for abatement of this amount was accepted by the Collector in accordance with the provisions of Section 279 of the 1924 Act. The effect of the abatement1929 BTA LEXIS 2698">2707 claims was to stay the collection of additional assessments for 1918 and 1919, pending the final disposition of the claims. Under date of November 18, 1925, the Internal Revenue Agent in Charge at San Antonio, Texas, submitted his report of the investigation of the decedent's books of account and records for the years 1917 to 1922 inclusive. It is noted that you signed an agreement consenting to the determination of the tax liability as disclosed by agent's report, but reserved the right to hereafter raise or prosecute, by protest, appeal, or proceedings under claim for refund, or otherwise, the question whether any part of the tax for the 15 B.T.A. 1256">1260 period in question is barred from assessment or collection by the statute of limitations, or the question as to the validity of any waivers filed for any of the years concerned. * * On April 28, 1926, the petitioner and the Hartford Accident & Indemnity Co. executed and delivered to the collector of internal revenue a bond in the penal sum of $8,800. This bond was executed and delivered when the demand was made for payment of the additional tax as set forth in the Commissioner's letter of February 26, 1926. The Commissioner1929 BTA LEXIS 2698">2708 of Internal Revenue made and mailed to the petitioner certificates of overassessment for the following years in the following amounts, which overassessments the collector of internal revenue credited against the additional assessment for 1918. 1916$101.9819171,254.3819172,165.311921$4,074.89Jan. 1, to Aug. 5, 19223,836.5019185,751.66The overassessment for 1916 of $101.98 and the overassessment for 1917 of $1,254.38 were credited against the additional assessment for 1918 on April 24, 1924. The overassessment for 1917 of $2,165.31, the overassessment for 1921 of $4,074.89 and the overassessment for the period January 1 to August 5, 1922, of $3,836.50 were credited against the additional assessment for 1918 on March 29, 1926. No suit or proceeding for the collection of any taxes due from the petitioner on from Hugh Hamilton, deceased, for the year 1918 was begun up to the date of hearing in this case of June 20, 1928. OPINION. MURDOCK: The petitioner has alleged that the taxes in controversy are for the calendar years 1916, 1917, 1918, 1921, and for the period from January 1, 1922, to August 5, 1922. It appears, however, that the Commissioner1929 BTA LEXIS 2698">2709 has determined overassessments for all of these years and that except for the year 1918 there has been no denial of a claim in abatement giving rise to a deficiency. Therefore, except as to the year 1918 we have no jurisdiction, and as to the other years and the period mentioned, the proceedings are dismissed. The Board has jurisdiction in a case like this. See , and . Neither the giving of a bond nor the filing of a claim in abatement extends the period of limitation for the assessment or collection of the tax. ; ; ; ; . In , the Supreme Court of the United States decided that the six-year period for collection after assessment provided in the 1924 Revenue Act does not apply to an assessment made before June 2, 1924, the date on which the 15 B.T.A. 1256">1261 Act was approved. That decision1929 BTA LEXIS 2698">2710 is controlling here. Hugh Hamilton filed his income-tax return for the calendar year in question on March 15, 1919. On March 13, 1924, the Commissioner made his first and only additional assessment of tax for the calendar year 1918. Thereafter, on June 2, 1924, the Revenue Act of 1924 was approved. The so-called waiver of February 15, 1924, was never signed by the Commissioner or anyone acting for him and was not a "consent in writing to a later determination, additional assessment and collection of tax", within the meaning of section 250(d) of the Revenue Act of 1921. ; . Thus the Commissioner after March 15, 1924, was barred from determining a deficiency in tax for the year 1918 and was barred from collecting any additional tax or, to state it differently, on February 26, 1926, it was too late for him to determine the deficiency and mail a notice thereof, and from and after March 15, 1924, he was barred from collecting the amount of $17,721.94 which he has now determined is due from this petitioner. 1929 BTA LEXIS 2698">*2711 There is no deficiency. ; ; ; . Judgment will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622203/	Russell Box Company, et al. 1 v. Commissioner. Russell Box Co. v. CommissionerDocket Nos. 28703, 28704, 28705, 28706, 28707.United States Tax Court1953 Tax Ct. Memo LEXIS 395; 12 T.C.M. 46; T.C.M. (RIA) 53025; January 29, 19531953 Tax Ct. Memo LEXIS 395">395 On the basis of the facts presented, held, that 1. The cost of erecting a substantial wire mesh fence completely enclosing a manufacturing plant was a capital expenditure. 2. The members of a partnership were not entitled to the benefit of a bad debt deduction for failure of proof either (a) that there occurred in the taxable year any identifiable event rendering the alleged debt worthless, or (b) that the alleged debt had any value at the beginning of the taxable year, or (c) that a valid debt ever existed. 3. Respondent did not err in denying a deduction in the year 1943 for an alleged loss on the sale of certain personal property for failure of proof that the sale was bona fide. O. Walker Taylor, Esq., 31 Milk St., Boston, Mass., for the petitioners. William C. 1953 Tax Ct. Memo LEXIS 395">396 W. Haynes, Esq., for the respondent. HILL Memorandum Findings of Fact and Opinion The respondent determined deficiencies against the petitioners as follows: TaxpayerYearDeficiencyRussell Box Company1942 Income Tax$11,975.65Declared ValueExcess Profits Tax3,977.11Excess Profits Tax6,896.921943 Income TaxNoneDeclared ValueExcess Profits Tax2,730.18Excess Profits Tax59,494.91Harlow M. Russell1943 Income Tax16,676.82Susan V. Russell1943 Income Tax16,678.67Waldo B. Russell and Marion P. Russell1943 Income Tax5,979.53Melvin H. Sidebotham1943 Income Tax1,720.72 These cases have been consolidated for hearing and decision. At the hearing petitioners' attorney conceded certain adjustments made by the respondent which had been assigned as error in the petitions. The following issues remain for our decision: 1. Was the cost incurred in 1942 in erecting a fence around a manufacturing plant a capital expenditure or an ordinary and1953 Tax Ct. Memo LEXIS 395">397 necessary business expense? 2. Did the respondent err in denying a deduction for an alleged bad debt in 1943 owed to the individual petitioners' partnership, Russell & Sidebotham, by a related corporation, Sterling Paper Converting Company? 3. Was there a bona fide sale in the taxable year 1943 of certain personal property owned by the Russell Box Company, thereby giving rise to a deductible loss in that year? Findings of Fact Part of the facts were stipulated and they are so found. At the time of filing their petitions, petitioners Harlow M. Russell and Susan V. Russell, husband and wife, resided in Chelsea, Massachusetts; petitioners Waldo B. Russell and Marion P. Russell, husband and wife, resided at Saugus, Massachusetts; and petitioner Melvin H. Sidebotham resided at Winchester, Massachusetts. All of these petitioners filed their income tax returns for the taxable periods here involved on the calendar year basis with the collector of internal revenue for the district of Massachusetts. Petitioner Russell Box Company was incorporated under the laws of the State of Massachusetts and filed its corporate income, declared value excess profits tax and excess profits tax returns1953 Tax Ct. Memo LEXIS 395">398 for the taxable periods here involved on the calendar year basis with the collector of internal revenue for the district of Massachusetts. The partnership of Russell & Sidebotham and the partnership of Russell & Russell each filed information returns for the fiscal year ended January 31, 1943, with the collector of internal revenue for the district of Massachusetts. Petitioner Waldo B. Russell is a brother of petitioner Harlow M. Russell. Included among the business enterprises which the individual petitioners were operating in 1942 and 1943 are the following: 1. A partnership under the name of "Russell & Sidebotham," composed of Harlow M. Russell and Melvin H. Sidebotham. The articles of partnership dated February 1, 1939, provided that the partnership was to engage in the business of manufacturing machinery generally, to develop, manufacture and sell machinery, and to manufacture and sell paper products, paper boxes and containers of all types, and to buy and sell patents and patent rights in inventions and to issue patent licenses therefor and to receive and collect royalties. In 1942 this partnership was doing business under the name of "Specialty Automatic Machine Company" 1953 Tax Ct. Memo LEXIS 395">399 and was engaged in machining tools, practically all of its work being covered by war contracts. The site of its operations was one-half of the first floor of a plant located on Boston Avenue, Medford, Massachusetts. 2. A partnership under the name of "Russell & Russell," composed of Waldo B. Russell and Susan V. Russell, which was formed on February 1, 1939. The articles of partnership provided that this partnership was created for exactly the same purposes as was Russell & Sidebotham. In practice, however, at least for the fiscal year February 1, 1942-January 31, 1943, the income of the partnership Russell & Russell consisted solely of a percentage of the profits of Russell & Sidebotham paid over in accordance with a provision of an agreement between the two partnerships which provided that Russell & Sidebotham should pay Russell & Russell one-half of the former's net profits derived from the use, lease and sale of any machinery owned or controlled by the latter. 3. Russell Box Company, a corporation and a petitioner herein. This company was engaged in the manufacture of paper boxes and like articles and its plant of operations was the remainder of the four-story building on1953 Tax Ct. Memo LEXIS 395">400 Boston Avenue, Medford, Massachusetts, in which the operations of Specialty Automatic Machine Company were conducted. The outstanding stock of this corporation during the years 1942 to 1944, inclusive, was as follows: Number of SharesPar ValueCommon5,000NonePreferred4,000 $100In the year 1942, 4,950 shares of the common stock of the Russell Box Company were owned by H. M. Russell & Company, a trust. Harlow M. Russell and Susan V. Russell were sole and equal beneficiaries of this trust during that year. The remaining 50 shares of common stock were owned by a person named Estelle L. Rice. On March 10, 1943, after the trust, H. M. Russell & Company, had transferred its common stock to the individual petitioners herein, the stock ownership of Russell Box Company was as follows: Number of SharesCommonPreferredHarlow M. Russell1,2381,423Susan V. Russell1,2381,424Waldo B. Russell1,237877Melvin H. Sidebotham1,237276Estelle L. Rice505,0004,0004. Sterling Paper Converting Company, a corporation. In 1942 100 per cent of the stock of this corporation was owned by H. M. Russell & Company trust. 1953 Tax Ct. Memo LEXIS 395">401 On December 31, 1942, all of these shares were transferred to the Russell Box Company. During the years 1942 and 1943 this corporation was engaged in the manufacture of paper boxes and like articles and had a plant located in East Rutherford, New Jersey. In 1942 there was built around the Medford plant, which housed the Russell Box Company and the Specialty Automatic Machine Company, a substantial wire mesh fence which was supported by steel posts and extended for about 1,200 feet, completely enclosing the building on all sides. Prior to the time this fence was erected the building was exposed except for an old wooden fence at the rear of the property and a wire fence on one side. The new fence was erected mainly to protect against sabotage the premises of the Specialty Automatic Machine Company, which was engaged in war work and a considerable portion of its work was carried on during the nighttime. The fence served this purpose, although its structure was such that at one end of the elevator entrances to the building difficulty was experienced in loading and unloading trucks. The cost of erecting this fence was a capital expenditure in the year 1942. The premises of Sterling1953 Tax Ct. Memo LEXIS 395">402 Paper Converting Company (hereinafter usually referred to as Sterling) were leased from the Borough of East Rutherford, New Jersey. Sterling made substantial improvements in the premises as required by the terms of the lease. The amount of these improvements, less depreciation, as shown on Sterling's 1942 income tax return, was $57,106.76. The original five-year term of the lease expired on December 31, 1940. On September 30, 1940, in accordance with an option contained in the lease which permitted the lessee at any time after the first day of January 1939 to renew the lease and extend the term thereof for a period of 99 years, Sterling properly notified the Borough of East Rutherford (hereinafter referred to as the lessor) that it was exercising this option effective October 1, 1940. On December 2, 1940, the lessor notified Sterling that its notice with respect to the extension of the term of the lease was considered null and void and of no effect, and on the same date the mayor and council of the Borough of East Rutherford passed a resolution empowering the attorney for the borough to proceed to institute such proceedings as might be necessary to evict Sterling and to obtain a final1953 Tax Ct. Memo LEXIS 395">403 determination as to the legality of the lease agreement. On March 1, 1943, Sterling was notified to quit and surrender the premises. An action at law was commenced in the Bergen County Circuit Court in April 1943 by the lessor to obtain possession of the premises. Sterling contested this action and filed a counterclaim for the value of the leasehold improvements. After the court had ruled on certain motions favorably to Sterling, the action and counterclaim were dismissed without cost to either party and the property was sold at public auction to Sterling for $28,000 in March 1944. Sterling later sold the property for $60,000. The general ledger of Russell & Sidebotham shows an account receivable - Sterling Paper Converting Company with a debit balance as of December 31, 1942, of $55,320.71. The ledger of Russell & Sidebotham shows a credit entry to the account of Sterling Paper Converting Company A7D in the amount of $55,320.71 on January 31, 1943. The general ledger of Russell & Sidebotham shows a note receivable account - Sterling Paper Converting Company with a debit balance as of December 31, 1942, of $10,520.07. The ledger of Russell & Sidebotham shows a credit entry to the1953 Tax Ct. Memo LEXIS 395">404 account note receivable of Sterling Paper Converting Company as of January 1943 in the amount of $10,520.07. The journal of Russell & Sidebotham shows the following entry: DebitCreditJan. 31, 1943Bad Debts$65,840.78Sterling$55,320.71NotesReceivable10,520.07To charge off uncollectible account and note.Petitioner Harlow M. Russell instructed his accountant to charge these accounts off as a bad debt as of January 31, 1943, the end of Russell & Sidebotham's fiscal year. The income tax return of Sterling for the calendar year 1942 showed net sales of $314,886.42 as compared with net sales of $478,260.27 on its 1941 return and $31,567.54 on its 1943 return. The balance sheets, Schedule L. attached to the 1942 return of this company, show the following as of December 31, 1942: AssetsCurrent assets$68,505.22Deferred charges6,103.71Depreciable assets (its lease-hold improvements)57,106.76LiabilitiesAccounts payable$ 7,234.78Accrued expenses519.33Other liabilities9,277.18Capital stock (including sur-plus)114,684.40 In the same schedule the balance sheets at the beginning of this1953 Tax Ct. Memo LEXIS 395">405 taxable year (1942) show a long-term note of $10,520.07, the amount of the note allegedly owed to Russell & Sidebotham, and other liabilities totaling $55,338.98. A comparison of the two balance sheets showed capital stock (including surplus) increased from $3,903.49 at the beginning of the year to $114,684.40 on December 31. It was stated on the return that this increase was due to the cancellation of certain liabilities in the amount of $107,488 and is reflected in the following journal entry on the books of Sterling on December 31, 1942: DebitCreditRussell Box Company - Ac-count Payable$39,302.33Russell & Sidebotham - Ac-count Payable55,302.60Specialty Automatic Ma-chine Co. - Account Pay-able2,363.00Notes Payable10,520.07Surplus Adjustment$107,488.00In the latter part of 1943, inasmuch as Sterling was faltering due to labor problems and operational difficulties, Harlow M. Russell decided to sell the entire plant and equipment as a going concern and placed it in the hands of several agents, including Garibaldi Associates. The latter agent interested a chemical company, Patent Chemicals, Inc., in the property. However, Patent1953 Tax Ct. Memo LEXIS 395">406 Chemicals found that it was not interested in certain machinery in the plant used by Sterling but owned by the Russell Box Company. An abortive attempt was made by Garibaldi and Patent Chemicals to work together in an attempt to sell the machinery. Finally, on December 29, Patent Chemicals agreed to purchase the Sterling Paper Converting Company's interest, less the machinery in question, and made a down payment of $5,000 by check dated December 30, 1943. The parties agreed, however, that Patent Chemicals retained the right to rescind the agreement if it found the premises unsuitable. Finding the property unsuitable for its purposes, within the time allotted, Patent Chemicals notified the Russell interests the agreement was rescinded. The amount of Patent Chemicals' down payment, less the forfeiture of $50, was returned to it by check of the Specialty Automatic Machine Company dated March 6, 1944, in the amount of $4,950. On December 29, 1943, a bill of sale covering the machinery was executed naming Douglas Downs, an employee of Garibaldi Associates, as the buyer. Legal title was passed to Douglas Downs and an entry was made on the books of Russell Box Company evidencing this sale. 1953 Tax Ct. Memo LEXIS 395">407 The entry showed a down payment of $5,000 and a mortgage payable running to Russell Box Company of $25,000, the total consideration being $30,000. Russell Box Company received no consideration from Downs for this property, nor did Downs ever consider himself liable to pay anything therefor. His only interest in the transaction was to obtain a commission from the sale of the property when and if a buyer could be found. Downs never acknowledged nor signed any note evidencing his liability to pay for the machinery; nor did he ever obtain possession of it. He agreed with Harlow M. Russell that they would both continue their efforts to find a purchaser for the property. As agreed, Downs could not sell the property for less than $30,000 and he understood that if the property was sold for more he was entitled only to his commission, the remainder of the profit going to the Russell interests. These parties further agreed that if a purchaser was not found within 30 days title to the property was to be transferred to Harlow M. Russell and Downs would receive a net payment of $500. A purchaser was not found, legal title to the property was transferred to Harlow M. Russell, who thereafter sold1953 Tax Ct. Memo LEXIS 395">408 the property to the Container Corporation of America on August 30, 1944, for $30,000. Opinion HILL, Judge: The first of the three issues presented for our decision concerns the question of whether or not the cost of the fence erected about the plant which housed the Specialty Automatic Machine Company and the Russell Box Company was a capital expenditure 2 or deductible in full as an ordinary and necessary business expense. This is a question of fact. The evidence indicated that the fence in question was of a permanent-type structure. When the parties built it they intended it to last at least as long as the Specialty Automatic Machine Company had war contracts, an indefinite period of time. The principal purpose of this fence was to protect the operations of that company against sabotage. It also replaced other older fences on two sides of the building. That the petitioners were not satisfied with the construction of the fence to the extent that it interfered with certain entrances to the plant is no basis for the determination that the cost of the fence was an ordinary and necessary business expense. Our findings of fact that the cost was a capital expenditure disposes of this1953 Tax Ct. Memo LEXIS 395">409 issue. The second issue presented concerns a claimed bad debt arising out of an alleged debt owed to Russell & Sidebotham by Sterling. The alleged debt was charged off on the partnership's books as of January 31, 1943, the last day of its fiscal year. Because the evidence presented is so confusing we have been unable to make a finding as to what, if any, basis existed for the alleged debt. With respect to bookkeeping entries, the parties stipulated as follows: "44. The surplus adjustment account in the ledger of the Sterling Paper Converting Co. as of December 31, 1942 shows a credit entry of $107,488. "45. The general ledger of Russell & Sidebotham shows an account receivable - Sterling Paper Converting Co. with a debit balance as of December 31, 1942 of $55,320.71. "46. The ledger of1953 Tax Ct. Memo LEXIS 395">410 Russell & Sidebotham shows a credit entry to the account of Sterling Paper Converting Co. A7D in the amount of $55,320.71 on January 31, 1943. "47. The general ledger of Russell & Sidebotham shows a note receivable account - Sterling Paper Converting Co. with a debit balance as of December 31, 1942 of $10,520.07. "48. The ledger of Russell & Sidebotham shows a credit entry to the note receivable of Sterling Paper Converting Co. as of January 1943 in the amount of $10,520.07. "49. The journal of Russell & Sidebotham shows the following entry: DebitCredit'Jan. 31, 1943Bad Debts$65,840.78Sterling$55,320.71Notes Receivable10,520.07To charge off uncollectible account andnote.'"We believe that the form of the stipulation is clear. It states as a fact only that the entries in the amounts given were made and appear on the books of Russell & Sidebotham. From our reading of petitioners' argument on brief, however, it appears to be their position that the above paragraphs of the stipulation prove the validity and worth of the alleged debt. Even if in limine the petitioners so misunderstood the stipulation, we believe that they were1953 Tax Ct. Memo LEXIS 395">411 nonetheless put on notice at the hearing that respondent did not concede the validity of the debt or the fact that it had any value at the beginning of the taxable year when counsel for respondent repeatedly assailed the debt's validity and attempted through his questioning to discover the origin of the entries. Petitioners had ample opportunity to introduce evidence establishing how the debt arose and what basis existed for the bookkeeping entries but failed to prove these facts. On cross examination the evidence was conflicting. At one point Harlow M. Russell testified that the debt arose as the result of sales of machinery and merchandise made by Specialty Automatic Machine Company to Sterling over a period of several years. Later he testified: "* * * I didn't testify they were items of machinery that Specialty Machine Company made for Sterling." Sidebotham, the other partner, had no recollection as to how the debt arose. Although the ledger sheet of Russell & Sidebotham containing the Sterling account was used by witnesses as an aid in answering questions on cross examination by respondent's counsel, this document was not introduced in evidence. The testimony with respect to1953 Tax Ct. Memo LEXIS 395">412 the entries in this account was too confusing to support a positive finding; however, it appears probable from the testimony of the petitioners' bookkeeper, as well as other testimony of Harlow M. Russell and certain statements made by counsel for petitioners on brief, that a substantial portion of the alleged debt was in fact the balance of alleged debts owed to other of the Russell enterprises and transferred to the partnership books of Russell & Sidebotham when this partnership was formed in 1939. Any such debts may or may not have had value when they were first entered on the books of Russell & Sidebotham. The record is certainly no help in this request. In any situation as in the case before us where the parties to the claimed bad debt are closely related, the transaction warrants close scrutiny. There is nothing in the record before us to establish that the debts were ever valid or that they had any value at the beginning of the taxable year. Further, even if we were to proceed on the hypothesis that the debts had value at the beginning of the year, the evidence presented fails to prove that they became worthless during the taxable year. Petitioners argue that the suit brought1953 Tax Ct. Memo LEXIS 395">413 by the Borough of East Rutherford to evict Sterling from the leased premises was an identifiable event which rendered its leasehold improvements valueless and gave birth to a substantial claim for back rent and damages, thereby causing Sterling to become insolvent. This claim was only contingent when the alleged debt was written off, and when an action in law was later commenced to evict Sterling, Sterling not only contested the action but filed a counterclaim. As we indicated in our findings of fact, the case was settled, the property sold at public auction to Sterling for $28,000 and was later disposed of by Sterling in consideration for a payment of $60,000. Furthermore, as of December 31, 1942, the balance sheet of Sterling, as shown on Schedule L of its 1942 income tax return, showed current assets totaling $68,505.22, which apparently would have been available for payment of the debt, disregarding the value of the leasehold improvements and the bookkeeping entries with respect to the alleged debts owed to the related Russell enterprises. Harlow M. Russell admitted that no attempt was ever made to collect the debt and it appears that he merely decided that because the prospects1953 Tax Ct. Memo LEXIS 395">414 of Sterling continuing in business appeared dim the account should be written off. The state of the record certainly does not show that Sterling was insolvent when the bad debt was written off, and we have not been able to find therein any identifiable event which would have rendered the alleged debt worthless during the taxable year in question. Having failed to prove either that the debt in question had any validity or any worth at the beginning of the taxable year, and having failed to prove any identifiable event which would render the alleged debt worthless, the petitioners have failed to prove that they are entitled to the bad debt deductions claimed. Accordingly, we held that respondent did not err in denying the same. The third issue presented concerns the question whether the Russell Box Company was entitled to a deduction for a loss in 1943 on the sale of certain machinery. It is the respondent's position, with which we agree, that there was never a bona fide sale of the machinery in question in the taxable year 1943. The legal title of the machinery was in fact transferred to an employee of a selling agent on December 29, 1943. But that is not enough. To support a1953 Tax Ct. Memo LEXIS 395">415 loss, a sale must be bona fide. ; . Downs, the alleged purchaser, held title for a period of only 30 days and then conveyed title to Harlow M. Russell. Downs paid no consideration for the property, never obtained possession of it; he was entitled to sell it to a third party but for not less than $30,000, and if he obtained a purchaser who was willing to pay in excess of $30,000 he understood that any such excess would accrue to the benefit of the Russell interests after the deduction of his commission. We hold that the respondent did not err in denying the deductior for this claimed loss. In view of the fact that the amount stated as the deficiency of petitioner Sidebotham is at variance with the amount of the deficiency as computed in the schedule accompanying the notice, this discrepancy will be resolved by the parties in accordance with Rule 50. In Docket Nos. 28703, 28704, 28705 and 28706, decisions will be entered for the respondent. In Docket No. 28707, decision will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Harlow M. Russell, Docket No. 28704; Susan V. Russell, Docket No. 28705; Waldo B. Russell and Marion P. Russell, Docket No. 28706; Melvin H. Sidebotham, Docket No. 28707.↩. In Schedule 2 attached to the notice, respondent's computation in arriving at the deficiency showed the amount of the deficiency to be $1,850.72.↩2. SEC. 24. ITEMS NOT DEDUCTIBLE. (a) General Rule. - In computing net income no deduction shall in any case be allowed in respect of - * *(2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, except expenditures for the development of mines or deposits deductible under section 23 (cc);↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622206/	N. Paul Kenworthy and Dorothy F. Kenworthy * v. Commissioner. Kenworthy v. CommissionerDocket Nos. 29355, 29356, 29357, 29358, 29359, 29360.United States Tax Court1952 Tax Ct. Memo LEXIS 344; 11 T.C.M. 60; T.C.M. (RIA) 52013; January 25, 19521952 Tax Ct. Memo LEXIS 344">344 Three partners purchased the entire interest of a fourth partner in a well-established business for $70,000. They also paid $5,000 attorney's fees in connection with such purchase. Held, such sums were capital expenditures and not ordinary and necessary expenses. James A. Moore, Esq., 2228 Land Title Bldg., Philadelphia, Pa., and B. Graeme Frazier, Jr., Esq., for the petitioners. Stanley W. Herzfeld, Esq., for the respondent. RICEMemorandum Findings of Fact and Opinion These consolidated cases involve income tax deficiencies for the calendar years 1947 and 1948 as follows: 1947DocketTaxpayerNo.DeficiencyThomas Kenworthy29356$22,666.79N. Paul Kenworthy2935722,585.58Thomas Kenworthy, III293584,341.151948Thomas Kenworthy andMarie Kenworthy29359$ 1,372.16N. Paul Kenworthy andDorothy F. Kenworthy293551,270.50Thomas Kenworthy, III andMary Wells Kenworthy29360657.801952 Tax Ct. Memo LEXIS 344">345 The issue is whether the payment of $70,000 in 1947, by or for the accounts of the petitioners to procure the withdrawal of a partner from the firm, and the payment of $5,000 in 1948, as attorney fees in connection therewith, should be treated as expense items, as reported by petitioners, or as capital items, as determined by the respondent. The possibility that the $70,000 payment might be held to be a partnership expense item for the fiscal year 1948 caused petitioners to amend their petitions for 1948 and allege that their pro rata shares of the $70,000 payment were ordinary and necessary expenses for the calendar year 1948. By virtue of the claimed additional deductions, petitioners allege, in effect, that they have overpaid their 1948 income taxes in the following amounts: 1948DocketOver-TaxpayerNo.paymentThomas Kenworthy andMarie Kenworthy29359$21,465.90N. Paul Kenworthy andDorothy F. Kenworthy2935520,195.40Thomas Kenworthy, III andMary Wells Kenworthy293604,596.36Some of the facts were stipulated. Findings of Fact The stipulated facts are so found and are incorporated herein. The petitioner are individuals, 1952 Tax Ct. Memo LEXIS 344">346 with residences as follows: Thomas and Marie Kenworthy, Limekiln Pike and Waverly Road, Glenside, Pennsylvania. N. Paul and Dorothy F. Kenworthy, Dale Road, Meadowbrook, Pennsylvania. Thomas and Mary Wells Kenworthy, III, Casita, Limekiln Pike and Waverly Road, Glenside, Pennsylvania. Thomas Kenworthy, N. Paul Kenworthy, and Thomas Kenworthy, III, were partners in the firm of Thos. Kenworthy's Sons in the fiscal years of the partnerships ending June 30, 1947, and June 30, 1948. The partnerships of Thos. Kenworthy's Sons filed income tax returns for such fiscal years, and used the accrual method of accounting. The petitioners filed their individual income tax returns for the taxable years 1947 and 1948 on the calendar-year basis, and used the cash receipts and disbursements method of accounting. Thomas Kenworthy, N. Paul Kenworthy, and Thomas Kenworthy, III, filed individual returns for the calendar year 1947. The petitioners filed joint returns for the calendar year 1948. The returns were filed with the collector for the first district of Pennsylvania. Thos. Kenworthy's Sons was formed as a partnership in 1894 in Philadelphia, Pennsylvania, by Joseph Kenworthy and Samuel1952 Tax Ct. Memo LEXIS 344">347 P. Kenworthy, sons of Thomas Kenworthy, deceased, to engage in the business of importing and selling carpet wool. The capital contributions of Joseph and Samuel P. Kenworthy at that time were: Joseph Kenworthy$78,131.29Samuel P. Kenworthy22,062.50From 1894 through June 30, 1947, there were at least nine separate partnerships that engaged in the business of importing and selling carpet wool under the firm name of Thos. Kenworthy's Sons. Over the period of 53 years covered by these several partnerships, five new partners were admitted, the two original partners died, and one partner retired. Except for the two original partners, none of the partners made a capital contribution of any kind to the partnerships. Following the deaths of each of the original partners, their estates were paid nothing for good will or any other intangible asset by the partnership or any individual partner. Upon the retirement of the partner aforementioned, nothing was paid to him or his estate for good will or any other intangible asset by the partnership or any of the individual partners. The partnership agreement of June 30, 1926, carried a provision that any partner had the right1952 Tax Ct. Memo LEXIS 344">348 to withdraw at the end of the partnership fiscal year upon giving 30 days' written notice of such intention. Each of the partnership agreements executed thereafter contained a similar provision. Oscar A. Fow became a partner in the firm of Thos. Kenworthy's Sons on July 1, 1930. Prior thereto he had been an employee of the firm. He severed his connection with the firm on or about July 3, 1947. On July 1, 1946, a partnership agreement was entered into between Thomas Kenworthy, N. Paul Kenworthy, Oscar A. Fow and Thomas Kenworthy, III, in Philadelphia, Pennsylvania, for engaging in business as importers and dealers of carpet wool under the firm name of Thos. Kenworthy's Sons. This agreement was in effect on July 3, 1947. The pertinent portions thereof are as follows: " * * That said partnership shall continue from July 1, 1946 to June 30, 1947 and unless dissolved by a mutual consent shall continue from year to year subject to dissolution by mutual consent on June 30th of any year and at no other date. Any partner shall have the right to withdraw on June 30, 1947 or on June 30th of any subsequent year during the continuance of this agreement upon the terms hereinafter set forth1952 Tax Ct. Memo LEXIS 344">349 upon the giving of thirty days written notice of such intention to withdraw before June 30, 1947 or in any subsequent year during the continuance of this agreement. * "The said Thomas Kenworthy, N. Paul Kenworthy, Oscar A. Fow and Thomas Kenworthy, 3rd shall respectively contribute to the partnership their respective capital credits standing upon the books of the former firm of Thos. Kenworthy's Sons and shall share any profits and losses on the following basis: * "In the event of the withdrawal of any partner or partners upon the Thirtieth day of June of any year, the remaining partner or partners shall have the right to continue to carry on the business without winding up the partnership affairs. "The value of the share or interest of such retiring partner or partners or of any partner or partners so dying during the partnership year shall be determined as of June Thirtieth, * "The withdrawal or death of any partner or partners shall not be deemed to prevent or interfere with the continuance of the partnership business by the remaining partner or partners or to necessitate the winding up of the partnership business. The payment of the value of the1952 Tax Ct. Memo LEXIS 344">350 share of any dying or retiring partner or partners in either of the methods herein provided, shall absolutely end such retiring or deceased partner's or partners' rights or interests in the firm's business or assets." * * The credit balances in the capital accounts of the partners on the books of the former firm of Thos. Kenworthy's Sons which were transferred to the books of the newly created partnership under the agreement of July 1, 1946, were as follows: Thomas Kenworthy$532,974.09N. Paul Kenworthy173,841.32Oscar A. Fow142,859.20 The capital accounts of these partners on the books of the former firm and on the books of the partnership created by the agreement of July 1, 1946, were the only capital accounts of the partners on the books. The above credit balances represented that share of partnership income which had not been withdrawn by the partner during the membership of such partner in any partnership or partnerships doing business under such firm name. The ordinary net income and gross receipts from sales by the partnerships doing business as Thos. Kenworthy's Sons for the 11 fiscal years ending June 30, 1948, as reflected by the income1952 Tax Ct. Memo LEXIS 344">351 tax returns filed by the partnerships, were as follows: FiscalYear EndedOrdinaryGross ReceiptsJune 30Net IncomeFrom Sales1938$ 26,189.73$ 3,665,256.83193946,721.853,636,740.28194086,416.866,639,544.781941568,127.4710,313,073.951942512,065.567,659,050.711943195,317.31880,503.971944142,643.572,612,679.841945164,900.963,369,261.161946298,941.187,953,356.411947270,833.809,086,771.681948298,436.1510,791,754.10The ordinary net income of the partnership for the fiscal year ended June 30, 1947 ($270,833.80) included the following amounts, debited on the partnership books to a salary account of each partner: Thomas Kenworthy$5,200N. Paul Kenworthy5,200Oscar A. Fow5,200Thos. Kenworthy, III4,160The capital account of each partner was credited with his share of income, and debited with his withdrawals against income during the fiscal year ended June 30, 1947. Oscar A. Fow's share of partnership income for the fiscal year ended June 30, 1947, exceeded his withdrawals during the fiscal year by $21,776.89. This sum, when added to his capital account as of June 30, 1946, reflected1952 Tax Ct. Memo LEXIS 344">352 a credit balance as of June 30, 1947, of $164,636.09. Prior to 1940, Fow began drinking intoxicating liquor to excess. During the period 1940 through 1946, the partners had frequent discussions with Fow about his excessive drinking. By December, 1946, the situation had become so intolerable that early in 1947 Fow agreed to go to a sanitarium for treatment the expense of which was paid by the partnership. He was assured by the other partners that, if a cure was effected, his previous misconduct would be forgotten. Instead of completing the treatment, Fow returned after two months, and shortly thereafter resumed his drinking habits. In May, 1947, the other partners decided that Fow's actions threatened their personal and firm assets, and that some kind of agreement should be worked out with him for their own protection. The problem was presented to their attorney who drafted a supplement to the partnership agreement of July 1, 1946, which permitted the partners by a majority vote to terminate Fow's interest in the partnership at the end of any calendar month, but in most other respects continued the partnership as before. In the event of the termination of Fow's interest and membership1952 Tax Ct. Memo LEXIS 344">353 in the partnership, the value of his interest was to be determined as provided in the partnership agreement, but at the end of the month of termination instead of at the end of the firm's fiscal year, and payment therefor was to be made after June 30th following termination at the time and in the manner provided in the partnership agreement of July 1, 1946. The right of the remaining partners to continue the business without winding up the partnership affairs was specifically reserved in the supplemental agreement. The supplement to the partnership agreement was dated May 29, 1947, and was presented to Fow for his signature on or about that date. Fow procrastinated over executing the instrument and took it home over the Memorial Day week end. When Fow returned to the office in the first week of June, it was too late to give the required thirty-day written notice of intention to withdraw from the partnership on June 30, 1947. Instead of executing the supplemental agreement, as the Kenworthys had been led to believe, Fow notified them that he had engaged counsel and was going to stand on his legal rights. During June, 1947, and until July 3, 1947, the attorneys for Fow and the Kenworthys1952 Tax Ct. Memo LEXIS 344">354 were negotiating to effect a settlement between the partners. Fow was willing to get out, but his original asking price was unacceptable to the Kenworthys. The latter were pressing for settlement by June 30, 1947, the end of the partnership's fiscal year. After numerous conferences the attorneys submitted to their respective clients, on or about July 3, 1947, a figure of $70,000 to be paid by the Kenworthys to Fow over and above the latter's capital account on June 30, 1947, adjusted as hereinafter mentioned. The several partners accepted the settlement arrived at by their attorneys on the same day. Their agreement is set forth in a letter dated July 3, 1947, which Fow addressed to the three Kenworthys individually as partners of Thos. Kenworthy's Sons. The Kenworthys noted thereon their acceptance of Fow's proposal. The agreement reads, in part, as follows: "Gentlemen: "For and in consideration of the sum of $227,623.46, to me in hand paid by or for the account of Thomas Kenworthy, N. Paul Kenworthy, and Thomas Kenworthy, 3rd, partners of Thos. Kenworthy's Sons (other than myself), receipt whereof is hereby acknowledged, I hereby agree with the said partners as follows: "1. 1952 Tax Ct. Memo LEXIS 344">355 To assign, and I do hereby irrevocably assign, transfer and set over unto Thomas Kenworthy, N. Paul Kenworthy, and Thomas Kenworthy, 3rd, remaining partners of Thos. Kenworthy's Sons, as their several interests may appear, all my right, title and interest as a partner in the said firm, its assets, good will and said firm name, and all my rights under partnership agreement dated July 1, 1946. "2. It is agreed that said remaining partners may continue to carry on said business under said firm name without winding up the partnership affairs. "3. In further consideration hereof it is agreed that a certain Cadillac automobile purchased by and registered in the name of the firm and heretofore used by me for the most part in the business of the firm and now standing on the books of the firm at a depreciated value of $3,175.79, shall be transferred by the firm to me and thereafter shall remain as my sole property. "4. I shall be responsible for and pay the U.S. income taxes on my share of the profits of said firm for the firm fiscal year ending June 30, 1947, which profits are included in the above consideration, as well as such other taxes as may be assessed against me. "5. It is1952 Tax Ct. Memo LEXIS 344">356 agreed that I shall remove my personal property from the firm premises as promptly as may be convenient. "6. It is agreed that I shall have the right, until July 18, 1947, to avail myself of the opportunity of inspection of the books and records of the firm for the purpose, inter alia, of making a list of persons and corporations with which the firm may presently do business. "7. It is agreed that if I so elect I may engage in a similar line of business alone or with others. "8. Appropriate announcement will be made by Thos. Kenworthy's Sons to the substantial effect that "Mr. Oscar A. Fow has retired as a partner in the firm of Thos. Kenworthy's Sons." Counsel for the remaining partners will effect appropriate withdrawal of registration of Oscar A. Fow as a member of said firm under the Fictitious Names Act and for that purpose Oscar A. Fow will execute the necessary documents. "9. The execution and delivery of this undertaking by me and the acceptance thereof by the remaining partners of Thos. Kenworthy's Sons shall operate as a full mutual release and discharge of all past and present claims and obligations whatsoever, whether in law or in equity, as between the undersigned1952 Tax Ct. Memo LEXIS 344">357 Oscar A. Fow, of the one part, and the firm of Thos. Kenworthy's Sons and Thomas Kenworthy, N. Paul Kenworthy, and Thomas Kenworthy, 3rd, individually and as remaining partners of said firm, of the other part. "IN WITNESS WHEREOF, intending to be legally bound, I have hereunto set my hand and seal as of the close of June 30, 1947. "(Sgd) Oscar A. Fow / "Oscar A. Fow" (SEAL) On July 1, 1947, Fow withdrew $3,000 from the firm. The depreciated value of the Cadillac automobile transferred to Fow in accordance with paragraph 3 of the agreement of July 3, 1947, was $3,175.79. Philadelphia income tax paid by the firm for Fow for the period July 1, 1946 to June 30, 1947, amounted to $836.84. On July 3, 1947, Fow received a check from Thos. Kenworthy's Sons in the amount of $227,623.46. On the books of account of Thos. Kenworthy's Sons. debit entries were made in the capital account of Oscar A. Fow to reflect the withdrawal of $3,000 by Fow on July 1, 1947, the accrual of Philadelphia income tax of $836.84, the depreciated value of the Cadillac automobile of $3,175.79 and the payment of $227,623.46 to Fow on July 3, 1947. 1 A credit entry of $70,000 was made in said account and debit1952 Tax Ct. Memo LEXIS 344">358 entries were made to the capital accounts of Thomas Kenworthy, N. Paul Kenworthy and Thomas Kenworthy III in the respective amounts of $30,800.20, $30,800.20 and $8,399.60. These were denominated on the books as "nuisance value payments." On or about July 5, 1947 Thomas Kenworthy, N. Paul Kenworthy and Thomas Kenworthy III entered into a partnership agreement for carrying on the business of importers and dealers in carpet wool under the firm name of Thos. Kenworthy's Sons. On December 28, 1947, Thos. Kenworthy's Sons paid B. Graeme Frazier $7,500, of which $5,000 was in payment for legal services in connection with the negotiations leading to the execution of the agreement dated July 3, 1947. Pursuant to the provisions of paragraph 6 and 7 of the agreement of July 3, 1947, Fow took certain information from the books and records of1952 Tax Ct. Memo LEXIS 344">359 the partnership and entered into business for himself. He was able to do some business with customers of Thos. Kenworthy's Sons, but his competition had no apparent effect on the firm's business. After Fow's departure, the firm's operations, the relationships between partners, and the firm's relationships with its customers were better. Fow's compesation did not continue for long as he died from chronic alcoholism in June, 1950. The various partnerships that operated under the name of Thos. Kenworthy's Sons from 1894 through the taxable years have all been engaged in importing and selling carpet wool. The several partnerships had agents and connections in the foreign ports of all countries producing carpet wool. These agents dealt with "up-country" buyers who acquired the wool produced in their localities. There is no open market for carpet wool, and the maintenance of these agents and connections by Thos. Kenworthy's Sons in foreign countries was the lifeblood of its wool-importing business. The various partners composing Thos. Kenworthy's Sons were constantly visiting their foreign agents to maintain and perpetuate these connections. When said foreign agents and their families1952 Tax Ct. Memo LEXIS 344">360 visited this country, the partners entertained them. The wool purchased through these connections was sold principally to carpet manufacturers, primarily through personal solicitation by a particular partner with a particular customer. Ordinarily a carpet manufacturer buys wool from various importers, and during 1947 Thos. Kenworthy's Sons had five important competitors. Sales to a particular customer, percentage-wise, would vary considerably depending upon the contacts the firm had with that customer. In the fiscal year ended June 30, 1947, 98.37 per cent of the sales of Thos. Kenworthy's Sons were to eight customers. Three of these companies became customers of Thos. Kenworthy's Sons in some year before 1928, and the other five companies became customers in some year before 1902. Each of these customers did business with Thos. Kenworthy's Sons in each year after it first became a customer through the fiscal year ended June 30, 1950. The balance sheets of Thos. Kenworthy's Sons, as reported on the partnership returns for the fiscal years ended June 30, 1947, and 1948, show the following assets and liabilities: ASSETSJuly 1, 1946June 30, 1947June 30, 1948Cash$ 215,829.84$280,533.54$ 310,828.57Notes and Accounts Receivable (less Reserve)897,746.98346,459.02555,413.51Inventories643,526.42179,453.41573,550.38Investments50,000.00Depreciable Assets18,187.14 117,071.11 2Total Assets$1,807,103.24$824,633.11$1,533,434.42LIABILITIESAccounts Payable$ 370,236.54$108,395.37$ 224,228.87Notes and Mortgages586,856.34400,000.00Other Liabilities335.753,071.99274.28 3Partners' Capital Accounts849,674.61713,165.75908,931.27Total Liabilities$1,807,103.24$824,633.11$1,533,434.421952 Tax Ct. Memo LEXIS 344">361 Thos. Kenworthy's Sons owned no patents, trade-marks, trade names, or exclusive agency contracts. Its advertising costs were about $50 a year. It did not carry good will as an asset on the books of the partnership, and prior to 1947 there had been no suggestion that any good will value attached to the firm of Thos. Kenworthy's Sons. The partnership agreement dated July 1, 1946 provided that Thomas Kenworthy III was entitled to 8 1/3 per cent of the profits and that Thomas Kenworthy, N. Paul Kenworthy and Oscar A. Fow were each entitled to an equal share of the balance. The income tax return of the partnership for the fiscal year ended June 30, 1947, showed distributive income to the partners as follows: Thomas and N. Paul Kenworthy, $51,117.91 each; Thomas Kenworthy III, $16,679.87; Oscar A. Fow, $151,918.11; or an ordinary net income for the partnership of $270,833.80. The partnership return carried the following explanation of the Fow transaction: 1952 Tax Ct. Memo LEXIS 344">362 "To avoid litigation and procure the resignation of Oscar A. Fow from the partnership at June 30, 1947, a nuisance value payment of $70,000 was made to the said Fow. This payment was not made for the purpose of acquiring any interest or assets and is therefore not considered a capital transaction. The payment of $70,000 is credited to Fow in the distribution reflected herein, whereas the proportion thereof chargeable to each of the other partners is deducted in determining the income indicated as accruing to them." The individual income tax returns of the three Kenworthys for the taxable year 1947 reported their distributive shares of the partnership income in the amounts set forth in the partnership return. In determining the deficiencies for 1947, respondent restored to income the amount deducted by each of the Kenworthys in computing his distributive share of the partnership income. The acquisition of Oscar A. Fow's interest in the partnership of Thos. Kenworthy's Sons was a capital transaction, and petitioners are not entitled to deduct their proportionate part of the cost as an ordinary and necessary expense of the taxable year 1947. On their income tax returns for the1952 Tax Ct. Memo LEXIS 344">363 taxable year 1948, which were joint returns, the petitioners deducted a proportionate part of the $5,000 paid as attorney fees in settlement of the dispute with Oscar A. Fow. In determining the deficiencies for 1948, respondent restored to income the amount deducted by each of the Kenworthys ($1,925, $1,925, and $1,150) as his proportionate part of the cost of employing counsel in the Fow dispute. The $5,000 attorney fee paid by the partnership in 1948 in connection with the settlement of the Fow dispute was a capital expenditure, and was not an ordinary and necessary expense in carrying on a trade or business. Opinion RICE, Judge: The basic question in these consolidated cases is the proper characterization to be given the $70,000 payment to Fow over and above the amount of his capital account as of June 30, 1947. The parties are agreed that the attorney fees paid for legal services in connection with the Fow settlement will take the same character. We will discuss only the $70,000 since there is no dispute between the parties with respect to the remainder of the $227,623.46 received by Fow on July 3, 1947. Petitioners' main contention is that the $70,000 was paid to preserve1952 Tax Ct. Memo LEXIS 344">364 and protect their business. It is their contention that Fow's misconduct was damaging the business, that it could reasonably be expected that his actions would continue to damage the business, and that his withdrawal from the firm was necessary. It is also contended that they acquired no capital asset by the payment of the $70,000. Finally, it is contended that $60,000 of the $70,000 payment was in lieu of Fow's anticipated earnings from the partnership for the fiscal year ended June 30, 1948. Petitioners cite A. King Aitkin, 12 B.T.A. 692">12 B.T.A. 692 (1928); and Charles F. Mosser, 27 B.T.A. 513">27 B.T.A. 513 (1933). Respondent contends that the payment to Fow was a capital expenditure which did not reduce the distributive income from the partnership of any of the Kenworthys and did not constitute an ordinary and necessary business expense. He contends that by making the $70,000 payment the Kenworthys secured assets which they would not have had if they had retired after giving the 30-day written notice required by the partnership agreement, namely, the going business, the firm assets, the right to use the firm name, good will, and all of Fow's rights under the partnership agreement1952 Tax Ct. Memo LEXIS 344">365 of July 1, 1946. Much of the argument by petitioners has been directed toward establishing that no good will was involved in the settlement with Fow. Petitioners offered a substantial amount of evidence tending to prove that the partnership earnings were derived from personal solicitation and contacts and not because of the existence of good will. They also established that good will had not been recognized as an asset at any time where a partner had died, or where a new partner had been admitted into the firm, and that no account therefor was carried on the books of the partnership. This proof was apparently for the purpose of taking these cases out from under the rule of Aaron Michaels, 12 T.C. 17">12 T.C. 17 (1949); Rodney B. Horton, 13 T.C. 143">13 T.C. 143 (1949), Richard S. Wyler, 14 T.C. 1251">14 T.C. 1251 (1950), and like cases, which have held good will under certain circumstances to be a vendible capital asset. Petitioners argue that the present situation does not involve any appreciable good will value, and that it is comparable to Estate of Leopold Kaffie, 44 B.T.A. 843">44 B.T.A. 843 (1941) and Estate of Henry A. Maddock, 16 T.C. 324">16 T.C. 324 (1951), where the efforts1952 Tax Ct. Memo LEXIS 344">366 of the partners, their business ability, and other personal factors were responsible for earnings rather than good will. We are not convinced that the question for decision turns upon the existence or lack of existence of valuable good will. In our opinion it is one of the factors to be considered; but it is not decisive. More important is the nature of the transaction consummated on July 3, 1947, and the intent of the parties participating in that transaction. The intent of the parties is ascertainable from the agreement entered into on July 3, 1947, when analyzed in the light of the partnership agreement of July 1, 1946, and the circumstances which led up to the execution of the July 3, 1947, agreement. The circumstances forming the back drop to the July 3, 1947, agreement can be briefly summarized. For over 50 years Thos. Kenworthy's Sons had been engaged in the importation and sale of carpet wool. The business was mainly a family affair with only Fow and one other partner being strangers to the name. The evidence shows that Fow's drinking habits had become a matter of personal and business concern to the Kenworthys prior to July 3, 1947. The firm had financed a treatment cure1952 Tax Ct. Memo LEXIS 344">367 for Fow without effecting the cure. By Memorial Day of 1947 the Kenworthys had reached the limit of their endurance and patience They sought to protect their personal and the partnership's assets from Fow's misconduct first by amending the partnership agreement so that the firm would exist on a month-to-month basis. Failing in this, and confronted with a partner insisting on his legal rights, they authorized their attorney to negotiate with Fow's attorney to effect a settlement. Counsel for Fow and the Kenworthys have testified at length as to the moves and counter moves made by the opposing parties in arriving at a price on which they could settle. These negotiations continued for a month with each side bargaining for its own best interests. The amount of $70,000 ultimately agreed upon was a compromise settlement. But the cash payment was not the only consideration that moved between the parties. Each partly mutually released and discharged the other or others of all past and present claims and obligations in law or in equity. The Kenworthys agreed to announce that Fow had "retired as a partner in the firm." Fow was given the right to inspect the books and records of the firm for1952 Tax Ct. Memo LEXIS 344">368 the purpose of making a list of the firm's customers and was specifically authorized to engage in a similar line of business alone or with others. On their part the Kenworthys intended to and did acquire all of Fow's right, title, and interest as a partner in the firm, its assets, good will, and said firm name, together with all of Fow's rights under the partnership agreement of July 1, 1946. In addition, Fow specifically agreed that the Kenworthys could continue to carry on the business under the firm name without winding up the partnership affairs. In view of their determination to sever their relationship with Fow at the earliest possible moment after Fow's rejection of the supplemental agreement, and in view of the nature of the settlement, we are convinced that the Kenworthys intended to and did purchase Fow's interest. We are also convinced that the transaction was capital in nature, and that respondent properly characterized it as such. In so holding, we have carefully considered petitioners' numerous authorities, including the Aitkin and Mosser cases, supra. The present cases are distinguishable in that each of the petitioners herein acquired a proportionate part of Fow's1952 Tax Ct. Memo LEXIS 344">369 partnership interest by their payments, whereas, Aitkin and Mosser acquired no increased interest in their partnerships by their payments. In the Aitkin case we found specifically that the $5,000 additional payment "was not made for any assets, tangible or intangible," and that the additional amount was paid by the taxpayers "to protect themselves against the injury which they anticipated would result from a continuance of the partnership." We held that a payment under such circumstances was directly connected with and proximately resulted from the taxpayers' business, and was deductible under Kornhauser v. United States, 276 U.S. 145">276 U.S. 145 (1928). The Mosser case follows the Aitkin case and quotes therefrom. The activities of Mosser's son-in-law were damaging the partnership's business and Mosser paid his son-in-law $15,000 to withdraw from the firm. Mosser acquired no part of his son-in-law's partnership interest by this $15,000 payment. Our findings in that case show that the taxpayer's sons purchased their brother-in-law's partnership interest in a separate transaction. We pointed out that a payment in excess of a retiring partner's investment, where no asset was acquired, 1952 Tax Ct. Memo LEXIS 344">370 was held to be a deductible expense in the Aitkin case, and that the same rule applied to Mosser's payment. A case more in point than either the Aitkin or Mosser cases is Burt L. Davis, et al., 26 B.T.A. 218">26 B.T.A. 218 (1932). There, two partners, the Davis brothers, paid $90,000 to procure the retirement of a third partner, Hougard, from a general insurance brokerage agency. The issue was whether such payment was a capital expenditure, a loss, or a business expense. We held that the payment was a capital expenditure, made to acquire a one-third interest in the tangible and intangible assets of the partnership. We thought the good will of the insurance agency was a valuable partnership asset, Hougard's interest in which was acquired by the Davis brothers, but we were careful to point out that Hougard's interest in the partnership's good will was acquired along with other partnership assets in consideration of the payment of $90,000. 2In the Davis case we enumerated some of the tangible and intangible assets acquired by the $90,000 payment to the retiring1952 Tax Ct. Memo LEXIS 344">371 partner. A comparison of the assets acquired in that case with the assets (other than good will) acquired by the Kenworthys for their $70,000 payment in the present cases presents striking similarities. In each instance the agreement, settling the dispute between the partners, provided that: (1) the purchasers acquired all the right, title and interest of the retiring partner, (a) in and to the partnership name and the use thereof; (b) in and to the firm assets, which was spelled out in the Davis case as all furniture, fixtures, contracts, books of account, and all other property and assets of every kind and description belonging to the partnership; (2) the purchasers acquired the right to continue the business; and (3) the retiring partner reserved the right to enter into a competing business and solicit business from customers formerly doing business with the partnership. In each instance the partners who bought the retiring partner's interest, continued the firm's business under a new partnership agreement. It can be said, therefore, that the Kenworthys secured valuable tangible and intangible assets by their $70,000 payment irrespective of whether the firm had valuable good will. 1952 Tax Ct. Memo LEXIS 344">372 This point can be further emphasized by noting Fow's contractual rights under the partnership agreement of July 1, 1946, if the three Kenworthys had retired by giving the required 30-day written notice prior to the end of the partnership's fiscal year. In that event Fow retained the right to continue to carry on the business without winding up the partnership affairs. The importance that the Kenworthys attached to the retention of this right in themselves is illustrated (1) by the language employed in the supplemental agreement, and (2) by the language employed in the agreement of July 3, 1947. In both instruments the Kenworthys were careful to reserve to themselves the right to continue the business without winding up the partnership affairs. The acquisition of this contract right from Fow was one of the major considerations for the $70,000 payment by the Kenworthys. Under such circumstances it cannot be said that the payment to acquire this contract right was a deductible business expense in computing the taxable incomes of these petitioners; it was a capital expenditure. A more recent case, which has some bearing on the question at issue, is Frank L. Newburger, Jr., 13 T.C. 232">13 T.C. 232 (1949).1952 Tax Ct. Memo LEXIS 344">373 In that case we held that the payment by a group of Philadelphia partners to a group of New York partners, under an agreement which accelerated the dissolution of the partnership, to be a capital expenditure. The taxpayer contended that the payments were ordinary and necessary expenses because they were made to accelerate dissolution of the firm rather than to acquire any capital asset. The evidence failed to convince us that the payments were current operating expenses paid or incurred merely in producing current income. On the contrary, the evidence showed that the payments were more proximately related to and were paid for the acquisition of assets which were expected to produce income for the purchasing group over a longer, more permanent period. An interesting factor in the Newburger case is that the New York partners, who were selling, had the right under the partnership agreement to continue the business without the capital and services of the purchasing group; but they were fully aware of all aspects of the situation and "drove the best bargain they could in disposing of their interests in the going business of the Philadelphia offices." The situation here is similar in that1952 Tax Ct. Memo LEXIS 344">374 Fow was getting out, and he drove the best bargain he could in disposing of his interest in the partnership. Cf. Specialty Engineering Co., 12 T.C. 1173">12 T.C. 1173 (1949), and Ruth W. Collins, 14 T.C. 301">14 T.C. 301 (1950), where the payments or a determinable portion thereof were held to be capital expenditures. The evidence in these cases is not convincing that the Kenworthys paid the $70,000 as current operating expenses in order to produce current income. On the contrary, the evidence shows that the $70,000 was more proximately related to and was paid to acquire assets which were expected to produce income over a longer, more permanent period. It is firmly established that a partnership interest is a capital asset. Allan S. Lehman, 7 T.C. 1088">7 T.C. 1088 (1946) affd., 165 Fed. (2d) 383 (C.A. 2, 1948), cert. den., 334 U.S. 819">334 U.S. 819 (1948), and cases there cited, and the purchase of such an asset from a retiring partner by the remaining partners is a capital transaction.3 It may well be that the Kenworthys were motivated in making the $70,000 payment by their desire to avoid litigation, to protect and preserve their business, and to remove a detrimental1952 Tax Ct. Memo LEXIS 344">375 influence therefrom; but the fact remains that as a result of their pro rata payments to Fow each of them increased his own interest proportionately in the excess of the partnership assets over liabilities. 24 B.T.A. 1070">Arthur P. Williams, supra.Their motives and desires were incidental to the object which they actually accomplished by paying the $70,000. Finally, we see no merit in petitioners' contention that $60,000 of the $70,000 payment was in lieu of Fow's anticipated earnings for the partnership's fiscal year 1948. The $60,000 figure was simply a yardstick used by counsel for the opposing parties in negotiating1952 Tax Ct. Memo LEXIS 344">376 a settlement. Whether Fow's share of partnership earnings for the fiscal year 1948 would have equaled $60,000 was purely speculative at July 3, 1947, and this estimated figure cannot be used to reduce petitioners' distributive shares of partnership income. The payment was made by petitioners individually in 1947; it was in no sense a partnership transaction. The parties having agreed that the $5,000 attorney fee paid in 1948 was of the same nature as the $70,000 payment on July 3, 1947, we have found as a fact that the attorney fee was a capital expenditure and not an ordinary and necessary expense. In view of our disposition of the issue raised by the parties with respect to the taxable year 1947 it is unnecessary to consider the alternative question raised by petitioners by their amended petitions with respect to the calendar year 1948. There being no other adjustments involved in the respondent's determinations herein, the deficiencies are approved. Decision will be entered for the respondent. Footnotes. Proceedings of the following petitioners are consolidated herewith: Thomas Kenworthy; N. Paul Kenworthy; Thomas Kenworthy, III; Thomas Kenworthy and Marie Kenworthy; Thomas Kenworthy, III, and Mary Wells Kenworthy.↩1. ↩Fow's Capital Account 6/30/46$142,859.20Excess Fow's Share 1947 profitsover his withdrawals21,776.89Amount of Settlement70,000.00234,636.09Less: Cash Withdrawal 7/1/47$3,000.00Cadillac Automobile3,175.79Philadelphia Income Tax836.847,012.63Amount of Fow's check$227,623.461. Depreciable assets beginning of year, $21,100.68, less reserve for depreciation of $2,913.54. ↩2. Depreciable assets beginning of year, $23,980.55, less reserve for depreciation of $6,909.44. ↩3. Accrued expenses.↩2. See also Arthur P. Williams, 24 B.T.A. 1070">24 B.T.A. 1070 (1931); Alfred Pincus, 18 B.T.A. 930">18 B.T.A. 930↩ (1930).3. This statement is not in conflict with our recent decisions in Gaius G. Gannon, 16 T.C. 1134">16 T.C. 1134 (1951), and Palmer Hutcheson, 17 T.C. 14">17 T.C. 14 (1951). We there recognized that the taxpayer's interest in the partnership was a capital asset, 16 T.C. 1139">16 T.C. 1139, but the cases turned upon whether there was a "sale" or "exchange" thereof under the similar circumstances of the two cases. We hold that a forfeiture was neither a "sale" nor an "exchange" within the meaning of sections 23 (g) and 117, Internal Revenue Code↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622207/	Elm Street Realty Trust, Whitfield W. Johnson, Trustee, Petitioner v. Commissioner of Internal Revenue, RespondentElm Street Realty Trust v. CommissionerDocket No. 1977-79United States Tax Court76 T.C. 803; 1981 U.S. Tax Ct. LEXIS 127; May 18, 1981, Filed 1981 U.S. Tax Ct. LEXIS 127">127 Decision will be entered for the petitioner. E and H transferred rental property to a trust which was to serve as a vehicle for their estate planning. The trust's organizing instrument vested the trustee with broad authority over the res and provided for transfer of the beneficiaries' interests. The beneficiaries had limited powers respecting amendment of the trust's organizing instrument, its termination and appointment of a successor trustee. E and H, the two original beneficiaries, transferred their beneficial interests to members of their families. Held, although the trust possessed a business objective, the beneficiaries were not associates within the meaning of sec. 301.7701-2, Proced. & Admin. Regs., and the trust is thus not classifiable as an association. William C. Hays and Robert F. Corliss, for the petitioner.Barry J. Laterman, for the respondent. Nims, Judge. NIMS76 T.C. 803">804 Respondent determined deficiencies in petitioner's income tax for the taxable years ending February 28, 1975, February 29, 1976, and February 28, 1977, in the respective amounts of $ 4,538.82, $ 4,320.88, and $ 3,912. The issue for decision is whether the Elm Street Realty Trust is an association within the meaning of section 7701(a)(3) 1 and thus taxable as a corporation.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation and the exhibits attached thereto are incorporated herein by reference.At the time the petition in this case was filed, petitioner's principal office was located in Boston, Mass.The Elm Street Realty Trust (petitioner or the trust) was formed at the behest of1981 U.S. Tax Ct. LEXIS 127">129 Zenas O. Egan and Earle B. Harvey by a declaration of trust dated March 1, 1971. At that time, Egan and Harvey were in the wholesale automobile parts business in Massachusetts; they had a business relationship with a Connecticut company named Risley-Leete Co., Inc. (Risley), which sold automobile parts. Also, at that time, Egan and Harvey were guarantors of certain obligations of Risley.Risley was engaged in business on the premises located at 43-47 Elm Street, West Haven, Conn. A corporation controlled by an individual who was a former stockholder of Risley owned the 76 T.C. 803">805 aforesaid Elm Street realty. Around the time the trust was created, the former stockholder was engaged in litigation with Risley.Sometime prior to the formation of petitioner, an opportunity to purchase the Elm Street property was presented to Egan and Harvey. They believed that a purchase of the property would not only represent a good investment, but would also contribute to Risley's future stability because of the removal of an adverse lessor.On March 1, 1971, the date of the petitioner's creation, Egan and Harvey effected a conveyance of the Elm Street property (which they previously had acquired) 1981 U.S. Tax Ct. LEXIS 127">130 to the petitioner. Also on that date, the trustee, Whitfield W. Johnson, executed a lease with Risley on behalf of the trust.The declaration of trust stated that petitioner was formed "to acquired, hold, improve, manage and deal in real estate." The maximum term of the trust was 11 years, the same duration as the lease term; the trust and the lease were intended to be coterminous. However, the trust could also be terminated if either of the following conditions, contained in article Third of the declaration of trust, occurred prior to the end of the 11-year term:(b) Upon notice in writing to the Trustee then serving by the beneficiaries hereunder or the heirs or legal representatives of any beneficiaries who may then be deceased, as the case may be, stating that the within trust is thereby terminated and instructing the Trustee as to the disposition of the property then held by him in trust hereunder.(c) Upon request in writing to the Trustee then serving by any beneficiary hereunder whose beneficial interest at such time as set forth under the provisions of Article First hereof as amended shall be 25% or more and that the within trust should be terminated provided that the Trustee1981 U.S. Tax Ct. LEXIS 127">131 then serving hereunder within seven days of receipt of such writing determines in his complete and absolute discretion that termination would be in the best interests of the beneficiaries hereunder.Article Second of the declaration of trust provides:The Trustee shall hold and manage certain real estate conveyed to him this day being property generally known as 43-47 Elm Street, situated in West Haven, Connecticut, together with such other property as may now or hereafter be added to this trust and he shall collect the income therefrom and after paying all expenses in connection with the administration of his trust including all mortgage payments due from time to time, he shall distribute the net income therefrom at least as often as annually to the beneficiaries hereunder from time to time.76 T.C. 803">806 Pursuant to article Sixth of the declaration of trust, the trustee was authorized to engage in the following activities:The Trustee shall have complete control, management and power to invest and reinvest the Trust property in any manner he may deem advisable and in any kind of property, real, personal mixed, tangible or intangible, without regard to whether such investments be such1981 U.S. Tax Ct. LEXIS 127">132 as are considered proper or legally authorized to be made by Trustees generally, and without in any way limiting the generality of the foregoing, the Trustee shall have the following powers:To purchase or sell any property of any character, at public or private sale, for cash or credit, or upon such terms or conditions as he shall see fit; to let, hire or lease any property for any terms even beyond the termination of this Trust; to exchange, release (with or without consideration) or partition any property or interest of the Trust; to place restrictions, reservations or conditions upon property acquired or disposed of by the Trust; to lay out, grant or dedicate any part of any land owned by the Trust for roads, streets, sidewalks, squares, open places, and easements; to survey and plot any land of the Trust; to take and give options for land, property, or interests to be bought or sold by the Trust; to provide drains, sewers, water supplies, cables and other conveniences; to subdivide land of the Trust and to grant or purchase easements in, under or over the soil of land for any purpose; to build roads, paths, bridges and other structures necessary to develop land of the Trust or1981 U.S. Tax Ct. LEXIS 127">133 any other land; to landscape and develop any land of the Trust in any way, and to remove soil, rock and other minerals and to sell or dispose of such materials in any way; to erect buildings of any sort, and to improve, remodel, demolish, move or otherwise alter or dispose of any buildings of the Trust or any other buildings; to pay commissions of any amount and by any means, to brokers and others for services rendered the Trust; to advertise in any manner and to use any other means to attract business to the Trust; to insure the Trust or any property of the Trust against fire or any possible other hazard, liability or contingency, in forms and amounts, and with companies at his discretion, but the Trustee shall not be liable for any failure to insure; to loan funds or property of the Trust upon any sort of security or without security to any person, association or corporation; to assign, release in part, discharge, hypothecate or foreclose mortgages of the Trust; and the Trustee may borrow, upon construction loan-so-called, or upon conditional sale or lease and purchase agreement, or otherwise for the purposes of the Trust and may issue notes, bills of exchange, bonds, debentures1981 U.S. Tax Ct. LEXIS 127">134 and other evidences of obligation of this Trust; secured or unsecured, and to secure the same to execute mortgages, debentures, deeds of Trust, and collateral agreements and to secure the repayment by a pledge, mortgage or hypothecation of the Trust property or any part thereof. The Trustee shall also have every possible power and right of dealing with the Trust property and estate which an individual can have over his own property as full and completely as if such individual powers were herein expressed.And for the foregoing purposes and in execution of any other powers of the Trustee (save the power to alter or amend this instrument or to resign this Trust) the Trustee may make such contracts with such persons, associations and corporations as he may deem desirable.76 T.C. 803">807 Petitioner's original beneficiaries were Egan and Harvey, each of them having a 50-percent beneficial interest. Article Fifth of the declaration specifically dealt with the matter of the transfer of beneficiaries' interests:No beneficiaries' interest hereunder shall be the subject of any alienation, gift, sale, assignment, pledge or transfer except (a) by will or intestate disposition in the event of the1981 U.S. Tax Ct. LEXIS 127">135 death of such beneficiary from time to time or (b) as the Trustee hereunder from time to time and all of the other beneficiaries hereunder at such time shall agree to in writing, which writing together with a copy of the instrument making such transfer shall be attached hereto and made a part hereof and shall be deemed to be an amendment to Article First hereof [wherein Harvey and Egan are named as petitioner's beneficiaries] or the same may be signified by an amendment hereto complying with the provisions of Article Ninth of this trust.Article Ninth provided for the amendment or modification of the trust document if a written instrument to that effect were signed and acknowledged by the trustee and all of the trust's beneficiaries.Article Eighth generally provided for a limitation on the liability of the trustee and beneficiaries:No Trustee or beneficiary shall be personally liable for any contract, tort, liability or obligation of the Trust and only the Trust estate shall be liable therefor, and all persons, associations and corporations dealing with the Trustee shall look only to the funds or property of the Trust for payment of any debt, damage, judgment or decree. The Trustee1981 U.S. Tax Ct. LEXIS 127">136 shall not be liable to any beneficiary except for his own willful misconduct, nor shall he be liable for any default, negligence or misconduct of any agent, servant, or attorney appointed by him to represent the Trust, nor shall the Trustee be required to give bond for the proper and faithful performance of his own duties or acts, nor for the acts of any agents, servants, or attorneys appointed by him.Article Tenth provided that the trustee could resign at any time provided the beneficiaries were notified in writing. If the trustee resigned, died, or was unable to serve, the beneficiaries could appoint a new trustee by way of a written instrument. If a new trustee was not appointed within 30 days of the vacancy of the trustee's office, then Whitfield W. Johnson was authorized to choose the successor trustee.One of the reasons Egan and Harvey utilized a trust to hold title to the Elm Street property was to facilitate their estate planning; they desired a form of ownership by which later transfers of beneficial interest to other members of their families would be permitted.76 T.C. 803">808 Whitfield W. Johnson, the trustee, is an attorney who has had substantial experience serving as 1981 U.S. Tax Ct. LEXIS 127">137 trustee for a number of trusts. Except in his capacity as the attorney for Egan and Harvey, he had no business or professional relations with them. At the time of the trial of this case, he was serving as trustee or cotrustee of approximately 20 other trusts which have assets totaling between 15 and 20 million dollars.Johnson's understanding with respect to the Elm Street Realty Trust was that it was to be a passive trust; his duties would be to collect the rent from the tenant, pay the mortgage, and distribute the income. The lease was a net lease under which Risley bore all expenses in connection with the property. Moreover, the trust was a "simple" trust which did not allow for any accumulation of income.It was never suggested to Johnson that the trust purchase additional property. He had no duties with respect to the Elm Street property because they were all assumed by the lessee. He never had occasion to confer with any of the beneficiaries regarding the real estate nor did he ever see the trust real estate.The various discretionary powers given to the trustee in the declaration of trust were inserted by Johnson as the attorney who drafted the trust instrument, without1981 U.S. Tax Ct. LEXIS 127">138 any participation by Egan and Harvey. It was Johnson's practice to include such powers in trust instruments in order to deal with any problems that might result from a wide array of unforeseen circumstances (e.g., fire, disaster, condemnations, etc.). Johnson never discussed the wording of these powers with Egan and Harvey.There have never been any meetings of beneficiaries of the trust. It has no share certificates evidencing ownership of beneficial interests. It has no seal, bylaws, officers, stationery or printed material, and no place of business. Its affairs required a negligible amount of the trustee's time.Subsequent to the petitioner's formation, Harvey transferred his 50-percent beneficial interest to his son, Kenneth Harvey, who in turn transferred one-half of his interest to John Belante and the other one-half of his interest to a trust for the benefit of his minor children. Subsequent to the petitioner's formation, Egan transferred his 50-percent beneficial interest to his daughter, Suzanne M. Egan, who in turn transferred her interest to a trust for her benefit.76 T.C. 803">809 OPINIONThe issue in this case is whether petitioner is an association within the meaning1981 U.S. Tax Ct. LEXIS 127">139 of section 7701(a)(3) and therefore taxable as a corporation. Respondent argues that the petitioner has a sufficient number of the corporate characteristics described in section 301.7701-2, Proced. & Admin. Regs., to warrant its classification as an association.Section 7701(a)(3) defines corporations to include associations. The regulations promulgated pursuant to that section indicate that the presence or absence of (i) associates, (ii) an objective to carry on business and divide 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, generally will determine whether an organization is to be classified as an association. Sec. 301.7701-2(a), Proced. & Admin. Regs.The corporate characteristics which are our chief concern herein are (i) associates and (ii) an objective to carry on a business. Not only are these two characteristics essential to any association classification, they are also usually the only ones that are relevant when it becomes necessary to distinguish between a trust and an association. The primacy of these two characteristics1981 U.S. Tax Ct. LEXIS 127">140 in the case at bar is made clear by the regulations:the absence of either of these essential characteristics will cause an arrangement among co-owners of property for the development of such property for the separate profit of each not to be classified as an association. * * Characteristics common to trusts and corporations are not material in attempting to distinguish between a trust and an association, and characteristics common to partnerships and corporations are not material in attempting to distinguish between an association and a partnership. For example, since centralization of management, continuity of life, free transferability of interests, and limited liability are generally common to trusts and corporations, the determination of whether a trust which has such characteristics is to be treated for tax purposes as a trust or as an association depends on whether there are associates and an objective to carry on business and divide the gains therefrom. * * * [Sec. 301.7701-2(a)(2), Proced. & Admin. Regs.]Accordingly, our analysis will focus primarily on whether petitioner has associates and the requisite business objective.Business ObjectivePetitioner has 1981 U.S. Tax Ct. LEXIS 127">141 directed a major portion of its argument toward the business objective issue. It is contended that the 76 T.C. 803">810 trust was created solely for the purpose of protecting and conserving the Elm Street property for the trust's beneficiaries and that there never was any intent to engage in a business enterprise. Petitioner also avers that a business enterprise was never in fact engaged in since the trustee merely let the property on a net lease basis.Respondent asserts that a business objective is discernible from the express terms of petitioner's organizing document, the declaration of trust. In particular, respondent characterizes the powers granted to the trustee as being extremely broad and as powers which would allow petitioner to engage in the operation of a business. Thus, the potential to engage in a business, as manifested by the trustee's powers in the declaration of trust, demonstrates a business objective which extends beyond the usual goals of private trusts, namely, the mere preservation and protection of the trust assets for the beneficiaries.In response, petitioner counters that the powers enumerated in petitioner's declaration of trust are ordinary trust powers which1981 U.S. Tax Ct. LEXIS 127">142 were exercisable solely with a view to keeping the trust res invested. In an effort to negate any suggestion that the trustee's powers were overly broad, Whitfield W. Johnson, the attorney who drafted the trust instrument, testified that these powers were broad in scope in order to avoid any unforeseen circumstances that might arise.To our mind, it seems reasonably clear that neither the original nor the subsequent beneficiaries ever intended that the trust would engage generally in the operation of a business. Nor can it be said that a business was ever actually conducted. The mere passive receipt of income from one parcel of rental property, particularly in a net lease context, does not constitute an activity which rises to the level of a business operation. Nonetheless, the form of petitioner's governing instrument indicates that petitioner had the potential to operate a business and the courts have consistently given substantial weight to the actual powers contained in an entity's organizing document, particularly where, as in article Sixth, they are of the type or scope which in our judgment go beyond the powers which normally involve the doing only of such business acts1981 U.S. Tax Ct. LEXIS 127">143 as traditionally and generally have been recognized as being incidents in the administration of an "ordinary" (vis-a-vis 76 T.C. 803">811 "business") trust. See Nee v. Main Street Bank, 174 F.2d 425">174 F.2d 425, 174 F.2d 425">429 (8th Cir. 1949). We therefore agree with respondent that the powers given to petitioner's trustee provided the authority to engage in business activity. The presence of such powers, regardless of their exercise, require a finding of a business objective for purposes of section 7701(a)(3) and the regulations thereunder.In Morrissey v. Commissioner, 296 U.S. 344">296 U.S. 344 (1935), the landmark case which provides the basis for a substantial portion of the current association regulations, all of the business activity (primarily subdivision, construction, and lot sales of realty) occurred prior to the taxable years which were at issue; the trust there under scrutiny merely held stock of a corporation during the years before the Court. The Supreme Court noted that --The fact that these sales were made before the beginning of the tax years here in question, and that the remaining property was conveyed to a corporation in exchange for its1981 U.S. Tax Ct. LEXIS 127">144 stock, did not alter the character of the organization. Its character was determined by the terms of the trust instrument. * * * The powers conferred on the trustees continued and could be exercised for such activities as the instrument authorized. [296 U.S. 344">Morrissey v. Commissioner, supra at 361.]Similarly, in Helvering v. Coleman-Gilbert Associates, 296 U.S. 369">296 U.S. 369 (1935), one of the three companion cases with Morrissey, 2 the Supreme Court emphasized the paramount status which is to be accorded the terms of the organizing document. The First Circuit had ruled in favor of the taxpayer in holding that the trust in question was not an association. Among other things, the court noted that the power to purchase additional property and other broad powers vested in the trustees had never been exercised. In reversing the Circuit Court's judgment, the Supreme Court stated:We agree with the Circuit Court of Appeals that weight should be given to the purpose for which the trust was organized, but that purpose is found in the agreement of the parties. * * * The parties are not at liberty to say that their purpose was other or1981 U.S. Tax Ct. LEXIS 127">145 narrower than that which they formally set forth in the instrument under which their activities were conducted. Undoubtedly they wished to avoid partition of the property of which they had been co-owners, but their purpose as declared in their agreement was much broader than that. * * [296 U.S. 369">Helvering v. Coleman-Gilbert Associates, supra at 373-374.]76 T.C. 803">812 In the instant case, the organizing document stated that its purpose "shall be to acquire, hold, improve, manage and deal in real estate." In addition, article Sixth specified the various activities in which the trustee was authorized to engage. The specific powers included authorization to buy, sell, and subdivide property; provide drains, sewers, and cables; build roads, bridges, and other structures necessary to develop the land; landscape and develop1981 U.S. Tax Ct. LEXIS 127">146 the land in any way; and erect, improve, remodel, or demolish buildings. If petitioner had, for example, embarked upon a general and continued course of acquiring and improving property and then selling it in lots, we do not doubt that such would have comprised engaging in a business for present purposes.The facts of the case at hand are similar to those in Sears v. Hassett, 111 F.2d 961">111 F.2d 961 (1st Cir. 1940). In that case, six parcels of land were conveyed (jointly by the six residual beneficiaries of a will) in 1921 to a trust which contained "the usual broad powers found in Massachusetts real estate trusts." 111 F.2d 961">Sears v. Hassett, supra at 962. Shortly thereafter, the trustee entered into a long-term lease for one of the parcels. All of the other parcels were sold by 1925; between that time and 1935 and 1936 (the 2 taxable years which were at issue), the trustees merely leased the remaining parcel. Testimony was introduced to the effect that the beneficiaries did not establish the trust for the purpose of engaging in real estate operations as a business, but rather to simplify the holding of legal title and thus facilitate 1981 U.S. Tax Ct. LEXIS 127">147 disposition of the remaining parcels. In analyzing whether the trust was created as a joint enterprise for carrying on a business, the First Circuit stated that --the character of the trust as an association is not determined by the intentions or expectations of its creators, proved by parol, nor by the extent to which the powers in the trust instrument have actually been exercised, but rather by the purposes and potential activities as disclosed on the face of the trust instrument. * * [111 F.2d 961">Sears v. Hassett, supra at 962-963.]See also 174 F.2d 425">Nee v. Main Street Bank, supra at 429.It is thus apparent that some considerations relevant to the determination of the existence of a business objective include the trustee's discretion to improve and build upon any realty which might be acquired at some future time, as permitted here. In such a case, the trustee is empowered to exercise business judgment for the profit of those associated together (assuming 76 T.C. 803">813 "associates" are present) in the undertaking. In the absence of limiting language contained in the organizing instrument, there is nothing to insure that the trust 1981 U.S. Tax Ct. LEXIS 127">148 would not engage in future business activity even though it might initially be confined to function as a passive receptacle for rental or investment income. Compare Commissioner v. North American Bond Trust, 122 F.2d 545">122 F.2d 545 (2d Cir. 1941), cert. denied 314 U.S. 701">314 U.S. 701 (1942), with Commissioner v. Chase National Bank, 122 F.2d 540">122 F.2d 540 (2d Cir. 1942). In the case before us, the trustee's powers were in no way limited merely to conserving and protecting the Elm Street property for the trust's beneficiaries. See White v. Hornblower, 27 F.2d 777">27 F.2d 777 (1st Cir. 1928) (powers in organizing document of a liquidating trust limited by liquidation purpose); Hugh MacRae Land Trust v. Commissioner, 1 T.C. 899">1 T.C. 899 (1943) (trustees specifically prohibited from operating a coal business); Wyman Building Trust v. Commissioner, 45 B.T.A. 155">45 B.T.A. 155 (1941) (trust could only deal with one piece of property). Rather, the trustee's powers expressly go beyond those kinds of activities which are generally typified by the usual nonbusiness trust. 31981 U.S. Tax Ct. LEXIS 127">149 Accordingly, we hold that petitioner possessed an objective to carry on a business and divide the gains therefrom within the meaning of section 301.7701-2(a), Proced. & Admin. Regs.AssociatesThe second fundamental test is the presence of associates. Sec. 301.7701-2(a)(2), Proced. & Admin. Regs. "Associates" refers to those individuals who possess a beneficial interest in the entity. 296 U.S. 344">Morrissey v. Commissioner, supra at 356-357; Crocker v. Malley, 249 U.S. 223">249 U.S. 223, 249 U.S. 223">234 (1919). However, a group's status as beneficiaries of a trust, standing alone, does not resolve the question of whether those within the group are associated together 1981 U.S. Tax Ct. LEXIS 127">150 in a common business enterprise. In 296 U.S. 344">Morrissey v. Commissioner, supra at 357, the Supreme Court suggested that associations generally require some concerted volitional activity on the part of those beneficially interested, noting that the beneficiaries of an ordinary trust "do not ordinarily, and as mere cestuis que 76 T.C. 803">814 trustent, plan a common effort or enter into a combination for the conduct of a business enterprise."The beneficiaries' role in creating a trust may provide an indication of a planned, common effort. Active participation in establishing the entity evinces a voluntary association for engaging in a joint endeavor. On the other hand, the lack of the current beneficiaries' role in the trust's creation does not mandate a finding that they are not "associates." See Swanson v. Commissioner, 296 U.S. 362">296 U.S. 362 (1935); Roberts-Solomon Trust Estate v. Commissioner, 34 B.T.A. 723">34 B.T.A. 723 (1936), affd. 89 F.2d 569">89 F.2d 569 (5th Cir. 1937). The absence of Egan and Harvey's continuing interest in petitioner, qua beneficiaries, is not determinative of the issue, since classification1981 U.S. Tax Ct. LEXIS 127">151 as an association can nonetheless result --where those who become beneficially interested, either by joining in the plan at the outset, or by later participation according to the terms of the arrangement, seek to share the advantages of a union of their interests in the common enterprise. [296 U.S. 344">Morrissey v. Commissioner, supra at 357.]See also sec. 301.7701-4(b), Proced. & Admin. Regs. As to those cases where the beneficiaries have either not participated in the trust's creation, or affirmatively entered into the enterprise (e.g., by way of a purchase of their beneficial interests), some further voluntary activity may be necessary on their part to satisfy the "associates" requirement. See R. McGee, "Problems of the Unintentional Corporation: The Association Taxable as a Corporation," 29 N.Y.U. Tax Inst. 853, 863 (1971). Where nongrantor beneficiaries receive their beneficial interests gratuitously, without solicitation, it is doubtful that they can be considered associated together in a common enterprise in the absence of some further joint activity (or at least the potential therefor) vis-a-vis the trust.It is in this1981 U.S. Tax Ct. LEXIS 127">152 context that the beneficiaries' relationship to the organized entity must be considered. Thus, the beneficiaries' influence over the trust's activities may militate in favor of a finding of associates. See Hynes v. Commissioner, 74 T.C. 1266">74 T.C. 1266, 74 T.C. 1266">1280 (1980) (sole beneficiary was similar to a 100-percent shareholder since he could control the trust profits to which he was entitled). The regulations under section 7701(a)(3) speak to this point:Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement 76 T.C. 803">815 is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit. [Sec. 301.7701-4(a), Proced. & Admin. Regs. Emphasis supplied.]One commentator has made the following observation regarding the issue of whether beneficiaries constitute associates:Thus, the characteristic of associates does not exist where the beneficiaries by taking no part in the creation of1981 U.S. Tax Ct. LEXIS 127">153 the trust are not voluntarily associated at the outset; the nature of their interests is such that no other persons can become voluntarily associated by acquiring their interests; and they have no participation in the conduct of the trust's affairs. But the characteristic of associates can exist even where the trust has not been created by the beneficiaries, if their interests are freely transferable and they have some voice in decisions as to amendments to the trust or its termination, though they have no voice in management. [M. Lyons, "Comments on the New Regulations on Associations," 16 Tax L. Rev. 441, 454-455 (1961).]We believe that the above-mentioned factors, particularly the role of beneficiaries in a trust's creation and the extent of their participation in its affairs, provide a helpful framework for ascertaining whether a trust's beneficiaries should be deemed associates. In fact, this framework is suggested by various cases which have considered the issue.In Curt Teich Trust No. One v. Commissioner, 25 T.C. 884">25 T.C. 884 (1956), a husband and wife established a trust in order to create an estate for the benefit of1981 U.S. Tax Ct. LEXIS 127">154 their four children, which contained a spendthrift provision. Nine parcels of realty were transferred to the trustees to hold, manage, invest, and reinvest; collect the gross income and pay expenses; and distribute the balance to the designated beneficiaries. The trustees were given broad powers over the trust estate including power to sell, assign, or transfer any portion thereof, reinvest in other property and erect, repair, and reconstruct improvements. The trustees were expressly authorized to deal with the property as would be lawful for an owner in fee to do. This Court held that the trust was not taxable as an association because the beneficiaries did not associate themselves in any enterprise. Particular emphasis was placed on the grantors' desire to create an estate for their children which could not be dissipated by spendthrift operations, a desire which was effectuated by the restriction on the beneficiaries' interests against any anticipatory assignment thereof. In addition, the Court indicated that the grantors 76 T.C. 803">816 entirely disassociated themselves from the trust property; that the beneficiaries had no previous interest in the property; and that the beneficiaries1981 U.S. Tax Ct. LEXIS 127">155 did not have any certificates or evidences of interest or participation which would make them associates in the operations of the trust. We held that --Under the circumstances of this case it is our opinion that it cannot be said that the beneficiaries planned a common effort or entered into a combination for the conduct of a business enterprise. It is our view that these beneficiaries are not associates and that the trust should not be considered an association within the meaning of the statute and the regulations and the rule of the Morrissey case. * * * [25 T.C. 884">Curt Teich Trust No. One v. Commissioner, supra at 891.]In an earlier case, Living Funded Trust of Harry E. Lyman v. Commissioner, 36 B.T.A. 161">36 B.T.A. 161 (1937), an individual established a trust to provide for the maintenance, welfare, and comfort of his wife, children, and grandchildren. The trustees were given broad authority to manage and deal with the trust property, including the power "to operate any business or interest in business comprised in this trust estate." The beneficiaries were precluded from selling, encumbering, or making any other anticipatory assignments1981 U.S. Tax Ct. LEXIS 127">156 of their interests. The trust did not provide for any stock certificates or certificates of beneficial interest. The Board of Tax Appeals held that the trust was not an association since it was not operated in essential respects in accordance with corporate forms of management. The Board stated that --In the case under consideration the beneficiaries did not establish a trust for the management of properties owned by them as tenants in common. They did not associate themselves together for the prosecution of a common enterprise; they did not create an "association" upon the methods and forms used by corporations; they had no part in establishing the trust, and were without power to modify the trust agreement or to terminate the trust. * * [36 B.T.A. 161">Living Funded Trust of Harry E. Lyman v. Commissioner, supra at 166.]We are cognizant that both of the cases quoted above, as well as the previously quoted comment by Lyons, stress the importance of any restrictions placed upon the beneficiaries' ability to transfer their interests. Consideration of this factor, in relation to an analysis of the beneficiaries' status as associates, would thus appear to 1981 U.S. Tax Ct. LEXIS 127">157 overlap the provisions of section 301.7701-2(e), Proced. & Admin. Regs. (wherein free transferability is listed as one of the four other factors bearing on corporate resemblance). In any event, absence of free transferability, in addition to 76 T.C. 803">817 hindering others from becoming voluntarily "associated" by acquiring the current beneficiaries' interests, bespeaks a form that is inconsistent with that of a quasi-corporate entity and accordingly suggests a nonassociation classification.Turning to the circumstances of the instant case in light of the above-mentioned considerations, we note that the beneficiaries played no role in petitioner's creation. Egan and Harvey transferred the Elm Street property to petitioner and were the original beneficiaries, but they soon thereafter assigned their interests pursuant to article Sixth of the declaration of trust. It also appears that the subsequent beneficiaries received their interests gratuitously. 4 We think it can be safely said that the individuals who were petitioner's beneficiaries during the years in issue played no active role either in the creation of petitioner or upon their subsequent entrance into a beneficial relationship1981 U.S. Tax Ct. LEXIS 127">158 with the trust. 5The interests of the beneficiaries in the trust were transferable only under certain restrictive provisions contained in article Sixth. That article generally prohibited a transfer of the beneficiaries' interests with the exception of testamentary transfers pursuant to the will of a beneficiary and transfers assented to by the trustee and all of the other beneficiaries. The requirement that1981 U.S. Tax Ct. LEXIS 127">159 all other beneficiaries agree to any transfer of a beneficial interest imposes a substantial limitation on free transferability (sec. 301.7701-2(e)(1), Proced. & Admin. Regs.), and thus significantly hinders the ability of the beneficiaries to voluntarily and unilaterally substitute others for themselves as associates.The beneficiaries' other powers under the trust instrument included the authority to appoint a successor trustee in the event of the trustee's death, inability to serve, or resignation; amend or modify the trust instrument if acknowledged in writing by the trustee and all of the other beneficiaries; and terminate the 76 T.C. 803">818 trust prior to the expiration of the stated 11-year period if all of the beneficiaries notified the trustee in writing, or if any 25-percent (or greater) interest holder notified the trustee, subject to the trustee's absolute discretion to refuse to terminate the trust.In our view, the ability of the beneficiaries to influence or otherwise participate in the trust's activities is limited in scope by virtue of the conditions attached to the exercise of the relevant powers -- either concurrence by all of the beneficiaries or concurrence of the 1981 U.S. Tax Ct. LEXIS 127">160 trustee in addition. Although petitioner possessed a business objective, the evidence concerning the trust's creation and its subsequent operations does not indicate that the beneficiaries affirmatively planned or entered into a joint effort for the conduct of a common enterprise. Similarly, the nature of the beneficiaries' interests, including the powers incident thereto, does not suggest that they could effect an unfettered, significant influence on petitioner. We thus conclude that petitioner's form did not afford a medium by which the beneficiaries could conduct income-producing activities through a quasi-corporate entity. The beneficiaries were not associates for purposes of section 7701(a)(3) and the regulations thereunder.Accordingly, since petitioner does not possess the fundamental prerequisite of associates, it is not classifiable as an association within the meaning of section 7701(a)(3).Decision will be entered for the petitioner. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, unless otherwise specifically indicated.↩2. The other two cases were Swanson v. Commissioner, 296 U.S. 362">296 U.S. 362 (1935), and Helvering v. Combs, 296 U.S. 365">296 U.S. 365↩ (1935).3. The Commissioner has recently demonstrated the manner in which he would distinguish a trust classifiable as an association from a "fixed investment trust." Compare Rev. Rul. 78-371, 1978-2 C.B. 344, with Rev. Rul. 79-77, 1979-1 C.B. 448↩.4. This fact can be reasonably inferred from the lack of consideration referred to in the assignment documents as well as the estate planning purpose which Egan and Harvey stated as being one of the main reasons they chose a trust form of ownership.↩5. For example, beneficiaries' purchase of beneficial interests would tend to indicate the presence of associates, since the purchase signifies a voluntary and affirmative entrance into the enterprise. See Second Carey Trust v. Helvering, 126 F.2d 526">126 F.2d 526 (D.C. Cir. 1942), cert. denied 317 U.S. 642">317 U.S. 642↩ (1942).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622208/	United States Projector & Electronics Corporation v. Commissioner.United States Projector & Electronics Corp. v. CommissionerDocket No. 7027-65.United States Tax CourtT.C. Memo 1969-102; 1969 Tax Ct. Memo LEXIS 195; 28 T.C.M. 549; T.C.M. (RIA) 69102; May 19, 1969, Filed 1969 Tax Ct. Memo LEXIS 195">195 James V. O'Connor, for the petitioner. Walter John Howard, Jr., for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined the following deficiencies and penalties with respect to petitioner's income taxes for the taxable years 1959 through 1961, inclusive: YearDeficiencyPenaltySec. 6651(a)PenaltySec. 6653(a)1959$23,274.16$1,163.7119604,597.23$353.83453.831961 15,216.92760.85Totals$43,088.31$353.83$2,378.39Petitioner not only contests these deficiencies but seeks the following overpayments: YearOverpayment1959$4,281.5719604,479.381961 221.27$8,982.22 The total amount in controversy is thus $54,802.75. Petitioner filed its Federal income tax return for 1962 in August 1963. Previously a revenue agent had examined petitioner's returns for 1959 through 1961 and had proposed adjustments to income. On its return for 1962 petitioner indicated substantial acceptance of such adjustments. In December 1963 petitioner submitted claims for refund. It claimed carrybacks of a 1962 net operating loss to the years 1959, 1960, and 1961. The1969 Tax Ct. Memo LEXIS 195">196 claims were based on deductions arising from purported rescissions of sales reported on its returns for 1960 and 1961. The sole issue for decision is whether petitioner was entitled to a deduction of $126,441.50 in 1962. 550 Findings of Fact Some of the facts were stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. Petitioner is a calendar-year taxpayer. It filed its Federal corporate income tax returns for all periods here involved on an accrual method of accounting with the district director of internal revenue, Tacoma, Washington. Petitioner's principal place of business was Federal Way, Washington, when it filed its petition in this case. The tax return for 1960 was filed on June 19, 1961, which was four days after the expiration of an extension of time to file approved by the district director of internal revenue. John Raymond Cissna (hereinafter referred to only as Cissna) is a lawyer. During the taxable years in question he was president of petitioner and owned 67.9 percent of the outstanding stock. Cissna is also president and chairman of the board of Federal Old Line Insurance Company (hereinafter1969 Tax Ct. Memo LEXIS 195">197 referred to as FOL). He incorporated the company about 31 years ago. Federal Association, Inc. (hereinafter referred to as FAI) held the master general agency contract for FOL. There are 19 wholly-owned subsidiary corporations of FAI. These subsidiaries include 99 Developments Corporation, University Sound Films, Inc., United Marketing Corporation, Riley Finance Corporation, and Builders of Communities. FOL and FAI decided to develop a process of projecting a single image from a frame of 16 millimeter movie film. The process would be useful as an audio visual aid in training life insurance salesmen. It was further envisioned that the salesmen would sell the projection equipment together with their customary product, life insurance policies. Prior to 1959 it was learned that Adslide Projector Company in Chicago, Illinois (hereinafter referred to only as Adslide) held patents on a projection process involving 16 millimeter film and the process could be purchased. FOL and FAI did not have sufficient funds to acquire the process. Cissna and other individuals purchased the assets of Adslide for a total cost of $36,427.63. They transferred these assets, together with $13,750 in cash1969 Tax Ct. Memo LEXIS 195">198 and other assets, to the recently incorporated petitioner. The investors received shares of stock of petitioner in exchange for the assets which they relinquished. The total investment to the share-holders was $50,177.63. The assets so transferred included an inventory of cameras, projectors, film, patents, tools, and dies. Petitioner capitalized these assets on its books at $200,000. At the time the process was acquired from Adslide, it was not sufficiently developed for public distribution. The primary need was to perfect a method for editing a roll of 16 millimeter film so that a person could select only specific pictures out of 2,000 frames on a roll. Petitioner under-took to develop the equipment that would perform the necessary editing. This equipment was referred to as Pix-A-Matic. Petitioner alone did not have sufficient funds to complete the development of Pix-A-Matic. Petitioner did have some completed equipment such as cameras and projectors. In 1960 and 1961 petitioner entered into the following transactions with the five afore mentioned subsidiaries of FAI: Invoice No. and DateAmount ofSaleCost of SaleGross ProfitPrincipal Item Sold99 Developments Corp.506 - 3/17/60$ 1,920.00$ 1,345.00$ 575.00Keystone Cameras & Pixalogs646 - 5/31/604,560.003,230.001,330.00Keystone Cameras651 - 5/31/60960.00680.00280.00Silver Star Cameras653 - 5/31/606,000.003,000.003,000.0035 mm - 4-U Cameras655 - 5/31/6014,400.0010,200.004,200.00Silver Star Cameras688 - 11/30/6020,000.0020,000.00Sales Franchise691 - 12/30/606,000.006,000.00Sales FranchiseUniversity Sound Films692 - 3/20/6130,625.0022,600.008,025.00Silver Star Cameras693 - 3/20/611,680.001,216.00464.00Phones. & Tape Rocorders703 - 6/1/6113,452.509,955.003,497.50CentapixGJ-13 - 12/31/618,190.008,190.00FranchiseUnited Marketing Company505 - 3/17/602,040.001,515.00525.00Keystone Cameras & Pixalogs629 - 4/25/603,360.002,380.00980.00Keystone Cameras654 - 5/31/606,000.003,000.003,000.0035 mm - 4-U Cameras656 - 5/31/6014,400.0010,200.004,200.00Keystone Cameras687 - 11/30/6020,000.0020,000.00Sales Franchise690 - 12/31/606,000.006,000.00Sales FranchiseRiley Finance Company507 - 3/17/602,040.001,515.00525.00Keystone Cameras & Pixalogs628 - 4/25/603,360.002,380.00980.00Keystone Cameras652 - 5/31/606,000.003,000.003,000.0035 mm - 4-U Cameras657 - 5/31/6014,400.0010,200.004,200.00Silver Star Cameras686 - 11/30/6020,000.0020,000.00Sales Franchise689 - 12/31/606,000.006,000.00Sales FranchiseBuilders of Communities630 - 4/25/60 5,040.003,570.001,470.00Keystone CamerasTotals $216,427.50$89,986.00$126,441.501969 Tax Ct. Memo LEXIS 195">199 Petitioner invoiced the preceding transactions. Its bookkeeper recorded the transactions as sales on the books of original entry and on the ledgers. Petitioner reported the income earned from these transactions on its Federal income tax returns for 1960 and 1961. Only two of the five purchasing subsidiaries kept formal records such as general ledgers. These two corporations, University Sound Films and Builders of Communities, both recorded the acquisitions as purchases. Two other subsidiaries, Riley Finance Corporation and 99 Developments Corporation, reported the transactions on their Federal income tax returns as loans rather than purchases. Riley Finance Corporation, however, had annotated the items as "purchases" in its checkbook. The subsidiaries paid petitioner in cash for the above purchases. Petitioner used the cash for several purposes, especially the further development of Pix-A-Matic. Some cash was used for the payment of dividends. The dividend record of petitioner for the years here involved was as follows: DateDeclaredAmountDeclaredDate PaidAmount Paid1959$ 2,267.501959$ 2,267.5019606,802.5019606,222.501961 6,802.50 1961 2,409.50$15,872.50$10,899.501969 Tax Ct. Memo LEXIS 195">200 Development of the 16 millimeter slide projector was finished in 1965. At that time fifty machines were completed in Japan. Prior to petitioner's filing of its 1962 Federal income tax return, respondent's agent examined its returns for the years 1959, 1960, and 1961. The agent stated that petitioner had incorrectly capitalized the acquisition of the equipment from Cissna and others. The agent further proposed additional adjustments. Petitioner agreed to all these adjustments for the years 1959, 1960, and 1961. On August 15, 1963, and within the extension of time as approved by the district director, petitioner filed its income tax return for 1962. Petitioner's agreement to the adjustments proposed by the agent for the preceding three years was reflected on petitioner's 1962 return. Petitioner entered into a Sales and Franchise Agreement with four of the five aforementioned subsidiaries. Only Builders of Communities was not a party to the Agreement. On December 19, 1963, Charles H. Anderson gave to respondent's agent a statement signed by him. Anderson had been a vice-president of petitioner in 1959, 1960, and 1961 and during the early part of 1962. The statement related to the1969 Tax Ct. Memo LEXIS 195">201 foregoing Agreement under which petitioner agreed to make sales to the five subsidiaries. The statement read: The attached Sales and Franchise Agreement was executed as of the 17th day of November 1959, but in fact, was signed and witnessed on November 11, 1963 by the different parties signing thereon. The Agreement, in part, stated: 3. Since the success of the sales program contemplated by this agreement and the United Management Services program set forth in the Federal Association Board of Directors minutes of October 552 21, 1959 is, to a large degree, dependent upon the Purchasers' ability to provide the basic inventory of saleable and competitive priced projection and camera equipment, it is hereby mutually agreed by all parties that in the event the Seller is unable to provide the basic inventory of $250,000 and a continuing flow of merchandise thereafter, that the Purchasers shall have, at their option, the following lines of recourse: A. To declare this agreement null and void and to retain in their possession all equipment on hand as security for the full settlement of all amounts advanced to the Seller, the form of settlement to be negotiated within one year1969 Tax Ct. Memo LEXIS 195">202 of date thereof. B. To declare this agreement null and void and to liquidate said equipment at "the best price obtainable" and credit the proceeds against amounts advanced to the Seller and negotiate settlement of any balance due. UNITED STATES PROJECTOR & ELECTRONICS CORPORATION By /s/ Charles H. Anderson Charles H. Anderson, Vice President 99 DEVELOPMENT CORPORATION By /s/ Harold M. Rose Harold M. Rose, President UNITED MARKETING CORPORATION By /s/ Richard Gronning Richard Gronning, President RILEY FINANCE CORPORATION By /s/ Robert D. Riley Robert D. Riley, President UNIVERSITY SOUND FILMS, INC. By /s/ Louis F. Risley Louis F. Risley, President On November 11, 1963, the same parties entered into another agreement: In accordance with the explanations given relative to the change in program of Federal Shopping Way, Federal Old Line and other companies cooperating in the United Marketing Services program due to the Securities Exchange action, do hereby find it impossible to carry forward said program, Sales and Franchise Agreement of November 17, 1959 and do for these and the other reasons discussed give notice of cancellation and are desirous to void said1969 Tax Ct. Memo LEXIS 195">203 agreement and treat it as of no affect whatsoever. 1. It now will be impossible for some period in the future to carry forward the agency system and accordingly impossible and to no avail the provision for $250,000 of inventory as therein recited. 2. Without the merchandise aid and the transfer device, which you advise us cannot be completed due to the suspension of the carrying forward of said program due to the foregoing revisions by recently aforesaid investigation and points of disagreement, makes the sales and franchise agreement of no value to the undersigned corporations and that the same are by reason of the circumstances, not only impossible to carry forward, but by reason of the relationships between the companies there has been in fact no actual transaction insofar as a valid sale is concerned and the same should be rescinded, voided and treated of no affect whatsoever. That it is thereby expressly agreed that liabilities to the respective companies to place all parties in a position that accurately reflects their true relation as follows: 99 Developments Corpo- ration$60,812.16United Marketing Cor- poration54,715.51Riley Finance Corpora- tion60,124.20University Sound Films42,862.121969 Tax Ct. Memo LEXIS 195">204 We the undersigned and individuals and in our representative capacities have read the foregoing and certified to said facts as an accurate recital of the understanding between the parties and the true state of affairs. That this agreement is executed as of the 14th day of November, 1962, but in fact, was signed and witnessed at later dates by the different parties signator hereto. 99 DEVELOPMENT CORPORATION By /s/ Harold M. Rose Harold M. Rose, President UNITED MARKETING CORPORATION By /s/ Richard Gronning Richard Gronning, President RILEY FINANCE CORPORATION By /s/ Robert D. Riley Robert D. Riley, President UNIVERSITY SOUND FILMS, INC. By /s/ Louis F. Risley Louis F. Risley, President Accepted: UNITED STATES PROJECTOR & ELECTRONICS CORPORATION By /s/ Charles H. Anderson Charles H. Anderson, Vice-President On December 16, 1963, petitioner submitted claims for refund to respondent's agent for filing with the district director. The claims were for the taxable years 1959, 553 1960, and 1961. The claims indicate acceptance of respondent's adjustments to income; however, they claim a carryback of a net operating loss of $146,343.78 incurred in the taxable year1969 Tax Ct. Memo LEXIS 195">205 1962. Included within this net operating loss is a deduction in the amount of $126,441.50. The deduction represents an attempt by petitioner to "void" for Federal income tax purposes amounts reported as sales to the five aforementioned subsidiaries of FAI. 1 Respondent has denied that petitioner is entitled to a deduction of $126,441.50 in 1962 which can be carried back as a net operating loss deduction to 1959, 1960, and 1961. Opinion The issue is whether petitioner should be allowed a deduction of $126,441.50 in 1962. We have encountered considerable difficulty in understanding the grounds on which petitioner has been presenting its case. It appears that petitioner is advancing two alternative grounds in support of its position. Petitioner apparently bases its first argument on the agreement dated November 11, 1963. The agreement purported to rescind, as of November 14, 1962, petitioner's1969 Tax Ct. Memo LEXIS 195">206 sales in 1960 and 1961 to the subsidiaries of FAI. Petitioner urges that as a consequence of the rescission agreement it is entitled to a deduction in 1962 of $126,441.50. This was the amount of its net sales to the five subsidiaries of FAI in 1960 and 1961. Assuming arguendo the agreement of November 11, 1963, did effect a rescission of the sales in 1960 and 1961, petitioner would still not be entitled to a deduction in 1962. When the partes signed the rescission agreement on November 11, 1963, the event occurred which purportedly fixed petitioner's liability to return amounts previously received from the subsidiaries of FAI. By making the purported rescission in 1963 retroactive to 1962, petitioner could not effect its intention to create a deduction accruable in 1962. If petitioner is entitled to accrue the deduction, such accrual would have to be made in a year subsequent to 1962. See ; . Petitioner's second argument appears to be that its transactions in 1960 and 1961 with the subsidiaries of FAI were not sales transactions. It is contended1969 Tax Ct. Memo LEXIS 195">207 that the subsidiaries were merely advancing money to petitioner to permit it to complete the necessary research and development of Pix-A-Matic. Petitioner contends that deliveries of equipment to the subsidiaries were only to provide security for the amounts received from the subsidiaries. Petitioner further argues that it erred in reporting on its Federal income tax returns for 1960 and 1961 receipts of such amounts as sales. Petitioner seeks to amend this alleged erroneous reporting by deducting the amounts of the sales on its 1962 return. The records of petitioner, which were introduced into evidence by respondent, overwhelmingly refute petitioner's contention that the transactions in 1960 and 1961 were not sales. Petitioner issued to the subsidiaries invoices characterizing the transactions as sales. It also recorded the transactions on its books as sales. The contention of petitioner is similar to the taxpayer's argument in (C.A. 4, 1962). The taxpayer's position in that case was that amounts which it had received from an affiliated corporation were loans rather than prepayments of rent. The Court of1969 Tax Ct. Memo LEXIS 195">208 Appeals for the Fourth Circuit stated: The corporate officers testified that the contemporaneous documentary entries were erroneous and that the transaction was in fact a loan, but the difficulty is that these declarations reflect hindsight and no evidence exists of a contemporaneous nature pointing to a loan. No note was executed, no interest was specified or collected and the financial records did not provide for such. * * * In short the record was either silent or in conflict with the intentions subsequently claimed by the corporate officers. Under the circumstances we cannot say that the trier of fact was clearly erroneous in its conclusion * * * The instant case is a situation similar to that found in the Kohler-Campbell case. In our case, as in the Kohler-Campbell case, no promissory note was ever executed with respect to the transactions, there was no agreement with respect to interest, and there was no specified time for repayment or collection. Furthermore, the contemporaneous bookkeeping of both petitioner and its customers treated the transactions as sales. 554 Petitioner cites only one case in its brief: 1969 Tax Ct. Memo LEXIS 195">209 (C.A. 7, 1963), reversing in pertinent part a Memorandum Opinion of this Court. Petitioner suggests that the decision should be controlling in our case. In Consolidated-Hammer the taxpayer had entered into a contract with the United States Government. The contract called for partial payments to the taxpayer. The partial payments were subject to completion of certain testing requirements. As the Government made each partial payment it acquired title to parts, inventories, and work in process. The taxpayer reported its income on an accrual basis. The issue for decision was whether the partial payments were reportable as accrual income for income tax purposes upon receipt or only when delivery and acceptance of the products were made. Holding for the taxpayer on this issue, the Court of Appeals looked to the specific terms of the contract. According to the terms of the contract the taxpayer did not have a right to retain the partial payments until the products were finished and accepted. The Court of Appeals also rejected the Government's position that the partial payments were includable in gross income under the claim of right doctrine. We think that our case is distinguishable. The1969 Tax Ct. Memo LEXIS 195">210 sales in our case became completed transactions at the time petitioner received its payments. Petitioner has not produced any cogent evidence to the contrary. We cannot give any weight to the sales agreement dated November 17, 1959, which purported to make the sales contingent upon the seller's providing an inventory of $250,000 and a continuing flow of merchandise thereafter. The sales agreement in fact was not signed until after respondent's agent had undertaken an audit of petitioner's returns for 1959, 1960, and 1961. We therefore conclude that petitioner correctly reported on its 1960 and 1961 returns the sales transactions in question. Accordingly, we hold that petitioner is not entitled to a deduction of $126,441.50 in 1962 which could be carried back as a net operating loss deduction to taxable years 1959, 1960, and 1961. Decision will be entered for the respondent. Footnotes1. The stipulation of facts states that sales to all five subsidiaries were voided. We must be governed by the stipulation. In fact, one of the subsidiaries, Builders of Communities, was not a party either to the sales agreement dated November 17, 1959, or to the rescission agreement dated November 11, 1963.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622209/	DANIEL A. ROBIDA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRobida v. CommissionerDocket Nos. 3521-68, 1593-69 SC.United States Tax CourtT.C. Memo 1974-294; 1974 Tax Ct. Memo LEXIS 26; 33 T.C.M. 1370; T.C.M. (RIA) 740294; November 19, 1974, Filed. 1974 Tax Ct. Memo LEXIS 26">26 Daniel A. Robida, pro se. Eugene H. Ciranni, for the respondent. QUEALYMEMORANDUM FINDINGS OF FACT AND OPINION QUEALY, Judge: The respondent determined deficiencies in the Federal income tax return of the petitioner for the taxable years 1964 and 1965 in the amounts of $1,002.31 and $557.95, respectively. Due to concessions by the parties, the issues for our decision are: Docket No. 3521-68. (1) Whether petitioner received additional dividend income in 1964 in the amount of $1,052.84; (2) Whether deductions of $820 for contributions, $190 for medical expenses, $1,000 for a casualty loss, and $1,874 for other deductions including legal fees and cost of keeping stock are allowable for 1964. Docket No. 1593-69 SC. (1) Whether deductions of $860 for contributions, $1,125 for cost of keeping stock, and $170 for loss from theft are allowable for 1965; (2) Whether petitioner is entitled to a dependency exemption of $600 for 1965. FINDINGS OF FACT Petitioner filed Federal income tax returns for the taxable years 1964 and 1965 with the district director for the Portsmouth District of New Hampshire. At the time of the filing of the petition in docket1974 Tax Ct. Memo LEXIS 26">27 No. 3521-68, petitioner's place of residence was Auburn, Massachusetts. At the time of the filing of the petition in docket No. 1593-69 SC, petitioner's place of residence was Sacramento, California. In his petition, correspondences to the Court and at the trial, petitioner made several contentions: First, that the amount of dividends he received from Walston & Co. was $4,206.03 and not $5,258.87, as determined by respondent; Second, that he made contributions for the taxable year 1964 totaling $820; Third, that $656.35 in interest was paid to Walston & Co. in 1964 but that Walston & Co. did not post this amount on his account until January of the next year; Fourth, that he incurred deductible medical expenses of $190 for the taxable year 1964; Fifth, that he had a casualty loss of $1,000 in the taxable year 1964 due to loss of personal property from his hotel room during the time he was incarcerated in Germany in 1963; Sixth, that he incurred legal fees in 1964, which together with costs of keeping his stock, totaled $1,874; Seventh, that in 1965, he had a capital loss on the disposition of 600 shares of stock that he held in Fiat in the amount of $1,144; Eighth, 1974 Tax Ct. Memo LEXIS 26">28 that he made contributions for the taxable year 1965 totaling $860; Ninth, that his cost of keeping his stock in 1965 was $1,125; Tenth, that he incurred in 1965 a loss by theft of $170 when personal property was stolen from his automobile; and Eleventh, that he was entitled to a dependency exemption of $600 for the taxable year 1965 for a person called Nancy. There was no evidence as to her identity or the amount of support he gave her. Prior to trial, the parties reached a tentative settlement agreement whereby the respondent conceded that the petitioner could take the interest deduction for the taxable year 1964 and that the petitioner did in fact have a capital loss of $1,144 in 1965. Although the agreement never was finalized, the respondent, at trial, again conceded these issues. Regarding the remainder of the issues, the deductions in 1964 and the deductions and exemption in 1965, the petitioner provided no evidence to verify the amounts or to show that he was entitled to such allowances. Although the German government confiscated some of his records, such records relate to years prior to 1964. OPINION At trial, the petitioner failed to present any evidence1974 Tax Ct. Memo LEXIS 26">29 verifying the amounts actually paid or their basis as qualified deductions. The respondent being willing to allow the deduction of the $656.35 of interest for the taxable year 1964 and the capital loss of $1,144 on the sale of 600 shares of Fiat in 1965, we find that the petitioner has failed to establish that he was entitled to the remaining deductions or exemption. Decision will be entered under Rule 155 in docket No. 3521-68; Decision will be entered under Rule 155 in docket No. 1593-69 SC.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622211/	Eugene J. Phillips v. Commissioner.Phillips v. CommissionerDocket No. 6798.United States Tax Court1946 Tax Ct. Memo LEXIS 21; 5 T.C.M. 1025; T.C.M. (RIA) 46279; December 5, 1946Eugene J. Phillips, pro se. Arnold R. Cutler, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: By this proceeding petitioner challenges respondent's refusal to afford him the benefits under Internal Revenue Code, section 107. A redetermination of a resulting deficiency in income tax for 1941 in the amount of $1,274.74 is sought. At the hearing the parties orally stipulated certain facts and later filed a "supplementary stipulation of facts." Findings of Fact The facts so stipulated are hereby found accordingly. Petitioner is an attorney at law in Providence, Rhode Island, and filed his income tax return for the year in question with the collector of internal revenue for the district of Rhode Island. On January 15, 1935, petitioner joined1946 Tax Ct. Memo LEXIS 21">22 the law firm of Swan, Keeney & Smith. Petitioner's arrangement with Swan, Keeney & Smith was oral. It called for a regular specified drawing account and contemplated that additional payments should be made should the business warrant it. At this time there was pending in the office of Swan, Keeney & Smith the matter of the City of Newport taking over the Newport Water Works by condemnation proceedings. The firm had theretofore performed services relating to this matter, starting on April 20, 1934. The firm had rendered legal services to the Newport Water Works as early as 1929. According to its books, from 1935 through 1941, the firm received from the Newport Water Works the following: 1935Mar. 13Miscellaneous matters, including all services to date except in connection withcondemnation and negotiations for sale of properties $125Sept. 21Miscellaneous matters and including all services to date except in connectionwith sale or condemnation of property of company1251936Disbursements only19371938193919401941Apr. 28Services re condemnation, etc.99,695.28Petitioner's first actual services were performed on December 5, 1935. He1946 Tax Ct. Memo LEXIS 21">23 conducted the trial of the condemnation proceeding on behalf of the Water Works, which consumed approximately 116 trial days. The award was made by the Commission on March 26, 1940, in an amount of $3,100,000. The best offer which the City of Newport had theretofore made to the Water Works had been $1,700,000. Thereafter a dispute arose as to the fee for Swan, Keeney & Smith, and the firm placed a lien on the funds in the hands of the City of Newport available for payment of the award. Petitioner successfully resisted legal proceedings seeking to release the lien. Petitioner also tried the matter of establishing the reasonable amount of the fee in a suit brought in the name of all the lawyers, including himself. The trial took place in the Superior Court in April, 1941. The firm was allowed a $100,000 fee. Petitioner personally procured the discharge of the lien the latter part of April, 1941. The fee was paid at that time. During 1941, petitioner received from the firm a total of $15,000. Of this amount he reported $10,000 as salary and other compensation for personal services, and reported the $5,000 difference as his share in the fee from the Water Works case for work done "between1946 Tax Ct. Memo LEXIS 21">24 Jan. 1936 and before end of 1940." He submitted his 1941 return on the basis of being entitled to the benefits of Internal Revenue Code, section 107. The partnership income tax return of Swan, Keeney & Smith for 1935 lists only three members as partners in the firm, being those whose names appear in the firm name. The partnership returns for 1936 to 1941, inclusive, list this petitioner in the schedule captioned "Partners' or Members' Shares of Income and Credits." During the years 1935 to 1941, inclusive, the books of the partnership designate payments made to petitioner as "salary." Social security payments were made for the first time by the firm under the Federal Social Security law in January, 1937. The firm records disclose no Social Security payments made on behalf of petitioner, and no deductions were made from his income during the period commencing January, 1937. M. Swan and D. M. Swan were admitted to the partnership on June 1, 1939, after petitioner was consulted about taking them in. During the years 1935 to 1941, inclusive, petitioner reported the amounts he received from the firm as "Salaries and other compensation for personal services. 1946 Tax Ct. Memo LEXIS 21">25 " In each of these returns no amount was reported as "Income * * * from partnerships; * * ," nor is reference made to any partnership income or affiliation. The distributions of income, according to the returns of the partnership for the years 1936 through 1941, inclusive, disclose that petitioner and six others connected with the partnership (including M. and D. M. Swan) received substantially consistent sums in round numbers, whereas, Swan, Keeney & Smith received varying amounts in odd dollars and cents figures. An exception to the foregoing in the case of Smith appears for 1939, 1940, and 1941. Respondent's notice of deficiency denied petitioner the use of section 107, stating that the facts did not show that he was entitled to claim its benefits. Opinion Although this proceeding is presented as if the decisive question were the existence of a partnership arrangement between petitioner and his associates in the practice of law, the record seems to us to make this question comparatively unimportant. In order to determine whether the additional payment of $5,000 made to petitioner in the tax year before us was compensation for services rendered over a period of five years1946 Tax Ct. Memo LEXIS 21">26 or more within the meaning 1 of Internal Revenue Code, section 107, the basic problem seems to us to be whether that sum if segregable as a portion of the fee in the Water Works case received as such by petitioner, and the only portion, or at least 75 percent of all, that he ever received. It is true that if petitioner was an employee over the years during which the services in question were performed, and received a fixed salary for all his work in that capacity, there would be no way of concluding that the $5,000 was 75 percent of the total compensation1946 Tax Ct. Memo LEXIS 21">27 received by him for such services, as the statute requires; at least in the absence of information, as to which the record is silent, justifying the allocation of a sufficiently small amount of his compensation in the earlier years to the work performed by him on that case. On the other hand, even though petitioner were a mere employee, his arrangement might have been one of a profit-sharing nature from which it could be deduced that, since no part of any fee had been previously collected for the specified services, what he received in the tax year was his entire compensation for those services, thereby demonstrating that at least 75 percent was received in the single year before us. But precisely the same conclusion would follow if the petitioner were a partner. That is, it is the participation in profits, as such, whether as partner or employee, which seems to us to be the decisive element permitting us to discover whether the payment he received was at least three-fourths of the total amount of all his receipts from his work on the case in question. So stated, there appears to be no basis for granting the relief which petitioner claims. Whether or not he was a partner, the practice1946 Tax Ct. Memo LEXIS 21">28 with respect to his compensation appears to have been uniform and consistent and resulted in payments to him of a specific and roughly equal amount each year. 2 There is nothing to indicate that the additional sum received by him and to which this controversy relates was the consequence of any agreement to distribute to him a part of the fee in the Water Works case, rather than a mere bonus of which the funds received from the Water Works company were the source. But what is of even greater significance, there is no evidence from which we can elicit even a suggestion as to whether payments to him in prior years included some element based upon the anticipation of his partners (or employers) that a fee in the Water Works case would ultimately be received. It is consequently impossible to find that this earlier compensation did not include more than the permissible 25 percent of the total paid to him for his work in that case. Such a finding is a prerequisite to a determination in his favor. 1946 Tax Ct. Memo LEXIS 21">*29 In that view, it becomes unnecessary to consider whether the services rendered by petitioner covered the requisite five-year period. Even if they did, the failure to fulfill the requirement of the statute governing the proportion of the payment received in one year would still require rejection of petitioner's claim. Decision will be entered for the respondent. Footnotes1. "(a) Personal Services. - If at least 75 per centum of the total compensation for personal services covering a period of sixty calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual."↩2. An annual guarantee, rather than a fixed percentage of net profits, is a frequent arrangement for junior partners in law firms. Petitioner himself refers to a "drawing account" but we are unable to reconcile his description of the percentage of profits assigned to him with the record of actual payments.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622212/	Estate of John E. Myra, Arthur W. Stokes, Executor v. Commissioner.Estate of John E. Myra v. CommissionerDocket No. 4532.United States Tax Court1945 Tax Ct. Memo LEXIS 54; 4 T.C.M. 958; T.C.M. (RIA) 45321; October 24, 1945Arthur W. Stokes, Esq., for the petitioner. Ned Fischer, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: This case originally involved proposed deficiencies in income tax liability determined against the petitioner for the years 1940 and 1941 in the respective amounts of $4,372.24 and $19.25. It is stipulated that this Court may enter an order that there is no deficiency or overpayment as to 1941. The only issue as to the determination for 1940 is the deductibility, under section 162 (a), I.R.C.1945 Tax Ct. Memo LEXIS 54">55 of income of the petitioner in the amount of $13,197.46. Findings of Fact The facts were stipulated and are so found, and, so far as pertinent, that stipulation follows: "1. That John E. Myra died testate on July 28, 1939, and that his will has been admitted to probate in Grand Forks County, North Dakota. The estate is still in the process of administration. "2. That during the years 1940 and 1941 Arthur W. Stokes was the duly appointed, qualified and acting Executor of the Estate of John E. Myra, deceased, and that letters of testamentary administration were issued in August 1939 and were in full force and effect during the entire years of 1940 and 1941. "3. That the residuary legatee mentioned in said will, the Myra Foundation, was incorporated under the laws of the State of North Dakota on April 28, 1941, and that said Foundation by Bureau letter dated November 4, 1941, was held exempt from taxation as a charitable organization in accordance with the provisions of Section 101 (b) of the Internal Revenue Code. "4. That for the calendar year 1940 the petitioner filed its fiduciary income and defense tax return with the Collector of Internal Revenue1945 Tax Ct. Memo LEXIS 54">56 at Fargo, North Dakota. "5. During the year 1941 the executor borrowed the sum of $33,000.00 secured by a mortgage on real property of the petitioner estate for the purpose of paying the balance of claims and specific bequests. On July 15, 1941, the real estate, so encumbered, was transferred to the Foundation." The will of the decedent, John E. Myra, provided, inter alia, as follows: "II. Except for certain specific bequests hereinafter provided for, it is my will that all of my property, real, personal and mixed, where ever the same may be situated shall go to establish what shall be known as the MYRA FOUNDATION which shall be a permanent institution hereby established for charitable, character building, and educational purposes. The intent and purpose being that the principal derived from the sale of any part of my estate shall forever remain intact to be invested and reinvested so that only the interest or the net income from such investments and from all of the property in my estate shall be expended for such charitable, character building and educational purposes." The income of petitioner prior to the payment of legacies, attorneys' fees and claims against the deceased1945 Tax Ct. Memo LEXIS 54">57 amounted to $13,197.46. Petitioner disbursed that income in the payment of specific legacies, attorneys' fees and claims against the decedent. In its return for 1940 petitioner deducted that income as being authorized by section 162 (a), I.R.C.1 Respondent disallowed the deduction and here supports that disallowance on the ground that it was not " * * during the taxable year paid or permanently set aside for * * * [statutorily exempt] purposes * * ". 1945 Tax Ct. Memo LEXIS 54">58 Opinion Respondent bases his position solely on the premise that this income was in fact used by petitioner for purposes other than those lawfully exempt and thus it was not so "paid or set aside." The fact, however, is wholly irrelevant. The will, as obviously appears from paragraph II thereof quoted in our findings of fact, and as respondent implicitly concedes, mandatorily directed that all of decedent's property, subject to the specific bequests, including the income in dispute, should go exclusively to the Myra Foundation which respondent expressly admits is a charitable organization under the statute. Thus, by the will, the income in dispute was "* * * during the taxable year paid or permanently set aside for * * * [statutorily exempt] purposes * * ." No action of the petitioner could change that fact. It has been so decided. Bowers v. Slocum, 20 Fed. (2d) 350; Leubuscher v. Commissioner, 54 Fed. (2d) 998; Estate of J. B. Whitehead, 3 T.C. 40">3 T.C. 40; affd., 147 Fed. (2d) 977. Upon the authority of those cases, decision of no deficiency will be entered as to 1940. Decision for 1940 and 1941 will be entered for the petitioner. 1945 Tax Ct. Memo LEXIS 54">59 Footnotes1. SEC. 162. NET INCOME. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - (a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23 (o)) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23 (o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, asquisition, maintenance or operation of a public cemetery not operated for profit;↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622213/	Bertha Gritmon v. Commissioner.Gritmon v. CommissionerDocket No. 4624.United States Tax Court1945 Tax Ct. Memo LEXIS 186; 4 T.C.M. 552; T.C.M. (RIA) 45182; May 22, 19451945 Tax Ct. Memo LEXIS 186">186 William T. Griffin, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent. SMITHMemorandum Opinion SMITH, Judge: Deficiencies have been determined in petitioner's income tax for 1940 and 1941 in the amounts of $39.60 and $221, respectively. The only adjustment made in petitioner's returns by the respondent in determining the deficiencies was the addition to gross income of $900 in each year representing the fair rental value of a home which petitioner occupied rent free. This was determined to be "Compensation for services" rendered. Petitioner alleges that the respondent erred in making this adjustment. [The Facts] Petitioner is a resident of New York, N. Y., and filed her returns for 1940 and 1941 with the collector of internal revenue for the first district of New York. The home which petitioner occupied during 1940 and 1941 was a small residence located at 8115 Ridge Boulevard, Brooklyn, New York. It was owned by the Elherb Realty Corporation, which was a family real estate holding corporation, organized by petitioner's husband in 1933, the year of his death. He and petitioner had occupied the home as their family residence since1945 Tax Ct. Memo LEXIS 186">187 1927. He conveyed that property, together with four other parcels of improved real estate in the same neighborhood, to the corporation in 1933. All of the capital stock of Elherb Realty Corporation is owned by Herbert F. Gritmon, petitioner's son, and Mrs. Eunice Smith, her daughter. The stock was issued to them in equal shares by their father as a gift in 1933. The other properties owned by the corporation are small units, the street floors of which are rented as stores and the upstairs as apartments. It receives rentals of approximately $500 per month from the stores and approximately $250 per month from the apartments. The rents are usually paid by checks and collected and deposited by petitioner's son or daughter. The corporation has its only office in the living room of the residence occupied by petitioner and also uses a portion of the basement for storage space. The rental checks when mailed are sent to that address. Petitioner sometimes takes up these checks as the postman delivers them and on rare occasions deposits them in the bank. Also at times, when convenient for her, she calls on the tenants who are delinquent in their rent payments and makes collections. Her only1945 Tax Ct. Memo LEXIS 186">188 regular duties are looking after the house and taking care of her daughter who at intervals is subject to a recurring illness. After the death of petitioner's husband her son and daughter permitted her to continue occupying the home rent free. The daughter and her minor daughter lived with her. There was no understanding that she was to perform any services on behalf of the corporation and she was never considered in the company's employ. Petitioner spent considerable time visiting in Florida, California, and other places. She had an independent income of her own. She reported an income of $6,104.03 for 1940 and $6,909.14 for 1941. In 1940 and 1941 the corporation claimed and was allowed depreciation deductions on the residence occupied by the petitioner. It is stipulated that the fair rental value of the premises occupied by petitioner in each of the taxable years 1940 and 1941 was $900 per annum. The respondent has determined that petitioner is taxable on that amount in each year as compensation received from the Elherb Realty Corporation. The respondent's determination, we think, is erroneous. The evidence is that petitioner was never employed by the corporation and never1945 Tax Ct. Memo LEXIS 186">189 performed any services for it which would entitle her to compensation. Her son and daughter merely agreed, as owners of the stock of the corporation, to permit her to continue to occupy the residence as her home after their father's death, as a gratuity. It was in no sense a consideration for services to be per formed on behalf of the corporation. Cases like Charles A. Frueauff, 30 B.T.A. 449">30 B.T.A. 449, cited by the respondent in his brief, are not applicable. There the taxpayer occupied an apartment owned by a corporation of which he was president and the sole stockholder. The rental value of the apartment which he occupied was held taxable to him as compensation for important services which he rendered on behalf of the corporation as its president. The case is obviously distinguishable from the instant one. Decision of no deficiencies will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622214/	FLOYD DEAN BROBST, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent SYDNEY J. BROBST, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBrobst v. CommissionerDocket Nos. 3906-87; 5913-87.United States Tax CourtT.C. Memo 1988-455; 1988 Tax Ct. Memo LEXIS 507; 56 T.C.M. 279; T.C.M. (RIA) 88455; September 22, 1988. 1988 Tax Ct. Memo LEXIS 507">507 Held: Statutory notices were issued before expiration of the 3-year limitation period. Held further, fraud addition sustained. Floyd Dean Brobst, pro se. David G. Hendricks, for the respondent. 1988 Tax Ct. Memo LEXIS 507">508 WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined deficiencies and additions to tax separately against petitioners Floyd D. Brobst and Sydney J. Brobst for the calendar years and in the amounts as follows: Addition to TaxSectionSectionYearAmount6653(b) 16654Floyd D. Brobst1977$ 3,221$ 1,610.50$ 102.82Sydney J. Brobst19783,5681,784.00113.91The separate petitions filed by each petitioner were consolidated for trial, briefing, and opinion. For convenience our Findings of Fact and Opinion are combined. Some of the facts have been stipulated and they are so found. During all of the year 1978, Floyd D. Brobst and Sydney J. Brobst were husband and wife, residing in the State of Texas. They were residents of Oklahoma when the petitions were filed. For 1978, these two petitioners together filed protester-type returns which contained their names, addresses, 1988 Tax Ct. Memo LEXIS 507">509 and signatures with the words "object self-incrimination" on almost every line. Separate statutory notices were issued to each petitioner. Respondent treated one-half of the combined incomes of each as taxable to each person. The slight difference in the deficiencies results, we assume, from the allowance to Mr. Brobst of two exemptions. The issues for decision are the fraud addition and, as stated by the parties, whether or not the statute of limitations had run prior to the issuance of the statutory notices. This latter issue is more correctly described as whether the statutory notices are valid under the facts of this case. 2During 1978 Mr. Brobst was employed by Gulf Oil Corporation and Mrs. Brobst by a unit of the Pampa Independent School System. At least for the years 1975 and 1976 petitioners filed Federal income tax returns on Forms 1040, reporting their income and itemized deductions in an appropriate manner. In September 1973, Mrs. Brobst submitted an employee's withholding exemption certificate showing zero exemptions and allowances. Mr. Brobst in February 1971 similarly submitted1988 Tax Ct. Memo LEXIS 507">510 a W-4 claiming zero exemptions. However, both petitioners adopted tax protester positions in December 1976, with the submission of new W-4 forms claiming respectively 16 allowances and 32 allowances. Thereafter in June 1977 they submitted a Form 1040X for 1975 with lines 1 through 6 containing the words "object self-incrimination" and claiming refund of the tax paid for 1975. This was followed by the filing of the protester returns for 1977 and 1978. For the years 1979 through 1981 either similar returns were filed or no returns were filed. In February 1983 Mr. and Mrs. Brobst were each convicted of violation of section 7203 for willful failure to file income tax returns for the taxable years 1977 and 1978. As a condition of probation, petitioners were required to file income tax returns for all years then due. Accordingly, on December 12, 1983, petitioners filed joint Federal income tax returns for the taxable years 1977 and 1978. The 1978 return was received on December 15, 1983. Respondent in some unexplained fashion mislaid the 1978 Federal income tax return. Hence, the statutory notices issued to each of petitioners were based on respondent's then belief that no proper1988 Tax Ct. Memo LEXIS 507">511 tax return had been filed for the year 1978. 3 This return was located shortly before trial. A comparison of the income and deductions determined in the statutory notices with those contained on the corrected 1978 tax return show that the amounts of income are the same. The difference between the statutory notices and the tax return is that on the 1978 income tax return petitioners claimed certain deductions which were not allowed by the statutory notices. However, petitioners presented no evidence during the trial with respect thereto and are deemed to have waived any claim they may have had to reduced deficiencies. The tax return constitutes an admission as to receipt of the income thereon reported. Thus the existence and the amount of the deficiencies for 1978 have been established. At the trial, petitioners made a contention that the statute of limitations had run on the 1978 year based upon a stamp on the face of the return with the date "1-18-84" inserted. This date refers, however, to the date a step1988 Tax Ct. Memo LEXIS 507">512 in processing the return was taken. Even if by error an Internal Revenue Service Center employee had concluded that the statute of limitations had run on that date, respondent would not be bound by such error. See, e.g., Zimmerman v. Commissioner,71 T.C. 367">71 T.C. 367, 71 T.C. 367">371 (1978), affd. without published opinion 614 F.2d 1294">614 F.2d 1294 (2d Cir. 1979). With respect to the fraud addition, respondent has the burden of proof. Sec. 7454(a); Rule 142(b). The deficiencies being established by petitioners' admission, respondent's burden of establishing same deficiency has been satisfied. Respondent's fraud addition is based on (i) petitioner's failure to file Federal income tax returns for the years 1977 and 1978, (ii) the filing of false W-4's in December 1976 claiming respectively, 16 and 32 exemptions, and (iii) their conviction for failure to file under section 7203. The Brobsts testified that they increased their exemptions in 1976 because they had started running race horses and thought they might have a zero tax liability, or at least they had no idea what their expenses or earnings would be from race horses. In addition Mr. Brobst lost some money on a gold contract. 1988 Tax Ct. Memo LEXIS 507">513 We note that, in spite of the filing of the W-4's in December 1976, the Brobsts' in February 1977 filed a joint Federal income tax return reporting for 1976 gross income of slightly more than $ 29,000 and a tax liability of about $ 4,500. Petitioners made no real effort to demonstrate that their new W-4's had any relation to their anticipated income tax liabilities and we deem the filing of these 1976 Form W-4's to be the initial step in their determination to file protester returns. Neither petitioner seriously claims that the protester-type returns filed for the years 1977 and 1978 should be treated as Federal income tax returns. See Valverde v. Commissioner,T.C. Memo. 1987-203. By the same token, the amended 1978 Federal income tax return signed by the Brobsts on December 12, 1983, and received by respondent on December 15, 1983, was properly filled out and is conceded to be a valid income tax return. The two statutory notices are dated December 12, 1986, and were, therefore, issued within the 3-year statute of limitations period. Petitioners contention is, however, that the statutory notices were not issued with respect to the return which they actually1988 Tax Ct. Memo LEXIS 507">514 filed in 1983, but were issued on the theory that no return had been filed. The statutory notices were apparently based on information used in petitioners' criminal trial or otherwise available to respondent. Petitioners contend that because a return had been filed prior to issuance of the statutory notices, those notices were required to be based on the return. Because they were not and no assessment was made on the 1978 return, the statute of limitations has run. Petitioners argue that a statutory notice can be based on other information only where no return has been filed. Petitioners' authority is section 6501. Respondent, on the other hand, contends that the statutory notices were proper in that they were issued in the light of the protester returns filed in 1979. Respondent argues, without citation of authority, that it is irrelevant whether the notice of deficiency is computed relative to a return or on the basis that no return had been filed. Petitioners' contention seems to fit more closely within the contentions made in Scar v. Commissioner,81 T.C. 855">81 T.C. 855 (1983), revd. 814 F.2d 1363">814 F.2d 1363 (9th Cir. 1987), and Campbell v. Commissioner,90 T.C. 110">90 T.C. 110 (1988);1988 Tax Ct. Memo LEXIS 507">515 that is that the notices are invalid. However, the statutory notices here were issued with respect to these two petitioners and were based essentially on their actual gross incomes and deductions. As we said in Campbell "no particular form is required for a valid notice of deficiency and respondent need not explain how the deficiencies were determined." 90 T.C. 110">Campbell v. Commissioner, supra at 115. The statutory notice in this case is valid and was issued within the 3-year period as we have noted. Thus, respondent's position is in essence correct that the unavailability of the 1978 tax return is immaterial. 4Respondent has the burden of proving by clear and convincing evidence1988 Tax Ct. Memo LEXIS 507">516 that an underpayment exists for the year 1978 and some portion of same was due to fraud. Sec. 7454(a); Rule 142(b). To meet this burden, respondent must show that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 398 F.2d 1002">1004 (3d Cir. 1968); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111 (1983). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 67 T.C. 181">199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978); Estate of Pittard v. Commissioner,69 T.C. 391">69 T.C. 391 (1977). Fraud is not to be imputed or presumed. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 55 T.C. 85">92 (1970); Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96 (1969). However, fraud may be proven by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. 80 T.C. 1111">Rowlee v. Commissioner, supra.The taxpayer's entire course of conduct may be examined to establish the requisite fraudulent1988 Tax Ct. Memo LEXIS 507">517 intent. Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 56 T.C. 213">223-224 (1971); 53 T.C. 96">Otsuki v. Commissioner, supra at 105-106 (1969). The intent to conceal or mislead may be inferred from a pattern of conduct. See Spies v. United States,317 U.S. 492">317 U.S. 492, 317 U.S. 492">499 (1943). A pattern of consistent underreporting of income, especially when accompanied by other circumstances showing an intent to conceal, justified the inference of fraud. See Holland v. United States,348 U.S. 121">348 U.S. 121, 348 U.S. 121">137 (1954); 53 T.C. 96">Otsuki v. Commissioner, supra.However, the mere failure to report income is not sufficient to establish fraud. Merritt v. Commissioner,301 F.2d 484">301 F.2d 484, 301 F.2d 484">487 (5th Cir. 1962). Fraud may not be found under "circumstances which at most create only suspicion." Davis v. Commissioner,184 F.2d 86">184 F.2d 86, 184 F.2d 86">87 (10th Cir. 1950); Katz v. Commissioner, 90 T.C. (June 15, 1988). Other badges of fraud which may be taken into account include: the making of false and inconsistent statements to revenue agents, Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1, 75 T.C. 1">20 (1980); the filing of false documents, Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995, 79 T.C. 995">1007 (1982),1988 Tax Ct. Memo LEXIS 507">518 affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984); understatement of income, inadequate records, failure to file tax returns, implausible or inconsistent explanations of behavior, concealment of assets and failure to cooperate with tax authorities. Bradford v. Commissioner,796 F.2d 303">796 F.2d 303 (9th Cir. 1986), affg. a Memorandum Opinion of this Court. Respondent's primary reliance is on the case of Zell v. Commissioner,T.C. Memo. 1984-152, affd. 763 F.2d 1139">763 F.2d 1139 (10th Cir. 1985). Zell is similar to this case in that protestor returns were filed for 2 years and either no returns or protester returns for 3 later years. Also, in Zell as in this case false W-4 forms were filed in an effort to reduce, if not eliminate, the withholding of income tax from the wages of each of the petitioners. There is no evidence that petitioners' Fifth Amendment concerns were genuine. Thus there are two badges of fraud. While the failure to file by itself is not sufficient, the intent to evade is demonstrated by the filing of false W-4s in an effort to prevent the withholding system from working. The filing of the false W-4 forms is an affirmative act1988 Tax Ct. Memo LEXIS 507">*519 which satisfies the 6653(b) requirements in the 10th Circuit, to which this case is appealable. See Zell v. Commissioner,763 F.2d 1139">763 F.2d 1139, 763 F.2d 1139">1146 (10th Cir. 1985). We conclude that the underpayment for 1978 is due to fraud on the part of both petitioners. Petitioners have submitted no facts or arguments as to why the addition to tax under section 6654 is not correct. The burden of proof is on them with respect to this addition. Therefore, we hold for respondent. Thus, we hold for respondent on all issues. Decisions will be entered for respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. A companion case involving unrelated issues for 1983 is also filed this date. ↩3. Apparently, the 1977 return was received. Whether a statutory notice was issued does not appear from this record. No petition was filed with respect to 1977. ↩4. Respondent does not argue in this context that the provisions of section 6501(c)(1) or (c)(3) would apply to preclude the statute of limitations from running. Subsection (c)(3) becomes inapplicable when a valid return is filed, Badaracco v. Commissioner, Stevens, J. dissenting 464 U.S. 386">464 U.S. 386, 464 U.S. 386">401 (1984); Bennett v. Commissioner,30 T.C. 114">30 T.C. 114↩ (1958). A protester return is not a false or fraudulent return within the intent of subsection (c)(1).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622216/	American Coast Line, Inc. (In Liquidation), Petitioner, v. Commissioner of Internal Revenue, RespondentAmerican Coast Line, Inc. v. CommissionerDocket No. 446United States Tax Court6 T.C. 67; 1946 U.S. Tax Ct. LEXIS 316; January 15, 1946, Promulgated 1946 U.S. Tax Ct. LEXIS 316">316 Decision will be entered for the respondent as to the deficiency, and the proceeding is dismissed as to the section 722 issue for lack of jurisdiction. Taxable Period, Calendar Year or Fiscal Year. -- The Commissioner did not err in determining the petitioner's subchapter E excess profits tax on the basis of the calendar year 1940 where the petitioner kept its books and filed its returns on that basis and never received permission to file any tax return for a period beginning prior to December 31, 1939, and ending thereafter.2. Jurisdiction -- Repeal of Law in Section 722 Issue. -- The Tax Court has no jurisdiction over a section 722 issue where the proceeding does not come within the provisions of section 732; held, further, that if section 722 (d), as it existed prior to December 17, 1943, was intended to give the Court jurisdiction in addition to that conferred in section 732, and if such jurisdiction survived the amendment of December 17, 1943, nevertheless, the petition in this case does not come within the provisions of that section 722(d). Howe P. Cochran, Esq., Margaret F. Luers, Esq., and Paul L. Clugston, Esq., for the petitioner. 1946 U.S. Tax Ct. LEXIS 316">318 Sidney B. Gumbill, Esq., and Z. N. Diamond, Esq., for the respondent. Murdock, Judge. Black, J., concurs only in the result. Opper, J., dissenting. Arundell, J., agrees with this dissent. MURDOCK 6 T.C. 67">68 The Commissioner determined a deficiency of $ 56,769.39 in the petitioner's excess profits tax for the calendar year 1940. He also, in that same notice, denied the petitioner's contention that it was entitled to relief under section 722 of the Internal Revenue Code. The petitioner presses only two of its assignments of error. The first is that the Commissioner erred in determining excess profits tax liability on a calendar year basis rather than on the basis of a fiscal year ended June 30, 1940, and the second is that the Commissioner erred in failing to grant relief under section 722 of the Internal Revenue Code. The Commissioner challenges the jurisdiction of the Court to consider and decide whether or not the petitioner is entitled to any relief under section 722.FINDINGS OF FACT.The petitioner is a corporation which was incorporated under the laws of the State of New York in 1933. Its certificate of incorporation authorized it to own and operate1946 U.S. Tax Ct. LEXIS 316">319 vessels carrying passengers and freight from any port in the United States to any other port, domestic or foreign. One certificate of stock was issued. That was issued for 100 shares to the Prudential Steamship Corporation, apparently as security for a loan. Lillian Stephanidis owned two-thirds of the stock of Prudential and Nicholas D. Allen owned the other one-third. The petitioner was completely inactive and apparently no more than an empty shell from some time in 1935 until July 1939.Stephen D. Stephanidis, Paul Costallat, Benjamin Young, and Nicholas D. Allen, all experienced in the steamship business, were considering the formation of a corporation in 1939 to acquire a steamship. They decided to use the petitioner instead of forming a new corporation. They particularly wanted its name.A meeting of the officers and directors was held on July 21, 1939, at which the minutes of the last previous meeting, held on May 22, 1935, were read and approved. New officers were elected and it was resolved to purchase the steamship Erica Reed. The ship was purchased in August 1939 for $ 97,500. Repairs costing $ 6,180.35 were made to the vessel and its name was changed to Eastern1946 U.S. Tax Ct. LEXIS 316">320 Trader.The authorized capital of the petitioner was increased from $ 10,000 to $ 60,000 and the number of shares from 100 to 600 in 1939. The certificate for 100 shares held by Prudential was surrendered and 150 shares of the petitioner's stock were issued to each of the following: Stephanidis, Costallat, Young, and Allen. The shares of Stephanidis were issued in the name of his wife, Lillian, at his request. All of the shares were issued solely for services of the four men in obtaining loans and in connection with the acquisition of the ship.The petitioner, after purchasing and repairing the ship, operated 6 T.C. 67">69 it until June 7, 1940. The operations during 1939 resulted in a loss of $ 4,658.52, and the operations during 1940 resulted in a loss.The petitioner entered into a contract on March 15, 1940, for the sale of the vessel to the British Government for $ 400,000. Final payment was made to the petitioner and the vessel was transferred to the British Government on June 7, 1940. The net profit from the sale was $ 287,494.59.The petitioner filed franchise tax returns with the State of New York for all years and paid the taxes due thereon. It also filed Federal capital1946 U.S. Tax Ct. LEXIS 316">321 stock tax returns for all years and paid whatever taxes were due, if any. It filed income tax returns for 1933, 1934, and 1935 on a calendar year accrual basis. It did not file any income tax returns for the years 1936, 1937, and 1938.The petitioner addressed a letter to the Commissioner of Internal Revenue on May 2, 1940, requesting permission to file tax returns on the basis of a fiscal year ended June 30, 1940. The Commissioner replied on June 12, 1940, granting permission to change to a fiscal year effective June 30, 1940, provided that the petitioner file returns on a calendar year basis for the years 1937, 1938, and 1939, and that it file a return for the period January 1 to June 30, 1940. The petitioner's books were closed as of December 31, 1939, after the receipt of the letter from the Commissioner. Thereafter, the petitioner filed income and excess profits tax returns upon a calendar year accrual basis for the years 1939 and 1940. The return for 1940 was filed in March 1941 with the collector of internal revenue for the second district of New York. The petitioner has not paid any excess profits tax for 1940. It has never filed a claim for refund of excess profits1946 U.S. Tax Ct. LEXIS 316">322 tax for 1940 or had such a claim denied by the Commissioner.The petitioner filed an application for relief under section 722 of the Internal Revenue Code with the Commissioner on March 14, 1942. The Commissioner, in his notice of deficiency dated September 29, 1942, as stated above, notified the petitioner of the denial of its contention that it was entitled to relief under section 722. The petition in this case was filed on December 26, 1942.OPINION.The excess profits tax here in question (subchapter E) was first imposed by section 710 (a) of the Internal Revenue Code. See section 201, Second Revenue Act of 1940. It was imposed "for each taxable year beginning after December 31, 1939." The petitioner is endeavoring to show that it had a fiscal year beginning prior to December 31, 1939, and ending on June 30, 1940. It would thus avoid most, if not all, excess profits tax liability, 6 T.C. 67">70 since it operated only seven days after June 30, 1940. It requested permission to file its tax reports upon a fiscal year basis. Permission was granted effective June 30, 1940, but the petitioner never took advantage of that permission. The reason is clear. The permission was upon condition1946 U.S. Tax Ct. LEXIS 316">323 that it file a return for the calendar year 1939 and a return for the short period January 1, to June 30, 1940. That latter period would be a period beginning after December 31, 1939, and would be subject to the excess profits tax of section 710 (a). The petitioner never obtained permission to file a tax return for a fiscal year beginning prior to December 31, 1939, and ending on June 30, 1940. Obviously, what the petitioner wanted was permission to file a return for a period from the beginning of its operations in 1939 and ending on June 30, 1940. Its application was made on May 2, 1940. That request was not timely under the Commissioner's regulations (see Regulations 103, sec. 19.46-1), and the Commissioner acted reasonably and within his regulations in granting the request effective June 30, 1940, and upon the conditions which he imposed. Furthermore, and this in itself is determinative, the petitioner never filed a tax return for a period beginning prior to December 31, 1939, and ending thereafter, but, instead, filed its excess profits tax return for the calendar year 1940 in accordance with the period for which it closed its books. Thus, it does not have a leg to stand1946 U.S. Tax Ct. LEXIS 316">324 on in opposing the Commissioner's determination of its excess profits tax liability on the basis of the calendar year 1940. Since the deficiency determined by the Commissioner is not otherwise attacked, it must be approved.The next contention of the petitioner is that it is entitled to relief under section 722. The Commissioner contends that the proceeding should be dismissed in so far as it seeks relief under section 722. He cites Uni-Term Stevedoring Co., 3 T.C. 917, and Pioneer Parachute Co., 4 T.C. 27. Solution of this question requires consideration of the legislative history of section 722 (d) (formerly (e)) and of section 732 of the code. Section 732 is the section which expressly confers jurisdiction on this Court (formerly the Board of Tax Appeals) over issues relating to relief under section 722. The principal purpose of section 722 (d) has been to fix a period of limitations within which claims for relief must be made, but it may also have conferred upon this Court jurisdiction in certain cases not covered by section 732. Therefore, the two sections should be considered together.The original subchapter1946 U.S. Tax Ct. LEXIS 316">325 E excess profits tax provisions came into the Internal Revenue Code through section 201 of the Second Revenue Act of 1940. The only reference to the Board of Tax Appeals was in section 722, which was as follows:6 T.C. 67">71 SEC. 722. ADJUSTMENT OF ABNORMALITIES IN INCOME AND CAPITAL BY THE COMMISSIONER.For the purposes of this subchapter, the Commissioner shall also have authority to make such adjustments as may be necessary to adjust abnormalities affecting income or capital, and his decision shall be subject to review by the United States Board of Tax Appeals.There was no elaboration to show how the relief system was to work. Those provisions were in effect until March 7, 1941, at which time the Excess Profits Tax Amendments of 1941 replaced the original with a wholly new section 722. Those amendments were made effective as of the date of the enactment of the Excess Profits Tax Act of 1940. The only reference to the Board of Tax Appeals in the new section 722 occurred in paragraph (e) thereof. That provision fixed a period of limitations within which applications for relief had to be made. It first required the taxpayer to compute its tax and file its excess profits tax1946 U.S. Tax Ct. LEXIS 316">326 return without the application of section 722, and then provided a general rule that the benefits of the section could not be obtained unless the taxpayer applied to the Commissioner for those benefits within six months from the date of filing the return. An exception was provided to this general rule allowing a taxpayer to claim the benefits of the section in its petition to the Board of Tax Appeals if the Commissioner mailed a notice of deficiency without having issued a preliminary notice thereof or if he mailed a notice of deficiency within 90 days after the date of his preliminary notice. One important purpose of the exception was that a taxpayer who asked for no relief from the tax shown on its return had to be given some time within which to make an application for relief after it had been notified that a deficiency was going to be or had been determined. But where the application was thus filed and was not filed within six months after the date for filing the return, the benefits of the section were limited to the amount of the deficiency.Section 722 was further amended by section 222 of the Revenue Act of 1942, approved October 21, 1942. The only change material here, 1946 U.S. Tax Ct. LEXIS 316">327 aside from changing the provisions from paragraph (e) to paragraph (d), was the additional requirement that the taxpayer "pay" its excess profits tax computed without the application of section 722.That new paragraph (d) was further amended by Public Law 201, 78th Cong., ch. 346, 1st sess., approved Dec. 17, 1943. It entirely changed the period for filing applications or claims for relief and was made applicable with respect to taxable years beginning after December 31, 1939. That part of it material hereto was as follows:(d) Application for Relief Under This Section. -- The taxpayer shall compute its tax, file its return, and pay the tax shown on its return under this subchapter without the application of this section, except as provided in section 710 (a) (5). The benefits of this section shall not be allowed unless the taxpayer within the 6 T.C. 67">72 period of time prescribed by section 322 and subject to the limitation as to amount of credit or refund prescribed in such section makes application therefor in accordance with regulations prescribed by the Commissioner with the approval of the Secretary.Section 322 is the general section authorizing refunds and credits "where1946 U.S. Tax Ct. LEXIS 316">328 there has been an overpayment of any tax." The period of limitation for the filing of claims for refund fixed in that section is within three years from the time the return was filed or within two years from the time the tax was paid, whichever period expires later.The principal purpose of section 722 (d), as shown by its legislative history, was to provide a reasonable period of limitations within which applications or claims for relief under section 722 had to be made. The period was extended from time to time, and, finally, when it included a two-year period after payment of the tax, there was no necessity for any reference to petitions to the Board of Tax Appeals, and, consequently, all reference to the Board or to the Tax Court was eliminated.The Excess Profits Tax Amendments of 1941, referred to earlier, added to the code for the first time section 732, entitled "Review of Abnormalities by Board of Tax Appeals." It parallels, to a degree, section 272, which conferred jurisdiction in deficiency cases but not in 722 cases. Uni-Term Stevedoring Co., supra. Section 732 expressly conferred jurisdiction on this tribunal in certain cases under section1946 U.S. Tax Ct. LEXIS 316">329 722. Paragraph (a) thereof provides, inter alia: "If a claim for refund of tax under this subchapter for any taxable year is disallowed in whole or in part by the Commissioner" he shall send a notice thereof by registered mail and the taxpayer may file a petition with the Board of Tax Appeals for a redetermination of the excess profits tax. That amendment likewise was made effective as of the date of the enactment of the Excess Profits Tax Act of 1940. No changes material hereto have been made in those provisions.The petition herein was filed on December 26, 1942, which was prior to Public Law 201, approved December 17, 1943, the last amendment of section 722 (d). However, that amendment was expressly made applicable to taxable years beginning after December 31, 1939. The year here involved is such a taxable year, the calendar year 1940. Section 722 (d) as thus amended makes no reference to the Board of Tax Appeals or to the Tax Court, and the only subchapter E excess profits tax provisions conferring jurisdiction upon this Court in 722 cases are contained in section 732. Those provisions, standing alone, do not give this Court jurisdiction over the 722 issue in this proceeding. 1946 U.S. Tax Ct. LEXIS 316">330 Prerequisites to such jurisdiction are computation and payment of the excess profits tax without reference to section 722, the filing of a claim for refund of that tax, in accordance with section 322, and a 6 T.C. 67">73 proper notice of the rejection in whole or in part of that claim. The petitioner has never paid any excess profits tax for the year here in question. It has never filed any claim for refund of excess profits taxes paid for the year, and it has never been notified by the Commissioner of his denial in whole or in part of any claim for refund of excess profits taxes for that year. Thus, the Tax Court, under the law as it now exists, does not have jurisdiction to consider the question of whether or not the petitioner is entitled to relief under section 722. There is no hardship in this. It simply treats all taxpayers alike. Cf. Pioneer Parachute Co., supra.If the petitioner pays the deficiency, it will then be entitled to file a claim for refund, and if that claim is denied in whole or in part, it will have a right to contest that action of the Commissioner in this Court, but at present the section 722 issue is not within the statute 1946 U.S. Tax Ct. LEXIS 316">331 giving this Court jurisdiction.The provisions of section 732 at the time this petition was filed were, so far as they are material hereto, exactly the same as they are now. However, it might be argued that section 722 (d), as it existed at the time this petition was filed, conferred jurisdiction upon this Court in certain cases not covered by section 732, and jurisdiction thus acquired was never taken away or lost. There is a general rule which may be found in 15 C. J. 825 that jurisdiction over pending cases is ousted by the repeal of the statute upon which it wholly depends unless the repealing act contains a clause saving pending actions from the operation of the repeal or contains a substantial reenactment of the provisions under which the action was brought. Mr. Chief Justice Waite, in Railroad Co. v. Grant, 98 U.S. 398">98 U.S. 398, expressed the rule as follows: "It is equally well settled that if a law conferring jurisdiction is repealed without any reservation as to pending cases, all such cases fall with the law." Congress apparently had this rule in mind when it enacted section 283 (a) of the Revenue Act of 1926, in which it expressly continued 1946 U.S. Tax Ct. LEXIS 316">332 the jurisdiction of the Board of Tax Appeals over cases filed with it prior to the enactment of the Revenue Act of 1926. The amendment to section 722 (d) contained in Public Law 201, supra, was an effective repeal of section 722 (d) as it existed at the time the petition in this case was filed. The new law provided that " section 722 (d) of the Internal Revenue Code (prescribing the time for filing applications for general relief under the excess-profits tax) is amended to read as follows," and the amendment was a wholly new provision, complete in itself. It was expressly made effective for all years for which the subchapter E excess profits tax was imposed. It completely superseded the old paragraph (d). There was no need for the amendment to contain any provisions saving the jurisdiction which the Board of Tax Appeals or the Tax Court might have obtained by reason of petitions having been filed with it under the former 6 T.C. 67">74 provisions of the paragraph and it did not contain any saving clause. It would follow that if this Court ever had section 722 jurisdiction in this case, it has been lost. Cf. Pioneer Parachute Co., supra, in which a1946 U.S. Tax Ct. LEXIS 316">333 similar argument was advanced.However, this petitioner has never brought itself within the provisions of section 722 (d) as they existed at the time its petition was filed. It had made a claim to the Commissioner for relief under section 722 before it ever filed its petition. No suggestion is made that that claim was not timely. Thus, the petitioner did not have to rely, and did not rely, upon the exception contained in section 722 (d). Furthermore, there is nothing to indicate that the notice of deficiency was mailed without a preliminary notice having been mailed or that it was mailed within 90 days after the date of a preliminary notice. Thus, if the provisions of section 722 (d), in effect at the time this petition was filed, were intended by Congress to give the Tax Court jurisdiction in certain cases not covered by section 732, nevertheless, this petition does not come within those provisions of the law. We had no jurisdiction of the section 722 issue under section 272. Uni-Term Stevedoring Co., supra.It follows that the Tax Court never acquired any jurisdiction over the section 722 issue in this proceeding.Decision will be entered 1946 U.S. Tax Ct. LEXIS 316">334 for the respondent as to the deficiency, and the proceeding is dismissed as to the section 722 issue for lack of jurisdiction. OPPEROpper, J., dissenting: From its inception, the Board of Tax Appeals has acquired jurisdiction upon application of a taxpayer to review a deficiency. I. R. C., sec. 272. The purpose was to avoid requiring payment of exactions which were not authorized by law. The method of reviewing a denial by the Commissioner of relief for abnormalities under section 722 was, at least under the earlier versions of the law, manifestly intended to follow this traditional procedure.It was recognized, however, that in some cases computation (and payment) 1 of the tax without reference to the relief provision, as was required by the 1941 and 1942 amendments, would involve situations where the only effective redress might be in connection with a claim for refund. To add jurisdiction to review the Commissioner's action in such situations, section 732 was enacted. 21946 U.S. Tax Ct. LEXIS 316">336 Even then, however, "there 6 T.C. 67">75 are some cases in which it would be inequitable to compel the taxpayer to pay the entire amount of such tax * . Thus at the time required for payment, an eligible1946 U.S. Tax Ct. LEXIS 316">335 taxpayer need pay only 67 percent of that portion of the tax on which it claims relief * * . Any determination of tax greater than the total amount paid will produce a deficiency." 3Section 710, as so amended (Revenue Act of 1942, sec. 222 (b)), clinches this approach by providing: * * For the purposes of section 271, if the tax payable is the tax so reduced, the tax so reduced shall be considered the amount shown on the return.Section 271 is the definition of a deficiency, from a determination of which by the Commissioner an appeal lies to the Tax Court under section 272.The only reference in the 1941 and 1942 provisions of section 722 to the Board of Tax Appeals is not an authorization to review a determination of the Commissioner, which was unnecessary in view of section 729, but (sec. 722 (d) (1), (2)) is an authorization to accept and act de novo upon claims for relief which because of the exceptional circumstances described arose in such a way that the taxpayer did not have opportunity to file his claim first with the Commissioner. 41946 U.S. Tax Ct. LEXIS 316">337 6 T.C. 67">76 If it were not intended that taxpayers could secure a review in advance of payment of the deficiency, this provision was unnecessary and illogical. Any other conclusion results in the further absurdity that a taxpayer who had not had time to file his claim with the Commissioner could litigate his 722 question along with any deficiency issues before the Board and obtain more adequate relief than a taxpayer who had filed his claim but whose claim had not secured favorable treatment. The latter would have to pay the deficiency, and claim a refund. I am entirely unwilling to ascribe so inconsistent and inequitable a purpose to the legislation.The change to the present procedure, requiring the Commissioner to pass on all claims as a prerequisite to jurisdiction here, has been assumed to be the result of Public Law No. 201, approved December 17, 1943, long after this petition was filed. Uni-Term Stevedoring Co., 3 T.C. 917; Pioneer Parachute Co., 4 T.C. 27. For present purposes I am willing to accept that position, and the conclusions there reached as sound.It seems to me to follow from what has been said, however, 1946 U.S. Tax Ct. LEXIS 316">338 that when this proceeding was commenced, the Tax Court had jurisdiction of it, at least under the law as it stood under the 1941 and 1942 amendments. That is a distinction from the Uni-Term case, as I think the Tax Court recognized in Pioneer Parachute Co.The latter case seems to me clearly distinguishable because that was not a petition to review a determination of the Commissioner at all, but an attempt to secure relief de novo under the exceptional situation covered in the 1941 and 1942 amendments. 5 The opinion there pointed out that by the 1943 amendment Congress recognized "that this Court is not equipped to handle claims for relief administratively," with a consequent change of -- * * the statute to its present form by Public Law 201, supra. * * ** * * so that in no case shall the question of possible relief under 722 be tried before this Court until after the Commissioner has acted adversely upon the claim. [Emphasis added.]In the present proceeding 1946 U.S. Tax Ct. LEXIS 316">339 this taxpayer made its application under section 722 to the Commissioner; it was denied; deficiency notice was issued; the petition claiming relief from both actions was filed here, all at the time that the law permitted such procedure. Unless there are impeccable reasons for assuming that the jurisdiction acquired at that time was withdrawn, I think every consideration of justice and sound administration requires that it be considered as having been retained.It may well be that the passage of Public Law No. 201 repealed, at least by implication, the provision for direct application to the Tax 6 T.C. 67">77 Court which had previously been incorporated in section 722 (d). But it did not repeal section 729 or section 272, and is silent on the subject of withdrawal of jurisdiction in such a proceeding as this. At most it prescribed a new procedure. Quoting another statement from Corpus Juris:* * * jurisdiction duly acquired under an existing statute is not taken away by a subsequent statute prescribing a different method of commencing an action. [21 Corp. Jur. Sec., p. 148.]In the words of Judge Parker in Duke Power Co. v. South Carolina Tax Commission (C. C. A., 4th Cir.), 81 Fed. (2d) 513, 516;1946 U.S. Tax Ct. LEXIS 316">340 certiorari denied, 298 U.S. 669">298 U.S. 669: * * a repealing act ought not be construed, if any other construction is possible, as intended to affect rights which have vested under the act repealed or as requiring the abatement of actions instituted for the enforcement of such rights. * * * [Emphasis added.]I respectfully dissent. Footnotes1. This requirement, added by the 1942 Act, seems to have been a mere clarification, for by that act "The administrative procedure presently provided for in section 722↩ is retained." H. Rept. No. 2333, 77th Cong., 2d sess., pp. 148, 149.2. "Sec. 9. * * * Under existing law, unless a deficiency has been determined by the Commissioner, a taxpayer has no right of appeal to the Board (sec. 272 (a) (1), I. R. C.). Thus, for example, if a refund claim were filed by a taxpayer and the Commissioner disallowed the claim in whole or in part but did not determine [a] deficiency↩, no right of review of the Commissioner's action by the Board would be present. Inasmuch as the taxpayer's right to relief under certain of the relief provisions provided in this bill may only be raised by a claim for refund, it is necessary that a procedure be provided whereby the Board may obtain jurisdiction to review a decision by the Commissioner disallowing such claims. Accordingly, section 732 (added to the Excess Profits Tax Act of 1940 by sec. 9 of the bill) provides that the taxpayer may file a petition with the Board of Tax Appeals within 90 days after notice of such disallowance is mailed for redetermination of the excess-profits tax. * * " S. Rept. No. 75, 77th Cong., 1st sess., pp. 15-16. [Emphasis added.]3. Op. cit., footnote 1, supra↩.4. "SEC. 722. * "(d) Application for Relief Under This Section. -- The taxpayer shall compute its tax, file its return, and pay its tax under this subchapter without the application of this section, except as provided in section 710 (a) (5). The benefits of this section shall not be allowed unless the taxpayer, not later than six months after the date prescribed by law for the filing of its return, or if the application relates to a taxable year beginning after December 31, 1939, but not beginning after December 31, 1941, within six months after the date of the enactment of the Revenue Act of 1942, makes application therefor in accordance with regulations to be prescribed by the Commissioner with the approval of the Secretary, except that if the Commissioner in the case of any taxpayer with respect to the tax liability of any taxable year -- "(1) issues a preliminary notice proposing a deficiency in the tax imposed by this subchapter such taxpayer may, within ninety days after the date of such notice make such application, or"(2) mails a notice of deficiency (A) without having previously issued a preliminary notice thereof or (B) within ninety days after the date of such preliminary notice, such taxpayer may claim the benefits of this section in its petition to the Board or in an amended petition in accordance with the rules of the Board.↩"If the application is not filed within six months after the date prescribed by law for the filing of the return, or if the application relates to a taxable year beginning after December 31, 1939, but not beginning after December 31, 1941, within six months after the date of the enactment of the Revenue Act of 1942, the operation of this section shall not reduce the tax otherwise determined under this subchapter by an amount in excess of the amount of the deficiency finally determined under this subchapter without the application of this section. * *"5. See footnote 4, supra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622217/	CENTRAL TRUST CO., ADMINISTRATOR, ESTATE OF AZEL FORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Central Trust Co. v. CommissionerDocket No. 12505.United States Board of Tax Appeals13 B.T.A. 924; 1928 BTA LEXIS 3143; October 11, 1928, Promulgated 1928 BTA LEXIS 3143">3143 The amount found due by an auditor appointed by an equity court held not deductible as a loss in the year in which the report was made in the absence of evidence showing that the report was approved by the appointing court or acquiesced in by the defendant, and where there is evidence tending to show that the liability was being contested and was compromised in a later year. William S. Hammers, Esq., for the petitioner. Leroy S. Hight, Esq., for the respondent. SIEFKIN13 B.T.A. 924">924 This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1920 in the amount of $18,095.28, and results from the disallowance of the deduction of $67,626.54 as a loss sustained in 1920. 13 B.T.A. 924">925 FINDINGS OF FACT. The Central Trust Co. of Charleston, W. Va., is a corporation duly organized and existing under the laws of the State of West Virginia and is the duly appointed, qualified and acting administrator of the estate of Azel Ford, deceased. The petition in this proceeding was filed by Azel Ford, who died October 20, 1926. A motion to substitute the present petitioner was duly granted. On his income-tax return1928 BTA LEXIS 3143">3144 for 1920 Azel Ford deducted as a loss sustained in 1920, the sum of $67,626.54, being the amount of his liability to one L. D. George, as determined by the report of the auditor made October 15, 1920, pursuant to the decree of the Supreme Court of the District of Columbia, dated and filed June 29, 1917, in a suit entitled L. D. George v. Azel Ford, No. 28979, equity. The court adjudged the decree, in its decree of June 29, 1917, that the defendant, Ford, as the agent of the plaintiff, was accountable for the proceeds of certain shares of stock and interests in corporations. The action was based upon fraud and deceit on behalf of the defendant Ford. The auditor found and reported to the court on October 15, 1920, that the total amount of money for which Ford was accountable to George was $67,626.54. In the year 1921 a supplemental account was rendered against Ford in an additional amount of $63,145.09. In 1922 the judgments were satisfied by a compromise payment of $85,000 plus $3,800 legal fees. Azel Ford was engaged in a number of business enterprises and had large investments therein, kept a book record of his various operations and transactions, and the method of1928 BTA LEXIS 3143">3145 accounting regularly employed by him in the keeping of his books and the basis upon which his income-tax returns for the year 1920 and prior years were rendered was the accrual method. In December, 1920, the decedent, Azel Ford, entered in his ledger as an accrued liability an item of $67,626.54, being the amount which the Supreme Court auditor, in his report of October 15, 1920, found owing by Ford to L. D. George. The decedent, Azel Ford, deducted the said amount of $67,626.54 in his income-tax return for the year 1920 as a loss sustained in that year. The respondent disallowed such deduction and determined the deficiency involved herein OPINION. SIEFKIN: The sole question in this proceeding relates to the time that a deduction for a loss may be taken when such loss is in litigation. The decedent deducted the amount of $67,626.54 in 1920 because in that year he placed that sum on his books as a liability, the 13 B.T.A. 924">926 amount having been determined by the auditor appointed by the court. It is not shown, however, that he did not continue to contest the liability or that the report of the auditor prior to approval or acceptance by the appointing court became binding upon1928 BTA LEXIS 3143">*3146 him. On the contrary, it appears that the proceeding was kept open through 1921 (in which year an additional amount was found due from him) and into 1922, when the decedent compromised liabilities found by the auditor in the total amount of $120,771.63, by the payment of $85,000 and $3,800 legal fees. We conclude that the respondent properly denied the deduction for 1920. See ; ; ; ; . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622218/	FRANCIS D. AND BRIDGET J. McLAUGHLIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMcLaughlin v. CommissionerDocket No. 1939-76.United States Tax CourtT.C. Memo 1981-270; 1981 Tax Ct. Memo LEXIS 467; 42 T.C.M. 1; T.C.M. (RIA) 81270; June 1, 1981. Robert M. Tyle, for the petitioners. David R. Smith, for the responent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Murray H. Falk pursuant to the provisions of section 7456(c) of the Internal Revenue Code1 and Rules 180 and 181, Tax1981 Tax Ct. Memo LEXIS 467">468 Court Rules of Practice and Procedure.2 The Court agrees with and adopts his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE FALK, Special Trial Judge: Respondent determined deficiencies of $ 1,077.74, $ 1,647.28, and $ 381.43, respectively, in petitioners' 1969, 1970, and 1971 federal income taxes. The sole question presented for our determination is the amount of a casualty loss suffered to petitioners' real property in 1972. Whether petitioners are entitled under section 172 to a net operating loss deduction for 1969 in an amount in excess of that determined by respondent and to any net operating loss deductions for 1970 and 1971 and, if so, the amounts thereof, turn upon our resolution of the issue first mentioned above. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are1981 Tax Ct. Memo LEXIS 467">469 so found. Petitioners, husband and wife, filed their original and amended joint federal income tax returns for 1969, 1970, and 1971 and their joint return for 1972 with the Internal Revenue Service Center at Andover, Massachusetts. At the time they filed their petition herein, they resided at Corning, New York. Petitioners purchased a house in Corning in June of 1960 for $ 16,900. They paid closing costs of approximately $ 340 upon its purchase. Prior to the events hereinafter described they made capital improvements to the property which cost them approximately $ 14,000. Petitioners used the property as their residence. In June of 1972, the property and its contents were damaged by a flood. Water rose to a level of two and a half feet on the first floor. The suspended ceiling in the basement was ruined. Mud covered the floor on the first story. The interior walls, to a height of four feet on the first floor, had to be replaced. One foundation wall was cracked and despite repairs made to it, water still enters the basement in heavy rains. The driveway and main walk were partially broken. Shingles on the exterior siding of the house shrank and faded. The sewer clogged. 1981 Tax Ct. Memo LEXIS 467">470 The yard was littered with debris. Petitioners expended approximately $ 5,076 to make repairs to the realty. They put 4,900 hours of labor into restoring the property. The parties are in agreement that the loss to petitioners' personalty was $ 6,841.54. Petitioners received a disaster loan from the Small Business Administration (hereinafter referred to as the SBA), repayment of $ 5,000 of which was forgiven. Petitioners now concede that the amount of their casualty loss should be reduced by $ 5,000 by reason of that forgiveness. On their 1972 federal income tax return, petitioners claimed a casualty loss deduction of $ 38,281.54, as follows: Damage to realty$ 31,540.00Damage to personalty6,841.54Total$ 38,381.54Less sec. 165(c)(3) limitation100.00Loss claimed$ 38,281.54Respondent determined that petitioners' deductible loss was $ 13,841.54, as follows: Loss to realty$ 12,100.00Loss to personalty6,841.54Total$ 18,941.54Less: Forgiveness of SBA loan $ 5,000Sec. 165(c)(3) limitation 1005,100.00Loss determined$ 13,841.54OPINION Individuals are allowed a deduction for losses not compensated for by1981 Tax Ct. Memo LEXIS 467">471 insurance or otherwise suffered upon the damage to or destruction of nonbusiness property by reason of fire, storm, shipwreck or other casualty or from theft to the extent that each such loss exceeds $ 100. Sec. 165(c)(3). The proper measure of the loss sustained is the difference between the fair market value of the property immediately before the casualty and its fair market value immediately thereafter, but not to exceed its adjusted basis. See Helvering v. Owens, 305 U.S. 468">305 U.S. 468 (1939); Millsap v. Commissioner, 46 T.C. 751">46 T.C. 751, 46 T.C. 751">759 (1966), affd. 387 F.2d 420">387 F.2d 420 (8th Cir. 1968); sec. 1.165-7(b)(1), Income Tax Regs. Physical damage to property caused by a flood is clearly a casualty within the purview of section 165(c)(3), and respondent concedes that petitioners suffered some such damage which qualified for deduction. Respondent does not contest petitioners' claim of the value of their personalty lost in the flood. Petitioners now concede that the amount of the loss should be reduced by $ 5,000, the amount of the SBA loan forgiveness. The only dispute, then, is the amount of the loss to petitioners' realty. The burden of proof rests with1981 Tax Ct. Memo LEXIS 467">472 petitioners. Pfalzgraf v. Commissioner, 67 T.C. 784">67 T.C. 784, 67 T.C. 784">787 (1977); Axelrod v. Commissioner, 56 T.C. 248">56 T.C. 248, 56 T.C. 248">256 (1971). To establish the amount of the casualty loss, the relevant fair market values "shall generally be ascertained by competent appraisal." Sec. 1.165-7(a)(2)(i), Income Tax Regs. Petitioners obtained appraisals of the fair market value of the house before and after the flood from two local real estate agents. The testimony of neither is before the Court and their appraisal reports do not contain any data to support their conclusions. The circumstances are such here that we draw no inference from the absence of their testimony that the testimony of these persons would be unfavorable to petitioners, 3 but neither can we given their appraisals any weight. The opinion of a landowner1981 Tax Ct. Memo LEXIS 467">473 as to the value of his or her property is admissible in evidence without further qualification because of the owner's special relationship to that property. But, we are not bound to accept that testimony at face value, even though it is uncontradicted, if it appears to be improbable, unreasonable, or offered solely to serve the self-interests of the taxpayer. While the owners of property are competent to testify as to its value, the weight to be given their testimony will depend upon their knowledge, experience, method of valuation, and other relevant considerations. Petitioner Francis D. McLaughlin testified that the house had a fair market value of $ 31,600 immediately prior to the flood. As willing as we might be to accept that, his testimony regarding the fair market value of the property after the flood was confusing and unpersuasive. The matter is not susceptible of precise determination on this record, but we are confident on the basis of the materials before us that the decrease in the fair market value of the realty resulting from the flood did not exceed the $ 12,100 determined by respondent. Petitioners having failed to carry their burden of proof that they are entitled1981 Tax Ct. Memo LEXIS 467">*474 to a greater deduction, respondent's determination must be sustained. In accordance with the foregoing, Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩2. Pursuant to the order of assignment, on the authority of the "otherwise provided" language of Rule 182, Tax Court Rules of Practice and Procedure↩, the post-trial procedures set forth in that rule are not applicable to this case.3. Petitioners unsuccessfully attempted to obtain the testimony of both persons. Their failure to appear as witnesses, therefore, is not unexplained and the "absent witness" rule (see Kean v. Commissioner, 51 T.C. 337">51 T.C. 337, 51 T.C. 337">343-344 (1968), affd. on this issue 469 F.2d 1183">469 F.2d 1183, 469 F.2d 1183">1187-1188↩ (9th Cir. 1972)) is not applicable here.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622219/	Morris M. Messing, Petitioner v. Commissioner of Internal Revenue, Respondent; Estate of Helen F. Messing, Deceased, Morris M. Messing, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentMessing v. CommissionerDocket Nos. 5865-65, 6295-65United States Tax Court48 T.C. 502; 1967 U.S. Tax Ct. LEXIS 76; June 29, 1967, Filed 1967 U.S. Tax Ct. LEXIS 76">76 Decisions will be entered under Rule 50. Petitioners made gifts of shares of stock representing a minority interest in a closely held corporation in September 1961, at which time the stock was not publicly traded. Petitioners valued the gifted shares at $ 10 per share, based principally on sales to third parties at the same price in the summer of 1961. In January 1962, the stock of the corporation was offered to the public at $ 36.66 per share. Respondent valued the gifted shares at $ 30 per share, using the public offering price as a starting point and applying certain discount factors. On that basis, respondent also claimed, in an amended answer, that a sale of shares to petitioners' son in September 1961 at $ 10 per share constituted a partial gift to the extent of the excess of $ 30 per share over that price. Petitioners made gifts to a son and daughter-in-law "I/T/F" (in trust for) their grandchildren and gifts to trusts for their minor children. The trust instrument provided that, in the event that a child died before attaining the age of 21, the principal and accumulated income were to be paid to the child's surviving issue or, if none, to the child's estate. Held :1. 1967 U.S. Tax Ct. LEXIS 76">77 Although the subsequent public offering price is not the proper starting point for computing the value of the shares and, under the circumstances, is of marginal significance, petitioners have not sustained their burden of proof that the gifted shares had a value of less than $ 13 per share; and2. Further held, respondent has not sustained his burden of proof that any part of the shares sold to petitioners' son constituted a gift; and3. Further held, the gifts "I/T/F" (in trust for) petitioners' grandchildren constituted gifts of present interests; and4. Further held, the gifts to the trusts for petitioners' children constituted gifts of future interests. Herbert Burstein and Arthur Liberstein, for the petitioners.Eugene S. Linett, for the respondent. Tannenwald, Judge. TANNENWALD48 T.C. 502">503 Respondent determined gift tax deficiencies for 1961 in the amounts of $ 125,029.47 and $ 56,435.30, respectively, for Morris M. Messing (hereinafter referred to as petitioner) in docket No. 5865-65 and Helen F. Messing, deceased, in docket No. 6295-65.After concessions made by petitioners, there remain for our decision the following issues:(1) What was the value of 26,400 shares of common stock of Sel-Rex 1967 U.S. Tax Ct. LEXIS 76">78 Corp. gifted by petitioner on September 13, and 16, 1961?(2) Did petitioner make a taxable gift under section 2512(b)1 to his son Robert on September 13, 1961, when he sold 10,000 shares of common stock of Sel-Rex Corp. to Robert for $ 100,000? (3) Were gifts by petitioner to his grandchildren in 1961 entitled to the $ 3,000 annual exclusion as gifts of present interests under section 2503?(4) Were gifts made by petitioner to his minor children in 1958 and 1959 entitled to the $ 3,000 annual exclusion as gifts of present interests under section 2503?FINDINGS OF FACTSome of the facts are stipulated and are found accordingly.Morris M. Messing and Helen F. Messing, deceased, the individual petitioners in the two dockets here involved, were husband and wife with their legal residence in South Orange, N.J., at the time of the filing of the petitions herein. 2 The Federal gift tax returns for the calendar year 1961 and the prior years 1958 and 1959, together with the 1967 U.S. Tax Ct. LEXIS 76">79 consents as required by section 2513, were filed with the district director of internal revenue at Newark, N.J. Sel-Rex Corp. (hereinafter referred to as Sel-Rex) was organized on January 2, 1951, as a New Jersey corporation under the name of Sel-Rex Precious Metals, Inc. Its name was changed to Sel-Rex Corp. on November 7, 1956.Since the date of its incorporation and at all relevant times, Sel-Rex has been engaged in developing and marketing patented precious 48 T.C. 502">504 metals electroplating compounds and processes. It has also conducted precious metals refining operations and developed, manufactured, and sold equipment for the electrodeposition of precious metals for use in industry. The principal industrial uses of the Sel-Rex products and processes have been in the fields of data processing, missiles, spacecraft, aircraft, chemicals, and transistors and other semiconductors. Its products and services have been adopted for various applications in a reasonably wide range of electronic devices.At 1967 U.S. Tax Ct. LEXIS 76">80 all material times, Sel-Rex had a reputation of being a well-managed leader in its field.The original authorized capital of Sel-Rex was 5,000 shares of common stock without par value but was changed to 2,100,000 shares on June 26, 1961. On October 26, 1956, petitioner acquired all of the issued and outstanding stock of Sel-Rex and became its principal executive officer. Between October 26, 1956, and June 29, 1961, the total issued and outstanding stock of Sel-Rex consisted of 1,200 shares, of which petitioner owned and held 1,195. The remaining 5 were held by three directors as qualifying shares.As of the following dates and times, the following number of shares were issued and outstanding:Total sharesoutstanding1951 to June 29, 19611,200June 29, 1961 (420 for 1 split)504,000June 30, 1961 (3,333 shares issued)507,333Sept. 21, 1961 (5 for 3 split)845,555Jan. 10, 1962 (33,000 shares issued)878,555In 1961, approximately 36 customers provided 80 percent and 7 customers accounted for approximately 44 percent of the gross sales of Sel-Rex.During 1960 and the first half of 1961, over 80 percent of Sel-Rex's net sales were attributable to sales of gold-electroplating products. For the 1967 U.S. Tax Ct. LEXIS 76">81 same periods, more than three-fourths of the sales of gold-electroplating products consisted of compounds for use in "Sel-Rex Processes," i.e., gold-electroplating processes developed and patented by Sel-Rex.Based on 845,555 shares outstanding, the book value per share of Sel-Rex was $ 2.23 as of June 30, 1961 and $ 2.70 as at December 31, 1961. Its working capital ratio was 1.9 to 1 on June 30, 1961, and approximately 4.58 to 1 on December 31, 1961, the latter increase being attributed to the conversion of $ 1 million from short-term to long-term debt on September 13, 1961, at an interest rate increased from 4 3/4 percent to 5 3/4 percent.48 T.C. 502">505 Consolidated net sales and net earnings of Sel-Rex and subsidiaries were as follows for the following years and periods:Net earnings perYear ended Dec. 31 --Net salesNet earningsshare based on(after taxes)845,555 sharesoutstanding1956$ 5,698,527$ 96,061$ 0.1119577,095,525139,801.1719586,197,732104,361.1219599,684,867294,281.35196031967 U.S. Tax Ct. LEXIS 76">82 13,422,282485,093.5719611 17,639,000817,000.97Six months ended June 30 --19606,350,701239,578.2819619,283,788416,104.49Five months ended Nov. 30 --19611 6,987,818272,042.32 In September 1961, Sel-Rex held approximately 49 patents and had applied for 106 patents, both foreign and domestic. These patents covered various processes and electrolytes used in precious metals electroplating. Of these, 5 were important in that they were so-called basic patents. None of the patents had been tested by litigation. Patent infringement suits involving chemical patents are frequent occurrences. The patents held by Sel-Rex were vulnerable to modification and to developments which were outside the range of its processes.In 1961, the science and technique of gold electroplating was part of an expanding technology. Competitors of Sel-Rex were filing applications and obtaining patents for precious metals electroplating; there were substitutes for gold in the industrial areas where the Sel-Rex patented processes were employed; and it was thought that miniaturization in the electronics field could result in reducing the application and use of gold.On June 15, 1961, following negotiations which commenced in November 1960, petitioner sold to Wertheim & Co., a prominent 1967 U.S. Tax Ct. LEXIS 76">83 New York financial firm, 60.4 shares, or approximately 5 percent, of his stock of Sel-Rex for $ 250,000. Wertheim had, on prior occasions, made investments in closely held corporations. The price was determined on the basis of an original valuation of Sel-Rex by Wertheim of $ 4,500,000 and agreement between the parties on a $ 5 million valuation in December 1960. The sale of the stock was subject to limitations and restrictions under a written agreement dated June 15, 1961, between petitioner and Wertheim. The pertinent limitations and restrictions gave Sel-Rex and petitioner a right of first refusal in the event of a proposed sale by Wertheim and also required Wertheim either to sell its shares with petitioner, if petitioner decided to sell, or resell its shares to petitioner 48 T.C. 502">506 for $ 250,000. This latter restriction was to remain in effect only so long as petitioner retained all his remaining shares. In the agreement, Wertheim represented that the acquisition of Sel-Rex shares was being made for investment purposes.Computed on the basis of 507,333 shares outstanding and on the number of shares actually received by Wertheim, the price paid by Wertheim was $ 9.80 per share.The 1967 U.S. Tax Ct. LEXIS 76">84 acquisition of Sel-Rex shares by Wertheim was the result of arm's-length bargaining and was unrelated to Wertheim's obligation to render financial advice to Sel-Rex under an agreement dated February 1, 1961, which provided for compensation to Wertheim of $ 10,000 per year and that one of the Wertheim partners, Malcolm K. Fleschner, would serve as a director of Sel-Rex.The following other transactions involving Sel-Rex stock (based on 507,333 shares outstanding) took place:(a) In June 1961, 10,000 shares were purchased by Lucien R. Collart, secretary-treasurer and a director of Sel-Rex, for $ 10 per share.(b) On June 30, 1961, Rene J. Rochat and Edwin C. Rinker exchanged their shares of Sel-Rex, S.A., a Panamanian corporation, for 3,333 shares of Sel-Rex at $ 6.90 per share. Prior to that date, petitioner had owned 80 percent and Rene J. Rochat and Edwin C. Rinker, respectively, 5 percent and 15 percent of the issued and outstanding capital stock of Sel-Rex, S.A.(c) In September 1961, 2,000 shares were purchased by Herbert Burstein, a director of Sel-Rex, for $ 10 per share.(d) In September 1961, 1,000 shares were purchased by Eugene J. Habas, a director of Sel-Rex, for $ 10 per share.The 1967 U.S. Tax Ct. LEXIS 76">85 exchange and all of the foregoing sales were made at arm's length. At the time they occurred, the stock of Sel-Rex was not registered under the Securities Act or any other law and was not publicly traded. Nor was there any agreement with any banker, underwriter, or any other person for the sale or other disposition of the stock of Sel-Rex.On September 13, 1961, Robert H. Messing, petitioner's son, purchased 10,000 shares for $ 10 per share, a transaction which is in issue herein.The price of $ 10 paid by Collart, Herbert Burstein, Eugene J. Habas, and Robert H. Messing was based upon the price paid by Wertheim.On January 10, 1962, a public offering of 200,000 shares of Sel-Rex stock was made through a group of underwriters acting through Eastman Dillon, Union Securities & Co. The underwriters acquired 167,000 shares from petitioner and 33,000 shares from Sel-Rex.48 T.C. 502">507 The preliminary registration statement under the Securities Act of 1933 was filed with respect to the anticipated public offering on September 27, 1961. The proposed maximum offering price per share stated therein, estimated solely for the purposes of calculating the registration fee, was $ 25 per share. The registration 1967 U.S. Tax Ct. LEXIS 76">86 statement became effective on January 10, 1962. The public offering price was fixed on that date at $ 22 per share, of which $ 20.50 went to petitioner and Sel-Rex. The offering was oversubscribed and the stock was bid as high as $ 29 per share on that date. Through March 30, 1962, Sel-Rex stock was bid as high as 37 3/4 and as low as 27 1/2. The offering price of $ 22 per share, adjusted to reflect the lesser number of shares of Sel-Rex issued and outstanding during September 1961, was $ 36.66 per share.Eastman Dillon, Union Securities & Co. had first been approached about a public offering of Sel-Rex stock in the first week of September 1961. At that time, the possibility of a public offering price of approximately 20 times anticipated 1961 earnings was discussed. Between September 15, 1961, and January 10, 1962, the stock market was relatively stable.During September 1961, when 507,333 shares were issued and outstanding, petitioner made the following gifts of Sel-Rex stock:(a) On September 13, 600 shares to his son Robert;(b) On September 13, 600 shares to Helen as custodian for Gilbert Scott, his minor son;(c) On September 13, 600 shares to Helen as custodian for Madeline 1967 U.S. Tax Ct. LEXIS 76">87 Ivy, his minor daughter;(d) On September 13, 600 shares to Helen as custodian for Andrew, his minor son;(e) On September 16, 24,000 shares to a certain trust created by a trust agreement of that date.Petitioner valued the shares of Sel-Rex gifted in 1961 at $ 10 per share. Respondent, in his deficiency notice and in his amended answer, in which he claimed an increased deficiency with respect to the sale to Robert Messing, asserted a value of $ 30 per share.During 1961, petitioner made the following gifts for the benefit of two minor grandchildren:Date ofAmount ofBeneficiaryGiftgiftgift (sec.2512(a))Robin May MessingCashMar. 21$ 1,000.00BondApr. 132,431.84CashDec. 122,000.00Bonnie Lynn MessingCashMar. 211,000.00BondApr. 131,621.23CashDec. 122,000.00Total10,053.0748 T.C. 502">508 The checks were payable to the order of, and the gifted bonds were registered in the names of, Robert and Norma Messing (the beneficiaries' parents) "I/T/F" (in trust for) the beneficiaries. No formal trusts were created with respect to these gifts.On December 26, 1958, petitioner, as settlor, created three trusts, one each for the benefit of his minor children, Gilbert Scott, Madeline Ivy, and Andrew.Under the indenture creating 1967 U.S. Tax Ct. LEXIS 76">88 these trusts, the trustees (petitioner and Helen) could, in their joint discretion, apply so much of the net income of each trust (and any accumulated income) to the support, education, medical care, and maintenance of the beneficiary as they saw fit during the beneficiary's minority. Income not so applied was to be accumulated. The trustees could also at any time pay over so much or all of the principal of each trust to the beneficiary during minority as they in their absolute discretion deemed advisable. When a beneficiary reached the age of 21, all accumulated net income and the then principal of the trust were to be distributed to the beneficiary and the trust was to terminate. If a beneficiary died before reaching age 21, all accumulated income and principal were to be paid to the beneficiary's surviving issue or, if there were no such issue, to the beneficiary's estate. In each of the years 1958 and 1959, petitioner made gifts in the value of $ 6,000 to each of these trusts, or a total of $ 36,000 for both years.OPINIONIThe principal issue herein involves the determination of an oft-litigated and plaguingly elusive question of fact -- what was the value on a given date 1967 U.S. Tax Ct. LEXIS 76">89 of gifted shares of stock, representing a minority interest in a closely held corporation whose shares were not being publicly traded at or about the time of gift? Not surprisingly, the gap which separates the parties is substantial -- petitioners having declared a $ 10 per share value on their gift tax returns and respondent having asserted a $ 30 per share value in his deficiency notice and amended answer.The fulcrum of respondent's position is that shares of Sel-Rex were offered to the public in January 1962, 4 months after the gift dates (in September 1961) at a price exceeding $ 30 per share. He insists that, in accordance with his regulations (sec. 25.2512-2, Gift Tax Regs.), "the public offering price, less a discount for lack of marketability on the valuation dates, is the best, and indeed the only cogent evidence of fair market value." (Emphasis added.)48 T.C. 502">509 We are not unaware that sales prices at or about the critical date are highly relevant to determining value. But, other things being equal, where such prices are reflected by private sales, only a time differential exits. Where such prices are reflected in sales through public trading and a public market does not exist on 1967 U.S. Tax Ct. LEXIS 76">90 the critical tax date, there is a further difference going to the underlying character of the property. In short, a publicly traded stock and a privately traded stock are not, as respondent would have us assume, the same animal distinguished only by the size, frequency, or color of its spots. The essential nature of the beast is different.In thus disagreeing with respondent's approach, we are not suggesting that the January 1962 price at which Sel-Rex stock was sold to the public should be ignored. On the contrary, we think it is a factor to be taken into account, but with due regard given to the time span involved between the critical dates and the dates of sale to the public, as well as to the contingencies inherent in the successful culmination of a contemplated public offering. In this context, we have also taken into account the fact that a preliminary registration was filed with the Securities and Exchange Commission approximately 2 weeks after the gift dates. The price stated therein was, however, expressly stated to have been made solely for the purpose of calculating the registration fee. We note also that, whatever hopes Sel-Rex, petitioner, and the underwriters may 1967 U.S. Tax Ct. LEXIS 76">91 have had and whatever informal discussions may have taken place among them during the latter part of September 1961, the fact remains that the offering price was not fixed until 4 months later, just prior to the public offering in January 1962. It is a matter of common knowledge that, as a result of the vagaries of the stock market and other national and international events, many a contemplated public offering never sees the light of day and that, because of factors affecting the market at the particular moment of the public offering, the offering price can be radically different from the price originally contemplated. In September 1961, there was no probable basis for predicting that a public offering would in fact take place at all and even less for estimating the particular price of the offering. Under these circumstances, the preliminary registration statement and the subsequent developments leading to the public offering four months later are, in our opinion, of marginal significance. The fact that the general market was stable throughout the time span does not require a different conclusion. The cases which respondent finds so comforting do not point in a contrary direction 1967 U.S. Tax Ct. LEXIS 76">92 in view of the fact that, in those cases, there were sales to the public prior to the valuation date. See 10 Mertens, Law of Federal Income Taxation, sec. 59.13 (Zimet Rev.).48 T.C. 502">510 We similarly view respondent's attempt, by a process of relation back, to utilize the financial position of Sel-Rex as revealed by the December 31, 1961, consolidated balance sheet as a basic prop for his determination of value. Its yearend financial position could not have been known with any degree of certainty in mid-September 1961. Consequently, although we have not ignored the data contained therein, we have accorded it little weight.Respondent's approach would have greater merit if he had sought merely to utilize the January 1962 public offering price and the financial data as at December 31, 1961 to corroborate an otherwise well-founded September 1961 valuation. But, as we have pointed out, he did not do this. Rather, he and his one expert witness 41967 U.S. Tax Ct. LEXIS 76">93 started with these elements and worked back. What might have been a measuring stick was unjustifiably employed as a divining rod. We turn now to petitioner's approach to the problem of valuation. Essentially, his position rests on the facts that shares of Sel-Rex (a) were sold at approximately $ 10 per share to Wertheim & Co. and Collart in June of 1961, (b) were exchanged at $ 6.90 per share for shares of Sel-Rex, S.A., held by Rochat and Rinker, also in June of 1961, and (c) were sold at $ 10 per share to Burstein and Habas in September of 1961. We have found that all of these transactions were arm's length and, absent other circumstances, they might be determinative of the valuation question before us. But the $ 10 price was agreed upon with Wertheim & Co. in December of 1960. The business relationship between 1967 U.S. Tax Ct. LEXIS 76">94 Sel-Rex and the other purchasers makes it reasonable to infer, and we have so found, that the transactions with them in all probability simply followed the pattern established by the Wertheim transaction and did not involve an independent reevaluation of the agreed sales prices. Yet, by the summer of 1961, additional figures showing the increased growth of Sel-Rex earnings were obviously available. Granted that Wertheim & Co. took prospective earnings into account in determining the $ 10 price it agreed to in December of 1960, the fact is that the continued success of Sel-Rex in the ensuing months was so marked as to support some increase in the value of the shares at the gift dates. Petitioners' two expert witnesses, whose qualifications were beyond question, submitted highly sophisticated analyses and arrived at valuations of $ 12.50 and $ 13.00 per share as of September 1961. 48 T.C. 502">511 Perhaps if the prior transactions were not subject to the infirmities we have noted, we would be disinclined to allow these detailed valuations, which are so carefully documented from a technical point of view and which are not substantially in excess of the value utilized by petitioners in their gift 1967 U.S. Tax Ct. LEXIS 76">95 tax returns, to vary prices which we are satisfied were established in the maelstrom of the market place. Cf. Fitts' Estate v. Commissioner, 237 F.2d 729, 731 (C.A. 8, 1956), affirming a Memorandum Opinion of this Court. But, under the circumstances outlined, we view this expert testimony as tending to confirm our judgment that the critical value was in excess of $ 10 per share and hold that petitioners have not sustained their burden of proof in establishing a value of less than $ 13 per share for the 2,400 shares of Sel-Rex gifted on September 13, 1961, and the 24,000 shares gifted on September 16, 1961. Accordingly, for the purposes of the Rule 50 computation herein, these shares should be valued at $ 13 per share.In addition to the gifts with which we have previously dealt, petitioner, in September of 1961, sold 10,000 shares of Sel-Rex to his son Robert, also at a price of $ 10 per share. Respondent maintains that the excess of the claimed value of $ 30 per share over that price constitutes a taxable gift under section 2512(b). Respondent first asserted this position by way of his amended answer under section 6214(a). Consequently, as we have pointed out, the burden of 1967 U.S. Tax Ct. LEXIS 76">96 proof is upon him. See fn. 1, supra.As far as the valuation element of this issue is concerned, respondent relies on the same evidence as was submitted in connection with the transfers which were concededly gifts. He seeks to reinforce his position by asserting that (a) Robert was a natural object of petitioner's bounty; (b) petitioner was obviously predisposed to benefiting Robert, as evidenced by direct gifts of Sel-Rex shares to Robert and indirect gifts of such shares to a trust for Robert's benefit in September of 1961; and (c) petitioner knew or should have known that the stock was worth in excess of $ 10 per share, although he may not have known its exact worth.We are not impressed with respondent's arguments. While a father in the normal course of events would be expected to want to benefit a son, it does not follow that every transaction with a son must be endowed with a conclusive presumption of suspicion. Indeed, in this case, we are disposed to view the conceded gifts as establishing a pattern of petitioner's desire to benefit each of his children without favoritism and that the separate sale of the 10,000 shares to Robert alone for what petitioner in good faith considered 1967 U.S. Tax Ct. LEXIS 76">97 a fair price, rather than being an indication of an intention gratuitously to benefit Robert, confirms petitioner's objective of equal treatment. Under all the circumstances, 48 T.C. 502">512 we hold that respondent has failed to sustain his burden of proof that, as to the 10,000 shares sold to Robert, any part thereof constituted a gift.Too often in valuation disputes the parties have convinced themselves of the unalterable correctness of their positions and have consequently failed successfully to conclude settlement negotiations -- a process clearly more conducive to the proper disposition of disputes such as this. The result is an overzealous effort, during the course of the ensuing litigation, to infuse a talismanic precision into an issue which should frankly be recognized as inherently imprecise and capable of resolution only by a Solomon-like pronouncement. See Commissioner v. Marshall, 125 F.2d 943, 946 (C.A. 2, 1942); Bosland, "Tax Valuation by Compromise," 19 Tax L. Rev. 77 (1963).We have studiously sought to avoid this pitfall. Thus, we have not subjected the detailed after-the-fact analysis of each expert witness to the dissection process of a scientific laboratory nor have we independently 1967 U.S. Tax Ct. LEXIS 76">98 constructed each of the various elements which may be appropriate to the determination of fair market value. Cf. Central Trust Company v. United States, 305 F.2d 393 (Ct. Cl. 1962). Similarly, we have concluded that extensive citation of previously decided valuation cases would serve no useful purpose -- each case necessarily turns on its own particular facts. Instead, we have indicated the particular difficulties with the basic approaches of the parties herein and then sought, in the total context of this case, to analyze the fair market value of the shares on the gift dates as seen through the eyes of an average purchaser -- neither as expert as petitioners' witnesses nor as retroactively imbued with the "hot issue" fever as the respondent's witness appeared to be. Our conclusion has been reached on the basis of weighing all the facts and circumstances revealed by the entire record herein and with due regard to the burden of proof placed on each of the parties by law.IIIn 1961, petitioner made gifts for the benefit of his grandchildren, Robin May and Bonnie Lynn Messing, both of whom were minors. The gifts, consisting of checks and bonds, were in the names of the parents of 1967 U.S. Tax Ct. LEXIS 76">99 the children as follows: Robert and Norma Messing, "I/T/F" (in trust for) (name of grandchild). No formal trusts were ever created. The checks were deposited in bank accounts bearing the same designations. The question before us is whether these transfers, which both parties recognize as gifts, were present interests and therefore 48 T.C. 502">513 entitled to the $ 3,000 annual exclusion provided for in section 2503. 51967 U.S. Tax Ct. LEXIS 76">100 Petitioner testified that he intended that his grandchildren have the immediate benefit of the gifts; that the funds be used for their support and maintenance and exclusively for their benefit; and that the transfers were made by him acting entirely on his own and as a layman, based upon his limited experience with bank accounts. We find his testimony wholly credible.At the outset, it is clear that the use of the word "trust" is not determinative for tax purposes; 1967 U.S. Tax Ct. LEXIS 76">101 we will not permit ourselves to be tyrannized by labels. E.g., Laura M. Hutchinson, 47 T.C. 680">47 T.C. 680 (1967); Prudence Miller Trust, 7 T.C. 1245">7 T.C. 1245 (1946). Under the decisions in the jurisdictions potentially involved -- New Jersey and New York -- there is ample authority for holding that the mere specification that property is to be held "in trust for" without more -- the situation herein -- vested the entire legal and equitable estate in the beneficiary grandchildren and that no ownership interest passed to their parents. Supreme Lodge, K.P. v. Rutzler, 87 N.J. Eq. 342">87 N.J. Eq. 342, 100 A. 189">100 A. 189 (1917); Jacoby v. Jacoby, 188 N.Y. 124">188 N.Y. 124, 80 N.E. 676">80 N.E. 676 (1907); Matter of De Rycke's Will, 99 A.D. 596, 91 N.Y.Supp. 159 (2d Dept. 1904); Matter of Baker's Will, 31 Misc. 2d 426">31 Misc. 2d 426, 231 N.Y.S.2d 470 (Westchester Co. Surr. Ct. 1962); Matter of Kuehnle's Will, 4 Misc. 2d 548">4 Misc. 2d 548, 158 N.Y. S. 2d 692 (Queens Co. Surr. Ct. 1956). In the event of death before the cash or bonds were actually turned over by the parents, the ownership would pass to the estate of the deceased grandchild. 87 N.J. Eq. 342">Supreme Lodge, K. P. v.48 T.C. 502">514 Rutzler, supra; Matter of Wolf's Will, 140 Misc. 595">140 Misc. 595, 251 N.Y. Supp. 552 (Kings Co. Surr. Ct. 1931); cf. In re Schaefer's Estate, 121 N.Y. S. 2d 233 (N.Y. Co. Surr. Ct. 1953).Thus, 1967 U.S. Tax Ct. LEXIS 76">102 it appears to us that the gifted property was in substance not held in trust but rather was held by the parents as guardians, in which event the transfers clearly constitute present interests under section 2503(b). Ross v. United States, 348 F.2d 577 (C.A. 5, 1965); United States v. Baker, 236 F.2d 317 (C.A. 4, 1956); Beatrice B. Briggs, 34 T.C. 1132">34 T.C. 1132 (1960); Rev. Rul. 59-78, 1959-1 C.B. 690. Alternatively, if the arrangement is considered a trust, the requirements of section 2503(c) would be met because the property and the income therefrom was to be expended for the benefit of the grandchild and, to the extent not so expended, would pass to the grandchild upon his attaining the age of 21 or to his or her estate in the event of death prior thereto. We need not decide between these two alternatives since, in either case, the $ 3,000 annual exclusion applies.IIIThe final issue involves the question whether transfers in 1958 and 1959 under the December 26, 1958, trust agreement constituted gifts of present or future interests under section 2503, i.e., whether they were entitled to the benefit of the $ 3,000 annual exclusion. 61967 U.S. Tax Ct. LEXIS 76">103 Under the trust agreement, income was to be applied, in the discretion of the trustees, for the benefit of the beneficiary and, to the extent not so applied, accumulated during minority. The trustees were also given discretion to pay out principal during minority. The trust was to terminate upon the beneficiary's attaining the age of 21, with the principal and accumulated income to be paid to the beneficiary or upon the beneficiary's death prior to 21, in which event the principal and accumulated income were to be paid to his or her surviving issue or, if there were no surviving issue, to the beneficiary's estate.If the trust instrument is taken at face, the gifts unquestionably do not qualify for the $ 3,000 annual exclusion. The pattern is the classic illustration of a future interest unless the safe harbor of section 2503 (c) comes into play. Arlean I. Herr, 35 T.C. 732">35 T.C. 732, 35 T.C. 732">734-735 (1961), affd. 303 F.2d 780 (C.A. 3, 1962); Jacob Konner, 35 T.C. 727">35 T.C. 727, 35 T.C. 727">730-731 (1961). In the event of death, the gifts were to the beneficiary's issue and only contingently to his or her estate. Thus, the application of section 2503(c)1967 U.S. Tax Ct. LEXIS 76">104 is precluded. Cf. Bernie C. Clinard, 40 T.C. 878">40 T.C. 878 (1963); Bonnie M. Heath, 34 T.C. 587">34 T.C. 587 (1960).48 T.C. 502">515 Petitioner seeks to avoid these consequences by arguing that the express language of the trust instrument is an inaccurate reflection of his true intent, resulting from a scrivener's error by his counsel, upon whom he relied completely. The only evidence he presented was his testimony "that it was my intention that there be a gift which would be deemed a gift of a present interest, both of income and of corpus. I certainly did not intend to create a gift of a future interest."We are not disposed, on the basis of such generalities, to rewrite the clear language of a trust instrument, which was obviously carefully drafted by competent counsel. The transfers in cases relied upon by petitioner involved ambiguities which afforded latitude for reasonable construction and are thus clearly distinguishable.We hold that the transfers in 1958 and 1959 under the December 26, 1958, agreement were gifts of future interests.Decisions will be entered under Rule 50. Footnotes1. All references are to the Internal Revenue Code of 1954.Respondent raised this issue for the first time in his amended answer and therefore has the burden of proof with respect thereto. Rule 32, Tax Court Rules of Practice.↩2. Helen died subsequent thereto; Morris was named the executor of her estate on June 9, 1966, and was substituted as petitioner in docket No. 6295-65 by an order of the Court dated Sept. 28, 1966.↩3. Sales in 1960 and 1961 included more than $ 2 million of nonrecurring sales to a domestic licensee who had suffered a disastrous fire.1. Approximate.↩4. The qualifications of respondent's expert witness left much to be desired. He had never previously valued a company comparable to Sel-Rex, his experience was limited to publicly traded stock, he was not familiar with the precious metals electroplating business, he made no personal investigation of Sel-Rex and its operations, as petitioners' expert witness did, nor did he make any comparison with publicly traded shares of other companies engaged in the same type of business in order to be in a position to judge whether or not they were comparable to Sel-Rex and, if they were, to take such comparable analysis into account.5. SEC. 2503. TAXABLE GIFTS.(a) General Definition. -- The term "taxable gifts" means the total amount of gifts made during the calendar year, less the deductions provided in subchapter C (sec. 2521 and following).(b) Exclusions From Gifts. -- In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year 1955 and subsequent calendar years, the first $ 3,000 of such gifts to such person shall not, for purposes of subsection (a), be included in the total amount of gifts made during such year. Where there has been a transfer to any person of a present interest in property, the possibility that such interest may be diminished by the exercise of a power shall be disregarded in applying this subsection, if no part of such interest will at any time pass to any other person.(c) Transfer for the Benefit of Minor. -- No part of a gift to an individual who has not attained the age of 21 years on the date of such transfer shall be considered a gift of a future interest in property for purposes of subsection (b) if the property and the income therefrom -- (1) may be expended by, or for the benefit of, the donee before his attaining the age of 21 years, and(2) will to the extent not so expended -- (A) pass to the donee on his attaining the age of 21 years, and(B) in the event the donee dies before attaining the age of 21 years, be payable to the estate of the donee or as he may appoint under a general power of appointment as defined in section 2514(c)↩.6. The issue of the exclusion of gifts in 1958 and 1959 is material to the computation of gift tax liability in 1961. Sec. 2502.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4622221/	ALBERT J. BERNARD and JANICE C. BERNARD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBernard v. CommissionerDocket No. 4605-70.United States Tax CourtT.C. Memo 1973-69; 1973 Tax Ct. Memo LEXIS 219; 32 T.C.M. 297; T.C.M. (RIA) 73069; March 26, 1973, Filed 1973 Tax Ct. Memo LEXIS 219">219 Held, petitioner was not in the separate business of promoting, financing, managing, and organizing businesses, or of lending money during the taxable years 1964 and 1965, and certain losses sustained by petitioner in those years are not deductible as business bad debts under sec. 166(d) (2), I.R.C. 1954. Bernard L. Weddel, for the petitioners. Lawrence G. Becker, for the respondent. WITHEYMEMORANDUM FINDINGS OF FACT AND OPINION WITHEY, Judge: Respondent determined deficiencies in petitioners' income tax for the taxable years 1964 and 1965 2 in the respective amounts of $3,857.28 and $7,558.99. 1The issues for our consideration are: (1) Whether the loss sustained by petitioner in 1964 due to the worthlessness of his common stock in Bohemian Surf Equipment Manufacturing Company is deductible by him as a business bad debt pursuant to section 166(a) (1), I.R.C. 1954, or as a worthless security under section 165(g), I.R.C. 1954; and (2) whether the losses sustained by petitioners in 1965 due to the worthlessness of loans made to this corporation 1973 Tax Ct. Memo LEXIS 219">220 and Wesley Deas are deductible as business bad debts or as nonbusiness bad debts. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners Albert J. and Janice C. Bernard are husband and wife and resided in San Francisco, California, when they filed the petition herein. They filed joint Federal income tax returns for the taxable years 1964 and 1965 with the district director of internal revenue, San Francisco. Janice C. Bernard is a party to this controversy solely because she filed joint income tax returns for the years 1964 and 1965 with her husband Albert J. Bernard. Any 3 reference hereinafter to petitioner will refer solely to Albert J. Bernard. In 1936 the petitioner began his employment as sales manager for the Louis F. Dow Company (hereinafter sometimes referred to as Dow), St. Paul, Minnesota. Petitioner maintained his position as sales manager for Dow through the taxable years involved herein. Dow sold promotional sales items. Petitioner spent between 30 and 50 hours each week in this work for Dow. Beginning in about 1930 and continuing through the taxable years involved herein, the petitioner made investments in various business ventures. 1973 Tax Ct. Memo LEXIS 219">221 At no time did Bernard receive a fee or salary from any of these ventures nor any benefit other than the normal investor's return. On November 4, 1960, Velzy Sports Equipment Manufacturing Company was incorporated as a California corporation with authority to issue 25,000 shares of no par common stock. On December 19, 1960, the Articles of Incorporation of the Velzy Equipment Manufacturing Company were amended to change its name to Bohemian Surf Equipment Manufacturing Company, sometimes hereinafter referred to as Bohemian Surf. Petitioner acquired 3,010 shares of Bohemian Surf common stock in exchange for consideration of $30,100 as 4 follows: June 1, 19612,010November 12, 19621,000Total3,010From May 1, 1961 to April 12, 1962, petitioner was president of Bohemian Surf. He was also director of that corporation during the entire term of its existence. He did not receive compensation for serving in either of these positions. In 1964 the common stock of Bohemian Surf held by petitioner became worthless. Bohemian Surf at no time made an election under section 1372(a) of the Code of 1954. At an unspecified date, the petitioner made a loan in the amount of $15,000 to Bohemian Surf, 1973 Tax Ct. Memo LEXIS 219">222 which became worthless in 1965. In 1958, petitioner loaned $2,500 to Wesley Deas. 2 In 1965, the loan to Deas became worthless. On their joint Federal income tax return for the taxable year 1964, petitioners claimed a "loss on Investment Bohemian Surf. Mfg. Equip." in the amount of $30,100. Respondent in his statutory notice of deficiency disallowed this claimed deduction on the ground that it is a short-term 5 capital loss under section 166(d) of the 1954 Code. Respondent made a written motion to amend his answer to the petition, alleging that if the Court determines that the $30,100 in question was an investment in the common stock of Bohemian Surf and therefore a capital asset, the petitioners's loss is deductible as a loss from the worthlessness of a security under section 165(g) of the 1954 Code. Respondent further alleged that the petitioners are therefore entitled to a deduction for the loss in 1964 on their investment of $30,100 as limited by section 1211(b) of the 1965 Code. Respondent's motion to amend was granted. On their joint 1973 Tax Ct. Memo LEXIS 219">223 Federal income tax return for the taxable year 1965, petitioners claimed "Employee's business expense" in the aggregate amount of $57,934.43, and on a statement attached to Form 2106, they enumerated several categories of expenditures which comprised most of this amount. Among these categories is "Bad debt expense" in the total amount of $26,597.07. No evidence was introduced with respect to the particular items included in this amount. Apparently, petitioner deducted as business bad debts the full amount of $15,000, representing a "loan to Bohemian Surf Manufacturing Company" and $2,500, representing a "loan to M. H. Wesley." Respondent, in his notice of deficiency, disallowed both of these amounts as business bad debts and determined that they were deductible only as short-term capital losses. 6 ULTIMATE FINDINGS OF FACT the common stock of Bohemian Surf owned by petitioner was a capital asset. Petitioner's only trade or business during the taxable period involved herein was that of sales manager for the Louis F. Dow Company. The loans made by the petitioner to Bohemian Surf and Wesley Deas were not proximately related to petitioner's trade or business. OPINION Issue 1. 1973 Tax Ct. Memo LEXIS 219">224 Worthless Stock. During 1961 and 1962, petitioner purchased 3,010 shares of common stock in Bohemian Surf for $30,100; and in the taxable year 1964, the stock became worthless. On his income tax return for 1964, he reported the $30,100 as an "investment" loss, deductible in full in that year as an ordinary business loss. It is the petitioner's position that the history of his activities establishes that he is in the business of promoting, organizing, financing, and managing corporations for profit on their sale; that his loans to Bohemian Surf were proximately related to that business; and hence the loss resulting from the worthlessness of the stock, which was collateral for the loans, was properly deductible in full as an ordinary loss. Respondent, in opposition, contends that petitioner is not entitled to the aforementioned bad debt deduction in full because the 7 alleged debt was not incurred in the conduct of petitioner's trade or business within the meaning of section 166(d) (1) (A) and (B) of the 1954 Code. 3 In essence, respondent argues that the loss in question was due to the worthlessness of petitioner's capital contribution to Bohemian Surf, and that the loss therefrom 1973 Tax Ct. Memo LEXIS 219">225 is deductible as a short-term capital loss under sections 165(g), 41211(b), and 1222(4) of the 1954 Code. It is well established that an individual, to be entitled to a deduction of a business bad debt, must show that the loss resulting from the debt's becoming worthless bears a proximate relationship to a trade or business in which he was engaged in the year in which the debt became 8 worthless. Sec. 1.166-5(b) (2), Income Tax Regs. Hickerson v.. Commissioner, 229 F.2d 631">229 F.2d 6311973 Tax Ct. Memo LEXIS 219">226 (C.A. 2, 1956), affirming a Memorandum Opinion of this Court. IAubrey S. Nash, 31 T.C. 569">31 T.C. 569 (1958); Hadwen C. Fuller, 21 T.C. 407">21 T.C. 407 (1953); and Jan G. J. Boissevain, 17 T.C. 325">17 T.C. 325 (1951). Although Congress did not define the term "trade or business," it made it clear in the committee reports that this concept was not intended to encompass all activities engaged in for profit, but was used in the realistic and restricted sense of a going trade or business. See Commissioner v. Smith, 203 F.2d 310">203 F.2d 310 (C.A. 2, 1953), "The question whether a debt is a nonbusiness debt is a question of fact in each particular case." Sec. 1.166-5(b) (2), Income Tax Regs.It is settled law that the business of a corporation is not the business of its officers. Burnet v. Clark, 287 U.S. 410">287 U.S. 410 (1932). However, a worthless debt, resulting from a loan by a stockholder to his corporation may qualify as a business bad debt if the stockholder was engaged in promoting, organizing, financing, and managing business enterprises for a fee or for a profit on their sale. Henry E. Sage, 15 T.C. 299">15 T.C. 299 (1950); Vincent C. Campbell, 11 T.C. 510">11 T.C. 510 (1948); Langdon L. Skarda, 27 T.C. 137">27 T.C. 137 (1956); Giblin v. Commissioner, 227 F.2d 692">227 F.2d 692 (C.A. 1973 Tax Ct. Memo LEXIS 219">227 5, 1955), reversing a Memorandum Opinion of this Court; Robert Cluett, 3rd, 8 T.C. 1178">8 T.C. 1178 (1947); Stuart Bart, 21 T.C. 880">21 T.C. 880 (1954); and J. T. Dorminey, 26 T.C. 940">26 T.C. 940 (1956). The authority of the foregoing line of decisions is 9 applicable only in the exceptional situations where the taxpayer's activities in promoting, managing, and making loans to a variety of businesses have been regarded as so extensive as to constitute a business separate and distinct from the business carried on by the enterprises themselves. H. Beale Rollins, 32 T.C. 604">32 T.C. 604, 32 T.C. 604">613 (1959), affd. 276 F.2d 368">276 F.2d 368 (C.A. 4, 1960); Max M. Barish, 31 T.C. 1280">31 T.C. 1280, 31 T.C. 1280">1286 (1959); Charles G. Berwind, 20 T.C. 808">20 T.C. 808, 20 T.C. 808">815 (1953), affd. 211 F.2d 575">211 F.2d 575 (C.A. 3, 1954); Holtz v. Commissioner, 256 F.2d 865">256 F.2d 865 (C.A. 9, 1958), affirming a Memorandum Opinion of this Court; I. Hal Millsap, Jr., 46 T.C. 751">46 T.C. 751 (1966), affd. 387 F.2d 420">387 F.2d 420 (C.A. 8, 1968). In Whipple v. Commissioner, 373 U.S. 193">373 U.S. 193 (1963), rehearing denied 374 U.S. 858">374 U.S. 858 (1963), the Supreme Court in positive language clarified what must appear in order for a taxpayer to sustain a deduction as a bad debt loss on the basis of engaging in the separate trade or business of organizing, financing, or 1973 Tax Ct. Memo LEXIS 219">228 promoting business enterprises for a fee or for a profit on their sale. 373 U.S. 193">Whipple, supra, involved loans by a substantial shareholder to one of several companies in which the taxpayer owned stock and for which he performed services. The Supreme Court held that the debts were not incurred in a trade or business of the taxpayer where his services were for the purpose of producing income or gain in the form of dividends or enhancement in the value of his 10 investment. The following language at p. 202 is significant in our analysis of the instant case: Devoting one's time and energies to the affairs of a corporation is not of itself, and without more, a trade or business of the person so engaged. Though such activities may produce income, profit or gain in the form of dividends or enhancement in the value of an investment, this return is distinctive by the process of investing and is generated by the successful operation of the corporation's business as distinguished from the trade or business of the taxpayer himself. When the only return is that of an investor, the taxpayer has not satisfied his burden of demonstrating that he is engaged in a trade or business since investing is 1973 Tax Ct. Memo LEXIS 219">229 not a trade or business and the return to the taxpayer, though substantially the product of his services, legally arises not from his trade or business but from that of the corporation. [Emphasis supplied.] The Supreme Court found no merit in the contention that one who actively engages in serving his own corporations for the purpose of creating future income through those enterprises is in a trade or business. In that connection the Court disapproved, inter alia, Henry E. Sage, Vincent C. Campbell, and Robert Cluett, 3rd, all supra, "to the extent that they hold or contain statements to the contrary." 373 U.S. 193">Whipple v. Commissioner, supra, 203, footnote 10. Also the Court recognized that the presence of more than one corporation: might lend support to a finding that the taxpayer was engaged in a regular course of promoting corporations for a fee or commissioner * * or for a profit on their sale * * * but in such cases there is a compensation other than the normal investor's return, income received directly for his own services rather than indirectly through the corporate enterprise. [Emphasis supplied.] [373 U.S. 193">Whipple v. Commissioner, supra, At 202-203.] 11 In his endeavor to sustain the 1973 Tax Ct. Memo LEXIS 219">230 burden of proving that his activities were extensive enough to warrant our finding that he was in such a separate business as defined in Whipple, petitioner testified concerning the numerous business ventures (about 25) which he allegedly organized and financed over the course of approximately 34 years. Except as to Bohemian Surf, his testimony with respect to these enterprises which do not find any affirmative support in the record, consists solely of self-serving statements. Virtually all of the ventures enumerated by petitioner were short-lived, nonprofitable, remote in years from subsequent activities, and generally too insignificant to contribute to the establishment of a pattern of business promotions. His testimony with respect to the enterprises was vague and not convincing. The record is insufficient, in our view, to support a finding that he organized the companies for the purpose of developing the corporations as going concerns for sale to customers in the ordinary course of a business. Significantly, petitioner testified that he could not recall receiving a "fee" from any of the businesses he allegedly caused to be formed. 373 U.S. 193">Whipple v. Commissioner, supra, at 202-203; 1973 Tax Ct. Memo LEXIS 219">231 United States v. Byck, 325 F.2d 551">325 F.2d 551 (C.A. 5, 1963). Petitioner has not borne his burden of proving that he sought any compensation other than the normal investor's return from the enterprises he organized and advised, including Bohemian Surf. 12 The record entirely fails to support a finding that petitioner was in the business of lending money to such ventures. With respect to the so-called loans to Bohemian Surf in the aggregate amount of $30,100, it is clear that petitioner did not make the advances to further any independent trade or business of his own in the special sense of section 166(d), supra, but merely to assist the corporation in its business. Wheeler v. Commissioner, 241 F.2d 883">241 F.2d 883, 241 F.2d 883">884 (C.A. 2, 1957), affirming per curiam a Memorandum Opinion of this Court. We are convinced that petitioner's activities with respect to Bohemian Surf were motivated more by his interest as an investor and an officer of the corporation than as an independent promoter. At no point is there any suggestion that he considered disposing of this corporation following the successful promotional or organizational phases. To the contrary, he continuously increased his investment therein. Cf. 1973 Tax Ct. Memo LEXIS 219">232 227 F.2d 692">Giblin v. Commissioner, supra.It is well settled that activity involving the protection or enhancement of one's investments, or otherwise involving their management, however extensive or time consuming, does not constitute a separate trade or business. Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212 (1941); Thomas Reed Vreeland, 31 T.C. 78">31 T.C. 78 (1958). Moreover, his purported loans to some of the businesses with which he was involved, including Bohemian Surf, are not substantiated by any records, evidence of indebtedness, interest, 13 payments, or collateral. His testimony pertaining to his money-lending activities was unclear and not persuasive. Furthermore, throughout the many years when he was a full-time sales manager of Dow, petitioner never characterized himself for annual Federal income tax purposes as engaged in the business of developing and selling businesses or lending money. Nor did he report any income from his alleged promotional and money-lending activities during the taxable period before us. According to his returns for 1964 and 1965, his largest source of income was derived from his sales manager position with Dow ($53,964 in 1946 and $80,741 in 1965); the major portion 1973 Tax Ct. Memo LEXIS 219">233 of the remaining income was made up of dividends and rentals. Petitioner reported a loss in both taxable years from a real estate joint venture with another individual. In the absence of affirmative evidence to substantiate the claimed promotional and lending activities of petitioner, we find that he has not met his burden of establishing the existence of a separate and distinct business as a promoter of businesses or as a money lender, and we have so found as an ultimate fact. Accordingly, we hold that the $30,100 in controversy was an investment in the common stock of Bohemian Surf and therefore a capital asset; and that petitioner's loss in 1964 is deductible as a loss from the worthlessness of a security under section 165(g), supra. 14 Issue 2. Loans to Bohemian Surf and Wesley Deas. During the taxable year 1965, loans which petitioner had made to Bohemian Surf in the amount of $15,000 and to Wesley Deas in the amount of $2,500 became worthless. Petitioner contends that these losses were proximately connected with his trade or business of lending money to a variety of business enterprises and individuals and, therefore, deductible in full under section 166(a) (1). 5 Respondent 1973 Tax Ct. Memo LEXIS 219">234 agrees that these losses are deductible in the taxable year 1965, but avers that they are deductible only as nonbusiness bad debts under section 166(d) (1) (B), supra. The record shows that petitioner was in the trade or business of being a sales manager for Dow since 1936, including the taxable years involved herein, and he does not contend that either of the debts in question relates to that trade or business. While we are mindful that a taxpayer may have more than one trade or business during the taxable period involved, considering the record in its entirety, we are convinced that the debts in controversy were not created in connection with a separate and distinct trade or business of petitioner within the intendment of section 166(d) (2) (B). For the 15 reasons expressed hereinabove in our resolution of Issue 1, we must sustain the respondent on this issue. Decision will be entered under Rule 50. Footnotes1. On May 17, 1971, this Court granted the respondent's motion to dismiss for lack of jurisdiction with respect to the taxable year 1967. ↩2. Until the date of the instant proceeding, the parties believed that this loan had been made to M. H. Wesley rather than to Wesley Deas. ↩3. SEC. 166. BAD DEBTS. * * (d) Nonbusiness Debts. - (1) General rule. - In the case of a taxpayer other than a corporation - (A) subsections (a) and (c) shall not apply to any nonbusiness debt; and (B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. ↩4. Section 165(g) of the 1954 Code states, in pertinent part, as follows: If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset.↩5. On his 1965 income tax return, petitioner deducted these losses as a portion of a claimed "bad debt loss" in the amount of $26,597.07 in a statement attached to Form 2106 pertaining to "employee business expenses," but he does not now argue its deductibility on that basis. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4562799/	NONPRECEDENTIAL DISPOSITION To be cited only in accordance with Fed. R. App. P. 32.1 United States Court of Appeals For the Seventh Circuit Chicago, Illinois 60604 Submitted September 2, 2020* Decided September 3, 2020 Before DAVID F. HAMILTON, Circuit Judge MICHAEL B. BRENNAN, Circuit Judge AMY J. ST. EVE, Circuit Judge No. 20-1273 ANTHONY STELMOKAS, Appeal from the United States District Plaintiff-Appellant, Court for the Northern District of Illinois, Eastern Division. v. No. 18 C 8262 BANK OF AMERICA, N.A., John Z. Lee, Defendant-Appellee. Judge. ORDER Anthony Stelmokas appeals the district court’s dismissal of this suit, his second one against Bank of America, in which he seeks damages arising out of funds that the bank withheld from his account. Because the district court correctly ruled that the doctrine of res judicata bars this second suit, we affirm the dismissal. * We have agreed to decide the case without oral argument because the briefs and record adequately present the facts and legal arguments, and oral argument would not significantly aid the court. FED. R. APP. P. 34(a)(2)(C). No. 20-1273 Page 2 Both suits arise out of a check-cashing service that Stelmokas offered customers at his tavern in Chicago. Stelmokas would deposit checks from customers into his account with Bank of America and give them the cash equivalent. In March 2013 Stelmokas deposited a cashier’s check from Zhibin Wang for about $90,000 and, he alleges, gave Wang the cash over the next two days. Six months later, Bank of America notified Stelmokas that it had placed a hold on his account for the check’s value because Wang filed an affidavit of forgery with the issuing bank (Citibank), asserting that he had never received the funds. Stelmokas allegedly twice demanded that Bank of America investigate his account hold, but it never did. Months later, Bank of America closed Stelmokas’s account, and he never recovered from the bank the $90,000 that it had held back. Stelmokas’s check-cashing operation ended soon after the bank closed his account. Without that service to draw customers, Stelmokas closed his tavern shortly after. Based on these allegations, Stelmokas filed two lawsuits in attempt to recover damages. First, in 2016, he sued Bank of America (and another defendant) in the Circuit Court of Cook County. Stelmokas v. Bank of America, N.A., No. 2016-L-012746, (Ill. Cir. Ct.) (Stelmokas I). Stelmokas invoked a legal theory of negligence: The bank’s negligent response to his demands to investigate its hold caused him to lose $90,000, his check-cashing operation, and the tavern. The court granted Bank of America’s motion to dismiss the complaint with prejudice as legally deficient or time-barred. The current suit is his second. Stelmokas filed it in the Circuit Court of Cook County in 2018 against Bank of America and Citibank. Stelmokas v. Bank of America, N.A., No. 2018-L-010610 (Ill. Cir. Ct.) (Stelmokas II). As Stelmokas concedes in his opening brief, “the facts are the same” in this suit as in Stelmokas I. Only the legal theories differ. In this second suit, Stelmokas abandoned the negligence theory and asserts theories of conversion and breach of contract against Bank of America. Citibank removed the suit to federal court on the basis of diversity jurisdiction, and Stelmokas then voluntarily dismissed Citibank, leaving Bank of America as the sole defendant. The district court granted Bank of America’s motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). It ruled that Stelmokas I ended with a judgment on the merits, both lawsuits named Bank of America as a defendant, and the complaints were “nearly identical.” With the three elements of res judicata met, the court dismissed the case with prejudice. On appeal, Stelmokas argues that the district court improperly dismissed his case. We review de novo dismissals of claims blocked by the defense of res judicata. Bell No. 20-1273 Page 3 v. Taylor, 827 F.3d 699, 706 (7th Cir. 2016). Res judicata (also called claim preclusion) is an affirmative defense best addressed under Federal Rule of Civil Procedure 12(c). But the use of Rule 12(b)(6) here “is of no consequence” because the uncontested history of Stelmokas I is everything that the district court needed to know to rule on the defense. Walczak v. Chi. Bd. of Educ., 739 F.3d 1013, 1016 n.2 (7th Cir. 2014) (quoting Carr v. Tillery, 591 F.3d 909, 913 (7th Cir. 2010)). Because an Illinois court resolved Stelmokas I, “we apply Illinois res judicata principles” to determine whether the district court properly dismissed this suit. Chi. Title Land Tr. Co. v. Potash Corp. of Saskatchewan Sales Ltd., 664 F.3d 1075, 1079 (7th Cir. 2011). In Illinois, res judicata bars a claim when “(1) a final judgment on the merits has been rendered by a court of competent jurisdiction; (2) an identity of cause of action exists; and (3) the parties or their privies are identical in both actions.” Hudson v. City of Chicago, 889 N.E.2d 210, 213 (Ill. 2008). Stelmokas argues only that the second element—an identity of cause of action— is not met because in Stelmokas I he raised a legal theory of negligence and in Stelmokas II he raised legal theories of conversion and breach of contract. But in Illinois “separate claims will be considered the same cause of action for purposes of res judicata if they arise from a single group of operative facts, regardless of whether they assert different theories of relief.” River Park, Inc. v. City of Highland Park, 703 N.E.2d 883, 893 (Ill. 1998). Here, Stelmokas concedes that the lawsuits arise from the same operative facts. The new legal theories that he raises in this suit cannot defeat the res judicata bar. The purpose of the doctrine is to force a plaintiff to bring in one suit against the same defendant all legal theories upon which the same facts may entitle them to relief, thereby not “burdening the courts and litigants with duplicative litigation.” Hudson, 889 N.E.2d at 222. Stelmokas also contests the propriety of Citibank’s removal to federal court. He contends that the state court had already ruled on Bank of America’s motion to dismiss, so removal was improper. Citibank properly alleged diversity so the district court had subject-matter jurisdiction. We need not decide if a state court’s consideration of a defense from one defendant (here, Bank of America) disables another defendant (here, Citibank) from seeking removal, because the factual premise is unfounded. As the district court correctly noted, nothing in the state-court record supports Stelmokas’s contention that the state court ruled on this motion at all. See, e.g., Holloway v. Soo Line R.R. Co., 916 F.3d 641, 645 (7th Cir. 2019). AFFIRMED	01-04-2023	09-03-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537644/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 09:07 AM CDT - 451 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. HESSLER Cite as 305 Neb. 451 State of Nebraska, appellee, v. Jeffrey Hessler, appellant. ___ N.W.2d ___ Filed April 3, 2020. No. S-19-652. 1. Postconviction: Constitutional Law: Appeal and Error. In appeals from postconviction proceedings, an appellate court reviews de novo a determination that the defendant failed to allege sufficient facts to dem- onstrate a violation of his or her constitutional rights or that the record and files affirmatively show that the defendant is entitled to no relief. 2. Postconviction: Judgments: Appeal and Error. Whether a claim raised in a postconviction proceeding is procedurally barred is a question of law which is reviewed independently of the lower court’s ruling. Appeal from the District Court for Scotts Bluff County: Andrea D. Miller, Judge. Affirmed. Jerry M. Hug for appellant. Douglas J. Peterson, Attorney General, and James D. Smith, Solicitor General, for appellee. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, and Papik, JJ. Stacy, J. In October 2016, Jeffrey Hessler filed this motion for post- conviction relief. The motion relies on the U.S. Supreme Court’s decision in Hurst v. Florida 1 and alleges Hessler’s death sentence is invalid because Nebraska’s capital sentenc- ing statutes violate Hessler’s rights under the 6th, 8th, and 1 Hurst v. Florida, ___ U.S. ___, 136 S. Ct. 616, 193 L. Ed. 2d 504 (2016). - 452 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. HESSLER Cite as 305 Neb. 451 14th Amendments to the U.S. Constitution. We addressed an identical argument in State v. Lotter 2 and held Hurst was not a proper triggering event for the 1-year limitations period of the Nebraska Postconviction Act. 3 Citing Lotter, the district court found Hessler’s motion was time barred and denied it without conducting an evidentiary hearing. Hessler appeals, and we affirm. FACTS In 2004, Hessler was convicted by a jury of first degree murder, kidnapping, first degree sexual assault, and use of a firearm to commit a felony. He was sentenced to death on the murder conviction. He unsuccessfully challenged his convic- tions and sentences on direct appeal 4 and in two prior postcon- viction proceedings. 5 On January 12, 2016, the U.S. Supreme Court decided Hurst. 6 Hurst found that Florida’s capital sentencing scheme was unconstitutional, because it required the trial court alone to find both that sufficient aggravating circumstances existed to justify imposition of the death penalty and that there were insufficient mitigating circumstances to outweigh the aggra- vating circumstances. Roughly 10 months after Hurst was decided, Hessler filed this successive motion for postconvic- tion relief. The motion asserts: Jurisdiction is proper in this Court as the decision in Hurst v. Florida . . . was issued by the United States Supreme Court on January 12, 2016 and . . . Hessler is asserting that Hurst is applicable in his case and therefore has one year from the date of that decision to file this motion pursuant to . . . § 29-3001 . . . . 2 State v. Lotter, 301 Neb. 125, 917 N.W.2d 850 (2018). 3 Neb. Rev. Stat. § 29-3001(4) (Reissue 2016). 4 State v. Hessler, 274 Neb. 478, 741 N.W.2d 406 (2007). 5 State v. Hessler, 282 Neb. 935, 807 N.W.2d 504 (2011); State v. Hessler, 288 Neb. 670, 850 N.W.2d 777 (2014). 6 Hurst, supra note 1. - 453 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. HESSLER Cite as 305 Neb. 451 Hessler’s motion relies on Hurst and alleges that Nebraska’s capital sentencing statutes 7 violate the 6th, 8th, and 14th Amendments. It specifically alleges the Sixth amendment is violated because the Nebraska statutes allow a panel of judges, and not a jury, to “make factual findings in imposing a death sentence.” The motion further alleges “to the extent that Nebraska’s death-penalty statutes do not require a unanimous recommendation from a jury regarding whether a sentence of death should be imposed, [the statutes] violate[] the 8th and 14th Amendments.” Identical 6th, 8th, and 14th Amendment claims based on Hurst were raised in a successive motion for postconvic- tion relief in Lotter, 8 and we rejected them in an opinion released September 28, 2018. We reasoned that the Nebraska Postconviction Act contains a 1-year limitations period for fil- ing a verified motion for postconviction relief, which runs from one of four triggering events or from August 27, 2011, which- ever is later. 9 The triggering events under § 29-3001(4) are: (a) The date the judgment of conviction became final by the conclusion of a direct appeal or the expiration of the time for filing a direct appeal; (b) The date on which the factual predicate of the constitutional claim or claims alleged could have been discovered through the exercise of due diligence; (c) The date on which an impediment created by state action, in violation of the Constitution of the United States or the Constitution of Nebraska or any law of this state, is removed, if the prisoner was prevented from fil- ing a verified motion by such state action; (d) The date on which a constitutional claim asserted was initially recognized by the Supreme Court of the United States or the Nebraska Supreme Court, if the 7 See Neb. Rev. Stat. §§ 29-2521 to 29-2522 (Cum. Supp. 2018). 8 Lotter, supra note 2. 9 § 29-3001(4). - 454 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. HESSLER Cite as 305 Neb. 451 newly recognized right has been made applicable retroac- tively to cases on postconviction collateral review[.] Like Hessler’s postconviction claims, the claims alleged in Lotter regarding the 6th, 8th, and 14th Amendments were all based on Hurst, and the defendant in Lotter relied on the trig- gering event in § 29-3001(4)(d) to contend the claims were timely. We rejected this contention. We held in Lotter that Hurst could not trigger the 1-year statute of limitations under § 29-3001(4)(d), because Hurst did not announce a new rule of law and merely applied the con- stitutional rule from the 2002 case of Ring v. Arizona. 10 Lotter also held that the “plain language of Hurst reveals no hold- ing that a jury must find beyond a reasonable doubt that the aggravating factors outweigh the mitigating circumstances.” 11 Finally, Lotter reasoned that even if Hurst announced a new rule of law, it would not apply retroactively to cases on col- lateral review, because it was based on Ring and the U.S. Supreme Court has held that Ring announced a procedural rule that does not apply retroactively. 12 Having concluded in Lotter that Hurst did not announce a new rule of law, we rejected the defendant’s contention that Hurst could trigger the 1-year statute of limitations under § 29-3001(4)(d), and we found the defendant’s postconviction claims were time barred. 13 The defendant’s petition for a writ of certiorari was denied by the U.S. Supreme Court on June 17, 2019. 14 Citing to our analysis and holding in Lotter, the district court here found that Hessler’s motion was time barred, and it dismissed the motion without an evidentiary hearing. Hessler timely appealed. 10 Ring v. Arizona, 536 U.S. 584, 122 S. Ct. 2428, 153 L. Ed. 2d 556 (2002). 11 Lotter, supra note 2, 301 Neb. at 144, 917 N.W.2d at 864. 12 Schriro v. Summerlin, 542 U.S. 348, 124 S. Ct. 2519, 159 L. Ed. 2d 442 (2004). 13 Accord State v. Mata, 304 Neb. 326, 934 N.W.2d 475 (2019). 14 Lotter v. Nebraska, ___ U.S. ___, 139 S. Ct. 2716, 204 L. Ed. 2d 1114 (2019). - 455 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. HESSLER Cite as 305 Neb. 451 ASSIGNMENT OF ERROR Hessler assigns, restated, that the district court erred in denying his postconviction motion without an evidentiary hear- ing, because Nebraska’s capital sentencing scheme violates Hurst and the 6th, 8th, and 14th Amendments to the U.S. Constitution. STANDARD OF REVIEW [1] In appeals from postconviction proceedings, an appellate court reviews de novo a determination that the defendant failed to allege sufficient facts to demonstrate a violation of his or her constitutional rights or that the record and files affirmatively show that the defendant is entitled to no relief. 15 [2] Whether a claim raised in a postconviction proceeding is procedurally barred is a question of law which is reviewed independently of the lower court’s ruling. 16 ANALYSIS At oral argument before this court, Hessler conceded the claims made in his successive motion for postconviction relief are identical to those raised and rejected by this court in Lotter. Hessler further conceded there was no factual distinc- tion between his postconviction claims and those asserted in Lotter, and he pointed to no change in the relevant law since our decision in Lotter. Our decision in Lotter is dispositive of the issues presented in this appeal, and Hessler does not contend otherwise. Hurst did not announce a new rule of law, and thus it cannot trigger the 1-year statute of limitations under § 29-3001(4)(d). Because this is the only triggering event relied upon by Hessler in con- tending that his postconviction claims are timely, we agree with the district court that Hessler’s postconviction claims are time barred. For the sake of completeness, we note that even if Hessler’s claims were not time barred, they would not entitle him to 15 Mata, supra note 13. 16 Id. - 456 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. HESSLER Cite as 305 Neb. 451 postconviction relief. After oral arguments in this case, the U.S. Supreme Court decided McKinney v. Arizona. 17 McKinney explained: Under Ring and Hurst, a jury must find the aggravat- ing circumstance that makes the defendant death eligible. But importantly, in a capital sentencing proceeding just as in an ordinary sentencing proceeding, a jury (as opposed to a judge) is not constitutionally required to weigh the aggravating and mitigating circumstances or to make the ultimate sentencing decision within the relevant sentenc- ing range. 18 As such, McKinney makes clear there is no merit to the under- lying premise of Hessler’s postconviction claims. We thus affirm the district court’s order denying postconvic- tion relief without an evidentiary hearing. Affirmed. Freudenberg, J., not participating. 17 McKinney v. Arizona, ___ U.S. ___, 140 S. Ct. 702, ___ L. Ed. 2d ___ (2020). 18 Id., 140 S. Ct. at 707.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4475467/	OPINION. Tietjens, Judge: The issue herein presents the primary question of whether respondent erred in including in petitioner’s income for the taxable year 1944, the amount of $289,815.54 received in 1947 in final settlement of a claim arising out of the cancellation and termination, in 1942, of a subcontract for production of materials for national defense. The supplementary questions involved are whether 1944 is a proper year for accrual of that amount for tax purposes under the facts herein and whether the applicable regulation required in the inclusion of that amount in income in 1944 as determined by respondent and, if so, the validity thereof. Under Regulations 111, section 29.42-1 respondent promulgated Mimeograph 5897, 1945 C. B. 131,1 to prescribe rules, for other than cash basis taxpayers, for the treatment and inclusion in gross income of compensation for the termination of a contract which constitutes a “war contract” within the meaning of section 3 of the Contract Settlement Act of July 21,1944. Under that portion of Mimeograph 5897 pertaining to war contracts terminated prior to July 21, 1944, and particularly under the provisions of the first paragraph of subpara-graph (a) (1) respondent determined that the amount of $289,815.54 (sio), received in the 1947 contract termination settlement, was in-cludible in petitioner’s income for the calendar year 1944 which was the first taxable year ending after the effective date of the Contract Settlement Act. The petitioner’s subcontract with Ford was for the production of materials for national defense and there is no question herein but that it constituted a “war contract” which was “terminated” within the meaning of section 3 of the Contract Settlement Act of 1944, 58 Stat. 649 (U. S. Code Ann., Title 41, Chap. 2). That section defines the term “prime contract” as meaning “any contract, agreement, or purchase order heretofore or hereafter entered into by a contracting agency and connected with or related to the prosecution of the war”; defines the term “subcontract” as meaning “any contract, agreement, or purchase order heretofore or hereafter entered into to perform any work, or to make or furnish any material to the extent that such work or material is required for the performance of any one or more prime contracts”; defines the term “war contract” as meaning “a prime contract or subcontract”; and defines the terms “termination,” “terminate,” and “terminated” as referring to “the termination or cancellation, in whole or in part, of work under a prime contract for the convenience or at the option of the Government (except for default of the prime contractor) or of work under a subcontract for any reason except the default of the subcontractor.” It may be stated as a general proposition that the Contract Settlement Act of 1944 prescribes methods and procedure for Governmental contracting agencies for determining speedy and fair compensation under terminated war contract claims. For purposes of the instant proceeding a brief analysis of some of the provisions of that act will be helpful. It is noted that section 6 of that act provides, inter alia, (in subparagraph b) that each agency shall establish methods and standards for determining fair compensation on the basis of certain standards of cost, or percentage of contract price for work completed, “or on any other equitable basis” deemed appropriate; (in subparagraph c) that settlement may be made by agreement which is conclusive with certain exceptions or made by determination by the contracting agency; (in subparagraph d) that where made by determination the methods and standards established shall take into account certain items of costs, etc., including “such allowance for profit on the preparations made and work done for the terminated portion of the war contract as is reasonable under the circumstances”; and (in subparagraph g) that war contracts which did not provide for fair compensation for termination shall be amended to provide therefor. Section 13 of the act provides, inter alia, that an aggrieved war contractor may appeal to an Appeal Board or bring suit against the United States in the Court of Claims or a United States District Court. Respondent contends that Mimeograph 5897 is a reasonable and therefore valid exercise of his authority, under sections 41 and 42 of the Internal Revenue Code, to prescribe a method of reporting income from compensation for termination of war contracts so as to reflect income clearly and prevent distortion in .tax accounting; that the method therein prescribed is consistent with recognized principles of tax accounting; and that the prescribed method is proper even if inconsistent with standard accrual accounting practices. Respondent argues that petitioner’s expenses connected with performance of its subcontract prior to cancellation were deductible in the years in which incurred and reduced excess profits net income for those years; that to include the $289,815.54 in 1947 income would allow it to escape excess profits taxation resulting in a distortion in tax accounting; and that while the inclusion of that amount in income for 1944 under Mimeograph 5897 is not a perfect solution, the result is less distortion in tax accounting than postponing the inclusion until 1947. Respondent further argues that upon enactment of the Contract Settlement Act of 1944 petitioner became definitely entitled to receive compensation for the termination of its war contract and while there remained the necessity of a determination being made of the amount of compensation the latter could be estimated by petitioner with reasonable accuracy at that time, i. e., in 1944, and accordingly Mimeograph 5897 is a reasonable application of principles of tax accounting and is fully supported by Continental Tie & Lumber Co. v. United States, 286 U. S. 290. Petitioner contends that its claim against Ford was an unliquidated claim for damages which under the standard accrual method of accounting was not properly accruable in income until 1947 when events occurred definitely fixing the right to receive income and the amount thereof became certain or determinable with reasonable accuracy; that its treatment of the settlement with Ford as income for 1947 wa3 in accordance with the accounting method regularly employed in keeping its books and correctly reflected its income; and that Mimeograph 5897 should not be construed as requiring an inclusion in 1944 income of the amount of the 1947 settlement, but if it must be so construed then it is unreasonable and invalid. In the instant case we are not concerned with the contract termination payment (incidentally received in 1944) for work done up to the time of the cancellation of job.No. 1700, for that payment was not embraced in the claim involved herein. .The issue involves petitioner’s claim for damages in not being permitted to perform the portion of job No. 1700 which was cancelled in 1942, and whether on account thereof the amount of $289,815.54, received under a final settlement agreement in 1947, is includible in income for 1944. The mere fact that petitioner’s books of account did not reflect such item as accrued income for 1944, based on the opinion of its accountants that the item was not accruable, is not conclusive. Respondent urges that his determination is consistent with standard accrual accounting practices but, if not, it is nevertheless consistent with recognized principles of tax accounting clearly to reflect income and is therefore reasonable. In our opinion, the respondent’s determination is contrary to the established general principles of accrual accounting as to accepted standard practices and also for tax purposes. Unless the circumstances herein are exceptional because of the enactment of the Contract Settlement Act of 1944, the petitioner’s taxable year 1944 can not be brought into focus as having any bearing upon when income accrued to it under its claim for damages against Ford. The contract termination giving rise to the claim for damages occurred in 1942. The contract contained no provision, nor was there any other agreement in effect between the parties setting any formula for liquidated damages and the claim remained in dispute, both as to liability and amount, until the final settlement agreement was reached in 1947. Throughout that intervening period, Ford’s denial of any liability was on the ground that petitioner was in default in performance and the cancellation did not occasion any legal damages. Furthermore, up to that time the Navy Department steadfastly refused its approval of Ford’s paying any amount on the basis of various proposed settlements made by petitioner. Thus, aside from any factual or legal effect which may have arisen from the enactment of the Contract Settlement Act, the facts establish that, in 1944, petitioner had no fixed right to receive payment in any amount on its disputed claim for damages for contract termination and there could be no account receivable which was accruable in income of petitioner in 1944, for tax purposes. The cases uniformly agree that before an item of income or expense may be accrued there must be a fixed or determined right to receive or pay an amount. Spring City Foundry Co. v. Commissioner, 292 U. S. 184; United States Cartridge Co. v. United States, 284 U. S. 511; Lichtenberger-Ferguson Co. v. Welch (C. A. 9), 54 F. 2d 570; Luckenbach Steamship Co., 9 T. C. 662; William Justin Petit, 8 T. C. 228; and Jamaica Water Supply Co., 42 B. T. A. 359, affd., 125 F. 2d 512, certiorari denied, 316 U. S. 698.2 The above stated principle as to the necessity of a fixed right to receive a reasonably ascertainable amount to establish accrued income, has its counterpart in the necessity of a fixed liability to pay an ascertainable amount to support an accrued deduction from gross income, United States v. Anderson, 269 U. S. 422; Dixie Pine Products Co. v. Commissioner, 320 U. S. 516; Security Flour Mills Co. v. Commissioner, 321 U. S. 281; and Virginia Stage Lines, Inc., 16 T. C. 557. In our opinion, the facts herein clearly distinguish the instant case from Continental Tie & Lumber Co. v. United States, supra, relied on by respondent as fully supporting his determination of petitioner’s tax liability for 1944. In the Continental Tie & Lumber Co. case the Court sustained the Commissioner in taxing as accrued income in 1920, an award which was determined in amount and paid in 1923 under the Transportation Act of 1920 [49 U. S. C. A. 377], authorizing payment to railroads for partial redress for losses on account of operating deficits suffered during the period of Federal control of railroads. The Court found that the taxpayer’s “right to the award was fixed” and again its “right to payment ripened” when the Transportation Act became law and that what thereafter “remained was mere administrative procedure to ascertain the amount to be paid.” The Court said the case did “not fall within the principle that, where the liability is undetermined in the tax year, the taxpayer is not called upon to accrue any sum [Lucas v. American Code Co., 280 U. S. 445, 50 S. Ct. 202, 74 L. Ed. 538],” but presented a problem of whether, upon the taxpayer’s own data and the calculations, required by the statute, the amount of the award could be ascertained within reasonable limits. All the basic facts to support the necessary data had transpired prior to 1920, and the Court concluded that the taxpayer’s “books and accounts fixed the maximum amount of any probable award” and “it could have arrived at a figure to be accrued for the year 1920.” In the instant case the factual circumstances are materially different for, in our opinion, not only was the right of petitioner to receive payment vigorously contested, but also, the claim was speculative in amount for services never to be performed rather than for a reasonably ascertainable amount based on events which had already occurred. Here, Ford denied liability and the Navy refused to approve any payment on the claim both before and after enactment of the Contract Settlement Act of 1944. A study of that act convinces us that its passage did not ripen in petitioner any fixed right to payment on the particular character of claim involved herein. We must remember that petitioner was a “subcontractor.” With this in mind the following language of the Court in Rumsey Manufacturing Corporation and Arthur T. McAvoy, Trustee in Bankruptcy v. United States Hoffman Machinery Corporation (C. A. 2), 187 F. 2d 927, becomes pertinent: It appears to us that the scheme or plan of the Act is reasonably apparent. It was of course to be expected that “prime contractors” would let out some of the work to subcontractors, that the accounts between the two would have to be settled, and that the “prime” contractor would wish whatever he paid the subcontractor to he credited to him in his own settlement with the “agency.” Thus the “agency” had a lively interest in the “prime contractor’s” settlement with his subcontractor which § 7 (a) recognized when it gave the “agency” power to “approve” the terms which the contractor was willing to tender to the subcontractor, or to “ratify” his settlement, if he had made one, or to “authorize” him to settle on his own terms if it thought him “reliable” enough. These courses the “agency” might take as between the contractor and itself; and they involved no action by it vis-á-vis the subcontractor. However, it might happen that the subcontractor, although by hypothesis he had no contract with the “agency,” was so unreasonable in his demands upon the “prime contractor” that he was blocking that speedy settlement which the Act was especially designed to promote. In that event the “agency” might intervene directly and “settle” the subcontractor’s claim, though on//y in case it had been able to induce the subcontractor to consent by offering the liability of the United States. In that event § 13 would come into play and we may assume that, if that happened, the subcontractor might not sue the contractor. Be that as it may, in the absence of such an agreement the “agency” was not authorised to “settle” a subcontractor’s claim at all, and there is no reason to suppose that the Act meant to put any limitations upon his action at common-law against the contractor. The only exception is that the regulations require all subcontractors promptly to file with “prime contractors” any claims they might have against them.* [Emphasis added.] Nowhere in the record before ns can we find that petitioner’s claim was settled directly by the “agency” or that the United States became liable for petitioner’s claim, albeit the Navy Department took a hand in negotiations and finally did approve the settlement between Ford and petitioner. Nor do we find anything in the Contract Settlement Act by which the “agency” could force the petitioner to submit its claim to the procedure laid down in the Act. So far as petitioner was concerned under the Act, it was free to proceed with an action at law against Ford had it not been able to agree on a settlement. In our opinion, the enactment of the Contract Settlement Act is without significance in this proceeding. We conclude that at all times prior to the final settlement in 1947 petitioner’s disputed Maim against Ford remained wholly contingent both as to the right to receive payment and the amount receivable, if any, and that respondent erred in including the sum of $289,815.54 in petitioner’s income for the year 1944. Reviewed by the Court. Decision will he entered wnder Rule 50. Section 28.42-1: When Included in gross income. 1945-16-12108 Mim. 5897 (July 24, 1945) *»»«« Mimeograph 5766 [C. B. 1944, 156], dated November 1, 1944, contains rules governing the treatment of compensation for the termination of fixed-price contracts -which constitute war contracts within the meaning of section 3 of the Contract Settlement Act of 1944 [58 Stat., 649, 650], in cases where the contractor renders his returns other than on a basis of cash receipts and disbursements and the compensation is received pursuant to a negotiated settlement, together with rules with respect to the effect of a no-cost settlement in respect of a termination of a fixed-price contract. The method of treatment therein prescribed wiU continue to be followed. Pursuant to the provisions of section 29.42-1 of Eegulations 111, as amended by Treasury Decision 5405 [C. B. 1944, 154], approved September 22, 1944, the provisions of Mimeograph 5766 are, however, restated in this mimeograph and are supplemented to prescribe rules for the treatment of compensation for the termination of all war contracts in all cases where the contractor renders his returns other than on a basis of cash receipts and disbursements. (a) When Compensation Included in Cross Income. — In the case of a termination of a contract which constitutes a war contract within the meaning of section 3 of the Contract Settlement Act of 1944, compensation for the termination shall be included in computing gross income for the taxable year or years determined in accordance with the following rules: (1) Taxable Years Ending Prior to July 21, 1944. — In case a war contract is terminated within a taxable year ending prior to July 21, 1944, the effective date of the Contract Settlement Act of 1944, compensation for the termination shall be included in computing gross income for the taxable year in which the claim is allowed (or the settlement proposal is accepted), or for the taxable year in which its value is otherwise definitely determined, or for the first taxable year ending after July 20, 1944, whichever year is the earliest; provided, however, that the contractor shall not be required or permitted to include in income for such year any part of the income from the contract termination which was. included in income for the taxable year of the contract termination. The provisions of the preceding sentence are applicable in'the case of negotiated settlements of fixed-price war 'contracts and in all other cases of terminations of war contracts. * * * If at the close of the taxable year of the contract termination there is no agreement to pay to the contractor any compensation for the termination, or if the agreement to pay is conditioned bipon events which have not occurred, no compensation for the contract termination shall be includible in computing gross income for such year. * * * « (2) Taxable Years Ending on or After July 21, 1944. — In case a war contract is terminated within a taxable year ending on or after July 21, 1944, the income from the contract termination shall be included in computing gross income for the taxable year of the contract termination. * * * (3) Adjustment of Return. — If the income from the contract termination which, under the above subparagraph (1), is to be taken into account in computing gross income for the taxable year in which the Contract Settlement Act of 1944 became effective, or which, under the above subparagraph (2), is to be taken into account for the year of the contract termination, is not definitely ascertained at the time of filing the return, the contractor shall include in his return a reasonable estimate of such income, and should attach to his return a statement identifying the contract termination to which such estimate relates. When the correct amount of such income from the contract termination is ascertained, an adjustment shall be made for the year for which such income was included. (Cf. Continental Tie & Lumber Co. v. United States, 286 U. S. 290, [Ct. D. 494, C. B. XI—1. 260 (1932)].) The Cartridge case involved a war contract termination claim which was wholly contingent as to the right to receive payment, if any, until final settlement was made subsequent to the taxable year there involved. § 845.521-3, Joint Termination Regulation, 9 Fed. Reg. 13359.	01-04-2023	01-16-2020

Subsets and Splits

No community queries yet

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